Making mischief

One of the main objectives of the proposed changes to the Housing Grants, Construction and Regeneration Act (1996) was to effectively outlaw “Tolent clauses” (Bridgeway Construction Ltd v Tolent Construction Ltd [2000] CILL 1662), whereby the referring party was obliged to pay the costs of an adjudication, whatever the result.

There is increasing debate within the industry, however, as to whether the provisions as finally drafted and included in the Local Democracy, Economic Development and Construction Act 2009 (LDEC) and likely to come into force next year will meet this objective.

The initial approach taken by the Department for Business Enterprise and Regulatory Reform (BERR) in their draft Construction Contracts Bill in 2008, was to propose a blanket ban on all agreements as to costs which were made prior to the appointment of an adjudicator.

This raised concern in certain quarters that this legislation could be used to prevent an adjudicator from receiving payment for his fees from the parties, where the contract terms entered into by the parties prior to the appointment of the adjudicator was relevant in determining liability for the adjudicator’s fees.

The result

As a result of which the government produced amendments 21 and 22 in the third reading of the bill in Parliament which are set out in clause 141 of the LDEC:-

“141 Adjudication Costs

In the Housing Grants, Construction and Regeneration Act 1996, after Section 108 insert-

108A Adjudication costs: effectiveness of provision

(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.” (emphasis added)

Whilst the intention of clause 141 is presumed to make ineffective all agreements as to costs unless they relate to the adjudicator’s fees, or the agreement is reached after the appointment of an adjudicator, Clause 141(2) (a) equally could be interpreted such that any contract condition allocating costs would be effective provided it met the requirements of the clause.

Indeed during the third reading of the Act, the point was made that the clause as drafted could: “leave a lacuna whereby a contract could be devised that included exactly such a provision for the adjudicator to be entitled to payment of reasonable expenses, but that might separately seek to impose a condition about other costs, including the legal costs of the other parties….being met by one party.”

For whatever reason this point was not addressed during the reading of the Bill and no distinction made between the adjudicator’s costs and the parties’ costs in the legislation, with the government’s amendments approved as drafted.

Whilst the rules applied to the interpretation of statutes may ensure that the original intention of Parliament to outlaw all pre-agreements as to costs (in order to prevent the re-occurrence of Tolent clauses) is achieved, this is far from certain. Taking the purely literal meaning of the act it would appear that provided a clause is:
i) made in writing
ii) contained in the construction contact and
iii) confers powers on the adjudicator to allocate his costs

Any subsequent allocation of the parties’ costs will be allowable.

The Interpretation Act (1978) and the Mischief Rule, whereby the court can look at the purpose of the Act and the mischief it was intended to prevent may yet ensure that such a clause would be held to be contrary to the Act and therefore unenforceable.

However given the lack of clarity in the drafting and the fact that costs will often be a significant issue for parties in a larger adjudication it will not be long before this point is tested in the courts (assuming the Act is implemented by the government of the day).

Irrespective of whether the courts are ultimately required to clarify the intention of the Act and utilise the Mischief Rule, it is submitted that it would be far better for Parliament to re-think their approach on costs and draft legislation which allows the adjudicator to make a decision as to costs, with the successful party being able to recover their costs incurred.

In order to ensure costs expended were proportionate to the amount in dispute, the recovery of costs could also be capped at an appropriate level.

This more just approach to dealing with the issue of costs in adjudications would enable a party with a bona fide grievance to pursue their claim and prevent the common abuse on projects where the final payment is withheld by a party, safe in the knowledge that the costs of pursuing the money due would outweigh the sums in dispute.