In a landmark judgment yesterday, the Technology and Construction Court held that clauses that require a contractor to pay the employer’s legal costs, win or lose, do not comply with the Construction Act

Protracted contract negotiations can often result in important amendments to a contract being overlooked. As many practitioners will know, it is only when disputes arise that the contract is dusted off and the full implications of the amendments are understood.

Yuanda, a curtain walling contractor, had been engaged by Gear on the Westminster Bridge Park, Plaza Hotel project and had signed up to a JCT Trade Contract which contained two significant amendments in relation to adjudication and interest on late payment:

1. The clause in relation to adjudication permitted the joining of members of the professional team (who were not parties to the contract) in what was described as a “multi-party dispute situation” and required that Yuanda was to meet Gear’s legal and professional costs of any reference Yuanda made to adjudication, regardless of the outcome

2. The clause in relation to interest on late payment was amended by Gear from the JCT standard of 5% to 0.5% above the base rate.

Yuanda had not appreciated the commercial consequences of the amendments to the contract until a dispute arose with Gear. Yuanda then realised that it could not refer disputes to adjudication if it was to pay Gear’s legal and professional costs, which were not limited by the contract. The lack of reciprocity meant that Yuanda’s right to adjudicate was fettered in a way that Gear’s was not. It was also noted by Yuanda that 0.5% as a rate of interest was very low and would not compensate Yuanda for late payment or act as an incentive for prompt payment by Gear.

Therefore, Yuanda had no real option but to commence CPR part eight proceedings seeking declarations that two clauses of the contract were void and invalid and should be struck out by the court.

Specifically, Yuanda sought declarations from the TCC that:

1. The clause on adjudication should be ousted and replaced wholesale by the Scheme because it was incompatible with the HGCRA 1996;

2. In the alternative, the term of the adjudication clause that permitted a “multi-party dispute situation” was void for uncertainty and the whole clause should be struck out and replaced by the scheme

3. In the further alternative, the requirement to meet Gear’s costs was an unreasonable contract term and void as defined by s3 UCTA 1977

4. Yuanda also sought a declaration that the clause relating to interest should be declared void in accordance with s8 and s9 of the LPCD(1)A as it submitted that 0.5% could not be regarded as a substantial remedy.

Judge Edwards-Stuart decided that although, on the facts, the adjudication clause was not unreasonable within the meaning of UCTA, it did fail to comply with the Construction Act 1996. He cast doubt on the judgment in the broadly similar case of Bridgeway Construction Limited vs Tolent Construction (2000) CILL 1662, which he observed was an early case decided before the full commercial impact of adjudication had been properly understood and where the facts were materially different because the relevant clause applied to the parties equally. He said that “if a party knows that it will have to pay the other party’s costs of any referral to adjudication, irrespective of the outcome, then it will not be worth making a referral unless the sum it expects to recover will significantly exceed the likely costs of the other party” - and it would not be able to estimate those costs (which the other party would have no incentive to minimise). Therefore, the clause in this case did fall foul of HGCRA as inhibiting the entitlement to adjudicate.

The judge also agreed that in view of the fact that the 0.5% interest rate had been effectively imposed on Yuanda, and there were no other special circumstances, it failed to constitute a substantial remedy for the purposes of LPCD(I)A. Therefore the statutory rate would be substituted. Obiter, he indicated that interest fixed below the statutory rate (even as low as 3% to 4%) might constitute a substantial remedy in appropriate circumstances.

This case also has interesting implications for multi-party adjudications (upheld) and in respect to international supply contracts for the purposes of UCTA. However, its overriding importance is that, in anticipation of the forthcoming revisions to the Construction Act, it undermines attempts by contract drafters to deny a party the right to adjudicate by oblique means and gives guidance as to what interest rates on non-payment may be of sufficient substance to be upheld in the Construction Industry.

Julian Critchlow is a partner and Theresa Mohammed an assistant solicitor at Fenwick Elliott