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Recovering Costs in Adjudication – A shift in the law? [December 2015]

The right to statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 (the “Late Payment Act”) applies to contracts which fail to provide a substantial, contractual remedy for the late payment of debts.

Section 5A of the Late Payment Act states that, once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum, in addition to the statutory interest on the debt, in the amount of £40.00, £70.00 or £100.00 (the “Fixed Amount”).
Where the right to statutory interest under the Late Payment Act is successfully excluded, no claim can arise for compensation under the Late Payment Act as, pursuant to section 5A, this right can only arise once statutory interest begins to run in relation to a qualifying debt. This remains the case even if the amendments arising from the Late Payment of Commercial Debts Regulations 2013 (the “Late Payment Regulations”) are incorporated.
Late Payment of Commercial Debts Regulations 2013
The Late Payment Regulations amends section 5A of the Late Payment Act by introducing a new subsection (subsection 2A). Subsection 2A states:
“If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.”
Therefore, even if subsection 5A applies, the debt would have to be a “qualifying debt” under section 3 of the Late Payment Act and the costs claimed pursuant to subsection 2A would have to be “reasonable”.
Qualifying debt
Under section 3 of the Late Payment Act, a “qualifying debt” is defined as a debt created by virtue of an obligation under the contract. It may be that, where a dispute arises by reason of an alleged absence of a payment notice and any sums claimed do not reflect an actual entitlement in respect of works undertaken pursuant to a contract, the sum claimed may not  constitute a “qualifying debt” under section 3(1) of the Late Payment Act.
Reasonable costs
Any cost claimed should not be disproportionate to a party’s entitlement and should satisfy the test of reasonableness.
What is the general position in adjudication
The general position in adjudication is that, absent an agreement between the parties, there is no free-standing power vested in an adjudicator to award legal costs. An adjudicator has no jurisdiction to order legal costs to be paid by either party unless both parties have agreed that his jurisdiction is widened to include such a power.
Where the Late Payment Act applies and a party is entitled to the Fixed Amount y way of compensation, the referring party in an adjudication may be able to recover further compensation under subsection 2A which may include its reasonable costs expended in the adjudication.
That said, there appears to be a degree of inconsistency between the Late Payment Regulations and section 108A of the Housing Grants, Construction and Regeneration Act 1996 (as amended) to the extent that a responding party may argue that the Late Payment Regulations constitutes delegated legislation and, as delegated legislation cannot override any Act, subsection 2A of the Late Payment Act does not apply.  
Despite the fact that subsection 2A refers to ‘the supplier’ being the only party able to recover its reasonable costs in recovering the debt, it remains to be seen whether, by virtue of a responding party subsequently asking for its legal costs in the adjudication, the parties are agreeing to widen an adjudicator’s jurisdiction so as to confer upon him the power to decide legal costs. Until a case emerges on this point one cannot be certain whether or not there has been a shift in the law and whether the referring party is taking a risk when seeking its reasonable costs in adjudication.


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