Negotiation and Good Faith in construction projects

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Good faith is increasingly an express provision in project contracts, requiring parties to deal with each other in good faith, and to discuss/negotiate in good faith in certain specific situations.

Therefore, when you are drafting the contract, be very careful about defining what contractual difficulties the duty of good faith applies to; is it general or does it only apply to specific situations?

Also, be specific where an Employer insists on a power to terminate for cumulative defaults. What constitutes excessive defaults or excessive deductions? What protection will the Contractor have?

It seems that even if the Court decides that a particular contractual right isn’t constrained by a duty to exercise that right in good faith, the parties will still need to demonstrate that they are as far as possible acting in good faith.

As a Contractor it is very important to resist the temptation to enter into a “tit for tat” argument or dispute where each party takes action without a great deal of pre-thought and/or planning. On the contrary, it is very important to lay an audit trail demonstrating that as a Contractor you will bend over backwards in order to meet the Employer’s concerns. Is there genuinely a problem in the design or the facility? Is it a problem that can be passed down the chain to a sub-contractor? Ultimately, can you speak to the Lender? The Lender has a step-in right, but the Lender may well be willing to have a word in the Employer’s ear as the Lender has an acute interest in the fate of the contract, and seeing it completed on-time and on-budget.

In the event a dispute arises, explore your options, don’t behave irrationally. Even if the Court ultimately says that good faith doesn’t apply, bend over backwards to lay an audit trail to demonstrate that you have approached the issue in good faith as far as possible.

Common law has grudgingly developed an implied term of “good faith” in “relational” contracts – not to exercise a contractual power arbitrarily, capriciously, irrationally or for an improper purpose.

However, this is still relatively limited. For example, see the below case:

  • Compass Group UK and Ireland Ltd v Mid Essex NHS Trust 2013] EWCA Civ 200: – confined an express good faith clause in the project agreement to the specific situation it addressed. It did not cover making deductions and awarding Service Failure Points for underperformance, even where cumulation of SFP’s gave rise to a right to terminate. Implied duty of good faith inapplicable to exercise of “absolute” contractual right, where “assessment” required. The only remedy available is under express performance provisions. In fact, the Trust had persisted in awarding “excessive” SFPs – so it wasn’t entitled to terminate.

Negotiation and Good Faith in construction projects was discussed in our webinar on 25 March 2021 with Gordon Nardell QC, Twenty Essex and Sue Kim, HKA.  Click here to view the webinar and detailed notes.

How can Barton Legal help?

At Barton Legal we have extensive experience in all the standard contract forms, including JCT as well as NEC, IChemE, and FIDIC.

We believe that an increased understanding of contractual terms and the roles and responsibilities of all parties ensures a successful conclusion to a project, which is why we always use plain English and ensure you understand and can apply the terms of your contract.

Our aim is to reduce legal gobbledegook and increase collaboration between parties to increase the prospects of completing your project on time and on budget

We place great emphasis in the early stages of the contract on understanding and preparing thoroughly, in order to avoid costly disputes later.

If you have any queries regarding any of these contracts or any form of construction dispute, please do not hesitate to get in touch by email  or call our office on 0113 202 9550.