Just in case someone bump into the same error. Here is the solution I managed to make it work. First you need to copy the Toolbar.php from the mage core and paste it in the local mage pool and find the the function setCollection and replace it with the following code:
public function setCollection($collection)
{
$this->_collection = $collection;
$this->_collection->setCurPage($this->getCurrentPage());
// we need to set pagination only if passed value integer and more that 0
$limit = (int)$this->getLimit();
if ($limit) {
$this->_collection->setPageSize($limit);
}
if ($this->getCurrentOrder()) {
if(($this->getCurrentOrder())=='position'){
$this->_collection->setOrder('position','asc');
}
else {
$this->_collection->setOrder($this->getCurrentOrder(),$this->getCurrentDirection());
}
}
return $this;
}