Adjudicators’ Fees – Do You Have to Pay if the Decision is Unenforceable?
Adjudication is probably the most widely used dispute resolution process in the construction industry. It is attractive because it secures a quick decision which is binding on the parties unless and until a court or arbitrator declares that the decision should not be enforced. The courts are extremely supportive of adjudication and therefore it is only in rare cases that an adjudicator’s decision will be held to be unenforceable.
However, in such cases, it is quite understandable that the parties may feel aggrieved that they have paid substantial fees to the adjudicator, only to receive a decision which is a nullity. It is perhaps surprising that although adjudication has been around for 14 years now, the courts had never dealt with a dispute about whether an adjudicator should be paid for making an unenforceable decision until the recent case of PC Harrington Contractors Ltd v Systech International Ltd.
PC Harrington (“PCH”) had been involved in 3 separate adjudications brought by a sub-contractor, Tyroddy Construction Limited (“Tyroddy”), regarding the recovery of retention monies. The conduct of each adjudication was governed by the Scheme for Construction Contracts (the “Scheme”) and was subject to the adjudicator’s standard terms and conditions. In all 3 adjudications, PCH had argued that Tryoddy was not entitled to payment of the retention because Tyroddy had been overpaid. The adjudicator, who was employed by Systech, believed he did not have jurisdiction to consider PCH’s defence and awarded Tyroddy the requested sums.
PCH applied to court for a declaration that the decisions were unenforceable, as the adjudicator had breached the principles of natural justice in failing to consider PCH’s defence. The court held that although the adjudicator had acted honestly, his inadvertent breach of the rules of natural justice meant the decisions were unenforceable.
As Tyroddy had ceased trading, PCH was liable under the adjudicator’s terms and conditions for payment of his fees. PCH refused to pay and Systech commenced legal proceedings. PCH argued that the adjudicator had completely failed to provide the service he had been appointed to provide and was therefore not entitled to payment.
The Judge disagreed and ordered PCH to pay the adjudicator’s fees (£22,000 plus VAT for the 3 adjudications) in full. The Judge was of the view that producing a decision is not the only work an adjudicator is appointed to carry out. The adjudicator’s role had also involved various other functions, such as giving directions to the parties, addressing correspondence and dealing with jurisdictional challenges. It was clear the adjudicator had spent a great deal of time carrying out these additional functions, and therefore even though his decision was ultimately unenforceable, he had fulfilled the role he was appointed to perform.
PCH appealed the Judge’s decision.
The Court of Appeal Decision
In a judgment handed down last week, the Court of Appeal overturned the Judge’s decision, confirming that an adjudicator who produces an unenforceable decision is not entitled to payment of his fees.
The Court was of the view that the parties had entered into a contract with the adjudicator for the production of a decision. It was not a contract for the carrying out of a series of different functions which culminated in the production of a decision. In the absence of the enforceable decision which the parties had bargained for, the adjudicator had no entitlement to be paid for the ancillary work he had carried out in conducting the adjudication.
The Court relied on the following principles in support of its decision:
- The Scheme envisages that the adjudicator will “decide” the matters in dispute.
- The Scheme clearly sets out the circumstances where an adjudicator is entitled to be paid notwithstanding that his appointment has come to an end before he makes his decision. For example, if an adjudicator resigns because the dispute is one which has already been referred to adjudication, he is entitled to be paid, but he is not entitled to payment if he resigns for any other reason. It is therefore clear from the Scheme that if an adjudicator fails to decide the matters in dispute, he is only entitled to be paid in certain carefully defined circumstances. None of those circumstances applied in this case.
- The ancillary functions which the adjudicator had carried out prior to making his decision, such as issuing directions and reviewing the papers, were of no value to the parties.
- The parties had agreed to pay for an enforceable decision. An unenforceable decision was of no value to the parties. There was nothing to indicate that the parties had agreed to pay for an unenforceable decision or that they would pay for the ancillary services performed by the adjudicator prior to making an unenforceable decision.
- The Scheme provides that if an adjudicator’s appointment is terminated due to his default, the parties do not have to pay the adjudicator’s fees and expenses. It is nonsensical to suggest that the parties had agreed (via the Scheme) that the adjudicator would not be paid if his appointment was terminated before the decision was made, but agreed that they would pay the adjudicator in full if his default only came to light after the decision was made.
- The purpose of adjudication is to encourage disputes to be resolved quickly. If the parties are required to pay for unenforceable decisions, this means they will have incurred cost and wasted time on a pointless exercise. This would be contrary to the whole ethos of the adjudication procedure.
The Court of Appeal’s decision confirms that where the parties to an adjudication do not get what they have agreed to pay for (i.e. an enforceable decision), the adjudicator is not entitled to payment of his fees, notwithstanding that he may have gone to a lot of time and effort conducting the adjudication and producing his unenforceable decision. Whilst this is encouraging for anyone who uses adjudication, it will be a worry for adjudicators, who will no doubt be considering how they can ensure payment in all cases.
Indeed, the Court of Appeal acknowledged that their judgment could cause concern for adjudicators and even went so far as to suggest that adjudicators could overcome any potential problems by including a provision in their terms of engagement which states that they are entitled to be paid even if their decision is not enforceable. It is likely that this practice will become commonplace. Unfortunately, if it does, there may be little referring parties can do about it, at least not initially. Few referring parties will want to risk alienating their adjudicator by objecting to his terms and conditions at the start of the adjudication.
However, even if adjudicators do amend their terms and conditions to insist upon payment in all cases, there may still be a line of argument which could be relied upon by parties who are unhappy at receiving an unenforceable decision.
The Unfair Contract Terms Act 1977 (“UCTA”) states that it is not possible for a contracting party to rely on a term which allows him to render a “performance substantially different from that which was reasonably expected of him” or to render “no performance at all”, unless that term satisfies the “reasonableness test” (as set out in UCTA). Given that the sole purpose of appointing an adjudicator is to procure an enforceable decision, there may well be some merit in the argument that a term which requires the adjudicator to be paid for producing an unenforceable decision (i.e. the opposite of what was expected of him) does not satisfy the requirement of reasonableness.
This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.