In 1998, Sir John Egan wrote: “A successful construction industry is essential to us all...At its best the UK construction industry displays excellence. But, there is no doubt that substantial improvements in quality and efficiency are possible.”
However, it remains unsurprising for headlines such as “Disputes rife between clients and main contractors”  to appear. The number of cases before the TCC since 2010, both in London and the regions, shows a sustained high workload, and the number of adjudications and alternative dispute resolution methods employed also remain at a high level.
According to a recent survey of the National Building Specification (“NBS”), almost half of respondents (44%) said they had had to deal with at least one dispute over the past 12 months, with one in ten dealing with three or more. According to NBS, the two most common causes of dispute in the industry were disagreements over extensions of time and the value of the final account.
In addition, widespread experience of employers retaining retention monies beyond the contractual date for release; contractors bidding low with the strategy of increasing margin through variations; Employers taking an unreasonable and unjustifiable stance over risk transfer (ultimately passed down the supply chain); and of projects being bid without sufficient resource if successful, is all suggestive of a culture in the industry which breeds disputes.
A duty of good faith
Egan observed that a commitment to people and the development of a “no-blame culture based on mutual interdependence and trust” was fundamental to improvement in the UK construction industry. Is the answer then for contracts to expressly include a duty of good faith and, in the absence of such an express clause, for the courts to imply such a duty?
Civil and common law systems
Many civil codes and common law systems include a duty of good faith. In the United States, an obligation of good faith (in both the performance and enforcement of it) is imposed into every commercial contract and has the meaning of “honesty in fact and the observance of reasonable commercial standards of fair dealing”. A recent decision of the Canadian Supreme Court demonstrates that it now recognises a new common law duty of honest performance and, in Quebec, it is stated that “parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished”. In France, the Civil Code states clearly that legal agreements must be performed in good faith. In Germany, “an obligor has a duty to perform according to the requirements of good faith”.
Yet, the English legal system does not contain such a general duty and the courts have, thus far, been reluctant to imply such a term. This reluctance can be attributed largely to three reasons:
- English law develops incrementally and is based on precedent. The courts are typically reluctant to impose broad, overarching principles and this has been true when it comes to the development of good faith principles;
- “If a man minded only about keeping faith, the spirit of the contract would be more important than the letter. But in the service of commerce the letter is in many ways the more significant.” The English legal system places great weight in this thinking and the freedom of parties to negotiate and agree contract terms is widely protected; and
- There is concern that to imply a duty of good faith would create uncertainty; the principle being vague, subjective and ripe with uncertainty.
Nonetheless, concepts of good faith are traceable through the English legal system and have typically been visible through the doctrines of the ‘reasonable man’ and ‘honest performance’. In recent years there has been an increased focus on the duty of good faith and the courts have been asked to consider its applicability in one form or another.
The approach of Standard Form Contracts
The JCT and FIDIC standard forms of contract do not, as a matter of course, contain express good faith wording but the NEC 3 contains an express clause that the parties “shall act as stated in this contract and in a spirit of mutual trust and co-operation.” Many in the industry view the NEC 3 as a less adversarial form of contract, in part due to this express wording. Nonetheless, many have questioned whether this wording does, in fact, have any real effect. As Eggleston observes, it is “not easy to determine from the wording of clause 10.1” what function this wording is to achieve and whether it is intended to be legally enforceable or merely an expression of good intent. The clause appears to contain two distinct obligations: to act as stated in the contract; and to act in a spirit of mutual trust and co-operation, the latter being an overarching principle guiding how the Employer and Contractor should behave.
Collaborative Contract Models
One typically finds good faith wording in collaborative framework agreements. These types of agreements are typically long term partnering arrangements on a project, where an integrated team is brought together and shares a financial incentive scheme which links the rewards of each of the alliance members to agreed overall outcomes. Whilst there are a wide range of collaborative contract models which themselves have varying levels of collaboration and risk sharing between the Employer and the supply chain, an obligation to act in good faith is common in almost every collaborative contract.
Collaborative agreements have proven to be effective. It is widely acknowledged that “Where effective alliances have been established long term performance improvement has been achieved.” Yet, it is widely acknowledged that for a collaborative agreement to be effective the wording of the contract is not enough; the contract alone cannot create new collaborative behaviours or change existing ones. The parties must show a willingness to properly embrace the principles of collaborative working. Without the behavioural change, the parties will be unable to properly adhere to the fundamental principles and the benefit of collaboration will be lost.
