The premature death of the costs allocation (or “Tolent”) clause

What is a Tolent Clause?

A Tolent clause (named after the 2000 case of Bridgeway Construction Limited –v-Tolent Construction Limited) is a clause in a construction contract whereby one party agrees to pay the other party’s costs of any adjudication, as well as their own, whether they win or lose.

Although, generally speaking, parties should be free to reach whatever agreement they choose, there has long been a certain amount of disquiet about a clause that many have seen as fettering a party’s right to have his disputes heard by an adjudicator.

What is changing?

These costs allocation clauses, which were on their last legs anyway with the coming into force of the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA) early next year, have been dealt a premature death blow by the recent case of Yuanda –v- WW Gear.

The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) says that a party to a construction contract has the right to refer a dispute arising under the contract to adjudication “at any time”. HGCRA says nothing about costs and this has always been interpreted as meaning that each party pays his own costs unless agreement is reached to the contrary.

In Bridgeway –v- Tolent, amendments to the adjudication procedure provided that any party referring a dispute to adjudication should pay the costs of both parties. Bridgeway referred a dispute to adjudication and won. Tolent paid the amount of the adjudicator’s decision less the amount of their costs. Bridgeway asked the court to order that the clause was invalid because it fettered their right to refer disputes to adjudication. Tolent argued that HGCRA is silent on costs, so therefore the parties can agree what they want. The judge agreed that he shouldn’t interfere with what the parties had agreed and that the clause should therefore stand.

To be fair, the Tolent case was decided in 2000, not long after the adjudication provisions came into force and at a time when no-one could have foreseen the popularity of adjudication and the escalation of costs brought about by the referral of ever more complex disputes. What might not have been a massive deterrent to adjudication in 2000 had certainly become so by the time that LDEDCA received royal assent in November last year. When the Act comes into force, probably early next year, it will outlaw Tolent clauses.

The judge in Yuanda (UK) Co Ltd –v- WW Gear Construction Ltd was therefore somewhat ahead of the game when he found, in May 2010, that a similar clause in Yuanda’s contract with Gear didn’t comply with HGCRA and should be struck out and replaced with the Scheme.

In that case, Yuanda was a specialist glazed curtain walling contractor engaged by Gear on a project to construct a luxury hotel in the old GLC building in London. The contract contained a clause which said that, if Yuanda were to refer a dispute to adjudication, it would be responsible for the costs of both parties, whatever the outcome. Yuanda asked the court for a declaration that the clause was invalid because it only applied when Yuanda was the referring party and its intention and effect were therefore to fetter Yuanda’s right to refer a dispute to adjudication under HGCRA. Gear relied on the decision in Tolent.

The judge found that the clause didn’t comply with HGCRA not only because it discouraged Yuanda from exercising its right to adjudicate, but also because it in effect meant that Gear could avoid compliance with an adjudicator’s decision. He saw no practical difference between the clause in question and a clause that simply allowed a losing party to deduct its costs from an adjudicator’s award. In both cases, the losing party could avoid compliance with the decision and the winning party would be deprived, at least in part, of the remedy it had adjudicated to obtain.

What does it mean?

What this means is that we’ve probably now seen the last of the Tolent clause, about a year ahead of schedule. Although the clause in Yuanda was different from the clause in Tolent in as much as it only applied to one party, rather than both, that didn’t form part of the judge’s reasoning, so wouldn’t be a ground for distinguishing the decision. Both cases are first instance decisions and therefore technically of equal weight, but Yuanda is more likely to be followed because it’s more up to date with the current state of adjudication.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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