Whilst originally seen as another ‘UK’ based contract,
NEC is now very much an international form that rivals FIDIC in its
international reach.
The principle of good faith is a concept that has not yet been
incorporated into English law. However, in an effort to increase
the cooperation of all parties, NEC3 and 4 imply the principle by
inserting a clear obligation in Clause 10. Although the specific
wording “good faith” is not used within either contract,
it is clear that this clause does indeed amount to a good faith
obligation.
Incorporation of Good Faith into NEC
The requirement for the parties to act in a ‘spirit of
mutual trust and cooperation’ was implemented into the NEC3
series of contract following the Latham Report, published in 1994,
which stated at 5.18 that ‘the most effective form of
contract in modern conditions should include:- A specific duty for
all parties to deal fairly with each other, and with their
subcontractors, specialists and suppliers, in an atmosphere of
mutual cooperation.’
NEC3 Engineering and Construction Contract (“ECC”)
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 cooperation’
This clause creates the obligation of the Employer, the
Contractor, the Project manager and the Supervisor to perform all
duties and actions as stated within the contract. It is the only
clause which uses the future tense and incorporates an ongoing duty
throughout the performance of the contract, implying the obligation
of good faith between the parties.
NEC4 ECC:
‘Clause 10.1 – The Parties, the Project Manager and the
Supervisor shall act as stated in this contract’
‘Clause 10.2 – The Parties, the Project Manager and the
Supervisor shall act in a spirit of mutual trust and
co-operation’
Demonstration of Good Faith within NEC
In our webinar on 26 May 2022, Andrew Singer KC
brought to our attention two cases, in which he served as counsel,
that discuss the implied obligation of good faith in NEC
contracts.
The case of NIHE v HBE [2014] NICA 27 concerned an
appeal brought by the Northern Ireland Housing Executive
(“Executive”) relating to a dispute that arose out of the
provision of asbestos surveying services in relation to properties
belonging to the Executive, seeking a declaration that the
adjudicator’s decision was wrong in law.
In looking at the meaning of clause 61.1, the time bar clause,
and in particular whether this was an obligation that the employer
had to notify to the contractor, at paragraph 29, Girvan LJ stated
the following:
“Applying Clause 10.1 to the language of Clause 61.1
the employer, at the time of giving what is admitted to be an
instruction, was bound to give a written notification of the
compensation event which arose from the fact that that was an
instruction which in fact changed the scope of the
works.”
In this case the employer did not give notification, but having
regard to its obligation under Clause 10.1, it should have done so.
Thus, we can see an example of how with NEC contracts the good
faith obligation can be imported into the language of another
obligation, which did not previously confer such an obligation.
The case of NIHE v HBE [2017] NIQB 43 concerned a
dispute in relation to the proper interpretation of an NEC3
Professional Services Contract.
In similar facts involving the same parties as above, the
plaintiff awarded the defendant two Asbestos Surveying Services
Contracts in December 2012 for its Belfast and North East areas.
The plaintiff issued an instruction altering the scope of works,
triggering a compensation event.
In assessing the costs of the compensation event, a dispute
arose as to the sum due and the disclosure of documents showing
actual costs. An argument was put forward that the consultant
contractor couldn’t rely solely on a forecast in their
assessment, and documents showing actual costs should be disclosed
due to relevance in completing the assessment of compensation
costs.
LJ Deeney stated at 43:
“First of all, it is a cardinal principle of
contractual interpretation that one should look at the agreement
overall. This particular contract begins with the agreement that
the employer and the consultant shall act “in the spirit of
mutual trust and co-operation” (10.1). It seems to me that a
refusal by the consultant to hand over his actual time sheets and
records for work he did during the contract is entirely
antipathetic to a spirit of mutual trust and co-operation. Further
clauses in the contract such as Clause 15 reinforce that spirit. I
find that the overall sense of the contract with its emphasis also
on the assessment of compensation events is strongly against the
defendant here.”
The resulting judgement was for an order that documents showing
actual costs should be disclosed.
These judgements demonstrate how the obligation to act in good
faith conferred by Clause 10 influences the manner in which the
whole of the NEC3 contract is to be construed. The principle of
good faith therefore represents a free-standing obligation which is
also to be considered in conjunction with other obligations in the
same contract.
There is no reason why NEC4 would be treated any differently as
the wording is identical, meaning that the principles derived from
the above case law are directly transferrable, conferring the
obligation of good faith into both NEC3 and 4 contracts as a
whole.
What does Good Faith mean as a Free-Standing obligation?
In establishing what good faith means as a free-standing
obligation, attention is drawn to two cases that, whilst not under
NEC, demonstrate the nature of the principle of good faith within
contracts, and the obligations that it imposes on contracting
parties.
In the case of CPC Group Ltd v Qatari Diar Real Estate
Investment Co [2010] EWHC 1535 (Ch) (25 June 2010), Voss J (now
MR), at 246, summarised the obligations in an express duty to:
“adhere to the spirit of the contract, to observe
reasonable commercial standards of fair dealing, to be faithful to
the agreed common purpose, and to act consistently with the
justified expectations of [the other party]”
Similarly, in Unwin v Bond [2020] EWHC 1768 (Comm), an express
duty has been described as imposing the following minimum standards
on a party:
- To act honestly.
- To be faithful to the parties’ agreed common purpose as
derived from the agreement. - Not to use powers for an ulterior purpose.
- To deal fairly and openly with the other party.
- To consider and take into account their own interests while
also having regard for the other party’s interests.
The recent caselaw of Soteria Insurance Limited (formerly CIS
General Insurance Limited) v IBM United Kingdom Limited [2022] EWCA
Civ 440 related to an invoice which had been disputed in good
faith. The Court of Appeal stated:
‘[134] If no-one acted in bad faith, I do not consider
that, in these circumstances, there can have been a breach of the
obligation to dispute invoices in good faith.
[137] It is clear that the judge found that CISGIL acted
fairly and honestly towards IBM and did not conduct itself in a way
which was calculated to frustrate the purpose of the contract or
act in a way that was commercially unacceptable. There was no
intentional or objectively reprehensible conduct. In the
circumstances, I conclude that there is no room for a good faith
challenge.’
This case suggests a dilution of applicability of the good faith
principle compared to the extended application of Clause 10.1
obligations discussed in the other caselaw discussed above.
Overall, it seems that whilst the principle of good faith has been
established to operate as a continuing obligation within the
performance of a contract, the qualification in terms of a breach
is a matter for the discretion of the relevant authority in
consideration of commercial factors in balance with the factors
listed in Unwin v Bond.
Good Faith in NEC3 was discussed at our 26 May 2022
webinar with Andrew Singer KC
of Kings
Chambers. To view the webinar and
supporting notes please click
here.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
