Tolent clauses: Read but don't weep

There has been much fuss in these legal pages and elsewhere (see, for example, John Riches’ column, 8 July) about an aspect of the changes to the legislation surrounding adjudication. The amendments to the Construction Act will come into force on 1 October, so it would be a good idea to sort out what the new law really means.

The problem, if there is one, lies in the new section 108A of the act. Parliament wanted to outlaw what has become known as “Tolent clauses”. These are sneaky contract terms that affect liability for costs in adjudication. Typically a main contractor will include a clause in its subcontracts that whoever starts the adjudication will have to pay the other party’s legal costs whatever the outcome. The intention of course is to deter the subcontractor from starting adjudications.

Arguably, in the light of the later Yuanda decision, it was not necessary for any amendment to deal with the problem because the court made it clear that such clauses would not be enforced

Such a clause was held to be effective in a case called Bridgeway Construction vs Tolent Construction in 2000 and so similar clauses have become known as Tolent clauses. They were used with subtle variations until a decision of the Technology and Construction Court (TCC) in 2010, Yuanda (UK) vs WW Gear Construction. Mr Justice Edwards-Stuart took the view that a clause that puts all the costs liability on one party was effectively a fetter on the statutory right of a party to take a dispute to adjudication, and was therefore not enforceable.

Strictly speaking the judgment was dealing only with a clause that required the contractor to pay the employer’s costs of an adjudication whoever started it and whatever the outcome. It might still be argued that if the clause was a little more balanced - for example, if it said that the party who starts the adjudication (not necessarily the contractor) would pay both sides’ costs, or that the adjudicator could decide - the term of the contract would be more acceptable and therefore enforceable. Most commentators though interpret the judgment as an expression of policy on the part of the TCC to the effect that any attempt to allow or require adjudicators to deal with costs of an adjudication will fail.

The amendments to the Construction Act were drafted before the Yuanda decision. At the time it seemed that Tolent clauses were enforceable and there was considerable enthusiasm for change. Arguably, in the light of the later Yuanda decision, it was not necessary for any amendment to deal with the problem because the court made it clear that such clauses would not be enforced. But parliament did not have the benefit of foresight and so the amendments include a specific section dealing with Tolent clauses. Section 108A applies to “any contractual provision […] which concerns the allocation as between […] parties of costs relating to the adjudication”.

The new section provides that such a provision is ineffective unless it is made in writing, gives the adjudicator power to allocate his fees between the parties, or is made after the referral to adjudication.

It is highly unlikely that any such agreement would be made after the start of the adjudication, so we can concentrate on the first two qualifications.
The worry expressed by John Riches and others is that if a clause in the contract says something like “The adjudicator can allocate his fees between the parties, but in any event the subcontractor will pay all the main contractor’s legal costs”, the clause will satisfy section 108A and so will be effective. On that basis a section that is designed to outlaw Tolent clauses has done exactly the opposite and allowed them, so long as they are coupled with a power of the adjudicator to allocate his own fees.

This is quite wrong. The section does not say that a contract “clause” is ineffective unless it satisfies the conditions. It says that a contract “provision” is ineffective unless it satisfies the conditions. A clause can be quite complex and contain lots of provisions. The hypothetical clause that John is worried about actually contains two provisions. The first provision, enabling allocation of the adjudicator’s fees, is effective because it satisfies the criteria in section 108A. The second provision, requiring the subcontractor to pay the main contractor’s legal fees, doesn’t satisfy the criteria and is therefore ineffective. The second provision doesn’t become effective just because it is put in the same clause as the first.

It is a pity the drafting of the legislation is so unsatisfactory that we have to have a debate like this even before it is in force.

John Redmond is a consultant at Osborne Clarke