Clear contracts are vital for long supplier deals


Author: Alan Woolston


This article was previously published in Construction News.

It has been said that success in construction is no longer a question of contractor competing against contractor, but supply chain against supply chain.

Proactive management of long-term supplier relationships is becoming more important than ever. This trend is being supported by the increased use of agreements to regulate long-term supplier relationships, with strategic partnering or framework arrangements becoming ever more common.

But as the use of these types of agreement increases, so too do the legal issues arising out of them.

For example, does the nature of collaborative contracts give rise to implied terms as to how parties should conduct themselves?

As a general principle, terms will usually not be implied if the words of the contract are clear, but when interpreting a contract the surrounding circumstances can be taken into account to help to understand the meaning of the words used or to fill gaps.

In that sense, the fact that parties are working towards a common goal could be influential – it is, after all, the primary purpose of partnering. But what might that mean in practice?

The recent case of Fujitsu v IBM concerned a long-term subcontracting framework, put in place to support a main contract partnering relationship.

The contract was for IT services, but the principles apply equally to supply chain arrangements in the construction industry.

Fujitsu argued that under the umbrella of the subcontract partnering obligations, IBM as main contractor had an implied “fiduciary duty” to procure work from its end client in a manner that benefited Fujitsu.

Fiduciary duties are onerous. A contractor under a fiduciary duty must act only in accordance with proper commercial practice, but would also owe an obligation of loyalty, putting the supplier’s interests before its own. This would be highly uncommercial.

Fortunately, while not dismissing the possibility, the courts confirmed that in a commercial contract fiduciary duties will not be implied lightly. Even where the parties had agreed to collaborate over time towards a ‘common’ goal, clear words would be needed for a party to subordinate its interests to those of another.

Good faith implied

More recently still, the fact that a contract was based on a long-term, mutually beneficial relationship influenced a decision that a duty of good faith should be implied where there was no express duty to that effect in the contract (Bristol Groundschool v Intelligent Data Capture).

It is well established that there is no general rule of good faith in English law (though it is increasingly written into agreements). Unlike fiduciary duties, good faith does not require a party to subordinate its commercial interests but it can still affect a party’s right to exercise a discretionary entitlement.

It is therefore significant that a court was prepared to imply the term based on its view of the intended nature of the partnering relationship.

In the Fujitsu case, the court refused to imply a duty of good faith. It decided that there was already a diluted collaboration obligation in the agreement that defined the parties’ intentions to the exclusion of any wider implied term. Yet it seems from the Bristol Groundschool case that not referring to good faith at all does not have the same relevance.

Setting out your intentions clearly in a written agreement is not new advice, but it seems that there is scope for terms to be implied because of the context.

So when getting into a long-term supply arrangement, stop to think about issues arising specifically out of the type of relationship involved.

Alan Woolston, Partner, Fladgate LLP (awoolston@fladgate.com)

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