UK adjudication: Court of Appeal denies adjudicator his fees in light of breach of natural justice

The Court of Appeal in PC Harrington Contractors Ltd v. Systech International Ltd [2012] EWCA Civ 1371 has held that where an adjudicator produces a decision that is unenforceable due to a breach of the rules of natural justice, then his fees should not be paid. The adjudicator's decision was unenforceable because he had failed to consider part of the sub contractor's defence.  In overturning the first instance decision, the Court decided that the adjudicator's duty was to produce an enforceable decision and there was no entitlement to be paid if he did not do so, even in respect of services performed by him which were preparatory to making the decision.

 Background

The adjudication was conducted under the Scheme for Construction Contracts applicable in England and Wales. The Scheme provides for payment to the adjudicator in certain circumstances where he ceases to act or resigns (but if revocation of his appointment is due to default or misconduct, he has no entitlement to his fees).  By paragraph 20, his obligation is to decide the matters in dispute.  Once he has made his decision it is temporarily binding on the parties unless and until the dispute is finally determined by further proceedings.

At first instance, the court held that the adjudicator's decision was unenforceable by reason of breach of the rules of natural justice but that this did not present a bar to payment of his fees as he had performed certain tasks prior to issuing his decision.

On appeal, the appellant maintained that the adjudicator had failed to perform the service which he had been contracted to perform and should not be paid.

Decision

The Court of Appeal held that the correct question to be decided was whether the contract could be described as "entire" which meant that it required complete performance as a condition precedent to the liability to pay.  The Court decided this in the affirmative and was guided by the terms of the Scheme which indicated that the adjudicator should not be paid in the case of default or misconduct.  Even though he was permitted to demand interim payment, that did not indicate an entitlement to payment for each discrete step of the process.  These had no separate value to the parties since the only result they expected from the process was an enforceable decision.

Comment

This decision accords with basic principles of fairness. The Court correctly applied the Scheme and concluded that it cannot be right for an adjudicator to produce an unenforceable award yet to be entitled to payment. 

Not all adjudications are conducted under the Scheme and a different conclusion might be reached where other institutional rules are adopted or a bespoke set of terms is agreed between the parties.  Further, the parties may make specific provision in their appointment letter as to the consequences of producing an unenforceable decision. 

The judgment raises practical questions for adjudicators. It is likely that adjudicators will review their standard terms of engagement to ensure they provide for payment in all circumstances (this may itself pose problems under section 3 of the Unfair Contract Terms Act 1977) or, at the very least, staged payments. Hopefully, the judgment will improve the dialogue between adjudicators and parties, such that when jurisdictional issues are identified, these are dealt with openly and the parties able to proceed in full knowledge.

It will be interesting to see how the judgment is applied in practice, in particular whether adjudicators who have already been paid for unenforceable decisions are sued. It is also open to question whether this could apply in relation to other ADR processes, for example expert determinations. These are usually enforceable under contract save in the case of fraud or manifest error, and the underlying contract usually provides for payment of the expert. Should there be no provision regarding remuneration, an expert may have to sue both to establish the fact of the debt (either as a matter of contract  or quantum meriut) and to justify the amount.