Tolent clauses: Failing to arrange a celebration in a brewery

It just shouldn’t be this difficult.

Not long after the 1996 Act came into force the Courts endorsed a contractual provision for the Referring party to any adjudication to pay all the costs and expenses of both parties, including legal costs, regardless of the outcome. The case was Bridgeway Construction v Tolent Construction and hence such clauses became known as ‘Tolent’ clauses.

It was not an entirely uncontroversial decision, but for about 10 years after that the construction industry went about their business in the fairly certain knowledge that they knew what the Courts’ approach would be to such clauses. It is worth noting that despite the very understandable concerns that such clauses would inhibit the use of the Act, the past 10 years have not been marked by an absence of Referrals.

Following two recent decisions, however, we are now in the unhappy position that the current law is unclear and, to make matters worse, the new Act, which was intended to clarify the position, only makes matters worse.

From Tolent to Yuanda

It is fair to say that the judgment in Tolent was not weighed down with jurisprudential analysis. In simple terms HHJ Mackay considered that the parties should be permitted to contract as they wished in relation to the recovery of costs in Adjudication and was not swayed by the Claimant’s argument that the clause inhibited a party from pursuing the remedies provided by the adjudication procedure.

Fast forward 10 years and step forward Edwards-Stuart J in Yuanda v WW Gear Construction. Faced with a similar clause, he took the opportunity to comment that he found the reasoning in Tolent difficult to understand. Such a clause was, in his view, “directly contrary to the purpose of the Act” because it “would in practice limit Yuanda’s freedom to refer a dispute to adjudication at any time and, in some circumstances, such as in a dispute involving a relatively small amount of money, to deprive it of the remedy altogether”. Consequently, pursuant to section 108(5) of the Act, since the contract did not comply with the requirements of the Act, Part I of the Scheme was to apply instead leaving the parties to bear their own legal costs.

Of course, one difference between the clauses in Tolent and Yuanda was that the cost provisions in the former were symmetrical – the Referring party had to pay the costs, whether that was the employer or contractor – whereas in the latter the cost provision only applied if the contractor referred. It is, however, not at all clear that this was the critical difference as far as Edwards-Stuart J was concerned and in the view of most commentators the decision sounded the death knell of the Tolent clause.

On one view this was timely. One of the advantages of the decision in Yuanda, and one which Edwards-Stuart J explicitly mentioned (albeit he made clear it was not a factor in his decision), was that the incoming Construction Act (or, to be precise, section 141 of the Local Democracy, Economic Development and Construction Act 2009, which adds a new section 108A to the 1996 Act) was supposed to outlaw such clauses anyway.

On that basis, although the Yuanda decision was a surprise, it was only bringing forward a change of policy which the industry was already anticipating. However, that position has now been seriously undermined because: (a) the recent Scottish case of Profile Projects v Elmwood (Glasgow) Ltd [2011] CSOH 64 has cast doubt on the decision in Yuanda and (b) many commentators now believe that the wording of the new Act fails to prevent Tolent clauses even though that was the evident intent of Parliament.

Profile projects

In a judgment from the Outer House of the Court of Session, dated 8 April 2011, Lord Menzies met Yuanda head on (well, almost).

Lord Menzies distinguished Yuanda on 2 bases (accepting Elmwood’s submissions):

• In Yuanda there was no reciprocity; the costs were to be borne by the contractor whoever chose to refer the dispute. In Profile Projects just as in Tolent, the clauses required the referring party to pay.
• In Yuanda the clause placed no limits on the amount of costs recoverable i.e. all costs were to be recovered even if they were not reasonable. In Profile Projects there was a provision for referring the costs for assessment.

In Lord Menzies’ view, a Tolent clause did not deprive a party of his statutory remedy; it simply required him by agreement to incur certain costs in order to obtain that remedy. In any event there were many circumstances which might discourage a party from referring a dispute, including sound commercial reasons, but one could not possibly prohibit them.

For a Court to strike down an agreement as being prohibited by an Act, Lord Menzies accepted that it would be necessary to consider “(1) what rights have been given to the parties by Parliament? (2) are those rights inalienable? and (3) does the agreement in question amount to the alienation of an inalienable right?”. None of these were considered in Yuanda. The contract contained everything required of it by section 108 and there was no evidence that either party had been deprived of a right to adjudicate.

Interestingly, Lord Menzies reached his decision in no small part due to his understanding of the new Act. In his view, unlike that of Edwards-Stuart J, section 108A permitted Tolent clauses but only in certain circumstances. As he put it, “The inference which must be drawn from the passing of the 2009 Act is that Parliament recognised that the law as it stands does not prevent the enforcement of Tolent clauses”. On that basis, if Yuanda was correct, the Act would actually be re-introducing them, which was plainly the opposite of Parliament’s intention.

Lord Menzies’ comments on the new Act were of particular interest. Whether he appreciated it or not (and there is no suggestion in the judgment that the construction of the Act was thought to be controversial), his comments have added fore to the debate already raging as to the impact of the new Act on Tolent clauses.

The 2009 Act

Section 108A of the new Act reads as follows:

(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.

Everyone agrees that the intention of Parliament in passing this law was to banish Tolent clauses but retain the parties’ rights to agree to allow adjudicator’s to allocate their fees and expenses (indeed, the original draft just included clause 2(b) and 2(a) was inserted to allow for the allocation of fees/expenses). Unfortunately, almost everyone disagrees as to whether the clause actually achieves this. This section appears intended to echo s.60 of the Arbitration Act 1996, which was expressed in much clearer and unambiguous language.

The real problem concerns the wording of clause (2)(a). It seems that the intention was that clauses would only be effective if they were (i) made in writing (ii) in the construction contract and (iii) limited only to conferring powers on the adjudicator to allocate fees/expenses. Sadly, the clause omits the limiting words. Consequently, some say that it should be read to mean exactly what it says; any clauses as to costs will be effective as long as they are in writing, in the construction contract and (as it happens also) confer power on the adjudicator to allocate fees/expenses. In other words the Act, rather than banishing Tolent clauses, actually introduces a legislative framework permitting them.

There is no obvious logic to such a system and it is not what Parliament intended, but it is what the Act says. Those wishing to rely upon the Parliamentary debates in order to require a construction in line with what Parliament actually intended may yet be stymied by the Pepper v Hart requirement that such an approach can only be taken where the statute is ambiguous, obscure or its literal meaning leads to an absurdity. On one view at least there is nothing ambiguous about the clause at all.

The BIS have been told about the problem but all indications are that they believe the wording is fine.

The overwhelming view of commentators is that, if the clause remains unaltered, the Courts will find a way to construe it so as to allow it to do what it was intended to do. That is probably right but it is worth noting that when Lord Menzies looked at the clause he did not think it prohibited Tolent clauses in all circumstances at all. 

There is simply no good reason to allow this unhappy state of affairs to come to pass and an amendment to the wording remains by far the best solution. There is no need for the uncertainty in the meantime nor for the costs which will be wasted finding a resolution, which will no doubt require the attention of at least the Court of Appeal. Unless of course anyone wants to instruct Hardwicke to run the point when the Act comes into force, which would be a completely different matter!