The NEC Form of Contract is now in wide use. The first clause says that the parties “shall act as stated in this contract and in a spirit of mutual trust and co-operation”, often referred to as “good faith”. What this means in practice is a question of importance for the construction industry, both in relation to this particular contract and to the numerous other standard form or bespoke arrangements where “good faith” obligations are included.

The extent of the good faith obligation was considered in the recent Costain v Tarmac case, decided on 28 February 2017. Here the Court was not prepared to allow a contractor to escape the effect of an express time bar clause by relying on the duty of good faith as imposing a positive obligation to point out its effect. The court commented that the express duty in this case said little more than was previously thought to be implied into all construction contracts in terms of a duty to co-operate. So, whilst a good faith obligation prohibits unreasonable conduct which is without regard to the interests of the other party, it does not, it would appear, extend to informing the other party about the adverse effect of a particular term of the contract of which it should already be aware.

Good faith clauses, therefore, do not prevent parties from relying on express terms of the contract. The effect is confined to a restraint on unreasonable conduct amounting to improper exploitation of the other party.

The background

This was a dispute between a contractor and subcontractor for works to the M1 motorway. It was entered into on the basis of the NEC3 Supply (Short Contract) Conditions which incorporated a time bar in respect of references to adjudication and a “good faith” clause. The subcontractor contended that the contractor had failed to comply with the time bar and therefore, its claims were barred. Whilst most of the judgement is concerned with the applicability of an arbitration clause, the court also dealt with the question of whether the subcontractor could insist on the applicability of the time bar.

The contractor said that the subcontractor was estopped from relying on the time bar. This means that as a result of dealings between the parties, the subcontractor had led the contractor to believe that the time bar would not be relied on by virtue of a representation or common understanding. The contractor said that the subcontractor had, as a result of the mutual trust obligation, an express obligation to point out to the contractor the nature, scope and potential effect of the time bar clause.

The decision

The court considered the meaning of the phrase “mutual trust and cooperation” and “good faith [obligation]”. Relying on the Australian case of Automasters (2002), it held that good faith obligations do not require parties to put aside self-interest, but rather to continue with normal reasonable business behaviour. The court can consider whether a party has acted reasonably or unconscionably or capriciously and may have to consider motive.

In summary, the parties can maintain their legitimate commercial interests but must behave so that their words and deeds are not attempts to improperly exploit the other party.

This was perhaps most tellingly put in another Australian case, Overlook (2002) which said “a party is precluded from cynical resort to the black letter”.

Applying these decisions to the facts of the case, the court concluded that, if the time bar was to be relied on, the subcontractor could not do or say anything which indicated to the contractor that the time bar would not be relied on. The good faith obligation extended, as its highest, to an obligation to correct any false assumption obviously being made by the contractor to the same effect. But the duty went no further, so that the subcontractor was not required to put aside its own self-interest. On the facts, the court concluded that the subcontractor had no reason to believe that the contractor was making any false assumptions.

Conclusion and what it means for you

The court’s approach to the “good faith” obligation is that it prohibits conduct which is without regard to the interests of the other party. Such a duty does not, it would appear, extend to informing the other party about the adverse effect of a particular term of the contract, of which it should already be aware. The court commented that the express duty in this case said little more than was previously thought to be implied into all construction contracts in terms of a duty to co-operate following the case of Leach (1986).

If the case can be regarded as an attempt by the contractor to escape the effect of an express time bar clause by relying on the duty of good faith as imposing a positive obligation to point out its effect, then clearly the court was not prepared to accept that the applicable duty went so far. Such clauses, therefore, do not prevent the parties from relying on express terms of the contract. The effect is confined to a restraint on unreasonable conduct amounting to improper exploitation of the other party.

James Doe
James Doe
Partner and UK Head of Construction & Infrastructure Disputes, London
+44 20 7466 2583
David Nitek
David Nitek
Partner, London
+44 20 7466 2453