PC Harrington v Systech – There is nothing for Adjudicators to fear (well almost…)

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PC Harrington v Systech – There is nothing for Adjudicators to fear (well almost…)

March, 2013
Jon Miller

Much has already been written about the 2012 decision of the Court of Appeal in PC Harrington v Systech. Some have suggested it will lead to even more challenges to the jurisdiction and, according to some (ill informed) observers the Systech case has been cited as authority that there is no need to pay an adjudicator who exceeds his jurisdiction. However, this was not the decision of the Court of Appeal…

To understand and appreciate the implications of the Systech case, it is necessary first to look at the law relating to adjudicators’ fees leading up to the decision.

Christopher Michael Linnett v Halliwells LLP [2009] EWHC 319 (TCC)

The facts in Linnett v Halliwells were as follows :

  • the Respondents and the Adjudicator received the Referral within seven days of the Notice of Adjudication. However, the Adjudicator did not receive the attachments to the Referral within the seven day period required and the Respondent raised objections;
  • there was a further objection to the Adjudicator's jurisdiction based on the underlying contract – it was claimed that not all of its terms were writing;
  • the Adjudicator sent out a set of terms which made both the Claimant and Respondents jointly and severally liable for his fees. In view of their objections to jurisdiction the Respondents could not agree to the terms;
  • The Respondent took part in the adjudication but maintained their reservations throughout.

The following salient matters arose on an application for enforcement of the Adjudicator’s decision:

  • On the merits the Court found that failure to give the attachments to the Adjudicator just outside the seven day period did not render his decision invalid. Further all of the terms of the contract did not have to be in writing, as there was a written contract in existence which contained an adjudication clause. For these two reasons alone the Court could have awarded the Adjudicator his fees.
  • Crucially the Court also found that by participating in the adjudication, and requesting the Adjudicator to act, the Respondent entered into a contract with the Adjudicator formed by their conduct and accordingly, the Adjudicator was entitled to payment of his fee.

In a precursor to Systech the Court added:

“if there is a valid jurisdictional challenge and if a party has not participated in the adjudication then … that party can have no liability for the fees and expenses of the Adjudicator”.

PC Harrington Contractors Ltd v Systech International Ltd [2012] EWCH Civ 1371

The Adjudication proceedings

The background to this case lies in adjudication proceedings between PC Harrington and Tyroddy Construction who had entered into three separate contracts. Claims for retention on all three projects were the subject of three separate adjudications before the same adjudicator (who was employed by Systech). During the course of the adjudications, PC Harrington advanced a defence that an overpayment of £225,000 on one of the projects should be set off against the retentions. The Adjudicator decided that retention monies had to be paid to the Claimant on each subcontract. However, he did not in any of the adjudications deal with the defence that no retention monies were due because there had already been an overpayment (holding that he did not have jurisdiction to consider the issue).

Enforcement (PC Harrington v Tyroddy Construction [2011] EWHC 813 (TCC))

PC Harrington took the view that all three decisions were not enforceable by reason of breach of the rules of natural justice – the Adjudicator having failed to consider a key issue. Whilst there was no question that the Adjudicator had acted in bad faith, it was found that the Adjudicator had “unwittingly [fallen] below the standards which are required to enable the decision or decisions to be enforced” and his failure to consider a key point in the defence meant the decisions were unenforceable.

Systech’s claim for fees

PC Harrington refused to pay the adjudicator’s fees; Systech therefore brought a claim for the fees. As we are all aware, when the claim reached the Court of Appeal Systech was found not to have any entitlement to recovery.

What is the adjudicator contracted to do?

One of the key points under consideration was what an adjudicator is contracted to do? The Scheme gives the Adjudicator a number of powers which he exercises during the course of an adjudication. Essentially the issues were:

  • Was the Adjudicator's contract with a party a divisible contract whereby the Adjudicator was entitled to be paid for the actions taken throughout the adjudication process?
  • Alternatively, was the agreement an “entire” contract which required complete performance and the delivery of an enforceable decision as a condition precedent to payment?

In the first instance the TCC found that the agreement between the Adjudicator and the Parties was not only for the issue of an enforceable decision, but was also for the steps that were necessary in undertaking the role of acting as an adjudicator – therefore the Adjudicator was entitled to be paid.