So what does an express duty of good faith actually mean and does it have any real bite?
The UK courts are now showing a willingness to give effect to express good faith obligations in one form or another. The case law does show a discernible pattern, with the courts narrowly applying the wording to performance of a specific obligation under the contract, rather than applying good faith as an overarching principle. This is demonstrated in the leading authority on good faith obligations, Medirest. The wording of the clause in this case was as follows:
“The Trust and the Contractor 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 the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract.”
The Court of Appeal found that this clause imposed an obligation to work together honestly, endeavouring to achieve the two stated purposes. The clause did not extend to all conduct under the contract and the judgment concluded that “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.”
Two further cases should be noted as affirming this position. In TSG Building Services, the court considered the following wording:
“The Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation for the benefit of the Term Programme, within the scope of their agreed roles, expertise and responsibilities as stated in the Partnering Documents, and all their respective obligations under the Partnering Contract shall be construed within the scope of such roles, expertise and responsibilities”.
In this case, the court held that the good faith obligation was restricted to the expressly listed actions and did not extend to the unqualified and unconditional express right to terminate.
In Fujitsu Services, Schedule 2 to the parties’ contract required them to “Work together to achieve a relationship of mutual respect and trust” and for all dealings to be “open, honest, clear and reliable”. Here, the court found that there was no express duty of good faith in the clauses relied upon by Fujitsu and that the partnering principles lacked contractual certainty. The parties’ agreement to have regard to the principles was considered “aspirational and motivational”; with the court concluding that the parties appeared to have deliberately drafted it in this way so as to avoid an express agreement to owe a duty of good faith.
Implied duty of good faith
There appears to be a weakening of the UK courts’ traditional reluctance towards implying a duty of good faith into contracts, and the UK courts are now implying such a term in certain circumstances.
The High Court gave extensive consideration to this issue in the case of Yam Seng Pte Limited. In this case, the claimant entered into a distribution agreement with the defendant. The defendant, when inviting the claimant to enter into negotiations for the agreement provided inaccurate and misleading information (stating that it had “recently signed” a licence agreement relating to products it sought to distribute when it had not). The claimant claimed damages for breach of contract and misrepresentation and the court held that the defendant had acted in bad faith by providing misleading information and threatening not to honour certain rights. The court also considered whether there was an implied duty that the parties would deal with each other in good faith. Leggatt J commented that “I respectfully suggest that the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent it still persists, is misplaced”. He observed that honesty, fidelity to the parties’ bargain, co-operation and observance of common commercial standards have already been generally accepted as possible implied terms in the English courts if the circumstances of the contract demand it. Cumulatively, these principles could be taken to amount to an implied duty of good faith. Furthermore, Leggatt J commented that in respect of ‘relational contracts’, there may be a requirement for a “high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.”
The case of Yam Seng has received judicial consideration. The Court of Appeal, in the case ofMedirest (referred to above), was asked to consider whether there was an implied term that the employer would not act in an arbitrary, irrational or capricious manner in assessing the contractor’s performance. Here, the court reiterated that “there is no general doctrine of good faith in English contract law” and went so far to say that should the parties wish to impose such an obligation, “they must do so expressly”. Whilst it was considered, the Court of Appeal fell short of overruling Yam Seng, distinguishing the contracts in each case (Medirest being a detailed and complicated contract, Yam Seng being very much a “skeletal” contract).
In Bristol Groundschool Limited the High Court considered whether there was an implied duty of good faith in the contract between the parties and, if so, whether that duty had been breached by the claimant party when it downloaded, without consent, materials from the defendants’ IT system. The contract was a long-term agreement which had been negotiated and agreed between two commercial parties. After ten years of a successful partnership, the parties fell out and terminated their agreement. Here, the court was willing to imply a duty of good faith into the agreement. It was accepted that the agreement in question was a ‘relational’ contract of the type referred to in Yam Seng and that a duty could be implied. Richard Spearman QC, acting as Deputy Judge of the High Court held that good faith “extends beyond, but at the very least includes, the requirement of honesty”. The relevant test was whether the conduct in question would be regarded as “commercially unacceptable” by reasonable and honest people in the particular context involved.
