Enviroflow v Redhill

05/09/2017

In the recent case of Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (unreported, 16th August 2017), the Technology and Construction Court (TCC) struck down an adjudicator’s decision to award adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998 as being contrary to section 108A of the Housing Grants, Construction and Regeneration Act 1996.

This judgment is likely to put an end to this increasingly common practice.

Background to the decision

Part of the appeal of adjudication is the general rule that parties are responsible for their own costs.  The Adjudicator generally allocates their fees and expenses between the parties after proceedings conclude.

Until amendments were made to the Housing Grants, Construction, and Regeneration Act 1996 in 2011, the position regarding construction contract clauses permitting the recovery of costs was unclear.  However, section 108A, inserted by the 2011 amendments clarified the situation as thus:

“Any contractual provision in a construction contract dealing with the allocation of adjudication costs between the parties is impotent unless:

a)    made in writing after service of a Notice of Adjudication, or

b)    if made in advance, is limited to conferring power on the adjudicator to allocate his fees and expenses as between the parties.”

In certain circumstances, the adjudication costs may be recoverable as a discrete head of damages for breach of contract.

But if a provision within the construction contract does effectually allow parties to allocate the costs of adjudication between themselves, but does not contain an adequate right to claim interest for late payment, is there a potential route to the recovery of interest?

Until this recent decision, it had become common for the out-of-pocket party to recuperate the ‘reasonable costs in recovering’ a debt under the Late Payment of Commercial Debts (Interest) Act 1998.  However, it was never clarified whether the Housing Grants, Construction, and Regeneration Act 1996, s 108A barred the extension of this right to adjudication costs.

Redhill was the main contractor on a project which involved internet installation works, subcontracting part of the works to Enviroflow.  A dispute arose as to payment, and Enviroflow commenced adjudication proceedings, seeking an order for payment as well as its reasonable costs in recovering payment under the Late Payment of Commercial Debts (Interest) Act 1998.  The Adjudicator accepted the claim and ordered Redhill to pay £81,000 as the principal sum due, as well as £14,900 in costs on top of his own fees and expenses incurred in the adjudication.

The money was not paid, so Enviroflow brought enforcement proceedings in the TCC.

The court upheld the principle sum but held the Adjudicator had no jurisdiction to make an award for costs under the Late Payment of Commercial Debts (Interest) Act 1998.  This was because, the Housing Grants, Construction and Regeneration Act 1996 section 108A, effectively removed any application of the Late Payment of Commercial Debts (Interest) Act 1998, including section 5A which allows a party to claim the costs of recovering a debt.

What the Enviroflow decision means in practice

This decision will bring comfort to the parties of a construction contract that if adjudication occurs, all participants will be responsible for their own costs unless the narrow conditions of s108A apply.

Adjudication was designed to be a quick, cost-effective dispute resolution for the construction industry, to avoid parties and projects suffering delays if a dispute occurred.  Therefore, the TCC’s decision in Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd is in the spirit of what Parliament intended and puts a halt to a practice which could, if left unchecked, have significantly increased the risks of adjudication, thus nullifying the original purpose of the process.