Costs and Expenses of Adjudication
- One of the most commonly asked questions by intending parties to adjudication is what will it cost and who pays?
- The answer is not straightforward and, other than in respect of the Building Disputes Tribunal Fixed Fee Low Value Claim (LVC) Service, the cost of adjudication is dependent on a number of relevant factors all of which are outside the control of the adjudicator including, in particular:
- the nature and number of matters in dispute;
- the complexity of the dispute;
- the nature and volume of documents provided by the parties; and
- the manner in which the claim and response (and any reply and rejoinder) are presented.
- There are two elements to the costs that parties might incur in relation to any adjudication: their legal and expert costs and expenses (if any), and the adjudicator’s fees and expenses.
- Consistent with the general purpose of the Act, the presumption/default position under the Act is that the parties will bear their own costs and expenses and contribute to the fees and expenses of the adjudicator in equal proportions.
- However, in making a determination, the adjudicator has the statutory power/discretion to depart from the default position and determine that a party’s legal and expert costs and expenses must be met by any other party and/or that the parties are liable to contribute to his or her fees and expenses in any proportions that the adjudicator may determine.
The relevant statutory provisions and legal principles
- The power to determine liability for the costs and expenses of a party in adjudication proceedings is addressed at section 56 of the Act, which provides:
56 Costs of adjudication proceedings
(1) An adjudicator may determine that costs and expenses must be met by any of the parties to the adjudication (whether those parties are or are not, on the whole, successful in the adjudication) if the adjudicator considers that the party has caused those costs and expenses to be incurred unnecessarily by-
(a) bad faith on the part of that party; or
(b) allegations or objections by that party that are without substantial merit.
(2) If the adjudicator does not make a determination under subsection (1), the parties to the adjudication must meet their own costs and expenses.
- Any agreement by the parties, whether by way of standard terms of contract or by separate agreement made before a dispute arises, as to how costs are to be apportioned or that one party will indemnify the other in relation to those costs, is not binding on the parties or the adjudicator.
- The power to determine the apportionment of the adjudicator’s fees and expenses is addressed at section 57 of the Act.
- Under section 57, the parties to an adjudication are jointly and severally liable to pay the adjudicator’s fees and expenses in equal proportions, or the proportions that the adjudicator may determine. An adjudicator may make a determination that a party pays all or bears a greater proportion of his or her fees if, in the adjudicator’s view, the claimant’s claim or the respondent’s response was without substantial merit, or a party to the adjudication acted in a contemptuous or improper manner during the adjudication.
- Whether allegations or objections are without substantial merit is an inquiry made at the time of pursuing those allegations or objections. A careful inquiry is necessary to determine whether a claim can properly be characterised as one that lacks substantial merit, viewed without the benefit of hindsight. Allegations or objections can be said to be without substantial merit where a party:
- should have known about the weakness of its case viz, where they make allegations that they ‘ought reasonably to have known they could not establish; and
- nonetheless, pursued the claim or argument in defiance of commonsense ie, where the only reasonable inference from the evidence, considered as a whole, demonstrably goes against a claim, or advancing a claim that directly contradicts expert evidence without reason to do so.
- The meaning of ‘bad faith’ depends on the circumstances in which it is alleged to have occurred. It is well established that the threshold for bad faith is a high one and that a party alleging bad faith must discharge a heavy evidential burden. The High Court in Clearwater held that conduct constituting bad faith can range from dishonesty to a disregard of legislative intent.
- The costs regimes under sections 56 and 57 of the Act are plainly intended to encourage the use of adjudication as a prompt, efficient and cost effective alternative to litigation to resolve disputes arising under construction contracts. Where parties are required to meet their own costs and share the decision maker’s costs equally, the rationale is that they will act sensibly and responsibly in their own cause and only take such legal and expert advice as is necessary to properly and proportionately advance their case and rebut that of any other party, and that they will take all practical steps to minimise the decision maker’s costs.
- The legal position can be summarised by saying that an adjudicator has a limited discretion to determine liability for costs against any of the parties, which discretion should be exercised judicially not capriciously.
- There is clearly an overarching presumption that the parties will bear their own costs and an equal proportion of the adjudicator’s fees and expenses in adjudications under the Act, unless the adjudicator is satisfied that the particular circumstances dictate otherwise.
- The mere fact that a party is unsuccessful does not of itself conduce to a finding that its allegations or objections were without substantial merit. In many cases both parties have a point to out forward on the matters at issue regardless of the actual determinations.
What has been the experience and the practice of adjudicators to date?
- The Building Disputes Tribunal has undertaken more than 1,000 adjudication cases and has collected comprehensive statistics relating to those proceedings.
- Our statistics establish that 75% of claims are successful in whole or in part with a median ratio of determined amount to claimed amount of 90.5% however, and notwithstanding that 37% of all claims are wholly successful, consistent with the underlying philosophy of the Act:
- adjudicators have largely declined to exercise the discretion in sections 56(1)(a) and 57(3)(b) of the Act in favour of the successful party other than in patently clear cases with the result that the parties have been ordered to bear their own costs and share the adjudicator’s costs and expenses in equal proportions in 81.8% of all cases;
- the respondent has been ordered to pay costs in only 15.3% of all cases; and
- the claimant has been ordered to pay costs in only 2.9% of all cases.
- BDT’s statistics also provide useful insights in terms of the average cost of adjudication. In particular, on average:
- adjudicator’s fees and expenses equate to 21.1% of the claim value within a range of 3-66%;
- claimant party costs equate to 17.81 % of the claim value within a range of 3.7-99.75%; and
- respondent party costs equate to 17.78% of the claim value with a range of 6.61-60.41%.
- Overall our statistics demonstrate that adjudication is both efficient in terms of time and process, and cost effective particularly when parties present their case in a cogent, logical, well-structured and clear manner.
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