REUTERS | Esam Omran Al-Fetori

Good faith in construction contracts: a sense of (cross-jurisdictional) perspective

A broad and generally applicable duty of good faith has long been rejected by the English common law. However, as commercial parties to contracts in the Middle East may be aware, the duty of good faith – sometimes referred to as “fidelity to the bargain” – is not only recognised but enshrined within the civil codes of the region. This is, in part, a reflection of the codes’ Egyptian roots, a point I return to below.

In a climate where lack of cooperation and motivation to fulfil the commercial bargain frequently characterise the dispute’s narrative, clients and in-house legal teams in the Middle East need to be prepared to deal with the principle of good faith.

Though often frowned upon when mentioned in an English law setting, it is important to be mindful that even the English courts have, in recent years, sounded-out the possibility of introducing the concept of good faith into contractual dealings. This has tended to be on a piecemeal basis, rather than as a generally applicable doctrine.

What is the duty of good faith?

Defining the duty of good faith is half the challenge. Commentators have long put this forward as the reason why common law jurisdictions have been reluctant to adopt the language of good faith within the commercial setting.

However, good faith is commonly understood to mean co-operation, honesty and/or reasonableness in the dealings between two parties. And the principle may, in theory, apply to both the pre-contractual as well as the contractual relationship.

A Middle Eastern perspective

Many Civil Codes of the Middle East were inspired by the Egyptian Civil Code of 1948, which enshrines a principle long recognised within the Islamic jurisprudential tradition: that a right could not be exercised unlawfully (that is, contrary to a principle of good faith).

The Qatari Civil Code stipulates that:

“The contract must be performed in accordance with its contents in a manner which is consistent with the requirements of good faith.”

It goes further and states that:

“The contract is not confined to obliging a contracting party to its contents, but also includes its requirements in accordance with the law, custom and equity as per the nature of the obligation.”

This is a very broad duty that may manifest itself in a number of ways, including in support of the duties of an employer under a construction contract to:

  • Deal with notices under the contractual change management procedure efficiently and without unreasonable delay.
  • Provide for the timely certification of interim payments where no specific time provision is specified in the contract.

It is interesting to note that the good faith obligation in the Qatari Civil Code relates to the performance of the contract. It is questionable whether this is sufficiently flexible to extend to dealings during the pre-contractual period. In this respect, the Qatari position may well be similar to that in English law as demonstrated by Walford v Miles [1992] AC 128, namely that a bare agreement to negotiate is unenforceable.

One of the most significant aspects of construction contracts upon which the principle of good faith may have an impact is variations or change orders. Of particular significance here is that, while the Qatari Civil Code asserts that there is no right to compensation in the absence of the employer authorising or causing a change, when considering the question of “cause”, the courts may weigh in the balance the equity of permitting an employer to avoid making a payment despite an informal instruction to implement a variation to the scope of works.

The principle of good faith may even facilitate the lawful termination or rescission of a construction contract. For example, the Court of Cassation in Dubai determined that Article 246 of the UAE Civil Code could permit the rescission of a contract where a breach of the duty of good faith could be evidenced. Article 246 expresses itself in similar terms to the same twin-track approach adopted in the Qatari Civil Code.

The Bahraini Civil Code (at Articles 127 and 129) arguably inhibits the operation of the principle of “good faith” by adopting the concept of “honesty” as part of its definition. Though this entails a more detailed consideration of linguistics than could be provided in this post, suffice it to say that it should not be assumed that the principle of good faith is equal in scope throughout the GCC, let alone the Middle East.

English conservatism

It is a generally accepted principle of English law that there is no overarching duty of good faith between commercial parties. If parties to a construction contract want to impose such a duty, the surest way to do so would be to incorporate a duty as an express term of the contract. Jackson LJ once succinctly stated that the general rule in commercial contracts is that:

“If the parties wish to impose such a duty they must do so expressly.”

To the extent that there is an express provision imposing a duty of good faith, the nature and scope of that duty will be a matter for construction by reference to the ordinary principles of contractual interpretation.

In a recent High Court decision, Richard Spearman QC opined that a duty of good faith is sometimes implied by law as incidental to certain categories of contract, but remembered to carefully revert to the classical English position as articulated by Jackson LJ. To paraphrase – if you want there to be a duty of good faith, say so. If you don’t say so, you may not get it.

Of course, within the English law setting – and despite protestations to the contrary – it is entirely plausible that there may be a duty of good faith implied within certain contracts. The English courts have typically referred to these as “relational contracts” that are perhaps best described as long-term contracts in which both parties are engaged in “high-frequency interaction”.

Conclusion

Having considered the above, what does a duty of good faith as articulated in the Civil Codes of the Middle East require of the parties within the construction context that would not be imposed by the TCC or an arbitral tribunal with an English seat?

I have considered above some practical examples in which the duty of good faith is pleaded in aid of extant duties (the duty to provide timely consideration of notified claims or interim payments, for example, or the duty as an employer to make diligent use of the change management procedure). Within the arbitral context there may be a serious question raised about the extent to which the duty of good faith, sometimes expressed by legal representatives within the Gulf as a strong positive obligation, will constitute a source from which new practical duties arise within the construction context. For example, to the extent that an employer fails to deal efficiently with notices for compensation or extensions of time under its change management procedure, the contract will ordinarily have something to say about that independently of the duty of good faith. Furthermore, delay claims are in no sense ordinarily dependent upon a duty of good faith within the construction setting.

Therefore, it is vital to be cognisant of the strength of the positive obligation of good faith when disputes are raised within Middle Eastern courts or arbitral tribunals. That should include an awareness of both the potential benefits and burdens arising from a general duty of good faith. However, more often than not, when engaged in a construction arbitration arising out of the Middle East (particularly insofar as it has an English seat with an English choice of law clause), it is preferable to focus on the express terms of the contract, where a more concrete and readily identifiable remedy may already exist.

Paul is a barrister at 4 New Square Chambers and is currently on secondment with Pinsent Masons LLP, Qatar.

Pinsent Masons LLP Paul Fisher

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