On appeal, however, the Master of the Rolls accepted that the Adjudicator was indeed obliged to perform some ancillary functions and carry out other discretionary acts throughout the adjudication process. However, the Contract with the Adjudicator did not contain any provision for payment of Adjudicator’s fees for the discrete parts of the adjudication process – there were no instalment or periodic payments. Paragraph 9(1) of the Scheme provides that the Adjudicator may resign at any time on notice. Paragraph 9(2) adds that he must resign where a dispute is the same or substantially the same as one that has been previously referred to adjudication. More significantly if the Adjudicator resigns by giving notice under paragraph 9(1) he is not entitled to any remuneration. The Master of the Rolls said:

“It can, therefore, be seen that the Scheme carefully defines the circumstances in which the adjudicator is entitled to remuneration where his appointment comes to an end before he has made a decision”.

Judges, arbitrators and adjudicators

At first instance, comparisons were made between the role of an adjudicator and the roles of judges and arbitrators.

  • So far as judges are concerned, the comparison was not relied upon in the Court of Appeal (as a judge has inherent jurisdiction and his authority does not derive from any contract with the Parties).
  • Arbitrators, in part, derive their authority from a contract (which again is entered into with the Parties); however, the Master of the Rolls accepted there were significant differences between an arbitrator and an adjudicator. For instance :
    • when ancillary functions are carried out by arbitrator they are binding on the Parties and therefore the Arbitrator gives value in performing them; and
    • an arbitrator has an inherent jurisdiction and power to make a binding decision on his own jurisdiction – section 30 of the Arbitration Act.

Policy

The Master of the Rolls also dealt with policy considerations. There is a distinction between :

  • the courts’ enforcement of decisions (even when they are wrong on the facts or the law) owing to Parliament’s intention to develop adjudication as a rough and ready temporary resolution of construction disputes; and
  • a decision which is unenforceable because the Adjudicator had no jurisdiction because of a breach of the rules of natural justice (which was viewed as being another matter because an unenforceable decision does not further the policy of encouraging parties to find a temporary resolution of their dispute – an unenforceable decision in many circumstances ‘… has quite the opposite effect’).

The Master of the Rolls found that the contract with the Adjudicator was for an enforceable decision and failure to provide one, albeit inadvertently, meant that the Adjudicator was not entitled to be paid.

Davis LJ however made clear that if, having received the Adjudicator’s ruling on jurisdiction the Responding party goes on to confirm that the Adjudicator should proceed to a decision, the Adjudicator is still entitled to be paid as per Linnett. In these circumstances the Adjudicator’s fees are payable but ‘… subject of course to any express terms agreed’.

The implications of Systech ….

Davis LJ concluded ‘I doubt if the present decision should have any very great ramifications’. The key issues arising out of the Systech case as far as I am concerned are as follows:

  • Adjudicators will be reviewing their terms. Systech and Linnett emphasised the importance of the contract between the Adjudicator and the Parties. Many of the points raised in Systech were subject to the express terms of the Adjudicator's contract. For example, an adjudicator’s terms conditions may now make it clear that the Parties are entering into a divisible contract, and that the Adjudicator will be entitled to be paid for the steps he takes throughout the process of adjudication.
  • There may be more payments on account of the Adjudicator’s fees as Adjudicators get more nervous about being paid. This raises an issue if just one of the Parties objects to the Adjudicator's terms or refuses point blank to pay fees on account. It is more than likely to be the Respondent who refuses while at the same time making the objection to the Adjudicator's jurisdiction.
  • Could Systech give rise to bolder Respondents? Respondents who object to jurisdiction but do not take part in the adjudication may not enter into a contract with the Adjudicator for his fees.
  • In the past I have objected to jurisdiction but also confirm that my client has not accepted responsibility for the Adjudicator’s fees. Is this sufficient if I continue to take part in the adjudication?
  • If an Adjudicator insists on standard terms, could they become his standard terms of business and unenforceable under section 3 of the Unfair Contract Terms Act 1977? My first reaction to this proposal is that it seems to be fanciful, but you never know…
  • What is the position with Adjudicators who have been paid in advance despite not giving an enforceable decision? Are they now liable to repay the fees?
  • A large part of the Systech analysis was concerned with the Scheme. A difference conclusion may be reached by a different court if a different adjudication procedure is in place.
  • How are an adjudicator’s fees to be assessed if the court severs an adjudication decision?

The key point I believe is how recovery of Adjudicator's fees will operate in practice. If an Adjudicator sues for his fees, will a Defendant be able to raise the point that the decision is unenforceable in these proceedings? Could this lead to the Small Claims Court or County Courts re-examining the conduct of an adjudication to decide whether the decision was enforceable or not? Alternately could it mean that claims for adjudicators' fees will be transferred automatically to the TCC if this defence is raised?

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