On a Proper Construction Issue 7: Recovering the Legal Costs of “The” or “An” Adjudication

Introduction

Drafting legislation might just be the hardest job in the law.

A construction contract that gives rise to a dispute might be closely analysed by a score or more of solicitors and counsel. Conversely veritable legions of construction lawyers have pored over the drafting of the various SOPA regimes around the country seeking to eke out some advantage for their clients.

As we explain below, an example of that in the current Western Australian regime depends on the difference between the use of the word “an” in one section as compared to “the” in another.

While it may seem overly pedantic our analysis is inspired by no less than Lord Diplock who famously stated that it was:

the habit of a legal draftsman is to eschew synonyms. He uses the same words throughout the document to express the same thing or concept, and consequently if he uses different words the presumption is that he means a different thing or concept.¹

We think the dicta is particularly applicable to the current regime. Whether similar analyses may be made of the new regime that is under consideration remains to be seen.

Read on to find out more.

Applications for adjudication made in Western Australia under the Construction Contracts Act 2004 (WA) (CCA) can significantly vary in complexity, size and quantum.

While the adjudication process is intended to be quick, informal and cost effective, a respondent may still incur significant (or at least disproportionate) internal or legal costs preparing a response to a frivolous or unfounded adjudication application.

Of course, there is no limit on the quantum of a payment dispute the subject of an adjudication application under the CCA (so long as the adjudicator is satisfied that the matter is not so complex that he or she cannot make a determination fairly (s 31(2)(a)(iv)). As such, the costs a respondent may incur (both in terms of the adjudicator’s fee and legal/internal/expert costs) responding to larger claims can be very significant.

The CCA provides that the default position regarding costs is that:

• The parties bear their own costs in relation to an adjudication of a payment dispute (s 34(1)); and
• The allocation of the costs of an adjudication is to be in equal shares between the parties to the payment dispute (s 44(6)).

However, if the adjudicator identifies “frivolous or vexatious conduct” or “unfounded submissions”, the adjudicator has the discretion to depart from the default position and decide that the other party must pay some or all of those costs (s 34(2), 44(7)).

A question arises as to how broad the discretion given to an adjudicator to award costs is under the CCA, particularly whether the discretion extends to award legal fees or other preparatory costs incurred by the successful (defending) party.

The CCA

Section 34 of the CCA provides (with our emphasis):

34. Costs of parties to payment disputes

(1) Subject to subsection (2), parties to a payment dispute bear their own costs in relation to an adjudication of the dispute.

(2) If an appointed adjudicator is satisfied that a party to a payment dispute incurred costs of the adjudication because of frivolous or vexatious conduct on the part of, or unfounded submissions by, another party, the adjudicator may decide that the other party must pay some or all of those costs.

(3) If an appointed adjudicator makes a decision under subsection (2) the adjudicator must —

(a) decide the amount of the costs and the date on which the amount is payable; and

(b) give reasons for the decisions; and

(c) communicate the decisions and the reasons in writing to the parties.

(4) Divisions 4 and 5, with any necessary changes, apply to a decision made under subsection (2) as if it were a determination of an appointed adjudicator.

Section 44 relevantly goes on to provide (with our emphasis):

44. Costs of adjudications

(1) For the purposes of this section the costs of an adjudication are —

(a) the entitlements of the appointed adjudicator under subsection (2); and

(b) the costs of any testing done, or of any expert engaged, under section 32(2)(c).

…

(5) The parties involved in a payment dispute are jointly and severally liable to pay the costs of an adjudication of the dispute.

(6) As between themselves, the parties involved in a dispute are liable to pay the costs of an adjudication of the dispute in equal shares.

(7) Subsections (5) and (6) do not prevent a decision being made under section 34(2).

Section 3 provides that “costs of an adjudication” has the meaning given to that term in section 44.

The advice of the Building Commission

The advice given by the Building Commission to adjudicators on the scope of the adjudicators power to award costs under section 34 is recorded in Practice Guidance Note 2: Awarding party-party costs under section 34 of the CCA. The Building Commission requires adjudicators to agree to comply with such guidelines as a condition of registration.

The Building Commission’s advice is that, if an adjudicator decides to exercise his or her discretion to depart from the default position:

• It is only the adjudicator’s entitlements and fees, and costs of any testing or experts engaged by the adjudicator, which may be allocated to the unsuccessful party; and
• Legal fees or other preparatory costs incurred by one party should not be allocated to the other.

