The well-worn words of Clause 10.1 of the NEC3 contract provide that the parties “shall act as stated in this contract and in a spirit of mutual trust and co-operation”. The precise nature of the legal obligation imposed by this clause has been the subject of much debate.
Helpful new guidance has recently been provided by the High Court in the case of Costain Ltd v Tarmac Holdings Ltd 1. In this case, which concerned a sub-contract agreement under which the claimant had engaged the defendant to supply concrete for the new safety barrier between junctions on the M1 motorway, Coulson J considered whether clause 10.1 of the NEC3 contract required the defendant to expressly point out to the claimant the nature, scope, and potential effect of an adjudication clause. The contract contained an adjudication provision with a restricted timetable and a time-bar, and a second stage arbitration provision. An adjudicator had already held that the claimant’s case was time-barred.
As a starting point, Coulson J turned to the standard practitioner’s text when seeking guidance on NEC3 contract interpretation, Keating on NEC32, which suggests that guidance on the interpretation of contractual obligations of “good faith” may assist in interpreting the words “mutual trust and co-operation”.
The English Courts and “good faith”
English law does not impose a general principle of “good faith” in the negotiation or performance of contractual obligations: traditionally it has “committed itself to no such overriding principle but has developed piecemeal solutions in response to demonstrated problems of unfairness”3.
Yam Seng Pte Limited v International Trade Corporation Limited4 seemed to mark a turning point in this approach. In that High Court case, decided in 2013, Leggatt J cited Bingham LJ’s comment above, but also suggested that “the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced”. He emphasised that the extent of the duty to perform a contract in good faith is dependent upon context, noting that in some contractual contexts the relevant background expectations may extend to an expectation that the parties will share information relevant to the performance of the contract such that “a deliberate omission to disclose such information may amount to bad faith”. He referred to such contracts as “relational” contracts which may require a high degree of communication and cooperation, based on “mutual trust and confidence” which involve “expectations of loyalty which are not legislated for in the express terms of the contract”.
In the same year, the Court of Appeal cited Yam Seng in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd5, agreeing with the principle that an obligation of good faith is dependent upon context. In this case, which concerned the rights of both parties to terminate a contract for the provision of catering and cleaning services in two hospitals, the Court held 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.
However, it is worth noting that in Compass the Court of Appeal did not develop the concept of a general duty of good faith, albeit it also did not expressly disapprove of the concept.
Also in 2013, the High Court followed a similar approach in TSG Building Services PLC v South Anglia Housing Limited6. This case concerned the termination of a contract for the provision of gas servicing and associated work programmes under which there was a provision that the team members would “work together and individually in the spirit of trust, fairness and mutual co-operation … within the scope of their agreed roles, expertise and responsibilities”. The Court held that there was no implied good faith obligation in the contract. The parties had gone as far as they wanted in expressing terms about how they were to work together in a spirit of “trust fairness and mutual co-operation”. Further, the parties had expressly agreed the termination clause, and no implied obligation of good faith could override such express agreement.
New guidance – Costain
In Costain, as well as in Keating on NEC3, Coulson J considered several leading Australian authorities. He ultimately held that, taking the obligation of mutual trust and co-operation at its highest point meant that the defendant in the case could not do or say anything which lulled the claimant into falsely believing that the time bar in the adjudication clause was either non-operative or would not be relied on. Coulson J also stated that he was “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.” However, he was of the view that there was no further obligation: the provision does not require a party to put aside its own self-interest.
Costain and “good faith”
Whilst Coulson J did not consider English cases on good faith in his analysis on the basis that “good faith has not been, at least until recently, a concept that has gained much traction in the English common law”, the decision does seem to be in line with the recent approach of the English Courts in Compass and TSG. Whilst NEC3 clause 10.1 is not limited by reference to the roles to which the obligation to act in the spirit of mutual trust and co-operation applies, the parties must also act “as stated” in the contract. Thus, whilst the obligation to act in good faith applies to the entire contract, it cannot prevent the parties from relying upon an expressly agreed term, such as the time-bar in the adjudication clause.
This is helpful guidance on the interpretation of the specific NEC3 clause, as well as good faith obligations under English law generally.