NEC Clause 10.1 The obligation of Mutual Trust and co-operation and Good faith.

Obligation of Mutual Trust and Co-operation and Good Faith?

In the recent decision of Costain Ltd v Tarmac Holdings Ltd, Coulson J drew a parallel between “mutual trust and co-operation” and the implied obligation of “good faith”, this paper examines this obligation and compares it to the expressed commitment to act in mutual trust and co-operation contained within the NEC 3 Contract.

The NEC 3 Contract is now well established as one of the preferred standard forms of contract in the construction industry, one of the clauses within this contract is clause 10.1 which expressly confers or attempts to confer an obligation to act in mutual trust and co-operation:

“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.”

One of the original principles of the NEC 3 Contract was to remove uncertainty. The drafters of the original EEC Contract attempted to remove the argument that had been raised in previous construction disputes where the parties argued over the implied duty to act in good faith.

In the development of the good faith argument, Vaughan Williams LJ observed in Barque Quilpue Ltd v Brown[1904] 2 KB 261 at 274 that:

"There is an implied contract by each party that he will not do anything to prevent the other party from performing a contract or to delay him in performing it. I agree that generally such a term is by law imported into every contract." 

Although Barque Quilpue Ltd v Brown was cited in London borough of Merton v Stanley Leach Ltd, Mr Justice Vinelott caveated the above extract with the following forewarning, “the courts have not gone beyond the implication of a duty to co-operate whenever it is reasonably necessary to enable the other party to perform his obligations under a contract. The requirement of "good faith" in systems derived from Roman law has not been imported into English law”.

The limitations of the principle stated in MacKay v Dick were stressed by Devlin J (as he then was) in Mona Oil Equipment Co v Rhodesia Railways where he said (at p 1018): 

 "I can think of no term that can properly be implied other than one based on the necessity for co-operation. It is, no doubt, true that every business contract depends for its smooth working on co-operation, but in the ordinary business contract, and apart, of course, from express terms, the law can enforce co-operation only in a limited degree - to the extent that it is necessary to make the contract workable. For any higher degree of co-operation, the parties must rely on the desire that both of them usually have that the business should get done.”

The English Courts have continued to re-evaluate the idea of good faith in law, Lord Justice Bingham explained in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd that the court preferred to develop “piecemeal solutions in response to demonstrated problems of unfairness”, further describing good faith as being most aptly conveyed by colloquialisms such as “playing fair”, “coming clean” or “putting one’s cards face upwards on the table”, concluding that it “is in essence a principle of fair and open dealing”.

Further recent legal developments have reaffirmed the court’s approach to dealing with an argument to a duty of good faith. In 2013 the issue of whether a duty of good faith could be implied into a contract was examined in the case of Yam Seng Pte Ltd v International Trade Corporation Ltd. Here, Mr Justice Leggatt, who also sat as Judge at first instance in the MSC Mediterranean shipping SA v Cottonex Anstalt, adopted a comparatively broad approach regarding the circumstances in which good faith obligations could be implied into ordinary commercial contracts.

Expressing in his judgment the view 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”.

Mr Justice Leggatt suggests that an obligation of good faith could be implied by reference to the established approach for the implication of terms into a contract – in this case, whether the term was so obvious that it goes without saying, or was necessary to give business efficacy to the contract.

Following both the decisions in Mid Essex Hospital Services and more recently the Court of Appeal judgment in MSC, the Yam Seng argument should be considered with discretion. In Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd the Court of Appeal took a much narrower and restrictive approach, the court made clear that the obligation to act in good faith under a particular provision did not extend to all conduct under the contract.

Similar to the NEC Contract, the Trusts substantial commercial contract contained the following term at Clause 3.5 which expressly incorporated a duty to cooperate in good faith:

“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 was asked to decide whether clause 3.5 provided an overarching obligation on the parties to cooperate with each other in good faith. Compass relied heavily on the decision in Yam Seng, arguing that the good faith obligation in clause 3.5 should be construed widely so as to apply to the contractual provisions relating to performance level failures and/or that a general duty of good faith should be implied into the contract as a whole.

