In this article, we look at the costs of adjudication under the Construction Contracts Act 2002 (CCA), including how awards of costs are dealt with, and comment on the potential for funding adjudications.

Costs under the CCA

The default position under the CCA is that parties will meet their own costs and expenses of adjudication, and the adjudicator’s fees will be split equally. Any agreement, made prior to the dispute arising, about how costs and expenses will be met will not be binding.

The adjudicator may determine that costs and expenses be met by another party if the adjudicator considers that that party has caused those costs and expenses to be incurred unnecessarily by:

• bad faith on the part of that party; or
• allegations or objections by that party that are without substantial merit.

In our experience, it has become usual for one or both parties to seek costs as part of the adjudication claim and response. Careful thought should be given to whether costs are sought rather than seeking them as a matter of course. The threshold for an award of costs is high (particularly to establish bad faith). Seeking costs where the threshold is patently not met, only adds to the cost of adjudication (both the cost of preparing the claim/response, and the cost of the adjudicator who is then required to consider the arguments).

The costs regime differs from court proceedings and arbitration, where a successful party is entitled to a contribution from the unsuccessful party. This may be a relevant consideration for a party deciding which forum to pursue its dispute in.

The cost of adjudicating 

The original intent of the CCA was to:

1. facilitate regular and timely progress payments between the parties to a construction contract;
2. provide for the speedy resolution of disputes; and
3. provide remedies for the recovery of payments under a construction contract.

Adjudication was introduced as a dispute resolution process to promote that intent. 

In our experience, the early disputes that were referred to adjudication after the introduction of the CCA were typically confined payment disputes and the costs of adjudicating were relatively low. 

Since then, there has been a steady trend of increasingly complex disputes being referred to adjudication. In parallel, there has been mounting criticism that adjudication has moved too far away from the original intent, has become expensive and is essentially a “mini-arbitration”. 

It is fair to say that the costs of adjudication for complex claims can be high, and this can be a material factor in whether a party pursues a claim, particularly if the amount in dispute is relatively low. However, adjudication (even for more complex disputes) is usually still faster and less expensive than court or arbitration. There is no one size fits all approach: some disputes are complex, and of material value (either in quantum or principle to the parties), and justify significant time and cost being spent on them. For disputes that are smaller in scale, the time and spend that can be justified may be equally smaller. This is a matter that should be considered at the outset of a dispute, including for a claimant deciding whether to use the adjudication process or not. 

To ensure that the costs of adjudication are proportionate, some nominating authorities also offer fixed fees for low-value and low-complexity disputes. 

Future opportunities to finance claims

There may also be scope for litigation funders to finance an adjudication claim in certain cases. Litigation funding is becoming more common in court proceedings in New Zealand, particularly for class actions. Generally, a litigation funder agrees to pay the costs of litigation (and any adverse costs if the claim is ultimately unsuccessful) in return for a share of any amounts recovered. 

We spoke to Jacob Kerkin, New Zealand Investment Manager at Omni Bridgeway, a global litigation funder regarding the potential for litigation funding of CCA adjudications. He commented that Omni Bridgeway have seen increasing demand for funding of construction disputes in recent years, particularly as the construction industry has faced significant pressures and claims are becoming more complex and costly to run. Mr Kerkin noted that the benefit of litigation funding is that it allows claimants to bring meritorious claims while at the same time focussing their resources and capital on their core business activities. He also commented that funding for CCA adjudications could be available where the claim size is significant or there was a portfolio of claims. 

Conclusion

In most cases, adjudication (even for more complex disputes) is a comparatively quick and cost-effective way of dealing with construction disputes. Parties considering adjudicating should be aware of the default position in relation to recovery of costs, which is that each party will bear their own costs. The cost of an adjudication and the amount recoverable are likely to be key considerations in pursuing a claim. Where cost may be a prohibitive factor, there are avenues available for a claimant such as litigation funding, in appropriate cases.

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