Yuanda v W W Gear Construction: judgement on Tolent clauses

This month property partner David Oram looks at the recent case of Yuanda v W W Gear Construction and how it affects ‘one side’ adjudication provisions known as Tolent clauses.

There has been a recent boost for parties wishing to pursue adjudications in the face of some common ‘contractual traps’ laid by cunning contract draftsmen.

Background
It is well known that construction is a litigious industry. Indeed, Parliament got so fed up with the number and variety of disputes involving the construction industry that they decided to do something about it.

Within the Housing Grants Construction Regeneration Act 1996 ("the Act") (which came into force in May 1998) they decided to provide mandatory rights for an aggrieved party to an eligible construction contract to have its dispute resolved by adjudication.

Adjudication is a short (28 day), relatively cheap method of resolving most disputes. Its primary aim was to keep the "life blood of the construction industry" (e.g. money) flowing. The idea was it would produce a speedy mechanism for settling disputes on a provisional interim basis, requiring the decisions of the adjudicator to be enforced, pending the final determination of disputes by arbitration, litigation agreement or otherwise. It has become the usual way of resolving disputes in construction projects since about 2000. Indeed, the ‘adjudication business’ has become an industry in itself. It is of great use to parties that can demonstrate that they have complied with the contract, and are owed monies. By adjudication they can obtain an enforceable award within 28 days of commencement of an adjudication.

The cynics’ view
Given the impact of adjudications on recalcitrant paying parties, a further industry has been created of contract draftsman trying to find new ways of frustrating a party's right to proceed to adjudication. Their view being that it would be far preferable for these parties to avoid adjudication, and force the ‘innocent party’ to use the pre-adjudication methods of recovery (which would involve greater expense, time etc.). A particular favourite of the draftsman became known as the ‘Tolent clause’. In the case of Bridgeway Construction v Tolent Construction in April 2000 the court was faced with a clause that provided:

"the party serving the notice to adjudicate shall bear all of the costs and expenses incurred by both parties in relation to the adjudication, including but not limited to all legal and expert fees". The clause also required the referring party to be liable for the adjudicator's fees and expenses.

The Act did not mention how the costs of the parties should be dealt with within an adjudication. The view was, that unless there was an express contractual provision, no party was entitled to recover the cost of representation within an adjudication. The Tolent clause expressly provided that the "referring party" would pay all of the costs involved in the adjudication, win, lose or draw. The court in that case stated:

"the mere fact that in this particular case the claimants are disgruntled, perhaps understandably so, about their cost situation, does not entitle me to say ‘Well, these clauses are a bit unfair, lets change them’.

"It seems to me that contracting parties can contract how they like and it is unsatisfactory … if at the end of the day, a disappointed party can come along and say ‘Well, the contract was entirely wrong’."

That decision gave the green light to a plethora of similar clauses. At the time it was stated in the construction press that the effect of a Tolent clause was to "clearly discourage a party from exercising its right to refer its disputes to adjudication". In practice it had that effect. The respective applicant was in a dilemma where, even though it had a good claim it had to weigh up the potential commercial advantage of proceeding with an adjudication knowing that it would have to pay the costs involved of the losing party in the adjudication, and against the backdrop of the losing party having no incentive to take steps to minimise its costs. Much worry, frustration and unfairness was caused because of this situation.

So much so that Parliament wants to implement a change in the legislation that would outlaw Tolent clauses. However, when that may come to fruition given the present political situation remains a mystery.

Fairness wins out
So we come to the case of Yuanda v W W Gear Construction decided in April 2010. The case covered various issues, but it squarely dealt with the current court view of Tolent clauses. The relevant parts of the Tolent clause in that case provided "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".

The judge set out the problem faced by the prospective applicant in adjudication as follows: "if a party knows that it will have to pay the other party's costs of any referral to adjudication, irrespective of the outcome, then it will not be worth making the referral unless the sum it expects to recover will significantly exceed the likely cost of the other party". An added difficulty here is that a referring party, whilst able to obtain an estimate of its own costs from its solicitors, is never in a position to obtain an indication in advance of the likely cost of the other party. Worse still, the responding party would have no incentive to keep its cost within reasonable bounds so long as the referring party is bound to pay them come what may".

The judge in this case, Mr Justice Edward Stewart, disagreed with the views set out in the Tolent case, and found that such a clause was contrary to the requirements of the Act and hence should be struck out of the contract.

The initial effect of this judgment has caused much rejoicing for parties which are likely to have to pursue adjudications against recalcitrant payers. At best it will now remove the Tolent clause from the contract, and at worse, it will create uncertainty as to whether one of the numerous variants of the Tolent clause is valid or not. That is partly because the judge considered that the lack of "reciprocity" within the clause was important to his conclusion that it was contrary to the terms of the Act. The issue as to whether a more even handed Tolent clause may fall foul of this judgment is yet to be decided.

This decision will no doubt spur the clever contract draftsman to more new and cunning ways to try and avoid the consequences of mandatory adjudication, but at the very least we should see less trouble from Tolent clauses within adjudication from now on.