UK: Is There A Duty Of Good Faith In Construction Contracts?

The rise of the use of partnering contracts and other contracts such as the NEC that expressly refer to phrases such as 'mutual trust and co-operation' and 'good faith' has turned the spotlight onto the general obligations of parties to construction contracts towards each other. In particular, do parties owe each other an implied duty of good faith when performing their rights and obligations pursuant to a contract that does not expressly refer to 'mutual trust and co-operation' or 'good faith'?

Good faith can be defined in many different ways. It incorporates both subjective elements by requiring honesty and objective elements by requiring adherence to standards of fair dealing. Variations in the meaning of good faith occur between different legal systems due to cultural and geographical differences. In England and Wales, it is often criticised for being a nebulous and vague concept and it has been stated that instances of bad faith are more easily recognisable than good faith.

English judges have on occasion attempted to define good faith. Generally good faith is taken to mean fair play and open dealing. Lord Justice Bingham (as he then was) in Interfoto Picture Library Ltd v Stilleto Visual Programmes Ltd defined good faith as "in essence a principle of fair and open dealing". The parties 'should not deceive each other' with obligations to 'play fair', 'come clean', or 'put one's cards on the table'.

On a European basis, the Lando Commission's Principles of European Contract Law defines good faith to mean 'honesty and fairness in mind, which are subjective concepts'. An Australian Judge, Mr Justice Miller in Bond Corporation Pty Ltd v the Western Australian Planning Commission defined good faith as having two divergent meanings:

"The first is a broad or subjective view which requires inquiry into the actual state of mind of the person concerned & The second involves the objective construction of the words by the introduction of such concepts as an absence of reasonable caution and diligence."

Some Common Law jurisdictions such as Canada and various states of Australia recognise an implied duty of good faith in contractual performance. For example, the Supreme Court of Victoria, Australia, in the 2007 case of Kellogg Brown & Root Pty Ltd v Australian Aerospace Ltd ruled that the principles of good faith may apply to the operation of a termination for convenience clause present in the parties' contract.

Good faith is also recognised in many civil law countries such as France, Germany and the Netherlands. In these countries, the civil Codes govern the parties' obligations towards each other. For example, the German Civil Code provides at §242 that:

"The debtor is bound to perform according to the requirements of good faith, ordinary usage being taken into consideration."

With the exception of contracts that are uberrimae fidei such as insurance contracts, English law does not yet recognise an implied duty of good faith in the performance of contracts. Part of the court's reluctance to introduce a duty of good faith is because of the nebulous nature of the concept of good faith. The court also adheres to the principles of freedom of contract i.e. parties are free to contract on their own terms as far as possible and these agreements should be upheld and enforced by the courts.

However, parties sometimes include terms in their contracts that embody good faith concepts. In the context of construction contracts, the Technology and Construction Court considered a good faith clause when considering a project manager's duty of impartiality in administering a contract in Costain Ltd v Bechtel Ltd. In this case, the claimant and defendants were working on the Channel Tunnel High-Speed Rail Link. One of the contract recitals provided that:

"The Employer, the Contractor and the Project Manager act in the spirit of mutual trust and co-operation and so as not to prevent compliance by any of them with the obligations each is to perform under the Contract." 1

Costain sought an injunction to restrain Bechtel from instructing, persuading or otherwise encouraging any employee, servant or agent of Bechtel or an associated company to seek to operate the assessment and certification functions of the project manager otherwise than impartially and in good faith. The evidence showed that Bechtel staff were advised to exercise their functions under the contract in the interests of the employer and not impartially. In obiter, Mr Justice Jackson referred to the use of the phrase "good faith" in the contract and stated that it was sometimes used as a synonym for impartially and sometimes as a synonym for honestly. In the context of certification, the Judge did not believe a debate about the meaning of the phrase "good faith" would serve a useful purpose. Therefore, the judgement concentrated on whether there was a duty of impartiality and whether it was arguable that this duty had been breached. The Judge believed that it was arguable that the duty had been to act impartially as between employer and contractor when the project manager was assessing sums payable to the contractor. However, an interim injunction was not granted.

This is the only case that has come before the courts considering the good faith obligations in the NEC3 contract. The court did not expressly consider the nature of the obligations of good faith and what the term 'mutual trust and co-operation' requires in the context of a construction contract. In particular, whether it required anything more from the parties than what they were required to do under 'conventional' construction contracts that do not import the obligations of good faith expressly into a construction contract. Therefore, the court actually shied away from such a discussion.

Rather than adopt a broad overarching principle such as good faith, the English courts have instead adopted solutions to unfair situations presented to them. For example, in relation to construction contracts, courts will commonly imply terms into the party's contract to remedy unfair situations on the basis of the parties' presumed intention. One example is that the contractor must do all work under the contract with proper skill and care. In the case of Balfour Beatty v Docklands Light Railway, Counsel for the employer accepted without reservation that an employer was not only bound to act honestly but also bound by contract to act fairly and reasonably, even when no such obligation was expressed in the contract. This concession was accepted by the Court of Appeal. This concession remedied a potentially unfair situation in the Contract.

Despite English court's reluctance to imply a general duty of good faith, they will interpret and give effect to express references to good faith in contracts. For example, in the case of Berkeley Community Villages Ltd, Berkeley Group plc v Fred Daniel Pullen, Kathleen Marguerite Pullen and Alan John Pullen¸ the parties' contract contained a term that the parties would act in the "utmost good faith". This was held to impose a contractual obligation to observe reasonable commercial standards of fair dealing in accordance with their actions which related to the relevant Agreement and also required faithfulness to the agreed common purpose and consistency with the justified expectations of the claimants.

Conclusion

Despite the rise of the use of construction contracts referring to good faith concepts, a decision on the interpretation of a good faith clause in a construction contract is awaited. However, although there is no implied duty of good faith in construction contracts, the courts have found solutions to unfair (or bad faith) situations that have been presented to them. In this way, the courts have implemented incremental solutions to these situations rather than adopting a broad overarching good faith principle. Until a decision is forthcoming on the interpretation of good faith clauses, whether there is a difference between the court's previous solutions to unfair situations that currently apply to 'conventional' contracts and good faith contracts remains to be seen.

Footnotes

1 This is very similar to clause 10.1 of NEC3 which provides: "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."

To see further articles on matters relating to construction, engineering and energy projects, please visit www.fenwickelliott.co.uk.

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