Legal

Faith can move mountains, but not contracts

22 May 2017

A recent court case has shone the spotlight on how best to approach good faith clauses, as Assad Maqbool and Helen Stuart from Trowers & Hamlins report.

It is now common to see “good faith” clauses in construction contracts. In a number of other countries, there is implied into every contract a requirement to perform all contractual obligations in good faith. That is not the case under English law and so it is still difficult to understand what precise effect express good faith clauses have on the practical management of construction contracts.

An example is clause 10.1 of each of the contracts in the NEC suite, which the Technology and Construction Court has considered this year in Costain Ltd v Tarmac Holdings Ltd. It obliges the parties to the contract (with others such as the project manager and supervisor) to act as stated in the contract and “in a spirit of mutual trust and cooperation”. 

Acting in accordance with the contract is what contract law generally requires in any case. However, acting in a spirit of mutual trust and cooperation seems so vague that it has been argued to be unenforceable.  

The case concerned a dispute over remedial works for defective concrete supplied by Tarmac for works to the M1 motorway. Costain and Tarmac had been in correspondence about the dispute for some time when Tarmac raised a defence that the contractual time-bar for referring the dispute to adjudication had passed. Costain referred the issue to adjudication and the adjudicator agreed with Tarmac. 

“Acting in a spirit of mutual trust and cooperation seems so vague that it has been argued to be unenforceable.”

As often happens, many of the arguments then raised were not about the original dispute but about which dispute resolution provisions applied, given the differing provisions in the framework contract and supply contract.

Costain’s most interesting argument was that, as a result of the obligation to act in mutual trust and cooperation, Tarmac had an obligation to point out the effect of the time-bar provisions.  

The court concluded that the obligation to act in a spirit of trust and mutual cooperation:

Consequently, Tarmac could not do or say anything which would lull Costain into falsely believing that the time-bar provision was either not operative or would not be relied upon. Also, Tarmac was obliged to correct any false assumption being made by Costain that the contractual time-bar was not to be operated or relied on.  

Applying the concept of good faith

So where does that leave us? Does it mean, for example in the NEC context, that project managers will have to accept programmes and quotations, even if they do not strictly comply with the contract, if the missing information is immaterial?

Similarly, does it mean that any quotes that the contractor is obliged to provide should be proper commercial offers so as not to improperly exploit the employer?

The problem with applying the concept of good faith to every practical decision is the problem with the concept of good faith as a whole: the loss of certainty.

While no one would argue that parties should act in bad faith, the point of contracting for construction projects is to give certainty to each party’s obligations in a complex environment. Instead of reducing disputes in an adversarial industry, these clauses appear to lead to more arguments about whether obligations have been complied with.

Much of what is considered to be bad faith appears to be the exploitation of a lack of information of another contracting party. When faced with a general good faith obligation, the better approach might be to drill down into the processes required under the contract and ensure that the contract management systems give explicit detail to the requirements for the open exchange of information at every stage.

Assad Maqbool is a partner and Helen Stuart is a senior associate at Trowers & Hamlins

Image: Rastan/Dreamstime.com

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