The Building Commission’s advice is predicated on the following analysis:

It is important to be aware that the “costs of an adjudication” referred to in section 34(2) of the CCA refers only to those costs described in section 44(1) of the CCA.

Analysis of the Building Commission’s advice

If the defined expression “costs of an adjudication” as used in section 44 also applies to the expression “costs of the adjudication” as used in section 34(2), an Adjudicator’s discretion does not extend to the allocation of legal fees or other preparatory costs incurred by one party. This being the view of the Building Commission.

However, another view is that the subtle distinction between the defined section 44 expression “costs of an adjudication” and the general undefined section 34(2) expression “costs of the adjudication” is intentional, as those expressions have a different meaning.

That question has not been tested by the Courts. As such, as matters currently stand, an adjudicator will, most likely, follow the Building Commission’s advice, although, it is a matter for the appointed adjudicator to interpret the CCA.

That said, we think that there is a reasonable prospect that a Court would take a different view to the Building Commission and accept that legal costs can be awarded in the limited circumstances identified in section 34(2). That is because:

1. Section 44(1) clarifies that the limited nature of the defined expression “costs of an adjudication” in section 44 is used only “[f]or the purposes of this section“. That is to say, it is not used for the purpose of section 34;
2. The defined expression “costs of an adjudication” is not used elsewhere in the CCA other than in section 44 (moreover, the defined expression “costs of an adjudication” is not used in section 34);
3. If it was intended that the definition of “costs of an adjudication” was meant to apply to section 34, this intention would have been made clear both by the use of consistent language and by the definition in sections 3 and 44 being expressly expanded to section 34(2). Neither of those things were done;
4. The power in section 34(2) is drafted to allow an “appointed adjudicator” to award costs where a party to the adjudication process has incurred those costs because of “frivolous or vexatious conduct” or “unfounded submissions” on the part of the other party;
5. The power created in section 34(2) is not limited to situations where the appointed adjudicator has found jurisdiction and made a determination in respect of a payment dispute, but also to situations where the adjudicator dismissed the application for want of jurisdiction. It is for that reason that section 34(2) does not use the language of “determination” but rather “decision” but that for the purposes of enforcement a decision under section 34(2) is to be taken as a “determination” under Divisions 4 and 5 of Part 3 of the CCA (s 34(4)); and
6. The Explanatory Memorandum to the Construction Contracts Bill 2004 (WA) provides that section 34(1) (that parties bear their own costs in relation to an adjudication of a payment dispute):

Allows each party to determine the amount of effort it puts in and prevents a weak party being bullied out of an adjudication by the threat of a massive costs order

But then immediately goes on to provide a counterbalance to that by section 34(2) which provides that:

[i]n the case of frivolous or vexatious conduct on the part of or unfounded submissions by another party the adjudicator has the power to apportion all or some of the costs to another party. This provides some discouragement to the making of frivolous or vexatious claims.

Which suggests that the draftsperson intended for section 34(2) to include legal costs.

In our view, in the appropriate circumstances, parties ought to be entitled to recover legal costs incurred defending frivolous or unfounded claims. We think that this was mostly likely the intention of the draftsperson of the CCA for the reasons set out above. There is a synergy here with the ability for a Court or Tribunal to be able to award costs against a “naughty” litigant. It is also a means of dis-incentivising frivolous or unfounded claims, after all while the jurisdiction is “quick and dirty” it is still designed to be used to settle genuine disputes not just as a means of running nonsensical claims.

However, at the time of preparing this article the Western Australian Government has released an exposure draft Bill, the Building and Construction Industry (Security of Payment) Bill 2020 (WA) (Bill) anticipated to be introduced later in the year. The Brief Explanatory Statement to the Bill provides (our emphasis): Claimants and respondents will be liable in equal shares for the registered adjudicator’s fees, unless determined otherwise. Neither party is entitled to any legal costs from the other.

As such, it appears as though the new security for payment law in Western Australia will likely expressly prohibit a party from being entitled to recover legal costs. So as entertaining as our analysis has been, it might all be moot. Nonetheless, it does demonstrate the point that even the smallest changes have big consequences.

This article was written by David Ulbrick, Partner, Kate Morrow, Special Counsel and Michael Harris, Associate.

¹ Prestcold (Central) Ltd v Minister for Labour [1969] 1 WLR 89, 97.