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Adjudicator`s entitlement to payment of their fees

08 December 2011 #Construction


Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.

In the recent case of PC Harrington Contractors Limited v Tyroddy Construction Limited, the Technology and Construction Court (Mr Justice Akenhead) had to decide whether an Adjudicator’s decision was in breach of the rules of natural justice in failing to consider the defence to the claim for payment of retention or did the defence amount to a new dispute outside of the dispute referred. 

This case then led to a subsequent, related decision at end October 2011 called Systech International Limited v PC Harrington Contractors Limited.  In this case, the same Judge decided that an adjudicator will be entitled to payment of his fees even if his decision is found to be in breach of natural justice, provided that he tried in good faith to fulfil his statutory duties.

PC Harrington (“PCH”) was engaged to carry out works at Wembley Stadium. PCH engaged a sub-contractor, Tyroddy for the provision of labour and small tools. The construction contract provided for retention to be paid at a rate of 5%, which was subsequently reduced to 3%. The payment certificates showed retention to be deducted at 3% and identified the retention as being held “on account.” Following the completion of the works, no final accounting process was undertaken, but the retention remained as retention. A dispute arose as to whether PCH was required to repay retention money.

The dispute went to adjudication, and the notice of referral asked the Adjudicator to decide whether the retentions should have been repaid by reason of an implied term and, if so, what that term should be. PCH argued that the amount of retention could not be calculated until the final account had been established and, therefore, until then Tyroddy could not properly argue that the amount of money retained on the basis of an on-account valuation had become due. The Adjudicator refused to consider TCL’s arguments regarding the final account as he considered these to be another dispute outside of the matter referred. As a result, he decided that the retention should have been repaid in accordance with an implied term that half of the retention monies should have been paid at completion of the subcontract works and the remainder 12 months later.

The Adjudicator therefore decided Tyroddy were due payment of retention without taking into account those valuation arguments.

In the subsequent TCC enforcement proceedings brought by Tyroddy, PCH argued that the Adjudicator’s decision ought not to be enforced as it did not address their defence that, as a matter of law or pursuant to the terms of the contract, PCH was entitled to raise the true value of the final account as a defence by way of abatement, set off or otherwise, to defeat the claim for payment of the retention.

PCH argued this failure constituted a breach of natural justice which rendered the decision unenforceable. Mr Justice Akenhead agreed that their defence was clearly set out during the course of the adjudication and that the Adjudicator had not therefore properly considered the merits of the question that he was called upon to answer.

Accordingly, the Adjudicator had committed a breach of natural justice and the decision was decided by the Court to be unenforceable.

PCH had in the meantime failed to pay the Adjudicator’s fees due.  The Adjudicator therefore, through his employer Systech International Limited (to whom the fees were owed) claimed against PCH for recovery of his fees. PCH argued that, as the Adjudicator had made a decision that was in breach of natural justice and therefore unenforceable, PCH was not liable to pay the Adjudicator’s fees. In particular, they argued that the unenforceability of the decision meant that there was a total failure of the legal doctrine of consideration in the contract for services between the Adjudicator and PCH.

In deciding that the adjudicator was entitled to be paid his fees, the Judge ruled that an adjudicator’s duty was to comply with the duties set out at section 108 of the Housing Grants, Construction and Regeneration Act 1996 and further to the terms of his appointment.

The Judgement of the Court set out how a total failure of consideration could occur:

"(a) In relation to contracts, it is the law relating to quasi-contract and restitution to which one must have regard in addressing total failure of consideration.

(b) One must determine as a matter of ordinary principles of contractual interpretation what the essential contractual performance bargained for was.

(c) Where the bargained for performance is on analysis the provision of one or even a number of services or things, there must on analysis, on the facts, be a total or complete failure to perform on the part of the provider.

(d) Where there has been a total or complete failure to provide any of the services or things bargained for, there will be a total failure of consideration. Where some of the services or things bargained for have been provided, there has not been a "total" failure of consideration."

The Judge considered, in coming to his decision, that where an adjudicator had complied with his statutory duties in good faith, there would be no total failure of consideration. In this case the Adjudicator (in the Judge’s words) “honestly and unwittingly misunderstood what his jurisdiction was”, and, in refusing to consider PCH’s defence, acted in breach of the rules of natural justice.

The Judge considered that the services the adjudicator had contracted with the parties to provide was the role of the adjudicator, which covers not only the preparation and publication of the decision, but also the remaining aspects of the role leading up to the decision, such as review of all documents submitted, dealing with jurisdictional objections, and dealing throughout with the parties. The adjudicator had performed all other aspects of these services to the best of his abilities, without bad faith or any dishonesty.

There had therefore been no “total failure of consideration”.  Part of the Judge’s rationale in coming to his decision was that adjudicators perform a statutory role, undertaking an essential adjudication procedure and so give effect to Parliament’s intentions.

Further, the Judge rejected the Contractor’s alternative argument that there was an implied term in the adjudicator’s terms of appointment providing that the adjudicator would comply with the rules of natural justice. It was not necessary to imply such a term because the law already ensures that an adjudicator`s decision cannot be reached in breach of natural justice principles.

Before this claim was brought to Court, there were no court decisions directly relating to an adjudicator`s entitlement to fees in circumstances where his decision had not been enforced due to a breach of the rules of natural justice.

PCH were left without any option to pay for a decision that had no benefit to either themselves or Tyroddy due to the adjudicator, for reasons entirely within his own control, having breached the principles of natural justice.  Some might ask: where is the justice in that.

For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at constructionsector@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

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David Rintoul

David Rintoul
Partner

E: drintoul@clarkslegal.com
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