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Hong Kong – Adjudicator’s Fee May Not Be Payable Where His Decision Is Unenforceable.

27 April, 2013

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

 

In the English Court of Appeal decision of PC Harrington Contractors Ltd v Systech International Ltd, the issue was whether an Adjudicator's fee was payable where his decision was unenforceable, for being in breach of the rules of natural justice.

 

Background

 

PC Harrington Contractors Ltd ("PCH") had been employed to carry out works on three construction projects and disputes arose between it and its sub-contractor in relation to the release of retention monies. The disputes were referred by the sub-contractor to three adjudications, in accordance with the terms of the sub-contracts and the Scheme for Construction Contracts (England and Wales) Regulations 1998 ("the Scheme"), under which adjudications were to be carried out. An adjudicator ("the Adjudicator"), employed by Systech International Ltd ("Systech"), was appointed in each of the adjudications, and ruled in favour of the sub-contractor in each case, without considering PCH's defence that no retention monies were due because the sub-contractor had already been overpaid. The Adjudicator also decided that PCH should pay his fees and addressed his invoices to PCH.

 

PCH issued proceedings seeking a declaration that the Adjudicator's decisions were not enforceable, as he had failed to observe the rules of natural justice, by refusing to consider PCH's defence. The Adjudicator had therefore, PCH submitted, failed to perform the service which he had contracted to perform (i.e. to produce an enforceable decision) and was therefore not entitled to any fees. Systech commenced proceedings against PCH for recovery of the Adjudicator's fees.

 

Court of First Instance Ruling

 

Although the Court of First Instance held that the Adjudicator's decisions were unenforceable, it held that he was still entitled to his fees because the role of the Adjudicator under the Scheme involved not only the production of his decision, but also the discharge of other duties involving the conduct of the adjudication in the period leading up to the decision, in the same way that it is not merely the function of a judge or arbitrator to produce the judgment or an award, but also to provide all necessary and important ancillary and anterior functions. The judge at First Instance therefore concluded that it could not be said that there had been a total failure of consideration, as the Adjudicator had done a considerable amount of work on the dispute, which was a partial discharge of his role as adjudicator.

 

Court of Appeal Ruling

 

PCH appealed to the Court of Appeal. The Court of Appeal said that the question was not whether there was a total failure of consideration, because the case did not involve a claim in restitution for repayment of money paid by PCH to the Adjudicator. The question, the Court of Appeal said, was whether the contract was (a) an entire contract, such that the bargained for consideration was an enforceable decision or (b) a divisible contract for the performance of a series of "ancillary and anterior functions", culminating in the making of a decision.

The Court of Appeal allowed the appeal, holding that:

 

  1. The bargained for performance was an enforceable decision and there was nothing in the contract between the Adjudicator and PCH to indicate that the parties agreed that they would pay for an unenforceable decision (which was of no value to the parties) or that they would pay for the services performed by the Adjudicator which were preparatory to the making of an unenforceable decision.
  2. As the decision was unenforceable, the Adjudicator was not entitled to recover his fees.

 

In reaching its decision, the Court of Appeal did place some significance on the fact that the Scheme provided that if the Adjudicator's appointment was revoked, due to his default or misconduct, he was not entitled to any fees. The Court of Appeal held that the making of an unenforceable decision by reason of a breach of the rules of natural justice was a "default" or "misconduct" on the Adjudicator's part. The Court of Appeal also took into account the fact that the contract did not contain any provision for the payment of the Adjudicator's fees by instalments or by reference to the completion of discrete parts of the engagement.

 

Lord Justice Dyson, who gave the leading judgment, referred to the judge at First Instance's comparison between adjudicators and judges and arbitrators (as referred to above) and said that such comparison was wholly inappropriate. In relation to the comparison between adjudicators and judges, Lord Dyson said that judges have an inherent jurisdiction and do not derive their powers over the dispute from a contract of appointment. In relation to the comparison between adjudicators and arbitrators, Lord Dyson said that although the comparison might seem more fruitful since they both derive their authority from the contract between the parties, there were important differences, namely:

 

  1. serious errors and fundamental misunderstandings by an arbitrator do not invalidate an award; the award is binding, subject to the court's supervisory jurisdiction;
  2. when anterior and ancillary functions are carried out by an arbitrator, they are binding on the parties and therefore the arbitrator gives value in performing them;
  3. if, during the course of the reference, the arbitrator ceases to hold office, the parties are free to agree whether and, if so, how they fill the vacancy and whether and, if so, to what extent the previous proceedings should stand, whereas if an adjudicator's appointment is terminated, the process must be started again with a fresh referral; 
  4. an arbitrator has inherent jurisdiction and power to make a binding decision on the scope of his own jurisdiction, unless the parties agree otherwise and an arbitrator, unlike an adjudicator, can give value by providing a binding ruling on his jurisdiction.

 

The judgment may lead to parties refusing to pay adjudicators' fees (or seeking to recover them if already paid) where the adjudicator's decision is held to be unenforceable. As referred to above, the Court of Appeal did place significance on the fact that under the Scheme, if the Adjudicator's appointment was revoked due to his default or misconduct, he was not entitled to any fees. Accordingly, a court may reach a different conclusion where a different adjudication scheme (with no such provision) applies. Notwithstanding this, it would be wise for adjudicators to review their terms of appointment in respect of payment of their fees and perhaps include a provision that they are to be paid even in the event of their decision being found to be unenforceable and also a provision for payment of their fees by instalments or by reference to completion of discrete parts of their engagement.

 

 

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