In the following case the court had to consider the effect of so-called “Tolent clauses” and also whether a contractual interest rate constituted a substantial remedy within the meaning of the Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act).
Yuanda (UK) Co Ltd v WW Gear Construction Ltd  EWHC 720 (TCC)
The employer (WW Gear) engaged the curtain walling trade contractor (Yuanda) to provide glazed curtain walling as part of the construction of a very substantial luxury hotel in the old GLC building in London. The contract between the parties was based on the JCT Trade Contract with a schedule of bespoke amendments to the standard form and was one of 30 similar trade contracts on the project.
Although there was some negotiation between the parties of the employer’s schedule of amendments, two of the clauses in the employer’s schedule of amendments were not discussed or altered. These clauses were:
- an amendment concerning the adjudication provisions of the contract; and
- an amendment to the standard wording that interest on late payments by the employer would be paid at the rate of 5 per cent over base rate to 0.5 per cent over base rate.
The trade contractor brought proceedings under Part 8 of the CPR seeking declarations that:
- the adjudication provisions in the contract should be replaced by the provisions of the Scheme for Construction Contracts 1998 (Scheme); and
- the contractual rate of interest of 0.5 per cent above base rate on late payment was void by reason to the Late Payment Act.
The adjudication provision
The amended adjudication clause 9A provided as follows:
“The adjudication procedure will be the TeCSA Adjudication Rules (amended to require nomination by the RICS and joining of the members of the professional team in a multi-party dispute situation … and regardless of the eventual decision in the adjudication or in subsequent litigation the Trade Contractor agrees that should he make a reference to Adjudication … then he will be fully responsible for meeting and paying both his own and the Employer’s legal and professional costs in relation to the Adjudication.”
The issues before the court in relation to clause 9A were:
- Whether the adjudication provisions of clause 9A complied with the adjudication requirements of section 108 of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act); if not what should replace them; and
- Whether clause 9A was void for uncertainty?
Did the adjudication provisions in clause 9A conflict with section 108 of the Construction Act?
The trade contractor argued that the amended adjudication provision imposed on them the entirety of the employer’s financial costs of the adjudication and was a fetter to the trade contractor’s ability to refer a dispute to adjudication at any time as was required by section 108 of the Construction Act.
The employer relied on the case of Bridgeway Construction Ltd v Tolent Construction Ltd (2000) CILL 1662. In Tolent a contractual provision requiring the referring party to an adjudication to bear all of the costs and expenses of both parties (including legal costs and adjudicators fees and expenses) was not in conflict with the Construction Act.
The Court recognised that the Construction Act and the Scheme were silent on the question of costs and considered that a contractual provision that conferred on an adjudicator a power to award the parties’ costs would not be in conflict with the Construction Act or the Scheme.
However, the court considered that a contractual provision which required a contractor to bear the legal and professional costs of the employer in any referral to adjudication would effectively deprive the contractor of its remedy (up to the amount of the employer’s costs). This was because if a party had to pay the other party’s costs of a referral to adjudication irrespective of the outcome then it would not be worth making a referral unless the sum it expected to recover would significantly exceed the likely costs of the other party.
In addition it was clear to the court that the requirement to permit the joinder of a member of the professional team where there was a multi-party dispute would make the costs burden on the contractor even more oppressive.
As a result the court considered that the adjudication provision was directly contrary to the purpose of the Construction Act and the Scheme since it would limit the trade contractor’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 - deprive the trade contractor of a remedy altogether. The court therefore disagreed with the reasoning of the court in the Tolent case (although the court did observe that the Tolent case had been given when adjudication was a fairly new procedure and experience of the process was limited).
What should replace the non-compliant adjudication provisions in clause 9A?
The court noted that there was a difference in the language used in the legislation concerning what was to happen in the event on non-compliance with the adjudication provisions of section 108 of the Construction Act and the payment provisions of sections 109 - 113 of the Construction Act. In the event of non-compliance with the adjudication provisions “the adjudication provisions of the Scheme apply”; in the event of absence of agreement on payment matters then “the relevant provisions of the Scheme apply”.
The court considered the authorities including Aveat Heating v Jerram Falkus Construction  EWHC 131 and Banner Holdings v Colchester Borough Council  EWHC 139 and held:
- It was “reasonably clear” that as a matter of construction, if the adjudication provisions were non-compliant with section 108 of the Construction Act then those provisions were replaced in their entirety by the adjudication provisions in Part 1 of the Scheme “lock,stock and barrel.”
- If the payment and notice provisions were non-compliant with the Construction Act (sections 109,110 and 113) the court’s provisional view (obiter) was that the correct approach was that that the Scheme would fill the gaps in the express terms of the contract.
As a result Clause 9A was replaced in its entirety by the adjudication provisions in Part 1 of the Scheme.
Did the joinder provisions in clause 9A lack certainty or conflict with section 108 of the Construction Act?
