PC Harrington Contractors Ltd v Systech International Ltd

This very recent Court of Appeal decision has confirmed (reversing the decision of the court below) that where an adjudicator produces an unenforceable decision on the basis that he has breached the rules of natural justice, he should not be entitled to his fees.

In the court below, Systech, the adjudicator's employer, successfully sued PC Harrington Contractors Ltd (PCH) for the adjudicator's fees. The case advanced by PCH (as replicated in the appeal) was that the adjudicator was not entitled to any fee because he failed to produce an enforceable decision. In a previous enforcement hearing between PCH and Tyroddy Ltd the court held that the decision in favour of PCH was not enforceable. This was because the adjudicator had breached the rules of natural justice by not considering a defence put forward by PCH.

PCH argued there had been a total failure of consideration: the adjudicator had failed to perform the service which he had been contracted to perform. The judge said there had not been a total failure of consideration and that the adjudicator was entitled to his fees. He said that the role of the adjudicator encompassed not only the production of the decision but also the remaining aspects of the role involving the conduct of the adjudication leading up to the decision.

The judge also referred to policy considerations, with adjudicators effectively performing a statutory role. He said that "One should therefore be somewhat slower to infer that what parties and adjudicators intended in their unexceptionally worded contracts was something which excluded payment in circumstances in which the adjudicator has done his or her honest best in performing his or her role as an adjudicator, even if ultimately the decision is unenforceable."

The appeal

There was a debate as to whether the adjudicator's failure to make an enforceable decision was a total failure of consideration. The court agreed that the adjudicator was obliged to perform some ancillary and anterior functions and entitled to perform others - "he could not simply produce a decision out of the hat."

However, the question was whether the adjudicator was entitled to be paid for these steps if they culminated in an unenforceable decision. Whether performance of the preliminary steps amounted to partial performance of the bargain - for which payment was agreed to be made - was correct depended on the true construction of the contract. At first instance, the judge did not appear to have analysed the terms of engagement and the Scheme for Construction Contracts in order to arrive at his decision.

On appeal, the court distinguished between the provision of stage payments and instalments under section 109 of the Construction Act (which relates to payment provisions) and the absence of stage payments in relation to the payment of adjudicators. The Scheme carefully defines the circumstances in which the adjudicator is entitled to be paid in the event that he does not reach a decision (paragraphs 8 and 9 of the Scheme).

The terms of engagement could not be viewed in isolation from the Scheme - the court held that "Paras 8, 9 and 11 of the Scheme show clearly that it was not intended that the adjudicator should be paid in every case where he did not perform all of his obligations (including the making of an enforceable decision)".

The adjudicator had no discrete entitlement to his fees and expenses for the ancillary and anterior functions that he performed since none of the circumstances in the following paragraphs of the Scheme existed:

  • 8(4) - adjudicator ceases to act because a dispute is to be adjudicated by another person.
  • 9(2) - adjudicator must resign where the dispute is the same or substantially the same as one previously referred to adjudication and a decision has been taken in that adjudication.
  • 11(1) - parties may at any time agree to revoke the appointment for any reason.

Such functions "had no discrete value to the parties". The parties had bargained for an enforceable decision.

The purpose of the appointment was to produce an enforceable decision which for the time being would resolve the dispute. An unenforceable decision was of no value to the parties and they would have to start a fresh adjudication.

As regards policy considerations, the court drew a distinction between an erroneous decision which is nevertheless enforceable and a decision which is unenforceable because the adjudicator lacked jurisdiction or breached the rules of natural justice. According to the court, "Such a decision does not further the statutory policy of encouraging the parties to a construction contract to refer their disputes for temporary resolution by an adjudicator. It has quite the opposite effect... I can see no basis for holding that Parliament must have intended that an adjudicator who produces an unenforceable decision should be entitled to payment".

The court highlighted that in 15 years of adjudication, this issue had not arisen and that the decision should not be of concern to adjudicators. Adjudicators could ensure that their terms of engagement provide for payment of unenforceable decisions.

Commentary

This is a very important decision as there is no authority directly on the issue of recoverability of fees where the adjudicator's decision is unenforceable by reason of a failure to comply with the rules of natural justice. This will of course be of concern to adjudicators who will need to review (and negotiate agreement of) their terms and conditions in the event that they produce an enforceable decision. Adjudicators will also need to be more alert to jurisdiction and breach of natural justice issues and ensure that they are dealt with quickly and comprehensively.

Clearly it is a good result for parties who find themselves in the same situation as PCH which was effectively being asked to pay for something it contracted for but did not receive, i.e. an enforceable decision. It will be interesting to see how the decision is applied in future.