A recent judgment of the TCC has provided further insight as the scope of the obligation to act in “the spirit of mutual trust and co-operation” found in most NEC contracts. The decision confirms that the courts are reluctant to allow such clauses to be interpreted in a way that would fetter the parties’ otherwise existing contractual rights. However, some of the judge’s comments could be seen to extend the obligation further than in recent cases, by imposing a positive obligation on the parties in certain circumstances.
Costain limited v Tarmac Holding Limited
Costain engaged Tarmac to supply concrete for a safety barrier on the M1 motorway. The sub-contract entered into by the parties incorporated the NEC3 Supply Short Contract conditions which included the requirement in the NEC standard clause 10.1 that the parties “shall act as stated in this contract and in a spirit of mutual trust and cooperation”.
Following adjudication proceedings in which its claim was held to be time-barred, Costain issued proceedings in the TCC. Tarmac sought to stay those proceedings on the basis that clause 93.3 of the sub-contract included a second stage arbitration agreement.
Costain argued that the arbitration agreement was “inoperative” by virtue of an estoppel (either by representation or by convention). In arguing its case, Costain submitted that even if Tarmac had not done anything which “crossed the line”, for example, by making a representation that it would not rely on the time bar provision and then later seeking to do so, Tarmac was in breach of clause 10.1 by failing to point out to Costain “the nature, scope and potential effect of clause 93 (including the time bar).”
In considering Costain’s argument, the court noted that the mutual trust provision might be said to do “little more than say expressly what Vinelott J thought was implied in all construction contracts [in] Merton LBC v High Stanley Leach”. Drawing support from Australian and English authorities on good faith obligations, Mr Justice Coulson noted that such provisions did not go as far as requiring a party to act against its own self-interest but agreed that they could prevent one party from “improperly exploiting” the other. He also rejected the suggestion that such clauses required parties to act “fairly” noting that the concept was too subjective.
In concluding that Tarmac had not breached clause 10.1, Coulson J held that “at its highest” the obligation imposed by clause 10.1 meant that:
“the defendant could not do or say anything which lulled the claimant into falsely believing that the time bar in clause 93 was either non-operative or would not be relied on in this case. For this purpose, I am also prepared to accept that this obligation would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied upon.”
However, on the facts, the judge considered that Tarmac had no reason to believe that Costain was acting under a false assumption with respect to the operation and effect of clause 93.
Conclusion and implications
The TCC last previously considered clause 10.1 of the NEC in Mears v Shoreline Housing Partnership. In that case the court was not satisfied that “the obligation to act in a spirit of mutual trust and cooperation or event in a ‘partnering way’ would prevent either party from relying on any express terms of the contract freely entered into by each party”. In our Law-Now on that case (see here), we queried whether under English law such clauses should be dispensed with on the basis that they lack purpose.
This latest decision confirms that, even at its highest, the obligation to act in “the spirit of mutual trust and cooperation” does not require a party to act against its own self-interest. However, it does suggest (albeit in equivocal language) that clause 10.1 may not be entirely toothless and that parties to an NEC contract should not seek to “improperly exploit” the other party or take advantage of another’s false assumption for their own benefit. It remains to be seen how far a party might be required to go in ascertaining another party’s understanding in order to meet its obligations in this regard.