In view of the court’s decision, it was not necessary to consider whether the joinder provisions in clause 9A lacked certainty but the court set out its view in case a similar point arose in another case.
The trade contractor argued that the requirement in clause 9A that the TeCSA Adjudication Rules be amended to “require joining of the members of the professional team in a multi-party dispute situation” lacked contractual certainty and was difficult to operate in practice.
However, the court considered that proper effect could be given to the clause by limiting its application to the joinder of members of the professional team when the dispute involved an issue which needed to be resolved against that professional as well as the trade contractor but would not extend to an adjudication about the professional’s liability.
In the case of a dispute between the trade contractor and the employer as to whether a defect resulted from poor workmanship or poor design it would be in the interests of the employer to have the issue of whether the defect was one of design or workmanship resolved as between himself and the contractor and also as between himself and the professional. However, the clause would not extend to a dispute involving the issue of the professional’s liability as between the professional and the employer as this would amount to a separate dispute to the issue of liability as between the contractor and the employer.
The interest provision
The rate of interest applicable on late payment was changed from 5 per cent above base rate stated in the JCT standard form to 0.5 per cent above base rate.
The trade contractor argued that the 0.5 per cent rate of interest was not a substantial remedy within the meaning of section 8 (1) of the Late Payment Act and the provision was therefore void. As a result the trade contractor claimed to be entitled to interest at the statutory rate.
The Late Payment Act is generally applicable to construction contracts and provides for a high rate of interest to run on commercial debts which are not paid on time. The statutory rate of interest is currently 8 per cent above the Bank of England base rate.
Many standard forms of contract (including the JCT form of contracts) and bespoke construction contracts substitute a lower rate of interest than the statutory rate. Where the parties agree a specific contractual provision allowing interest, on the assumption that those arrangements provide a “substantial remedy” for late payment, the Late Payment Act will not apply.
The question was whether the contractual rate of 0.5 per cent above base rate was a substantial remedy within the meaning of the Late Payment Act.
A substantial remedy
Under section 9(1) of the Late Payment Act a contractual remedy for late payment is regarded as a substantial remedy unless:
- “(a) The remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment; and
- (b) It would not be fair or reasonable to allow the remedy to be relied on to oust or (as the case may be) to vary the right to statutory interest that would otherwise apply …”
In determining whether the remedy was substantial, section 9 (1) of the Late Payment Act provided that regard had to be had “to all the relevant circumstances at the time the terms in question are agreed.” This involved a consideration of the statutory criteria of:
- the benefits of commercial certainty;
- the strength of the bargaining positions of the parties;
- whether the term was imposed by one party to the detriment of the other; and
- whether the trade contractor received an inducement to agree to the term.
A substantial remedy: the court’s view
As a general point of construction, the court considered that it had not been the intention of Parliament to treat a contractual rate of interest as not being a substantial remedy simply because it was lower than the statutory rate. Rather, the statutory rate should be regarded as the penalty that a contracting party paid for failing to provide a fair remedy for late payment.
The court should bear also bear in mind the following when applying the statutory criteria:
- Where the contractual rate of interest for late payment was not obviously unreasonable and appeared to have been the product of genuine agreement then the contractual rate of interest should not be lightly set aside.
- Those responsible for drafting the JCT contract must have considered 5 per cent above base rate to be a fair rate of interest for late payment. A rate of interest of 5 per cent above base rate should therefore be considered to be a substantial remedy even though it was less than the statutory rate of interest.
- A rate of 3-4 per cent above base rate might also be regarded as a substantial remedy if it had been specifically discussed and agreed between the parties.
Taking all the factors into account it was clear to the court that:
- 0.5 per cent over base rate as a rate of interest for late payment could not be regarded as a substantial remedy within the meaning of the Late Payment Act in the absence of special circumstances (there were none here).
- There was no reason why it would be fair or reasonable to allow the contractual rate of 0.5 per cent to oust the statutory rate. The rate of interest had effectively been imposed on the trade contractor and it would not be fair or reasonable to allow the employer to take advantage of the fact that during pre-contract negotiations the trade contractor failed to spot the amendment to the interest rate.
Therefore the statutory rate of interest of 8 per cent above base rate was substituted for the contractual rate of 0.5 per cent.
This case confirms that Tolent clauses are likely to be contrary to the purpose of the Construction Act. Such clauses will in any event be outlawed by section 141 of the Local Democracy, Economic Development and Construction Act 2009 once it comes into force. Under the proposed changes, parties will no longer be able to agree in advance of an adjudication which party will pay the other side’s legal costs. Parties will still be able to give the adjudicator jurisdiction to allocate his own fee and expenses between them, if they do so in writing in their construction contract or after the adjudication notice.
It is interesting to note that interest as low as 3 - 4 per cent above base rate might constitute a substantial remedy in appropriate circumstances especially given the very low rates of interest at present.