Tolent clauses in construction contracts

Adjudication has been a method of dispute resolution under construction contracts since 1 May 1998. Legislation which recently came into force in England & Wales and in Scotland has revised some of the key aspects of the adjudication provisions, in particular who pays for it.

That new legislation comprises Part 8 of the Local Democracy, Economic Development and Construction Act 2009, which amends the Housing Grants, Construction and Regeneration Act 1996 which first introduced adjudication. Part 8 was commenced in England & Wales on 1 October 2011 and in Scotland on 1 November 2011. The related Schemes for Construction Contracts, which apply in these jurisdictions, have also been amended in order to reflect the changes made by the 2009 Act, and came into force on 1 October and 1 November respectively.

The Journal recently featured an article (August 2011, 16) taking a practical approach to the changes that will be effected to contracts in the construction sector. With the spotlight being shone on the legislative regime affecting such contracts there has also been discussion in the sector concerning “Tolent clauses”, and where the 2009 Act has placed the industry in relation to these clauses.

Legislative gap

So-called Tolent clauses, by virtue of the English case Bridgeway Construction Ltd v Tolent Construction Ltd [2000] CILL 1662; [2000] WL 1027055, where their validity was first put to the test and approved, are well known in the construction industry. They are clauses in construction contracts which determine which party will pay the cost of adjudication. In Bridgeway v Tolent it was the referring party that was contractually bound to pay the adjudication costs. This is colloquially known as the “lighter form” of Tolent clause. The “heavier form” is where the contract states that a named party will pay these costs irrespective of which party seeks the adjudication.

At the heart of the debate over the validity of Tolent clauses is the fact that the 1996 Act was silent on the matter of allocation of the costs of adjudication between the parties. Section 108(1)-(4) of the Act sets out the specific requirements for which a contract must provide, for example requiring a party to give notice at any time of his/her intention to refer the dispute to adjudication (s 108(2)). If these requirements are met in the contract, the dispute can effectively be referred to adjudication – and if not, subs (5) provides that the relevant Scheme for Construction Contracts will apply in order to enable the dispute to be properly referred to adjudication.

The Scheme for Construction Contracts is equally silent on the matter of Tolent clauses. In Bridgeway v Tolent, HH Judge Mackay remarked that due to the need for expedition in resolving these disputes the element of costs was not at the forefront of the makers of the legislation, and that Parliament clearly did not consider the matter. He very swiftly concluded that he could not interfere with the contract.

Tolent clauses have, since the 1996 Act came into force, been a feature of the majority of construction contracts. There have followed some disputes as to the allocation of costs of adjudication, and as a result the courts have been turned to, albeit on a number of limited occasions, to determine the matter. To date this has resulted in an apparent divergence north and south of the border as to whether Tolent clauses are permitted by the 1996 Act.

England & Wales

Following the judgment in Bridgeway v Tolent, the construction industry in England & Wales was concerned that the right to adjudication was effectively being fettered in some situations. For example, smaller firms might be precluded from instigating adjudication where they would have to fork out for both sides’ costs (and possibly also the adjudicator’s costs). So, the subsequent judgment in Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC) was welcomed by the industry when Edwards-Stuart J refused to follow Bridgeway v Tolent.

He identified the lack of reciprocity in the “heavier form” of clause, where a named party (as opposed to the referring party) was tied in to pay the costs of adjudication, and concluded that the purpose of such a clause was to impose a fetter on that named party to adjudicate, but not on the other party. If one party is aware that it will have to pay the other’s costs if it refers the dispute to adjudication, the referral will not be worthwhile unless the amount it expects to recover will significantly exceed the costs. Estimation of these sums, in itself, is a difficult task. This operated as a barrier to adjudication for one party.

Additionally, the fact that the particular clause in question also included a further requirement in relation to multi-party disputes made, in Edwards-Stuart J’s view, the overall clause even more oppressive. In this way, the decision turns very much on the particular circumstances of this case. The judge was not attempting to make a general principle (see para 51 of Yuanda).

Scotland

In Scotland, we were until recently awaiting a judicial view on Tolent clauses. This came in the form of the decision in Profile Projects Ltd v Elmwood (Glasgow) Ltd [2011] CSOH 64. In that case Lord Menzies approved the lighter form of Tolent clause as compatible with the 1996 Act.

Lord Menzies held that s 108 of the 1996 Act requires a contract to comply with certain specific requirements, and if it does not, the relevant Scheme for Construction Contracts will apply. He observed that Parliament did not see fit to include provision on allocation of costs of adjudication in the 1996 Act and, in the circumstances, aligns his judgment more closely with the conclusion of HH Judge Mackie QC in Bridgeway v Tolent.

In his opinion Lord Menzies reached this view essentially on the basis of the submissions for the defenders. Senior counsel for the defenders distanced the decision in Yuanda from the case before Lord Menzies. He noted that in Yuanda, Edwards-Stuart J was basing his decision on the specific facts before him and not trying to establish a general principle. The present case could be distinguished on two distinct grounds: first, there was no provision for reasonableness in terms of costs in the Yuanda contract, but there was in the current contract; and secondly, in Yuanda the court was dealing with the “heavier” type of Tolent clause, unlike in Profile Projects.

