Parties to NEC3 contracts must act in a spirit of mutual trust and co-operation. We consider what that means under English law and in other jurisdictions.

The aim of the NEC3 is to nurture a spirit of partnership and fairness between the parties. To that end, there is an express clause in the ECC and PSC contracts, Clause 10.1, which states that:

“The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation”.

There are two parts to Clause 10.1. The first is that the parties shall act as stated in the contract, and is self-explanatory.

The second – that the parties shall act in a spirit of mutual trust and co-operation – embodies the NEC’s partnering ethos. Its intentions are clear, which might be why it has never been tested in the courts (although the obligation to adjudicate before litigating in Clause W2.4 could be equally responsible), but its wording, and the exact nature of its obligations, is vague.

In an article by Humphrey Lloyd QC in the International Construction Law Review in 2008, he said the obligation is “…tantamount to one of performance in good faith… The phrase… imports not only honesty and reasonableness but may also oblige someone to do more than the contract calls for if the contract is truly to be performed co-operatively”.

So it’s good faith, honesty, reasonableness, and maybe even a duty to go beyond one’s contractual obligations. But how will the English courts apply it? There is no implied duty of good faith at common law, but parties can expressly agree a good faith duty, which is exactly what NEC3 does in Clause 10.1.

Good faith obligations in English law

Back in 1999, Birse Construction Ltd v St David Ltd dealt with a mutual trust and co-operation clause in a “partnership charter” that the parties had signed outside the contract. The court recognised that even though the charter wasn’t legally binding, it clearly showed how the parties intended to conduct themselves, using examples in the judgment such as taking a sympathetic approach to extension of time claims, and a non-rigid approach to the question of contract formation (which was the issue in dispute). In other words, a clause in a non-binding collateral document could place obligations on how a party could exercise its contractual rights.

If this collaborative approach to interpretation suggests that parties would be expected to compromise their rights, it hasn’t lasted. In 2010, Gold Group v BDW Trading Ltd confirmed that “…good faith, whilst requiring the parties to act in a way that will allow the parties to enjoy the anticipated benefits of the contract, does not require either party to give up a freely negotiated financial advantage clearly embedded in the contract”. In that case, Gold Group was not in breach of an express good faith obligation in refusing to negotiate with BDW to reduce its share of profits in a housing development after the market crashed. Good faith did not mean it had to enter discussions to sacrifice some of its agreed profit.

Then in 2013, two cases demonstrated an even more restrictive approach to express good faith obligations. Both took a strict and technical view of the wording and found the obligations to be restricted to the performance of certain functions. For example, in Mid Essex Hospital v Compass Group, the wording of the clause was “[the parties] will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable [Mid Essex] or, as the case may be, the Beneficiary to derive the full benefit of the Contract”.

The Court of Appeal held (reversing the first instance judgment) that the clause did not impose a general obligation of good faith, but was limited to exercising good faith in “the efficient transmission of information and instructions”. A similar decision was reached in TSG v South Anglia Housing. In both cases, the court found that the good faith obligation did not impact on the exercise of a party’s absolute rights, such as the deduction of performance related sums, or terminating under a termination-at-will clause – which is the same principal as Gold Group.

That said, Clause 10.1 is not restricted in its language, and when we think back to the decision in Birse Construction, and the importance placed on the precise wording of the good faith clauses in Mid Essex and TSG, as well as recent shifts towards implying good faith duties in certain circumstances, Clause 10.1 in its breadth might indeed “oblige someone to do more than the contract calls for”, as Humphrey Lloyd QC suggested.

Indeed in Willmott Dixon v Newlon Housing Trust, also in 2013, the court found that a similar obligation in a PPC2000 contract to “…work together… to achieve transparent and cooperative exchange of information in all matters relating to the Project…” (which the judge equated to working in mutual co-operation) extended as far as the dispute resolution clause, which meant that the party on the receiving end of an adjudication had a duty to enquire as to why it hadn’t received the right documents from the referring party, rather relying on the defective referral.

However, although it wasn’t stated, it is arguable that the obligation in Willmott Dixon can be limited in the same way as that in Mid Essex (that it is only applicable to the exchange of information), as the case concerned the exchange of adjudication pleadings.

So, whilst Clause 10.1 should make a party think twice before taking a rigid black letter or potentially unreasonable view on a point, the words of Beatson LJ in Mid Essex can be their guide when it comes to express contract rights:

“…care must be taken not to construe a general and potentially open-ended obligation such as an obligation to ‘co-operate’ or to ‘act in good faith’ as covering the same ground as other, more specific, provisions, lest it cut across those more specific provisions and any limitations in them”.

Good faith obligations in other jurisdictions

NEC3 promotes itself for international use – so how will mutual trust and co-operation be dealt with overseas? Most civil law jurisdictions already impose a good faith obligation on the parties. For instance, Article 148 of the Egyptian Code provides that “a contract must be performed in accordance with its contents and in compliance with the requirements of good faith”.

It’s not just civil law jurisdictions either – both the USA and Australia recognise an implied duty of good faith. The USA has implied a good faith obligation into every contract since 1917, and it is now incorporated into the Uniform Commercial Code. Even so, its full reach remains unclear, and in 2007 a New York State Court and a US Federal Court were at odds over whether there could be a claim for breach of a good faith obligation, even when there was no other breach of contract – the Federal Court holding that it does not provide a separate cause of action. What is settled though is that in the USA good faith can act to fetter express rights, specifically the right to terminate at will. A party cannot exercise a termination clause in order to obtain a better bargain elsewhere – to do so would be acting in bad faith.

The doctrine of implied good faith in Australia is less certain. There is no definitive High Court decision. Some states have decided in the affirmative (New South Wales and South Australia), other states (Victoria and Tasmania) in the negative, with the others undecided.

A number of approaches have been adopted in Australia to clarify what such a duty means, with a frequently cited approach being that of Sir Anthony Mason, who suggests that good faith in commercial contracts includes the following elements:

  • An obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself).
  • Compliance with honest standards of conduct.
  • Compliance with standards of conduct that are reasonable having regard to the interests of the parties.

However, even where a duty is implied, parties are free to contract out of it, and in NSW the position is that express clauses that endow parties with absolute rights act to exclude any implied duty of good faith. Such clauses giving specific rights to a party would also conflict with an express good faith duty, such as Clause 10.1, with the same outcome.

Conclusion

The full legal effect of Clause 10.1 remains something of a mystery, but parties contracting under English law should be aware of its breadth and should take their duties of trust and co-operation seriously – that is the point behind the NEC after all. Those operating in other jurisdictions which have a recognition, or even a codified obligation, of acting in good faith might expect the reach of Clause 10.1 to go even further.