A major deterrent

In July 2008, the Department of Business, Enterprise and Regulatory Reform (BERR) issued a draft bill to amend Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (known as ‘the Construction Act’).

Proposals have been made to change the Act regarding costs of adjudication, and one particular area concerns clauses in subcontracts that make a referring party (usually the subcontractor) pay all the costs, regardless of the outcome.

This type of clause is simply designed to deter or even prevent a subcontractor from referring a dispute to adjudication because of the likely costs.

How the adjudicator deals with parties’ costs is led by the subcontract. If if sets out a provision such as “the parties shall each pay their own costs”, the decision is made for the adjudicator.

This type of clause is in the general spirit of adjudication as a contractual procedure. Unless there is such a clause in the subcontract, the adjudicator has no power to award the parties’ costs. It is simply left to each party to bear its own costs.

The deterrent clause was brought to public attention in Bridgeway Construction v Tolent Construction.

Prior to the court action, Bridgeway was engaged by Tolent as groundwork subcontractor on its own terms and conditions. During the project, a dispute arose over the amount properly due for payment under the subcontract. Bridgeway’s claim for a gross payment of £117 702 was rejected by Tolent, which asserted that only £53 570 was due.

Bridgeway referred the dispute to adjudication and the adjudicator ordered Tolent to pay £100 139, which left a net figure of just under £40 000. However, Tolent said that Bridgeway was liable for its legal costs and expenses and deducted £13 206 from the net figure.

Little left

This figure was not made known to the adjudicator, but as he was bound by the terms of the subcontract, and in particular the deterrent clauses, he ordered Bridgeway to pay Tolent’s costs. If one takes into account Bridgeway’s own costs, it is plain to see there was little left of the net figure.

Bridgeway was not satisfied and commenced proceedings, seeking a declaration that the subcontract terms had, by their very nature, inhibited it from pursuing its remedies under the Construction Act, and therefore the terms were void.

The subcontract included the CIC Model Adjudication Procedure, but clauses 28 and 29 had been rewritten so that the party serving the notice to adjudication would bear the costs and expenses of both parties, lawyers and experts and of the adjudicator.

Bridgeway relied on the case Johnson v Moreton, which concerned a lease that prohibited a tenant from acting under the Agricultural Holdings Act. The House of Lords held that such a term was void in that it purported to avoid, get round and eliminate the difficulties caused to the landlord by the operation in law of that Act.

Bridgeway said that, in this case, similar considerations apply. Amended clauses 28 and 29 inhibited it from pursuing its remedies provided by the adjudication procedure, therefore the clauses were void.

Tolent disagreed and said the clauses were not void. They said it was not unfair and the clauses applied to both parties. But its main contention was that they were not void because they were part and parcel of a scheme that adopted the Construction Act. The clauses were simply dealing with the party’s costs, about which the Construction Act itself is silent.

The judge concluded that to throw out the clauses would be an interference with the procedure set out in the subcontract and agreed by the parties. He held that the clauses were not void.

Bridgeway’s claim was quite legitimate, so why did Tolent remain silent on what it said was the true design of these clauses?

Disallow costs

The proposed change under the draft bill states that, where the contract provides such clauses, the adjudicator can decide that the provision is unreasonable and may disallow certain costs. Does the proposal go far enough?

It would be a simple matter to maintain the parties’ right to agree that an adjudicator can deal with costs, and to ban any agreement prior to a dispute that one side should bear all the costs.

The changes are expected to be enacted by autumn 2009, so until then – and perhaps thereafter – this type of clause remains destructive to the rights of subcontractors to adjudication.

• Email: andrewmilner@integritam.com