Practical Law

I recently attended a topping out ceremony organised by a developer client. At the ceremony, I was extremely interested to hear the developer attribute the early completion of this particular superstructure to the spirit of good faith in which the parties had worked. Having drafted the JCT-based building contract between the developer and the contractor, I knew that it did not contain an express obligation on the parties to act in good faith and that, traditionally, English law has been reluctant to imply such terms into contracts.

Yet, despite this, it was clear from what our client was saying that the notion of good faith is not alien to construction contracts and that the benefits of working in a spirit of good faith were tangible, to him at least. I wondered if, having worked in this manner so successfully on this project, our client would want to see the “good faith” concept encapsulated in future contracts as an express obligation?

The law

Our client’s comments were particularly pertinent given two recent cases on this topic and the flurry of legal commentary that they have attracted. In Yam Seng PTE Ltd v International Trade Corporation Ltd, Legatt J commented that in his view “the traditional hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still exists, is misplaced”. He went on to say that, while English law has not yet reached a stage where good faith is implied as a default, it seemed to him that there was “no difficulty, following the established methodology of English law for the implication of terms in fact, in implying such a duty in any ordinary commercial contract based on the presumed intention of the parties”. However, six weeks later, in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) the Court of Appeal took a narrow view of the express good faith obligation contained in that contract.

As Shy Jackson pointed out in his blog post last week, these two cases can be reconciled on their own facts. But what we seem to be left with is an increased willingness of the courts to imply a duty of good faith where the context requires it.

In practice

So what does that mean for our contracts? In your next building contract, will you include an express obligation on each of the parties to act in good faith? Or are projects that are successfully managed in a spirit of good faith those that have the “right” people on the job, sharing a common project delivery strategy and with aligned objectives and attitudes, both from a cultural and behavioural perspective, whatever the contract may say?

These may sound like fine ideological principles but, as Legatt J pointed out, contracts cannot provide for every event or nuance of relationship. Are happy and successful marriages those that reach for a copy of the marriage vows whenever there is a problem or things aren’t running smoothly? Or are they the ones where the parties are “right for each other” and support each other to resolve issues when they arise, in pursuit of their common longer term goal?

I have heard some developers complain that including an express obligation to act in good faith actually implies a lack of trust between the parties and that this can start the relationship off on the wrong footing. However, this is not an issue which the NEC form of contract (which requires that the parties act in a “spirit of mutual trust and co-operation”) seems burdened by.

I have also heard it said that attempting to negotiate the terms of a contract containing a “good faith” provision may be seen as lawyerly and as undermining its basic ethos. That remains the view of the NEC Panel, but in practice NEC contracts are often heavily amended without losing their essence (the Olympics being a good example).

In both Yam Seng and Medirest, the courts stressed that any duty to act in good faith is dependent on the context of the agreement in question. Any express term to act in good faith needs careful drafting so that the extent of the obligation is clear. Indeed, the poor drafting of the contract in Medirest ultimately proved to be problematic for both parties. Legatt J saw advantages in describing the duty as one of good faith and “fair dealing” on the basis that this eliminated elements of uncertainty by introducing a set of objective standards with which the parties were expect to comply. What constitutes fair dealing would be defined by the terms of the contract.

It is also interesting to note that the NEC’s “spirit of mutual trust and co-operation” wording has not posed too much of an interpretation challenge to date. Indeed, this type of provision may be gaining in popularity: the CIOB Contract for use with Complex Projects (CPC 2013), published a couple of weeks ago, includes a very similar clause.

The future

How will this issue develop going forwards? My feeling is that door has not been closed and that discussions surrounding good faith clauses are here to stay for the time being. While I wouldn’t describe all construction contracts as “matches made in heaven” I was pleased to see that one on which I worked clearly was.