Lord Menzies agreed with further submissions of senior counsel. First, Tolent clauses may discourage parties from referring disputes to adjudication, but many factors could so discourage: for example, a party may consider that its chances of success in an adjudication are not sufficiently high to make it worthwhile. In this way, a Tolent clause may amount to a disincentive, but certainly not a disablement from referring a dispute to adjudication. Secondly, in the contract, none of the matters required by s 108 of the 1996 Act had been omitted.

Senior counsel further distinguished the approach taken in Yuanda. He submitted that for the court to impliedly strike down an agreement as prohibited by the 1996 Act it would be necessary for the court to consider: (i) What rights have been given to parties by Parliament? (ii) Are those rights inalienable? (iii) Does the agreement in question amount to the alienation of an inalienable right? This process was not carried out by Edwards-Stuart J in Yuanda and, in this case, the contract contained everything required of it by s 108. There was no evidence that either party have been deprived of a right to adjudicate.

The 2009 Act

The absence of any legislative provision in relation to the costs of adjudication was addressed through Part 8 of the 2009 Act, making common provision for England & Wales and for Scotland.

Part 8 (at s 141) introduces a new s 108A after s 108 of the 1996 Act:

“108A.–(1) This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract.

“(2) The contractual provision referred to in subsection (1) is ineffective unless –
(a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties, or
(b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication.”

The intention of this section is to invalidate Tolent clauses in construction contracts save in two limited circumstances: first, where the provision meets the requirements in subs (2)(a); and secondly, where provision is made in writing after the giving of notice to refer the dispute to adjudication. Further detail on the intended purpose of the drafting of this section can also be found in the explanatory notes to the 2009 Act, which reiterate this view.

The purpose of the provision is also referred to in the parliamentary debate on the Local Democracy, Economic Development and Construction Bill available on Hansard. The bill, as introduced, contained draft new s 108A of the 1996 Act at clause 135 and subsequently as clause 137 in the same draft form. At this stage, the drafting and commentary to the clause indicate Parliament’s intention to put an end to the practice of Tolent clauses by prohibiting parties to construction contracts from entering into agreement about who should pick up the costs of an adjudication before a dispute has arisen (see Hansard, HC, 13 October 2009, col 172). This draft clause is effectively what is now reflected in new s 108A(2)(b) of the 1996 Act.

The later parliamentary commentary goes on to identify the fact that the above general prohibition as originally drafted could have had the unintended effect of preventing adjudicators from receiving any payment of fees or expenses, thus acting as a disincentive from taking up an adjudication. It appears, therefore, that the new clause with subs (2)(a) and (b) was drafted in order to address this concern, and not to override the clear intention behind the earlier drafts (see Hansard, HC, 13 October 2009, col 180).

These references point towards the intended purpose of the new s 108A being to clarify the position on the validity of Tolent clauses once and for all. In turn this would harmonise the position throughout Great Britain.

Alternative view

Subsection (2)(a), however, has been the subject of some debate amongst industry professionals and representatives, who have suggested their own interpretation of what the provision means. That is, as long as a contract clause provides for the allocation of the adjudicator’s fees and expenses, if it additionally provides for the allocation of the party’s costs then it will not be rendered ineffective by subsection (2)(a).

Yet this suggested interpretation does not accord with the explanatory notes to the Act, nor the intention as evidenced in the early stages of parliamentary debate. It can be put forward, moreover, that this interpretation affords a narrow and arguably unnatural interpretation of the term “contractual provision” in subs (2)(a). Indeed, throughout the rest of part 8 the term “provision” is not used to indicate an individual clause, but rather is used in a wider sense.

For example, s 108 of the 1996 Act as amended by s 139 of the 2009 Act states that “the contract shall include provision in writing as to”, followed by specific requirements as aforementioned. Although it is common in construction contracts that these requirements be set out in individual clauses, a natural interpretation of this provision would not mean that there must be a separate clause for each set requirement. Instead, the parties would be free to provide as they wish in the contract as long as the contract is in writing. This approach is reflected throughout part 8 of the 2009 Act.

Reflecting the intention of Parliament, it would appear to be clear that under s 108A a clause concerning costs of adjudication is only valid to the extent that it complies with that clause.

We can, however, only wait and see whether those who wish to argue for a different interpretation of s 108A(2) would seek to pursue that before the courts, and what the courts north and south of the border would conclude. In the meantime, however, it is perhaps also worth referencing Lord Menzies’s own words in Profile Projects at para 38: “When passing the [1996] Act it would have been open to Parliament to make it a requirement that if a contract makes allocation on the costs of adjudication, such allocation must meet certain conditions. Such a requirement has been added prospectively by Parliament by s 141 of the 2009 Act.”