06 Feb 2014

Adjudicators: what am I actually paying for?

by Victor Lau, Joseph Haddad

A UK decision that held adjudicators will not be able to recover their fees if their decision is unenforceable has ramifications for dispute resolution mechanisms in Australian construction contracts.

The England and Wales Court of Appeal decision of PC Harrington Contractors Ltd v Systech International Ltd [2012] EWCA Civ 1371 held that an adjudicator was not entitled to payment of their fees when the rendered decision is unenforceable by reason of a failure to afford natural justice to the parties.

The arbitration and the arbitrator's fees

A contractor, PC Harrington Contractors (PCH), engaged Tyroddy Construction as a subcontractor to conduct work at Wembley Stadium. A dispute arose between the parties concerning the return of retention moneys held by PCH under the subcontract. The parties referred the dispute to an adjudication by Mr Doherty.

During the adjudication, PCH argued that Mr Doherty did not have jurisdiction to determine the matter until the question of whether PCH had overpaid Tyroddy on another project was resolved. However, Mr Doherty determined that he did have jurisdiction and expressly declined to deal with PCH's overpayment defence.

Ultimately, Mr Doherty held that PCH was to return the retention moneys to Tyroddy and ordered PCH to pay his fees of £18,144. Mr Doherty's decision was subsequently held to be unenforceable because he had failed to afford natural justice to the parties by reason of his refusal to consider PCH's overpayment defence. Notwithstanding the unenforceability of his decision, Mr Doherty sued PCH for his fees.

Is an adjudicator entitled to be paid when their decision is unenforceable?

At first instance, Justice Akenhead rejected the argument that there had been a "total failure of consideration" and held that Mr Doherty was able to recover his fees as "there has been in effect at the very least partial performance by the Adjudicator". Even though the decision was unenforceable, Mr Doherty had conducted a substantial amount of work, including reviewing documents and corresponding with the parties.

On appeal, the Court focused on the governing legislation and the contract.

The relevant legislation provided:

"The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned." (Scheme for Construction Contracts, clause 25)

The Court found that this entitled the adjudicator to be paid when the appointment came to an end before the decision was made, but not when an unenforceable decision was rendered. Further, the Court drew a distinction between:

  • an entire contract – where payment is made for the final product, that is, an enforceable decision; and
  • a divisible contract – where payment is made for the performance of the preliminary functions in the making of a decision.

The Court held that the present contract was of the former type. There was nothing in the contract or in the governing legislation to indicate that the parties intended to pay for an unenforceable decision or for the preliminary functions performed by the adjudicator. Essentially, the unenforceable decision was of "no value to the parties".

Therefore, it was determined that Mr Doherty was not entitled to recover his fees.

Implications for contracts with arbitrators

This decision highlights the primacy of the contract in determining whether parties will be liable to pay for the fees of the adjudicator or arbitrator in the event that any rendered decision is determined to be unenforceable.

The Security of Payment legislation provides that an adjudicator will not be entitled to be paid his or her fees where the decision is not made within the time limits allowed by the legislation. It remains to be seen, however, whether the approach taken by the English Court of Appeal will be adopted in Australia to limit recovery of fees when the rendered decision is unenforceable due to issues in relation to jurisdiction and/or denial of natural justice.

Parties should give thought to whether their contract with the adjudicator or arbitrator entitles the adjudicator or arbitrator to recover payment for an unenforceable decision and, at the very least, whether the contract is an entire contract or a divisible contract.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.