South Africa: NEC: Mutual Trust And Cooperation

The NEC3 form had the (widely publicised) aim of encouraging cooperation, collaborative working and a fair allocation of risk between the parties to the contract. This was typified by clause 10.1, which appeared in each contract in the NEC3 suite and imposed an obligation on the parties to act in "a spirit of mutual trust and co- operation".

This clause created a great deal of debate amongst lawyers and those working under the contract which, until recently, had been left largely unresolved due to the lack of judicial comment on the clause. However, there have been two court judgments in the United Kingdom  this year which have drawn on clause 10.1 in support of their respective decisions and in doing so have shed light on what it means in practice for parties to act "in a spirit of mutual trust and co- operation."

Costain Limited v Tarmac Holdings [2017] EWHC 319 TCC was a dispute about which form of tribunal should hear the underlying dispute between the parties, based on the contractual agreements between them. One contract incorporated the NEC3 Supply (Short) Conditions. These conditions provided, at clause 93, adjudication and then arbitration, with strict time limits applying in each instance. However, another contract provided for adjudication, followed by litigation. Costain had attempted to adjudicate the dispute but the adjudication claim was rejected as it had been commenced beyond the contractual time limits to refer.

Understandably, fearing that an arbitrator would reach the same conclusion and find an arbitration claim was time-barred, Costain launched court proceedings to resolve the dispute. However, Tarmac applied to the court to have the court proceedings stayed to arbitration under s.9(1) of the UK Arbitration Act 1996, on the basis that the parties had entered into an arbitration agreement, and that the correct tribunal to hear the dispute was an arbitral tribunal, and not the court. Tarmac made this application, knowing that Costain would be time-barred from commencing an arbitration. Costain raised a number of counter-arguments, including that, as the contracts together provided for adjudication, arbitration and litigation, the "mutual trust" provision must mean that it was open to the parties to decide which tribunal was most appropriate for the dispute.

Coulson J interpreted the contractual dispute resolution provisions agreed by the parties and rejected Costain's arguments. He held that the parties had clearly intended to arbitrate their disputes, and a stay of the court action would be ordered accordingly.  . Coulson J further considered whether clause 10 (the 'mutual trust' provision) made any difference to his analysis. He endorsed (for the most part) the commentary in one of the leading textbooks on NEC (Keating on NEC3)and held that for parties to act with "mutual trust and co- operation" they must be prohibited from attempting to "improperly exploit" or mislead each other. In his view, this could extend to imposing certain positive obligations upon them and the example he gave was that a party would have to correct an "obvious false assumption" in light of this provision. He made it clear, however, that the obligation does not extend to a requirement for the parties to act against their own self-interest.

Applying this interpretation of clause 10.1 to the facts, Coulson J decided that Tarmac had not misled Costain, as its actions did not suggest that it would forego reliance on clause 93 or that it had waived its right to arbitrate. Simply participating in the first stage of a pre-action protocol procedure (which is a process which applies in the UK before court proceedings are instigated) was not enough to mislead Costain. He also held, on the facts, that Tarmac had no reason to believe that Costain was acting under a false assumption. As such, Tarmac had not infringed clause 10.1 and it was not estopped from relying on the arbitration agreement in clause 93.

In Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2017] NIQB 43, Deeny J went further than Coulson J in his interpretation of clause 10.1. This case involved the question of whether, when assessing compensation for a compensation event after the event, the prospective method of assessment set out in the NEC conditions was the correct method to adopt, or whether, due to clause 10.1, actual evidence of the cost impact of the event should be heard. Relying on clause 10.1, he required the consultant to disclose to the employer the records that it held of the actual time and costs incurred relating to a compensation event. In Deeny J's view, to not do so would be "entirely antipathetic to a spirit of mutual trust and co-operation".

Although the mutual trust and co-operation obligation was not crucial to the ultimate decision in the case, which was decided by determining the commercial reality of the circumstances, it is nevertheless noteworthy that Deeny J's decision that the consultant ought to disclose its records of actual cost coincided with a broad interpretation of clause 10.1. This is particularly so, if one considers hypothetically that, imposing this obligation could have required the consultant to act contrary to its own self-interest (if the actual costs incurred were lower than the costs which the consultant would have projected if it had submitted a prospective forecast before the works were commenced). Such an approach would be inconsistent with Coulson J's view in Costain, that the obligation could not be interpreted so as to require a party to act against its own interests.

Putting this interpretation point to one side, it is also arguable that the employer itself failed to act in "a spirt of mutual trust and cooperation" in the Healthy Buildings case. The question of whether the assessment of the consultant's costs ought to be made on the basis of forecast or actual costs only arose due to the employer's breaches – (first, the failure of its project manager to submit an instruction of the change of the works as a compensation event under the contract, and secondly, its project manager's failure to then request the consultant to provide a quotation for this change).

Returning to Costain, there was one aspect of the interpretation in Keating with which Coulson J disagreed, namely that the obligation went so far as to require the parties to act "fairly", which Coulson J felt would be too subjective. This makes both legal and commercial common sense. What would be considered fair by one party might not be considered fair by the other. This can be clearly illustrated by the decision in Healthy Buildings, where both parties would have had a strong argument for claiming that the other party had not acted fairly. In addition, the UK courts, when interpreting a contract are not generally concerned with the question of whether the parties have struck a fair bargain.

This is in contrast to the view taken by the Constitutional Court in South Africa, where in Botha and another v Rich N.O and others 2014 CCt89/13, the court considered whether a provision dealing with the cancellation of the contract was fair, in an attempt to develop the concept of good faith and fairness in the law of contract. It remains to be seen how far the South African court will go in sacrificing the requirement of certainty in the law of contracts for the concept of good faith and acting fairly, as "fairness" is not an independent substantive rule allowing the courts to interfere in contractual relations. At the very least, the notion of fairness should not be used to set aside clear contractual terms negotiated and agreed by sophisticated parties – and it can be seen from the judgments in Costain and Healthy Building that the interpretation of the mutual trust and cooperation obligation in clause 10.1 is becoming increasingly wide in the UK, despite Coulson J seeking to set limits on its scope  The clause clearly has teeth as  the willingness of the judges to use it in their reasoning when interpreting other NEC terms demonstrates.

Of course the caveat to the principles discussed in these cases is that how the mutual trust and cooperation obligation is interpreted and how much weight it is given will probably depend on the specific facts of each case but it is not likely that the clause could be used to escape express provisions such as those considered in Costain.

The cases above concern the "mutual trust and cooperation" wording in clause 10.1 of NEC3, when that obligation was combined with a duty to act as stated in the contract. In June 2017, NEC4 was released in the UK, and that link was broken. Clause 10.1 of NEC4 requires the parties (and the project manager and supervisor too) to act as stated in the contract. Clause 10.2 of NEC4 contains the mutual trust and cooperation provision. This amendment (which simply divides one clause into two) seems purely cosmetic. However, the relegation of the mutual trust and cooperation obligation from the very first clause in the NEC form, may suggest an intention by its drafters to lessen the importance of the mutual trust and cooperation obligation, and it remains to be seen whether the courts will so decide.

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.

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