Author: Kim Fowler
This article was previously published on Construction News on 22 September 2016.
A number of recent cases have reopened questions of implied obligations of good faith in NEC contracts.
The NEC standard clause 10.1 requires that the parties “shall act as stated in this contract and in a spirit of mutual trust and cooperation” which is arguably an attempt to enshrine an overriding good faith obligation into the contract.
The question is how the obligation to act in a spirit of mutual trust and co-operation works in conjunction with the obligation to act as stated in the contract and how likely this is to change in the future.
Historically English common law has been reluctant to imply a term of good faith into commercial contracts and has instead developed equitable remedies to specific issues as summarised in the judgment of the High Court in Interfoto Picture Library v Stilleto (1989): “English law has, characteristically, committed itself to no such overriding principle [of good faith] but has developed piecemeal solutions in response to demonstrable problems”.
Over the last few years there have been several cases which have dealt with the question of whether there is an inherent duty to act in good faith.
In the case of Yam Seng Pte Limited v International Trade Corporation Limited, the High Court held that, although the ordinary approach under English law is that there isn’t a general duty of good faith placed upon the parties to a contract, there can be contracts in which the duty is implied.
Justice Leggatt stressed how many other jurisdictions – both common law and civil law – impose a duty of good faith on contracting parties, and concluded 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”. This seemed to indicate a move away from the piecemeal approach.
However, the Yam Seng case was followed by both Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Limited and TSG Building Services Plc v South Anglia Housing Ltd which seemed to row back on this approach.
In Mid Essex the question was whether a duty of good faith ought to be implied into an agreement and also what the scope of an express good faith contractual clause ought to be. The Court of Appeal held, unlike in Yam Seng, that the duty of good faith related to the specific obligation it was connected to and did not impose an overarching obligation to act in good faith.
In TSG Building Services Plc v South Anglia Housing Ltd, the Housing Association exercised its right to terminate for convenience and the Contractor sought to rely on a provision in the contract which provided for the parties to perform their contractual obligations and responsibilities in a spirit of “trust, fairness and mutual cooperation”, arguing that this duty extended to the parties’ rights of termination.
Justice Akenhead concluded that there is no general duty of good faith applicable to commercial contracts and that each case would depend upon its own facts and upon the contractual provisions in question.
Good faith and termination
The latest case to grapple with this issue is Bluewater Energy Services BV v (1) Mercon Steel Structures BV and others, where Ramsey J examined the impact of a good faith provision in the context of termination. The judgment in this case appears to have muddied the waters again.
The contract provided for a notice of default to be issued to the subcontractor requiring them to “immediately commence and thereafter continuously proceed with action satisfactory to Bluewater to remedy such default”. If they did not comply, a notice of termination could then be issued.
The subcontract also provided that the parties “shall uphold the highest standards of business ethics in the performance of the contract. Honesty, fairness and integrity shall be paramount principles in the dealings between the parties”.
Bluewater terminated the contract and argued that the decision to terminate was triggered by a subjective view taken by Bluewater as to whether the action taken by Mercon, as at the time of the view, was satisfactory.
Mercon’s position was that the “action satisfactory to Bluewater” had to be objectively reasonable so that it was not a question of the subjective satisfaction of Bluewater and relied on the obligation on the parties to “uphold the highest standards of business ethics”.
Implied obligations of good faith?
Although, on the facts, the court held that the contract had been validly terminated, the court also held that there was an implied limitation on Bluewater’s ability as decision-maker: “by reference to concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality”.
That implied limitation was consistent with the contract but existed even without the express words.
It is arguable that Bluewater has reopened the question of implied obligations of good faith. It will be interesting to see where this goes next and whether, in the future, the NEC obligation will be read more widely.
For now it is advisable to link any express obligation to act in good faith to a specific provision and not to assume that that an obligation to act in good faith will be implied.
Kim Fowler, Senior Associate, Fladgate LLP (firstname.lastname@example.org)