Relying on the role of “mutual trust”, “co-operation” and “good faith” to permit fair and equitable judgments is dangerous. It leads to uncertainty and opens the floodgates to pointless litigation.

This could not be truer given the recent TCC judgment of Costain Limited (Costain) v Tarmac Holdings Limited (“Tarmac”) [2017] EWHC 319 (TCC).

In this case, the employer, the Secretary of State for Transport (SST) concluded an NEC3 framework contract with Costain for particular transport infrastructure projects. A similar framework contract was concluded with Tarmac for the supply of concrete.

Coincidentally, Costain procured the necessary concrete from Tarmac. The subcontract between Costain and Tarmac incorporated the NEC3 supply short contract conditions which, at clause 93.3, contained an adjudication provision with a restricted timetable and a time bar clause and a second stage arbitration provision.

It is common ground that the concrete was defective but a dispute arose as to the scope of the appropriate remedial work.

It is Tarmac’s case that, by December 2015, Costain had failed to comply with the provisions of clause 93.3 and was time barred from making a claim for costs incurred. Tarmac referred that dispute to adjudication. The adjudicator agreed that the subcontractor was time barred. Costain then issued these proceedings in the TCC, seeking to recover just under £5.8 million by way of damages for breach of contract.

Tarmac brought an application to stay Costain’s claim in the TCC and, in doing so, relied on clause 93 of the short supply contract. Costain resisted the application to stay. It argued that the subcontract agreement included another clause which allowed for adjudication “at any time” and made no reference to arbitration. As a matter of contract construction, clause 93 did not apply to the claim.

The confusion in this matter arose from the two separate clauses dealing with dispute resolution. We assume, although this was not dealt with in the judgment, that there was no priority clause.

The framework contract conditions contained a dispute resolution provision that permitted adjudication “at any time”. The dispute resolution provision in the supply contract (clause 93) contained a restricted right to adjudicate and, if one or other party was dissatisfied with the adjudicator’s decision, a right to arbitrate. That provision would not permit either party to go to court, to litigate.

Costain argued that, when read together, the provisions allowed the parties either to adjudicate, or to arbitrate, or to litigate, depending on which forum was thought to be the most suitable for the particular dispute which had arisen.

Relying on the “mutual trust” provision at clause 10.1 of both the framework contract and the supply contract, Costain argued that “when a dispute arose, the parties would liaise between themselves and agree which of the three possible dispute resolution routes should be adopted for that particular dispute”.

The judge rejected this argument. The judge held that although there was one overall subcontract agreement that agreement itself expressly made plain that it incorporated two separate sets of contract terms and conditions. This reflected the fact that Costain’s decision to seek a quotation from Tarmac was itself governed by the pre-existing framework contracts with the SST to which both parties were subject. As such, the NEC3 framework contract conditions covered the circumstances of the offer and the acceptance, whilst the NEC3 supply contract conditions covered the actual supply of the concrete in accordance with the specification.

In its final attempt at persuading the court, Costain argued that, as a result of the mutual trust obligation, Tarmac had an express obligation to point out to Costain the nature, scope and potential effect of clause 93 (including the time bar).

Quoting Keating on NEC3 (First Edition 2012), the judge drew a parallel between “mutual trust and cooperation” and obligations of “good faith”. The judge relied on the following propositions:

  • What is good faith will depend on the circumstances of the case and the context of the whole contract.
  • Good faith obligations do not require parties to put aside self-interests; they do not make the parties fiduciary.
  • Normal reasonable business behaviour is permitted but the court will consider whether a party has acted reasonably or unconscionably or capriciously and may have to consider motive.
  • The duty is one to have regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms.

Taking the obligation of mutual trust and co-operation (or even good faith) at its highest, meant that Tarmac could not do or say anything which lulled Costain into falsely believing that the time bar in clause 93 was either non-operative or would not be relied on. This obligation would go further than the negative obligation not to do or say anything that might mislead. Tarmac would need to correct a false assumption being made by Costain, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied on.

Beyond that, there can have been no further obligation, because otherwise the provision would have required a party to put aside its own self-interest.

In this case, Tarmac did and said nothing about clause 93 which was or could have been misleading. Tarmac had no reason to consider that Costain failed to have regard to clause 93. There was no reason for Tarmac to believe that Costain was making any false assumption at all.

The obligation in clause 10.1 is not a safety net when all other remedies fail you. Relying on clause 10.1 to escape the time bar clause will not hold muster.

From a South African perspective, good faith is arguably one of the most viable avenues through which to align the common law of contract with the values underlying the South African Constitution. The South African Constitutional Court has stated that “good faith… has a creative, a controlling and a legitimating or explanatory function. It is not, however, the only value or principle that underlies the law of contracts”.

Although the value of good faith is fundamental to the South African law of contract, it does not constitute an independent substantive rule that courts can employ to intervene in contractual relations. So, think twice about using nebulous statements about the role of “good faith”, “mutual trust” and “co-operation” to escape express provisions – particularly time bar clauses.