Bulletins | December 8, 2016

Why it’s even more important now to check the interest clause within your building contracts and appointments – adjudication costs

In a recent case (Lulu Construction vs Mullalley & Co) the contractor benefitted from a legal uncertainty regarding compensation for late payment and was awarded his adjudication costs. Although the case turned on its own facts, it is likely that others will now be encouraged to try to achieve the same result.

A quick reminder:

  • It is generally accepted that it was not Parliament’s intention to allow parties to claim the costs of participating in an adjudication under the Housing Grants Construction and Regeneration Act (Construction Act).  However there is a potential conflict between the Construction Act and the compensation provisions of the Late Payment of Commercial Debts (Interest) Act 1998 as amended (the Late Payment Act).
  • The Late Payment Act enables businesses to claim interest for late payment and recover reasonable debt recovery costs.  The Act applies to contracts for the supply of goods or services (with a few exceptions) where the purchaser and the supplier are each acting in the course of business.
  • Under the Act, contracting parties are free to agree their own terms for late payment but if those terms do not constitute a ‘substantial remedy’ they will be void and the following will apply:
    • the interest rate will be 8% per annum above the Bank of England base rate – very high in today’s climate of low interest rates; and
    • a fixed sum of compensation (£100 for debts above £10,000) or, to the extent that sum is insufficient, the reasonable costs of recovering the debt will be payable to the party which is out of pocket

What happened?

The employer asked the adjudicator for a declaration as to the value of the final account.  In its response the contractor set out its case regarding the final account and included a request for its ‘debt recovery costs’ (being the costs of running the adjudication) as compensation in accordance with the Late Payment Act. The Adjudicator awarded the contractor his costs.  In enforcing the decision the Court did not look at whether the adjudicator had made the correct decision and the law in this area remains unclear.

What next?

Until we have clarification in this area, there are likely to be parties who will try to claim their adjudication costs under the Late Payment Act.  If you are the paying party under any contract, it would be wise to check your interest provisions to ensure that the provisions of the Late Payment Act will not be implied. If you fail to do so, you could end up being embroiled in lengthy (and costly) legal arguments over this as yet unsettled area of law – something to avoid.