Reversing the decision of the High Court at first instance, the Court of Appeal held that the obligation to act in good faith was limited to the purposes identified in the clause; the court also found that commercial common sense did not favour the addition of an overarching duty to cooperate in good faith in circumstances where good faith had been provided for in the contract in such a precise manner at clause 3.5.

The Court of Appeal emphasised that:

“if the parties want to impose a duty they must do so expressly.”

In respect to construction disputes, clause 10.1 remains ubiquitous in construction claims where there is little or no opportunity to pursue a claim under one of the more classical paths, or as an alternative argument to support the principle claim. The aggrieved party will usually contend that the respondent is in breach of contract, habitually quoting a failure to act in mutual trust or co-operate.

There has not been an overabundance of NEC cases in the courts, and as such, a lack of case law, even less case law on the argument of mutual trust and co-operation, but some recent decisions are worth examining to understand the legal hurdles to be overcome when mounting a claim of breach of mutual trust and co-operation in Adjudication and the TCC.

Although a JCT Contract and not strictly within the scope of this paper the case of Birse Construction Ltd v St David Ltd highlights the importance of similar construed clauses. The parties entered a charter with the intention of producing an “exceptional quality development within the agreed time frame, at least cost, enhancing our reputations through mutual co-operation and trust.” 

The Charter had no binding effect but it was held that the terms “are important for they were clearly intended to provide the standards by which the parties were to conduct themselves and against which their conduct and attitudes were to be measured.” 

In the case of Northern Ireland Housing Executive, NIHE contracted with Healthy Buildings (Ireland) Ltd to check for the presence of asbestos in their properties. The contractual terms were the NEC 3 standard form. Under those terms, Healthy Buildings contracted to complete surveys in accordance with the Health and Safety Guidance.

During a subsequent meeting between NIHE and HB, NIHE informed HB that when it was conducting the surveys it should make a more detailed inspection than HB had anticipated and in a manner which was more rigorous than those specified in the Health and Safety Guidance.

In short, the dispute was that the parties could not agree that NIHE had instructed a change, and NIHE contended that even if they did, HB were time barred due to not notifying a compensation event within 8 weeks.

In the High Court, Weatherup J found that when NIHE informed HB that they should be conducting more detailed inspections, that this statement constituted an instruction and furthermore NIHE should have notified HB of a compensation event therefore removing the time-bar.

The Court of Appeal rejected the argument purported by NIHE’s that it had only suggested an alternative way of complying with the statutory requirements and found that NIHE had instructed HB to go beyond the mechanisms set out in the Health and Safety Guidance. The Court held that this must result in the instruction being considered a directive which changed the scope of the works.

The Court of Appeal also held that HB’s notice was not time-barred, HB was only obliged to give notice within 8 weeks “unless the employer should have notified the event to the consultant but did not”. NIHE’s mistaken conviction that it was not giving an instruction which changed the scope of the works did not alter the requirement to give notice.

In the Court of Appeal Judgement, it can be seen that the obligations contained in clause 10.1 are applied into an understanding of Clause 61.1, although the judgement does not explain what part of “shall act as stated in this contract and in a spirit of mutual trust and co-operation” is used.

“Applying Clause 10.1 to the language of Clause 61.1 the employer, at the time of giving what is admitted to be an instruction, was bound to give a written notification of the compensation event which arose from the fact that that was an instruction which in fact changed the scope of the works. The instruction under Clause 13.1 was required to be in writing. The notification of it being a compensation event was required to be communicated separately under Clause 13.7. The consultant was obliged to put the instruction into effect. In fact, the Executive did not give notification of a compensation event although, having regard to its obligation to do so, it should have done so.”

