A hefty price for adjudicators

Posted: 05/02/2013

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This recent decision in PC Harrington Contractors Ltd v Systech International Ltd [2012] EWCA 1371 (Civ) by the Court of Appeal has held that an adjudicator was not entitled to be paid because his decision was unenforceable due to a breach of the rules of natural justice. The result of the breach being that he failed to decide the parties’ dispute. The basis for this decision, as set out by Lord Dyson, was that the parties had not got what they bargained for ie an enforceable decision.

Background

The facts were fairly straightforward. Harrington (the contractor) and Tyroddy Construction Ltd (the sub-contractor) were involved in three adjudications, relative to three separate contracts, in which the sub-contractor sought payment of outstanding retention. The contractor’s defence to non-payment was based on (amongst other matters) a re-measurement of the sub-contractor’s works which it argued meant that it had overpaid the sub-contractor so no retention was payable. An adjudicator was appointed (Systech) who rejected the contractor’s defence stating that he did not accept the re-measurement because it was "not agreed but also contractually flawed and outwith [the] dispute." In other words, the adjudicator claimed he did not have jurisdiction to consider the contractor's defence.

The contractor obtained a declaration from the court that the three decisions were unenforceable due to breaches of natural justice by the adjudicator and in the meantime, the adjudicator commenced proceedings against the contractor to recover the outstanding fees.

At the TCC, Mr Justice Akenhead concluded in the adjudicator’s favour and held that he was entitled to his fee. He reasoned that an adjudicator's role in an adjudication is wider than simply producing a decision. Even where a decision is unenforceable (save for instances of bad faith which was lacking here), there is nevertheless part performance by the adjudicator of his obligations in giving opinions and arriving at a decision and consequently an entitlement to be paid for that performance. Whilst the doctrine of "total failure of consideration" was considered, it was held not to apply here as some of the services had been provided and therefore there could not be a total failure.

Decision

The case went on to the Court of Appeal which dramatically overturned the TCC judgment holding that the adjudicator’s entitlement to be paid accrues upon the giving of an enforceable decision.  The basis for this approach came from a careful reading of both the terms of the adjudicator’s engagement and the Scheme for Construction Contracts (England and Wales) Regulations 1998. In doing so, the Court of Appeal concluded that it could not possibly have been Parliament’s intention that an adjudicator should paid where its decision is unenforceable and therefore of no value to the parties in dispute. The Court considered it indisputable that the making of a decision which is unenforceable due to a breach of natural justice is a “default” or “misconduct” under the Scheme. It referred to para 11 (2) which allowed parties to revoke the adjudicator’s appointment and avoid paying fees if the adjudicator committed default or misconduct during the adjudication. Notwithstanding that here the adjudicator’s default or misconduct only came to light in the decision itself when it was too late for a revocation, the Court still held that there was no obligation to pay.

Implications

Some may view this as a welcome decision and one which will improve the standards exercised by adjudicators and thereby improve the quality of decisions. Adjudicators on the other hand may see it instead as a severe price to pay for an adjudicator who clearly “honestly and unwittingly” (Akenhead J) misunderstands his jurisdiction.

On a practical level, the decision potentially could discourage adjudicators from dealing robustly with challenges to both their jurisdiction and their decisions on the grounds of natural justice even where such challenges may be purely tactical and/or spurious.  Equally, where it is impossible to call which way a jurisdictional challenge will go, an adjudicator may be more likely to resign rather than continue at risk of not being paid.  The other more certain consequence of course is that adjudicators will quickly address changes required to their terms of engagement to include a provision covering payment of fees and expenses in the event of a decision not being delivered or proving to be unenforceable. This then leaves the burning question of whether parties will sign up to such terms.

It is unclear as to how far the reasoning in this decision can be applied to breaches of natural justice other than failing to consider a defence. It is certainly possible that, on the basis of this case, any breach of natural justice or error of jurisdiction which is enough to render the decision unenforceable might be sufficient to deprive the adjudicator of his fee and adjudicators should be aware of this. Query also whether parties who have received unenforceable decisions in the past will seek to reclaim such fees on the basis of this case. For the moment at least, we can only “watch this space” as we await further decisions and clarification on the issue. Suffice to say that in the meantime, this decision is going to impact both how the terms of the adjudicator’s appointment are viewed at the outset and how the adjudication is run in practice.

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