REUTERS | Jason Lee

Cases on good faith clauses are a bit like waiting for a bus…

Over the past 10 to 15 years, more and more construction contracts have included good faith clauses, and yet there are relatively few cases on this subject. However, over the past year we’ve had the first instance judgments in Mid Essex Hospital Services NHS Trust v Compass Group UK and Yam Seng PTE v International Trade Corporation (albeit this concerned an implied duty of good faith), and the Court of Appeal’s view of the former case. Now we also have Akenhead J’s judgment in TSG Building Services v South Anglia Housing.

Unlike the other cases, TSG v South Anglia is particularly relevant to the field of construction law because it concerns a good faith clause in a standard form of construction contract, namely the ACA Standard Form of Contract for Term Partnering (TPC2005). Although there were some bespoke amendments to the relevant clauses, I don’t think that anything turns on this.

TSG Building Services v South Anglia Housing

TSG had contracted with South Anglia to undertake gas servicing works in 5,500 dwellings, but when the parties fell out, South Anglia terminated the contract under clause 13.3. This provided that either party could terminate for convenience, that is, there did not have to be any failing by the other party for the entitlement to arise.

TSG was a tad upset by this. It issued a claim of around £1.1 million for compensation consequential upon the termination, arguing that it was inconsistent with the good faith provisions of the contract and/or an implied duty of good faith.

The parties ended up in adjudication and the adjudicator awarded TSG around £384,000. South Anglia refused to pay, and so TSG issued enforcement proceedings. As well as resisting enforcement on the grounds that more than one dispute had been referred, South Anglia also issued CPR Part 8 proceedings seeking a declaration to the effect that it was not obliged to act in good faith when it terminated the contract. Therefore, it argued, TSG was not entitled to compensation.

No duty to act reasonably when terminating

I don’t want to discuss the jurisdictional challenge, other than to say that Akenhead J was in no doubt that only one dispute had been referred and therefore the adjudicator had jurisdiction. I want to concentrate on Akenhead J’s findings on the good faith provisions.

Clause 1.1. of the contract stated that:

“…in all matters governed by the Partnering Contract [the parties] shall act reasonably and without delay…”

Akenhead J analysed this clause and said that it was primarily directed to the “…way in which the parties shall work together (and individually)”. It did not mean that “…each and every obligation, power or right must be exercised reasonably”.

Akenhead J explained this reasoning with some very useful examples. He said that there clearly needed to be “substantial co-operation” between the parties when undertaking tasks such as the annual maintenance of gas appliances in 5,500 dwellings. Conversely, if clause 1.1 applied to all rights and obligations under the contract, it might be reasonable for TSG to be paid additional sums if work proved to be more expensive than it had envisaged. However, the parties had clearly agreed that South Anglia would pay the rates and prices in the contract. Furthermore, clause 1.1 could have the effect that the parties could only refer disputes to adjudication if they were acting reasonably, which is clearly not the case.

Akenhead J therefore concluded that:-

“…properly construed Clause 1.1 does not require Anglia to act reasonably as such in terminating under Clause 13.3. Clause 13.3 entitled either party to terminate for any or even no reason… it was clear that there was an unqualified right available to either party; it was obvious to each that the other could terminate at any time.”

Akenhead J also found that there was no implied duty of good faith, and consequently granted South Anglia the declaration sought.

Useful guidance

I think that Akenhead J has provided extremely helpful guidance on the application of good faith clauses in construction contracts, particularly partnering contracts such as PPC2000 and TPC2005. I appreciate that Akenhead J considered the matter to be relatively straight forward, but I am sure that I am not alone in hearing employers, contractors and lawyers argue that such obligations apply to each and every obligation and right. This judgment should put a stop to such arguments.

There will be some naysayers out there who will say that, as a result of this case, express good faith obligations are worthless. However, I disagree: they are relevant during the course of a contract to the behaviour and actions of the parties, and the overall ethos of the contract. While good faith clauses may not be relevant to all rights and obligations, I don’t think that it was ever the intention of the authors of PPC2000 and TPC2005 to restrict the parties strict contractual rights.

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