Do you remember the old song: “I fought the law and the law won”? To some extent, it could be what the defendant was feeling after reading the judgment in Yuanda (UK) Co Ltd v WW Gear Construction Ltd and losing key battles over the Construction Act and the Late Payment of Commercial Debts (Interest) Act 1998.

Yuanda, an English subsidiary of a Chinese company, entered into a trade contract with Gear to provide glazed curtain walling for a hotel. 30 or so trade contractors were involved in the project and they all negotiated on the basis of the same contract terms which were based on the JCT Trade Contract, but with a schedule of Gear’s amendments.

Yuanda failed to spot some disagreeable amendments during the contract negotiations:

  • replacement of the adjudication provisions with a clause 9A that • incorporated the TeCSA Rules, amended:
    •  “...to require ...joining of the members of a professional team in a multi-party dispute situation”; and
    • to make Yuanda fully responsible for both its own and Gear’s legal and professional costs if it referred a dispute to adjudication;
  •  a reduction of the late payment rate of interest from 5% to 0.5% over Base Rate.

When it realised the unpalatable financial consequences of these amendments, Yuanda asked the court to make declarations, in particular, that:

  • section 3(1) of the Unfair Contract Terms Act 1977 applied to the contract, because the contract was on Gear’s written standard terms of business;
  • clause 9A was contrary to section 108 of the Construction Act and the adjudication provisions should be replaced by the provisions of the Scheme for Construction Contracts; and
  • the rate of interest was void by reason of the Late Payment of Commercial Debts (Interest) Act 1998.

Section 3(1) of the Unfair Contract Terms Act

Yuanda claimed it had dealt with Gear on Gear’s written standard terms of business, so that section 3(1) of UCTA applied to prevent Gear from excluding or restricting its liability for breach of contract, except to the extent reasonable. But what exactly are “written standard terms of business” under UCTA?

Mr Justice Edwards-Stuart considered the case law and noted that, to be standard, the terms have to be terms which the company in question uses for all, or nearly all, of its contracts of a particular type without alteration (apart from filling in the blanks). It is the essence of such terms that they are not varied from transaction to transaction.

Negotiations are not in themselves fatal to the terms being standard but, if there are significant differences between the terms offered and the terms of the contract actually made, then the contract will not have been made on one party’s written standard terms of business.

The judge decided that the parties did not contract on Gear’s written standard terms of business because:

  • Gear did not have standard terms; although it had offered the same terms to all of the Trade Contractors, few if any had contracted on the same terms; and
  • Yuanda had negotiated some material alterations to the terms.

Section 108 of the Construction Act and “Tolent clauses ”

Clause 9A was an example of a ‘Tolent clause’, so-called because in Bridgewater Construction Ltd v Tolent Construction Ltd Judge Mackay had decided that a clause requiring the party serving the notice of adjudication to bear both parties’ costs and expenses and the adjudicator’s costs, was not void. The claimants in Tolent had unsuccessfully argued that the clause inhibited the contracting parties from pursuing their lawful remedies through adjudication.

Mr Justice Edwards-Stuart in Yuanda considered that the non-reciprocal Tolent clause (9A) was contrary to s108 because its practical effect, that the contractor would be deprived of its remedy (up to the amount of the employer’s costs), would discourage Yuanda from referring a dispute (particularly a low value dispute) to adjudication “at any time” (as it was entitled to do under the Construction Act). He disagreed with Judge Mackay’s conclusion in Tolent, at least on the basis of the Yuanda version of a Tolent clause.

This may mean it is curtains for Tolent clauses, in advance of the ban in the Local Democracy, Economic Development and Construction Act 2009 that is yet to come into force.

So what adjudication provisions did apply? Mr Justice Edwards-Stuart said that the effect of section 108(5) of the Construction Act was that the adjudication provisions of the Scheme applied “lock, stock and barrel” and replaced the adjudication provisions in the contract.

So far, so good, but, even though the judge did not need to decide the point, there was still the unusual multiparty aspect of clause 9A. Would that really work or was it uncertain or in conflict with s108? The judge said the requirement to join the professional team did not fall foul of section 108 and that proper effect could be given to this clause with some “modest” amendments to the TeCSA Rules. The thoughts of the Court of Appeal on the point could make interesting reading.

 Interest – a substantial rate?

Last, but not least, the judge said that a 0.5% rate of interest over base rate was not a “substantial remedy” for the purposes of the Late Payment of Commercial Debts (Interest) Act 1998 and that it must be replaced by the statutory rate (8% over base). Of interest to JCT contract users, however, are the judge’s comments that he could see no reason why the rate in the standard printed form of JCT Trade Contract (5% over base) should not be regarded as a substantial remedy, even though 3% less than the statutory rate.

All of which probably left Gear feeling that statute had, overall, won the day.