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How enforceable is NEC3’s obligation of mutual trust and co-operation ?

The NEC3 Vision

Advocates of the NEC3 extol the benefits of its forward looking attitude to risk mitigation, efficient collaborative management to optimise project outcomes and the use of straightforward contractual tools and mechanisms drafted in plain English.

There is little doubt that a well managed and administered contract with all parties sharing this vision and approach can deliver benefits to its users, facilitating smoother progress and a positive outcome with a reduced likelihood of disputes arising.

NEC3’s ‘mutual trust and co-operation’ obligation

Key to the success of the NEC methodology therefore, and consequently the first of the Core Clauses in the NEC 3 Engineering and Construction Contract, is clause 10.1: 

“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.”

The parties named in clause 10.1 vary according to which form NEC 3 contracts is used,  but its meaning is crystal clear throughout the suite; the parties have a positive contractual obligation to act in a spirit of mutual trust and co-operation in their operation of the contract. 

However, if one party has not kept up its end of this obligation, and a dispute rears its head, can anything be done about it by the innocent party?  Does this clause have teeth?

What could ‘mutual trust and co-operation’ mean legally ?

The enforcement of such contractual ‘good faith’ style clauses is beset with difficulties, not least of which is whether the clause has indeed been breached – what exactly does acting in a ‘spirit of mutual trust and co-operation’ mean? 

An NEC team at the KCCLA and Sweet & Maxwell Twelfth Annual Lecture: ‘NEC v JCT - Same problems different solutions’ put forward the view that the obligation was enforceable and should be interpreted as “acting in a trustworthy way, being able to trust the other party and having regard to the other party’s interests, but not having to put them above your own.”[1]

The importance of such clauses was highlighted in Birse Construction Ltd v St David Ltd[2]  in which the parties entered a charter with the intention of producing an exceptional quality development within the agreed time frame, at least cost, enhancing our reputations through mutual co-operation and trust.”  The Charter had no binding effect but it was held that the terms “are important for they were clearly intended to provide the standards by which the parties were to conduct themselves and against which their conduct and attitudes were to be measured.” 

Similarly in Multiplex[3] while it was agreed that the parties would use "reasonable endeavours to agree to re-programme the completion of the sub-contract works…"  It was held by Jackson J., however, that this was merely a statement of aspirations and therefore imposed no obligations as to the parties' conduct.

While English case law provides authority as to the importance of such clauses it is lamentably lacking as to the content and enforceability of such clauses and the behaviours that will be deemed in breach.  On enforceability of 'good faith' obligations, however, Australian authorities are more forthcoming.

In Automasters Australia[4] the court considered a clause providing:

"The Franchisor will use its best endeavours to promote the performance and success of the Franchise Business and will deal at all times with the Franchisee in absolute good faith."

The Court viewed that 

"..an express term concerning good faith, either in negotiation or performance, is likely to be considered certain and the term will be interpreted to give it meaning.  What constitutes good faith will depend on the circumstances of the case and upon the content of the whole contract.  The courts will allow normal and reasonable business behaviour, with the result that the parties are not obliged to put aside their own self-interest or proprietary rights.  A Court considering such a proposition is entitled to have regard to the reasonableness of the conduct and whether a party has acted unconscionably or capriciously…"

Potentially then the obligations contained in 10.1, albeit somewhat undefined, could be enforceable. 

More recently the English shipping case of Progress Bulk Carriers Ltd v Tube City IMS LCC[5] gave some guidance on the limits of self-interested but lawful commercial behaviours.  In this case Tube wished to transport a cargo of scrap to a buyer in China and so chartered a ship from Progess.  In breach of contract Progress hired the ship to a third party and then, the arbitrators viewed, proceeded to lull Tube into a false sense of security by offering to provide a substitute ship and cover Tube's losses.

Having relied upon Progress' offer, Tube was then forced to accept a significant price reduction from its buyer for failing to deliver the cargo on time as well as paying increased storage costs due to the delay in finding a substitute ship.

In the knowledge that the falling price of scrap had effectively 'cornered' Tube, Progress then refused to honour its promise to Tube and made a new offer which required Tube to waive all of its claims against Progress, an offer which Tube accepted under protest.

The arbitrators and, upon appeal, the court, held that Progress lawful but unethical behaviour amounted to illegitimate pressure and held that the firm should not benefit from its original contractual breach.

Daventry District Council[6] and Traditional Structures Ltd[7] provide further authority that the English courts are loathe to allow parties the benefit from what it considers to be unconscionable behaviour.

So where does this leave us?  The NEC appears to under no illusion that the construction world is full of both saints and sinners making the incorporation of such a clause necessary.  Whether a warning to an employer leaning on their project manager to act less than impartially or to a contractor not quite endeavouring to prevent delay, the message that they are not only expected to but positively obliged to act in good faith, ‘in a spirit of mutual trust and co-operation’ is loud and clear.

However, there exists a lack of clarity on the behaviours that would be considered a breach of this clause.  Behaviour extending to the extreme of being 'unconscionable' is clearly likely to fall foul of the clause, but there are myriad circumstances and behaviours where breach would be less certain and where it could be argued that the allegedly breaching party was not required to put aside their own self-interest. 

Conduct of the parties giving rise to a compensation event under clause 60.1, such as the Employer or Others not working within the agreed times/conditions (clause 60.1(5)), may also give rise to a claim under clause 10.1, as might an event falling under the 'any other event' scope of clause 60.1(18).

Conclusion

It appears therefore that a clause that seems to have been intended to calm the inherently adversarial approach frequently found in the construction industry may itself become a ground for claim, leading to welcome judicial clarification of the extent of the behaviour that can be expected under this clause and its enforceability.

Jonathan Brooks is a partner in the law firm Osborne Clarks, with over 20 years construction law experience. He acts on behalf of employers, contractors, sub-contractors and consultants doing advisory work and dispute resolution, including arbitration, adjudication and mediation procedures. Most of his work is related to NEC in some way. He can be contacted on +44 117 917 3462 / +44 7785 950070 or at jonathan.brooks@osborneclarke.com

[1] Article: NEC v JCT: mutual trust and co-operation v good faith and sprit of trust and respect?  Anna Smyth, 21 April 2010

[2] [1999] BLR 194

[3] [2006] EWCH 1341 (TCC)

[4] [2002] WASC 286

[5] [2012] EWHC 273 (Comm)

[6] [2012] Bus. L.R. 485

[7] [2010] EWHC 1530 (TCC);

2 comments

Feb 24, 2016 • Posted by Terrence Davis

An article has recently been publish by the Institution of Civil Engineers (London) titled “Good Faith Obligations in NEC Contracts” digital object identifier (DOI): 10.1680/jmapl.16.00004
Management, Procurement and Law
This article sets out a legally enforceable contractual interpretation of core clause 10.1 of the NEC, and covers the issues raised by Jonathan Brooks and Peter Berry.

Nov 06, 2015 • Posted by Peter Berry

Even in Australia, where good faith appears to have some legal meaning but, nevertheless is said to rely upon the specific circumstances of the particular case, the parties will have to await a court decision before they really know what the NEC clause means, In the UK, the concept of good faith does not appear to be accepted by the courts without a more detailed description in the contract of the meaning of good faith. If so and without the clarification, the NEC clause is meaningless until the courtroom battle has run its course, with the outcome most uncertain. Nice work if you can get it.

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