In the case of Bluewater Energy Services BV the court considered whether a duty of good faith should be implied into a sub-contract for the fabrication of a mooring system which was to be installed as part of the development of an off-shore oil-field. Following delay and disruption to the sub-contract works, Bluewater issued a contractual notice of default. The contract provided that Bluewater was entitled to terminate the contract following such a notice if Mercon failed to“immediately commence and …proceed with action satisfactory to Bluewater to remedy such default”. Bluewater subsequently issued a termination notice. The sub-contract contained a clause requiring the parties to “uphold the highest standards of business ethics in the performance of the contract. Honesty, fairness and integrity shall be paramount principles in the dealings between the parties”. Mercon argued that Bluewater was not entitled to terminate the contract; that Bluewater’s action must, when determining whether Mercon’s action was satisfactory, be objectively reasonable.
The court rejected this argument; the test of Bluewater’s actions was subjective and was limited only by reference to the “concepts of honesty, good faith and genuineness and the need for the absence of arbitrariness, capriciousness, perversity and irrationality”. This implied limitation was consistent with the wording of clause 33.1 but existed even without this clause. This would appear to be another example of the UK court showing willingness to imply a form of duty of good faith and to be increasingly willing to limit a party’s discretion where it acted in bad faith.
More recently, Edwards-Stuart J in the TCC was asked to consider the interpretation of a contract relating to the award of service points under a long term PFI contract in the case of Portsmouth City Council v Ensign. The parties in this case had entered into a long term PFI contract for the maintenance and operation of the Council’s highway network. A regime for awarding services points to Ensign if it was in breach of its obligations under the contract was set out in the contract (clause 24). Whilst the contract set out the methodology for calculating the services points to be levied, it did not provide a timetable or any time limits for the issue of the service points. The contract also contained a clause dealing with good faith; at clause 44.4.1, which stated that the parties “shall deal fairly, in good faith and in mutual co-operation with one another…” In the dispute, a key issue was whether the wording of clause 44.4.1 extended to the Council’s obligations in relation to the award of service) points pursuant to clause 24, and if it did not, whether a term should be implied into that clause. The TCC found that there was no overriding duty of good faith; the wording at clause 44.4.1 related to clause 44 only. As to clause 24, there was an implied term that the Council should act honestly, on proper grounds and not in a manner that was arbitrary, irrational or capricious.
It is readily apparent that the industry continues to be marred by an adversarial culture. Analysis of the industry suggests that, rather than diminishing, disputes will continue to remain an everyday affair. A duty of good faith may improve this situation.
One reason cited for the courts’ reluctance to imply such a duty is that the principle is vague and uncertain. If it were accepted that good faith meant that the parties act honestly, genuinely and observe the reasonable commercial standards of fair dealing it should be possible to overcome these concerns (with the absence of arbitrariness, capriciousness, perversity and irrationality). These terms have easily ascertained definitions in the English dictionary and are the terms being used in case law on this point already. One does not need to go beyond the features already identified in case law to impact upon the adversarial nature of the industry. Of course, showing that a party has acted capriciously may prove difficult but that is a burden of proof point, not a matter of construction of the duty itself.
In some construction disputes, the dispute itself is borne out of some perverse, capricious, irrational or arbitrary action of one side or another (or both). Take for example the case ofCaledonian Modular Ltd where the defendant admitted in its defence that £442,394.23 was due and payable to the claimant yet had failed to pay it. A not unreasonable inference can be drawn from this; that the industry’s attitude remains concerned with keeping money for as long as possible and delaying payment, even when it is due. If a duty of good faith clause on the terms set out above was contained in a contract between parties and if such a clause were to receive judicial support, one could conceive that parties would move away from such unacceptable behaviour.
The industry accepts that the NEC 3 is a less adversarial form of contract, in part due to its mutual trust wording. This wording has yet to receive judicial consideration yet its impact is felt. It is widely acknowledged that collaborative agreements have had a positive impact; the parties abiding by good faith wording and working towards a common goal is considered beneficial. Of course, one cannot expect, nor would it be appropriate, for collaborative agreements to be used on all types of construction contracts . What we may take from collaborative agreements is the positive impact of good faith wording and apply this to the Construction industry more widely. Perhaps the other drafting bodies will include good faith wording into standard form contracts in the future.
It is not unreasonable to expect that contractual relations should be governed by a principle of good, honest dealing and for parties to be contractually obliged not to act in bad faith. An adversarial culture undermines the true potential of the industry, acts as a barrier to innovation, creates a poor public profile (thus making it an unattractive industry for investment) and is undesirable in the 21st century. Latham, Egan and others since have recognised the benefit of mutual trust and cooperation wording; perhaps the time has come for the industry to take this forward and incorporate good faith wording into its ontract documentation.