Recovering costs in adjudications

It is no secret that dispute resolution is a costly exercise. However, most forms of dispute resolution recognise this expense and include a mechanism where the victor can recover some of what they had to spend in bringing or defending a claim.

For instance, if you take proceedings against someone in the High Court there is a general presumption that ‘costs follow the event’ i.e. the winner is entitled to be paid back a proportion of their costs.

In this article we look at some recent law that explored the complications around recovering costs in Construction Contract Act 2002 (CCA) adjudication.

Adjudication under the CCA is one of the most widely-used forms of dispute resolution available to construction contractors. The goal of adjudication is to keep cash flowing by resolving disputes quickly. There are a lot of advantages to adjudication.

Adjudicators are typically very experienced in construction issues so can quickly turn around robust decisions, which allow everyone to carry on with their lives without spending years in a bitter dispute. In addition, compared to other forms of dispute resolution, adjudication is relatively cost effective.

Unlike proceedings in the High Court, the CCA default position in respect of costs is that each party equally pays the adjudicator’s fees, and wears their own costs.

However, this default position can be varied in a few instances. The adjudicator can determine that Party A’s costs and expenses must be met by Party B, if the adjudicator considers that Party B caused those costs unnecessarily by:

• Bad faith on the part of that party; or

• Allegations or objections by that party that are without substantial merit.

Likewise, in respect of the adjudicator’s fees, one party can be ordered to pay a greater proportion of the adjudicator’s fees if:

• The claim or response of that party was without substantial merit; or

• The party acted in a contemptuous or improper manner during the adjudication.

When a decisive victory isn’t decisive enough

Adjudication cost principles were examined in the recent case of Ace Structural Limited v Green [2019] NZHC 1558. This case was the judicial review of an adjudicator’s
decision not to make an order for costs in favour of the winning party.

The parties to the adjudication were Firma Construction Ltd (the head contractor) and Ace Structural Ltd (a fabricated steel installer, subcontractor). The dispute related to whether Firma had lawfully cancelled its subcontract with Ace, on the basis that Ace had served a stop work notice which, according to Firma, repudiated the contract.

Firma claimed that Ace was required to pay Firma the costs of completion. Conversely, Ace argued that they served their stop work notice as a last resort after not being paid for progress claims and variations.

The adjudicator was asked to determine:

• Whether the contract was lawfully cancelled and, if so, whether Ace was required to pay Firma the costs of completion and rectification of allegedly defective work;

• Whether Ace was entitled to recover in respect of unpaid progress claims and variations and if so in what amount;

• What amount of interest should be paid; and

• Whether costs should be ordered and, if so, in what amount.

In his determination the adjudicator, Green, found in favour of Ace. However, consistent with the default position in adjudication, Green declined to award costs and determined the adjudicator’s fees should be met equally.

Bad faith?

Ace challenged the ruling on costs and the adjudicator’s fees through judicial review, claiming that the adjudicator had made a mistake in finding that there had been no bad faith. In particular it noted that:

• Firma had attempted to take advantage of its own breaches of contract;

• Firma’s variation defences were disingenuous; and

• Firma had claimed costs that it had not incurred and which it knew it had not incurred.

Ace also argued that the adjudicator did not give coherent and adequate reasons for his decision not to award costs. Ultimately it was this lack of reasons that swayed the judge in deciding that the matter should be sent back to the adjudicator to reconsider.

Without substantial merit?

The Court also was required to determine whether the adjudicator was wrong to conclude that there was substantial merit to Firma’s allegations and objections. Ace’s position was based on the adjudicator decisively dismissing all Firma’s claims.

Again, the Court was concerned that the reasons given for this finding were inadequate, so once more the decision was sent back to the adjudicator to determine.

What does this mean?

After making the effort to bring a judicial review of the adjudicator’s determination in the High Court, Ace was left with no more certainty about costs than it already had. This was a lost chance for the High Court to provide useful guidance to all concerned with adjudications, whether they be the parties, their advisors and adjudicators generally, as to what ‘bad faith’, ‘without substantial merit’ and ‘contemptuous or improper manner’ mean in practice.

However, we understand that this judgment has been appealed to the Court of Appeal so we may see some further development on these points.

Because the Court’s concerns were with the adequacy of reasons given (and not the substance of the issues) Green could simply make the same decision with further explanation. That in itself should be informative, but only to Firma and Ace, as the CCA places strict confidentiality on the contents of the determination.

If the Court of Appeal agrees with the High Court and does not make substantive rulings on this point then it is very unlikely we will ever learn the outcome.

In our adjudication experience, costs are only awarded in exceptional circumstances. This case allowed a rare peek behind the curtain into the confidential adjudication determination process to illustrate just how difficult recovering costs can be.

It serves as a reminder to take this into account when considering adjudication as a dispute resolution option.

• Kensington Swan offers 15 minutes of free advice on construction issues to CCNZ members.

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This article was first published in the October 2019 issue of Contractor Magazine