Practical Law

Everyone knows that NEC contracts are different. Their fans and detractors are both quick to tell us. And no NEC clause is quite so eye-catching as clause 10.1. Famously it says (in its ECC form):

“The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation.”

What does clause 10.1 mean?

Opinion has ranged on clause 10.1’s meaning. Some people have emphasised the second limb, suggesting that it is almost freestanding and must fundamentally condition (or qualify) each party’s entitlements under the contract. This might not be a good thing: too much contractual certainty could be lost (for example, around the circumstances in which termination rights may be exercised).

Others have argued for a more restricted interpretation: mutual trust and co-operation is intended to support and encourage the open, proactive, project-focused and problem-solving mentality embedded in NEC. But it doesn’t require the parties to give up fundamental rights, or privilege the interests of one over the other.

Instead, it requires a party to exercise its rights in a way that is not capricious and which does not deprive the other party of the benefit of the contract without some due consideration of its interests.

The more restricted approach sees the second limb of clause 10.1 as joined to the first. It colours, but does not dissolve, the parties’ respective contractual rights. If the second limb has a more free-ranging role, it is to provide the parties with a standard of behaviour to observe in resolving matters not catered for in NEC’s deliberately brief, pared down clauses.

Until the end of February, there was little judicial guidance on which approach was correct. That has now changed.

Costain v Tarmac

In Costain Ltd v Tarmac Holdings Ltd, the Technology and Construction Court analysed clause 10.1 in an unusual context: did it require Tarmac to bring to Costain’s attention the effect of an adjudication clause containing a time bar inimical to Costain’s claim? On the facts, Coulson J held emphatically not. His approach to the meaning of clause 10.1 endorses the second approach sketched out above.

In reaching his view, the judge readily accepted a “parallel” between the second limb of the clause and good faith obligations. He cited a number of cases dealing with good faith. In particular, he approved the following summary of good faith in F & C Alternative Investments (Holdings) Limited v Barthelemy (Nos. 2 and 3):

“It is a form of contractual duty which requires the obliger to have regard to the interests of the obligee, while also being entitled to have regard to its own self-interest when acting.”

Coulson J also approved a passage in Keating on NEC3, which glosses the second limb as permitting the parties to “maintain their legitimate commercial interests” but not “so that their words and deeds [are] attempts to improperly exploit” the other party. But he felt “uneasy” about Keating’s suggestion that clause 10.1 imported a “more general obligation to act ‘fairly'”. This was because such an obligation would be too subjective, and so difficult to apply in practice.

In the specific context of Costain, Coulson J decided that clause 10.1 meant that Tarmac could not “lull” Costain into believing that the time bar was inoperative. This extended to a positive obligation on Tarmac to correct a false assumption put forward by Costain on the inapplicability of the time bar. But it did not go further, as clause 10.1 would otherwise have required Tarmac to sacrifice its own self-interest.

Some thoughts

My first thought on reading Costain’s treatment of clause 10.1 is that it is, well, rather unsurprising. But the case is still of genuine significance, at least for NEC users and commentators.

• Mutual trust and good faith: The approach to good faith in Costain appears entirely in line with the recent overall approach of the English courts, although only F & C Alternative Investments was referred to in the judgment. Coulson J’s view that clause 10.1 does not in ordinary circumstances, where the relevant party has not misled the other, require it to lay aside its self-interest echoes cases such as TSG Building Services Plc v South East Anglian Housing Ltd and Gold Group Properties Ltd v BDW Trading Ltd. These cases variously emphasised that good faith did not blunt hard-edged contractual rights (such as termination) or require parties to jettison their own commercial interests.
• Uneasiness on “fairness”: The judge’s unwillingness to give the concept of fairness a free-ranging role in the interpretation of clause 10.1 also reflects well-established judicial trends. One can point to leading cases on interpretation, recently culminating in Arnold v Britton. These have underscored the primacy of the words with which the parties have chosen to clothe their bargain. Commercial common sense and surrounding circumstances are not to be readily deployed to “clarify” the parties’ deal. The same point must go to any broad concept of fairness included in a contract. It will not be used to unseat specific terms.
• Judicial attitude to NEC: There is relatively little judicial authority on NEC. But the approach of Costain is welcome. It is easy for people – and even the occasional judge – to carp about the contract and its use of language. But the truth of the matter is that billions of pounds of contracts, particularly in the public sector, are let on NEC-based terms. The courts have time and again underscored the need to give parties the benefit of the deal they signed and provided the interpretative tools to do so. Costain is a good example of a judge rolling up his sleeves and getting on with the task.

What would be fascinating now, if still a little unnerving for the litigants, is a case where the practical application of clause 10.1 is tested in circumstances where the weight of evidence against the second limb having a “restraining” role on another contract term is less than in Costain. But at least we have had helpful confirmation that, whatever else, clause 10.1 will be seen as a lubricant facilitating the parties’ deal, not an acid uncertainly dissolving their ordinary expectations.