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.
To find out how Barton Legal can help you, please click here.
