Keywords: Bridgeway Construction Ltd –v– Tolent Construction Ltd (2000) CILL1662; Yuanda (UK) Co Limited –v– WW Gear Construction Limited [2010] EWHC 720 (TCC); Tolent clauses; Alternative Dispute Resolution; Adjudication; Housing Grants, Construction and Regeneration Act 1996; Construction Act; Statutory Adjudication

Costs incurred in Alternative Dispute Resolution, including mediation and adjudication, are generally not recoverable, unless the parties have agreed otherwise.  This was also the case with statutory adjudication, with so-called Tolent clauses becoming rife in sub-contracts.

History of Tolent clauses

Tolent clauses were named after the High Court case of Bridgeway Construction Ltd –v– Tolent Construction Ltd (2000) CILL1662.  In this case, the contract included a term that the party serving a notice to adjudicate (the referring party), should bear all of the costs and expenses incurred by both parties in relation to the adjudication, including but not limited to, all legal and experts’ fees, together with the adjudicator’s fees and expenses.  The claimant’s argued that the relevant clauses were void because they tended to inhibit the contracting parties from pursuing their lawful remedies by way of adjudication.  HH Judge Mackay disagreed and said at paragraph 1663:

"I have come to the view that there should be no interference with this contract. I do not consider that the terms are either void or – and it was not used in this particular case but I say so to resolve any doubt – voidable. It seems to me that main contractors and subcontractors are entitled to develop contracts to implement Acts of Parliament. There are good grounds for saying that a system for costs is important and relevant. The mere fact that in this particular case the claimants are disgruntled, perhaps understandably so, about their costs situation, does not entitle me to say, "Well, these clauses are a bit unfair. Let’s change them." . . .”

Many contractors, especially sub-contractors, will be all too aware that Tolent clauses have become commonplace, and for the unwary, have not been realised until a dispute occurs.  Well, that has now been changed as a recent case has declined to follow Bridgeway. 

Tolent clauses kicked-out

In Yuanda (UK) Co Limited –v–  WW Gear Construction Limited [2010] EWHC 720 (TCC), the contract provisions included for the referring party to bear all of the costs of the adjudication and, interest was set at a low level.  HH Mr Justice Edwards-Stuart said at paragraphs 49, 51 and 54 that:

“49… If the effect of the contract drafting is to "clearly discourage a party from exercising its right to refer disputes to adjudication", then it must be for consideration whether a provision so drafted is contrary to the requirements of HGCRA.”

51. For these reasons, I consider that clause 9A would in practice limit Yuanda’s freedom to refer a dispute to adjudication at any time and, in some circumstances – such as in a dispute involving a relatively small amount of money – to deprive it of a remedy altogether. I must therefore respectfully disagree with the conclusion reached by HH Judge Mackay in the Tolent case, at least on the basis of the wording of clause 9A in this particular contract.

“54. For the reasons set out in this section of the judgment, I consider that clause 9A is in conflict with the requirements of section 108 of HGCRA and the Scheme.”

And concludes at paragraph 65 that:

“For the reasons that I have given, therefore, clause 9A must go in its entirety and be replaced by the provisions of Part I of the Scheme.”

The Facts

Yuanda was the curtain walling sub-contractor on a very substantial project to construct a luxury hotel in London, and it entered into a JCT Trade Form of Contract with Gear, which Gear’s project manager modified with its Schedule of Amendments. 

The standard JCT adjudication provisions were replaced by a bespoke clause 9A, and incorporated the TeCSA Adjudication Rules and the following Tolent clause:

"Notwithstanding the provisions of the above procedure and regardless of the eventual decision in the adjudication or in any subsequent litigation the Trade Contractor agrees that should he make a reference to Adjudication under the terms of this contract then he will be fully responsible for meeting and paying both his own and the Employer’s legal and professional costs in relation to the Adjudication."

In its claim under Part 8 of the CPR, the Claimant, Yuanda, sought a declaration in relation to clause 9A.  It argued that, as the clause was not reciprocal but only applied when it was the referring party, and not to Gear, its intention and effect were to fetter Yuanda’s right to refer a dispute to adjudication, contrary to section 108 of the Housing Grants, Construction and Regeneration Act. Gear relied on Tolent to argue that the clause was permissible.  The judge had these questions to answer:

Question	Answer
Does this clause comply with section 108 of the HGCRA, either wholly or in part?	No
If not, what should it be replaced with? Would all the contractual adjudication provisions be replaced by the Scheme, or just the offending clause?	The contractual adjudication procedures are replaced by the Scheme "lock, stock and barrel".

 

Compatibility issues with the Housing Grants, Construction ad Regeneration Act

There are two primary reasons why His Honour found that Tolent clauses are incompatible with the Construction Act. 

The Act was intended to provide a speedy method of resolving construction disputes and facilitating cash flow, with an adjudicator’s decision being central to that process as being temporarily binding (section 108(3) of the Act).  And with neither the Construction Act nor Part 1 of the Scheme for Construction Contracts giving adjudicators jurisdiction to decide costs, terms in a contract that conflict with the requirement that parties comply with an adjudicator’s decision will fall foul of the Construction Act.  With the particular Tolent clause in Yuanda, a party could easily avoid an adjudicator’s decision by simply setting-off its costs against the decision, thus would be at odds with the Construction Act.  In addition, the contractor would be deprived of the fiscal remedy for which it had originally referred the dispute for.

Secondly, the Judge found that such clauses positively discourage parties from adjudicating, especially where the value which the dispute is over could be off-set by the claimed costs from the responding party.  An active Tolent clause would also discourage a responding party from managing its own cost as after all, it will be reimbursed no matter the outcome of the adjudication.  Hence, the presence of a Tolent clause could deter the referring party from instigating adjudication and thereby fetter its right to adjudicate at any time (section 108).

Interest

Yuanda also contended that the provision of 0.5% above base rate on late payment of debts is void by reason of the Late Payment of Commercial Debts (Interest) Act 1998.  The Judge agreed, deciding that such a provision was not a "substantial contractual remedy".

Comment

The Tolent clause in Yuanda specifically applied to Yuanda.  This can be contrasted to Bridgeway Construction where the Tolent clause only applied to a referring party.  However, despite both cases being of equal authority, given that the ruling in Yuanda post-dates Bridgeway by some 10 years, and with Tolent clauses due to be outlawed once the Local Democracy Economic Development and Construction Act 2009 comes into force, it is considered that future cases will follow Yuanda.

© Michael Gerard Consulting Limited
December 2010