Practical Law

As the new broom in the TCC, Edwards-Stuart J has carried out some important spring cleaning and, in Yuanda v WW Gear, he has delivered possibly the most significant decision in construction law so far this year.

His decision looks at:

• Agreements on adjudication costs, particularly whether they comply with section 108 of the Construction Act 1996.
• The applicability of the Scheme for Construction Contracts 1998 to non-compliant contract provisions.
• Unfair Contract Terms Act 1977 (UCTA) and what constitutes written “standard terms of business”.
• The extent to which contractual interest rates in the construction industry comply with the Late Payment of Commercial Debts Act 1998.

Yuanda’s trade contract

Yuanda was a trade contractor who fitted the curtain walling for the Park Plaza Hotel on Westminster Bridge. In 2007, Yuanda, along with over 30 other trade contractors, contracted with WW Gear Construction Ltd (Gear) on the basis of the JCT Trade Contract. The contract was subject to Gear’s set of “standard” amendments, which included provisions relating to interest and adjudication, both of which were very heavily weighted in Gear’s favour.

Yuanda’s application for declaratory relief

Yuanda sought declaratory relief in the TCC, relying on CPR Part 8. It argued that the new adjudication clause, clause 9A, incorporating the TeCSA scheme, did not comply with section 108 of the Construction Act 1996. If it was right, the whole adjudication agreement should be ousted and replaced wholesale by the adjudication provisions in Part I of the Scheme.

Yuanda argued that the joinder provision in the first part of clause 9A in a “multi-party dispute situation” infringed section 108 because it provided that a dispute arising under the contract between Yuanda and Gear should be decided in an adjudication involving more than one dispute in the same reference; and involving other parties (members of the professional team) who were not parties to the construction contract between Yuanda and Gear, but may be parties to contracts which may not even be construction contracts within the meaning of the Construction Act 1996.

Yuanda also argued that the joinder mechanism was uncertain, and prevented it from referring a dispute to adjudication “at any time”.

Yuanda attacked the second part of clause 9A as non-compliant with section 108 because it acted as a punitive deterrent (if Yuanda referred a dispute to adjudication, it would bear both parties’ costs) and was a very real fetter on its right to adjudicate “at any time”. It was notable that, unlike in Tolent, the costs provision was not reciprocal. Yuanda submitted that the decision in Tolent, which had stood unloved but unchallenged for 10 years, was wrong.

Yuanda also argued that the second part of clause 9A was void under UCTA, because it was an unreasonable restriction on its remedy (on the basis that the contract was formed on Gear’s written standard terms of business).

On the discrete interest point, Yuanda argued that the 0.5% rate of interest in clause 4.11.2 of the JCT standard form was not a “substantial remedy” and was therefore void under section 8 of the Late Payments Act 1998. Instead, the statutory rate of 8% above base rate should apply.

Tolent wrong; Scheme replaces Clause 9A

Edwards-Stuart J held that a Tolent clause, particularly a non-reciprocal clause, did not comply with section 108 of the Construction Act 1996. Thus, Tolent was wrongly decided as such clauses are a real fetter on a party’s right to adjudicate “at any time”. He ruled that this was sufficient to oust the whole of clause 9A.

After reviewing a long list of authorities which left the point in some doubt, he held that, if an adjudication clause fails to comply with section 108, the whole of the contractual adjudication provisions are ousted and are replaced wholesale by the adjudication provisions in Part I of the Scheme; this point should now be regarded as settled.

Edwards-Stuart J drew a distinction between, on the one hand, the provisions in the Construction Act 1996 of wholesale replacement in respect of non-compliant adjudication clauses and, on the other hand, the contrasting terminology used in relation to non-compliant payment clauses (where only the “relevant” provisions of Part II of the Scheme were stated to apply). However, he observed obiter that, in some payment cases, it might well be appropriate to replace the payment terms completely with the payment provisions of the Scheme.

Perhaps surprisingly, however, Edwards-Stuart J did not hold that the multi-joinder provision infringed section 108. He reached that conclusion on the basis that the multi-party joinder provision had to be construed in a limited way so as to permit the joinder of other members of the team merely to bind them to the result, rather than allowing a separate dispute between Gear and the other party to be dealt with. He suggested some amendments to the TeCSA scheme to make the joinder provision work. Nonetheless, it is respectfully suggested that it remains to be seen whether this is a workable solution.

Did Yuanda deal on Gear’s standard terms of business?

Edwards-Stuart J concluded that Yuanda did not deal on Gear’s standard terms, in short because Yuanda had successfully negotiated some material changes from those proposed terms when it made the final deal. In reaching that decision, the judgment sets out useful, updated guidance on meeting the requirements of section 3 of UCTA.

Edwards-Stuart J concluded that “standard” means the terms are ones that the company uses for all, or nearly all, of its contracts of a particular type without alteration (apart from blanks which have to be completed showing the price, name of the other contracting party etc). It is the essence of such terms that they are not varied from transaction to transaction. If they were, they would no longer be “standard”. He also observed that, in principle, some alterations may be so insignificant as to make it possible to hold that the party has dealt on the other’s written standard terms of business, but that was not the position here.

What is a “substantial remedy”?

Edwards-Stuart J held that it was not the intention of Parliament to treat a contractual rate of interest for late payment as not meeting the “substantial remedy” test simply because it was materially lower than the statutory rate. The imposition of the statutory rate is the penalty that a contracting party pays for failing to provide in its contract a fair remedy for late payment to suppliers. He struck down the 0.5% contractual rate of interest because it was not a “substantial remedy”, particularly when that clause was not individually discussed. He held that there was no reason why it would be fair and reasonable to allow Gear to oust the statutory rate; as such he declared that the statutory rate of 8% above base applied.

That decision is, in itself, of enormous significance in these hard-pressed times when interest rates are so low. The judgment also sets out a useful analysis of the 1998 Act, which may provide pointers for other parties in challenging contractual rates in appropriate cases.

The construction industry will also be interested in Edwards-Stuart J’s observation that he could not see any reason why interest at 5% (as provided in the JCT standard forms) would not be a substantial remedy, and that a case could even be made out for 3 to 4% above base.

What next?

As the new TCC judge, Edwards-Stuart J’s decisions have been viewed with a great deal of interest for clues as to the way in which the court’s thinking is headed. This is another decision in which he has demonstrated his willingness to look anew at well-established principles of adjudication jurisprudence.

This post in based on an article that first appeared in issue 12 of 4 Pump Court’s construction newsletter.