Practical Law

In June 2014, I wrote about clause 10.1 of the NEC form and how it was applied in Northern Ireland Housing Executive v Healthy Buildings. Clause 10.1 and good faith in general are increasingly a feature of judgments handed down by the courts. So where are we now?

NEC and Clause 10.1

Mears v Shoreline was a claim for payment under an NEC3 Term Service Contract (TSC). The parties agreed and executed an Option C version (target cost with price list), but then operated the contract on a different basis (an agreed schedule of rates).

Later, the employer sought to revert to the terms of the executed contract. This led to adjudication, an unsuccessful strike-out application (both at the High Court and Court of Appeal) and then a full hearing.

The contractor argued that it had a cause of action based on the trust and partnership language used in the NEC contract. It argued that this resulted in an implied term that a party would not take advantage of the other party (by insisting on compliance with the agreed terms), when the first party was aware of a departure from those terms and wished to revert to them without warning (and without giving the other party an opportunity to change).

The court, having found for the contractor on the basis of estoppel by convention, did not address this point in great detail. However, obiter, Akenhead J thought that:

• There were no grounds for implying such a term.
• The obligation to act in a spirit of mutual trust and cooperation in clause 10.1 did not prevent a party from relying on the express terms of the contract freely entered into by the parties.

This re-affirms the principle that good faith obligations are unlikely to override express contractual rights (see TSG v South Anglia Housing). However, it does depend on facts and context.

Relational contracts

Such context could be the nature of the contract. In Yam Seng v ITC, Leggatt J relied on the concept of relational contracts as the basis for implying a good faith obligation. The Court of Appeal did not follow that approach in Compass Group v Mid Essex Hospital (which I wrote about at the time) or in Hamsard v Boots.

However, in Bristol Groundschool v Intelligent Data Capture, Richard Spearman QC (sitting as a deputy High Court judge) reviewed Yam Seng in detail. He held that the agreement (relating to training materials for the UK Civil Aviation Authority and the EU Joint Aviation Authority) was a “relational” contract of the kind referred to in Yam Seng and that there was an implied duty of good faith.

Similarly, D&G Cars v Essex Police Authority concerned a contract for the recovery of vehicles for the Essex Police Authority. Dove J held this was “a ‘relational’ contract par excellence” and that there was an implied term that the parties would act with honesty and integrity in operating the contract.

While these two decisions focused on honesty and integrity, they demonstrate that some judges are open to using relational contracts as the basis for implying terms. Of course, construction contracts are very likely to be regarded as such relational contracts.

A relationship of mutual trust and confidence

However, the need for cooperation and working together will not always result in implied terms. This was the issue in Chelsfield Advisers v Qatari Diar Real Estate Investment, which was about a development agreement for the US embassy site at Grosvenor Square.

Having entered into the initial agreement in 2009 concerning payment of fees, the parties failed to reach agreement on the subsequent management agreement.

Following commencement of proceedings for payment by Chelsfield, Qatari Diar wrote to say that it had lost trust and confidence in Chelsfield and that therefore the agreement came to an end.

Chelsfield applied for summary judgment, arguing there were no grounds for implying a term that the agreement was conditional on the continued existence of a relationship of trust and confidence. Qatari Diar argued the nature of the relationship was such that the parties cannot have intended for it to continue, if trust and confidence no longer existed.

The court rejected this argument and expressed its scepticism about the basis for implying such a term, noting its similarity to implying a good faith term. It recognised a duty of good faith is implied by law as an incident of certain categories of contract (including contracts of employment) but held that the general rule in commercial contracts is that “If the parties wish to impose such a duty they must do so expressly” (citing Jackson LJ in Mid Essex v Compass).

The rest of the common law world

Good faith is often seen as a common law/civil law issue. This ignores the fact that other common law jurisdictions (for example, the US and Israel) have good faith as part of the law of contract.

In Singapore, the Court of Appeal in HSBC Institutional Trust Services v Toshin Development held that there was no good reason why an express agreement between contracting parties that they must negotiate in good faith should not be enforced. (I have mentioned this case before.)

Last year, the Canadian Supreme Court in Bhasin v Hrynew 2014 SCC 71 decided to recognise good faith contractual performance as a general organising principle, holding that “Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations”.  Leggatt J referred to this decision in MSC Mediterranean Shipping Company SA v Cottonex Anstalt, when he repeated his observations from Yam Seng that good faith is increasingly recognised in the common law.

What has changed, if anything?

It certainly seems that parties feel more confident about raising arguments based on good faith obligations, relational contracts and the need for trust and confidence. Parties increasingly use collaborative contracts and construction contracts are very likely to be regarded as relational contracts.

Have the courts changed their approach? I looked at good faith in June 2013 and suggested there was no clear answer so far, but watch this space. Quite a few cases have come up in the last 24 months, but I’m afraid there is still no clear answer.