Last week the Technology and Construction Court declared Tolent clauses to be non-compliant with the Construction Act. The clauses are so-called after the case ten years ago that said they were in fact Act-compliant.
In that case there was a contractual provision that required the referring party in an adjudication to pay both parties' costs and the adjudicator's fees, whether it won or lost the adjudication. In last week's case the Tolent clause only applied to the contractor if it referred a dispute to adjudication. It did not apply to the employer if it started an adjudication.
While the judge was concerned with a more severe kind of Tolent clause it seems clear from his reasoning that all Tolent clauses are non-compliant with the Act. (There is an even more severe kind of Tolent clause that requires one party to pay the other's costs and the adjudicator's fees, whether or not it starts the adjudication and whatever the outcome.)
The judge said: "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 [Act's] requirements".
This is not the first time the courts have sought to apply the intention, and not just the letter, of the Act. For instance, in Midland Expressway (no. 2) the court said that the Act's ban on conditional payment provisions could not be escaped "by the use of circumlocution". It remains to be seen which of the array of devices that are employed to defeat the Act's right to adjudicate and payment rules actually work. It is perhaps a testament to their success that they are rarely tested in court.
The problem for parties and drafters, pending further clarification from the courts, is identifying which provisions are Act non-compliant (although some are clearly safer than others). For instance, the judge said that a contractual provision empowering an adjudicator to apportion the parties' costs between them was Act compliant. However, it is precisely such provisions that the government targeted as anti-adjudication in its now otherwise defunct ban on Tolent clauses (which has yet to come into force). The judge also upheld as Act-compliant a provision which simply said that the chosen adjudication rules should be amended "to require ... joining of the members of the professional team in a multi-party dispute situation".
If the drafting of adjudication rules is non-compliant with the Act in only one respect, the default adjudication rules in the statutory Scheme are implied wholesale - as the judge confirmed. Any other bespoke adjudication rules are lost. Also if an adjudication is conducted under one set of bespoke rules, the resultant decision may be unenforceable if a court holds that those rules were Act non-compliant (and the adjudication should have been conducted under the Scheme's rules instead).
It is still unclear, though, whether one may have in a construction contract governed by the Act, an Act non-compliant adjudication regime alongside an Act-compliant one. Referring parties may then opt which regime to follow when adjudicating. It is hard to see why one cannot have such an arrangement, which would allow Act avoiders to initiate an Act non-compliant adjudication (complete with Tolent clause) whenever they are referring parties.
The judge confirmed the Act's less drastic approach where contractual payment provisions are Act non-compliant. Usually the Scheme's default payment rules will only apply insofar as needed to fill the gaps left by the non-compliant bits. However, the judge said there may be situations where the Scheme's default payment rules would have to be substituted for the non-compliant contractual provisions in their entirety because no other solution might be feasible.
This case does not kill off all Act avoidance devices, but it does spell the end for some and the beginning of the end for others. Currently those intent on Act avoidance can avoid it by ensuring that part of their contract is not "in writing", as the Act requires in order for it to apply. If and when the recently enacted changes to the Act come into force (removing the "in writing" requirement) this avoidance measure will no longer be available. While the changes to the Act may help in this way, they otherwise do little to address Act avoidance devices. The only two devices the changes seek to ban (Tolent clauses and conditional payment clauses) have largely been struck down by the courts' purposive interpretation of the original Act. The decision not to ban clauses that make interim payment decisions final and binding (while recognising their efficacy) now looks even more critical, as they seem less likely than other adjudication avoidance devices to fall foul of the courts' broad approach.
Reference: Yuanda (UK) Co Ltd v WW Gear Construction Ltd
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 19/04/2010.