It is useful to examine this judgement in the light of the parallels drawn by Coulson J in Costain Ltd v Tarmac Holdings Ltd, the analysis of whether or not clause 10.1 make any difference to this analysis starts at paragraph 119,

“I now turn to whether or not clause 10 (the 'mutual trust' provision) makes any difference to this analysis. It appears that the claimant maintains that, even if (as I have found) the defendant said or did nothing which 'crossed the line' (i.e. made a representation that was inconsistent with the point they subsequently took) the defendant was in breach of clause 10.1 in any event. This rather startling submission means that, in essence, the claimant must argue that, as a result of the mutual trust obligation, the defendant had an express obligation to point out to the claimant the nature, scope and potential effect of clause 93 (including the time bar). I consider that to be contrary to the passages set out at paragraphs 102-108 above. In any event, for the reasons set out below, I reject that submission.”

What follows is a detailed analysis by Coulson J at paragraph 120, where he explains “that a parallel is drawn between 'mutual trust and cooperation' and obligations of 'good faith'. The authorities dealing with 'good faith' are mainly from outside the United Kingdom, because good faith has not been, at least until recently, a concept that has gained much traction in the English common law.”

The Judge noted that Keating NEC3 sets out the authority in Automasters Australia PTY Limited v Bruness PTY Limited for the following propositions,

1.    What is good faith will depend on the circumstances of the case and the context of the whole contract

2.    Good faith obligations do not require parties to put aside self-interests; they do not make the parties fiduciary. 

3.    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.

4.    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.'’

It was further stated that Keating also said that the term of mutual trust and co-operation suggests that:

“whilst the parties can maintain their legitimate commercial interests, they must behave so that their words and deeds are ‘honest, fair and reasonable, and not attempts to improperly exploit’ the other party.”

For completeness, Coulson J noted that in F & C Alternative Investments (Holdings) Limited v Barthelemey, Sales J (as he then was), when dealing with an obligation of utmost good faith, referred to another Australian case (Macquarie International Health Clinic PTY Limited v South West Area Health Service [2010] NSWCA 268, and said that:

"It is a form of contractual duty which requires the obliger to have regard to the interests of the obligee, while also being entitled to have regard to its own self-interest when acting.”

The Judge commented that he was a little “uneasy” about a larger general obligation to act ‘fairly’. His reasons were that he felt it could be a difficult obligation to police because of its subjectivity. However, on the facts here, Tarmac did and said nothing in respect to clause 93 which was or could have been misleading.

Conclusions

Mounting challenges in mutual trust and co-operation will depend on a number of factors, these will include the circumstances of the case and the context of the contract, but as can be seen from the Mid Essex Hospital case it was made clear that the obligation to act in good faith under a particular provision did not extend to all conduct under the contract and therefore must be taken in consideration.

One of the critical components of the mutual trust and co-operation argument is exactly as the clause states, that the party has failed in their duty to co-operate or have not acted in mutual trust. That a party acts in a manner that is more beneficial to their business self-interest is not in itself a breach of clause 10.1.

Unconscionabe or capricious behaviour is a genuine reason but again it is a fine line between what is unconscionable and what is reasonable, it depends on the facts of the case.

The failure to apply a remedy at the time can see clause 10.1 used as the primary or alternative argument, with the Referral drafted more in pity that based on fact. This is a situation best avoided, but if the situation dictates that good faith is the only argument then the points detailed above in Automasters Australia PTY Limited v Bruness PTY Limited need to be considered if there is to be any hope of a successful outcome.

Parties become emotive about the behaviour of others when they believe that the have been unfairly treated, try to take a step back and detached yourself from the situation, examine the claim from the other party’s viewpoint and only as a last resort mount the principle argument in the duty of good faith.

Reference

·     Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC) (28 February 2017)

·     Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, [1989] QB 433

·     Mona Oil Equipment Co v Rhodesia Railways [1949] 2 All ER 1014

·     Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2014] NICA 27

·     Automasters Australia PTY Limited v Bruness PTY Limited [2002] WASC 286

·     F & C Alternative Investments (Holdings) Limited v Barthelemey (Nos. 2 and 3) [2011] EWHC 1731 (Ch)

·     Macquarie International Health Clinic PTY Limited v South West Area Health Service [2010] NSWCA 268,