Yuanda (UK) Co Ltd v WW Gear Construction Limited (2010) saw Edwards-Stewart J consider two issues - the enforceability of Tolent clauses and the meaning of 'substantial remedy' under the Late Payment of Commercial Debts (Interest) Act 1998.
For the last ten years clauses requiring the referring party in a construction adjudication to pay all the legal and professional costs of both parties have been considered compliant with the Housing Grants, Construction and Regeneration Act 1996 (the Act). These clauses are known as Tolent clauses following Bridgeway Construction v Tolent Construction (2000). Ten years on, it has been ruled that Tolent clauses are incompatible with section 108 of the Act and are void and unenforceable.
Why are Tolent clauses void and unenforceable?
It was held that Tolent clauses are incompatible with the Act as they discourage parties from adjudicating at any time. The reasoning being that in disputes involving relatively small amounts of money, it may not be commercially viable for a party to pursue an adjudication not knowing how much the other side might spend on legal fees.
As it has been common practice for contractors to include Tolent clauses in their standard terms of sub-contract, the unenforceability of these clauses may increase the number of adjudications. Those who are thinking of signing up to standard terms which contain Tolent clauses should seek to remove them as their inclusion may lead to the adjudication provisions in the contract being disapplied in their entirety and replaced with the contractor-favoured Scheme for Construction Contracts.
This decision reflects the position that will be adopted in the Local Democracy, Economic Development and Construction Act 2009 (which has received royal assent) when it comes into force. The new act prevents parties agreeing in advance of an adjudication which party will pay the other side's legal costs. Parties will, however, be able to give the adjudicator jurisdiction to allocate his fees and expenses between the parties provided this is either written into the construction contract or agreed in writing after the notice of intention to refer the dispute to adjudication has been issued.
It was ruled that the contractual rate of interest of 0.5% over base did not constitute a 'substantial remedy' under the Late Payment of Commercial Debts (Interest) Act 1998 and that the statutory rate of 8% above base was to be applied.
It was, however, made clear that it was not Parliament's intention for a rate of interest to fall foul of the substantial remedy rule simply because it was below the statutory rate and that it could be argued that rates of 3% or 4% above base rate were substantial.
This decision is currently being appealed.