The case law moves on apace

A judge has ruled that costs incurred at a adjudication cannot be recovered as damages if the dispute subsequently goes to court. Daniel Atkinson considers the effects this decision might have.

ADJUDICATION has helped achieve the rapid resolution of disputes but, ironically, it has also given rise to a wealth of judgments by the courts. This is mostly due to the brevity of the Construction Act, which requires the courts to flesh out the details of adjudication and develop the jurisprudence on the bare skeleton of the Act.

The Act itself also limits the application of adjudication. The result has been legal arguments on jurisdiction, usually only found in international arbitrations in the realm of conflicts of laws. Perhaps it is now time for Parliament to consolidate the law to make adjudication simple and easy to apply by non-lawyers to all disputes. In the meantime, it pays to keep abreast of court decisions in cases now numbering almost 100.

One such decision is that of Judge Wilcox, in the recent case of Total M&E Services v ABB Building Technologies, dealing with the two perennial issues of costs and set-off. The case concerned an application by Total for summary judgment arising out of an adjudication.

Judge Wilcox gave summary judgment to Total for the sum awarded by the adjudicator of £462,789.69.

The first issue was Total's claim for its costs in the adjudication, amounting to £92,512. The second was ABB's claim for set-off for defective work worth £121,087.50. This latter issue had been considered by the adjudicator, but rejected on the basis that ABB had not given proper notice to withhold the sum.

This question of costs has given rise to a number of court decisions, but the issue here was a new one. It has often been argued that, while the costs of adjudication cannot normally be recovered in adjudication, except by agreement of the parties, they could be recovered as damages for breach of contract in subsequent court proceedings.

In a situation where one party does not pay as required by the contract, this will be a breach of contract. These days, the injured party will often spend money in adjudication to enforce the payment terms. That cost will be a loss caused by the original breach. There is no reason why those costs should not be recovered in subsequent proceedings as damages, either in arbitration or litigation.

But in this case Judge Wilcox rejected the argument that the costs could be recovered as damages. He noted that the Scheme for Construction Contracts envisaged that both parties may go to adjudication and incur costs which they could not recover under the Act. He said it therefore followed that such costs could not arise as damages for breach of contract, and that to permit such a claim would be to subvert the statutory scheme under the Act.

The report of this case gives no further justification for the decision. The widest interpretation is that the decision prevents recovery of such damages in any proceedings. The narrowest interpretation is that it only prevents recovery to enforce an adjudicator's decision.

This latter interpretation can be justified on several grounds. The prospect of having to pay costs could prevent small firms from seeking adjudication - the very firms the Act is meant to protect against larger firms. The issue of costs could distort the process in ways often seen in arbitration and litigation, favouring the larger firm and leading to procedural wrangling. Hence, costs should be excluded from adjudication.

The wider interpretation is harder to justify. Why should the fact that adjudicators have no jurisdiction to awards costs without the agreement of the parties completely rule out the recovery of damages for breach of contract? The main issue is the prospective loss and there is little doubt that both parties will consider adjudication following a contract breach. So, adjudication costs should be recoverable as damages in any final resolution.

But it could also be argued that adjudication is part of the administration of the contract, fulfilling part of the traditional role of the architect or engineer.

If that is the case, and the parties have agreed how their costs for such administration are to be dealt with, then that is a matter of contract and should be enforced by the courts. Thus there is no basis for recovery of costs as damages.

I suggest that Judge Wilcox's decision is limited to the narrow interpretation;

we will have to wait for further court decisions to see if the wider one is adopted.

Judge Wilcox dealt smartly with the second issue, namely the set-off costs.

He said the adjudicator had considered the issue and rejected it. It was not the function of the courts in enforcement proceedings to review each and every aspect of the adjudicator's decision. He then considered whether to grant a stay of execution of the judgment for £462,789.69. ABB's concern was that if the adjudicator was found to be in error when the disputes were decided, there was a risk that Total would not be able to repay the £462,789.69. Judge Wilcox decided that the risk of future non-payment was not established on compelling, uncontradicted evidence.

With no special circumstances to prevent enforcement of the judgment for £462,789.69, the stay was refused.

Surprisingly, Judge Wilcox then ordered payment into court of the set-off cost of £121,087.50 pending resolution of that issue. Total did not receive payment in full on the adjudicator's decision. Thus ABB was able to rely on a set-off already rejected by the adjudicator for lack of notice. The basis of this part of Judge Wilcox's decision and the factors in ordering payment into court are unclear and we must wait to see whether this is a new departure in enforcement.

Key points

In the case of Total M&E Services v ABB Building Technologies, Judge Wilcox ruled that the costs of adjudication cannot be recovered as damages for breach of contract in subsequent court proceedings.

Until a wider interpretation is accepted by the courts, we must assume that this decision would only prevent recovery in proceedings to enforce an adjudicator's decision.

While upholding the adjudicator's decision to reject ABB's application for set-off, Judge Wilcox ordered Total to pay into court the set-off amount of £121,087.50 pending resolution of that issue.