Discussion: Good faith obligations in NEC contracts and Construction Law Quarterly

It is interesting to compare and contrast two recent papers in Management, Procurement and Law: Davis and Thurlow’s briefing entitled ‘Good faith obligations in NEC contracts’ (Davis and Thurlow, 2016) and Jackson’s contribution to the ‘Construction Law Quarterly’ (Higgs et al., 2016)

Whereas Davis and Thurlow assert in their introduction ‘… the duty of good faith is accepted by the parties in core clause 10.1 as governing their dealings concerning the project’ (Davis and Thurlow, 2016: p. 145), Jackson’s review of case law suggests that the English courts are generally reluctant to imply a duty of good faith. Jackson notes that neither NEC3 (2013) nor the Framework Alliance Contract (FAC-1 (ACA, 2016)) expressly use the term ‘good faith’.

In TSG Building Services PLC v. South Anglia Housing Ltd [2013] (a decision regarding a term partnering contract (ACA, 2008), referred to by Jackson), Mr Justice Akenhead stated in paragraph 51 ‘I do not consider that there was as such an implied term of good faith in the Contract. The parties had gone as far as they wanted in expressing terms in Clause 1.1 about how they were to work together in a spirit of ‘trust fairness and mutual cooperation’ and to act reasonably. Even if there was some implied term of good faith, it would not and could not circumscribe or restrict what the parties had expressly agreed…’ It would appear on the basis of this case that rather than unequivocally incorporating good faith obligations into the contract clause 1.1, and by extension NEC3 clause 10.1, serves to limit the relationship of the parties to the words expressly used.

It is also interesting to note that although the word ‘trust’ is used, there is no suggestion in this decision that this implies a duty greater than that of good faith – that is, of a ‘quasi-trustee’. Is there such a judicial precedent or is the more likely interpretation going to rely on the context rather than on the literal interpretation of an isolated word? The leading cases on contractual interpretation would suggest that the courts would not interpret ‘trust’ in a vacuum but would provide more weight to the context: perhaps the authors could shed some light.

The use of the word of ‘trust’ in core clause 10.1 imports into the contract the legal concept of trust (as a legal device) with its concomitant fiduciary duties. This is what the words of 10.1 say: ‘The Employer, the Contractor… shall act… in… trust…’ (NEC3, 2013: core clause 10.1).

The laws of trust govern the manner in which a trustee may deal with the trust property held by the trustee for the benefit of a beneficiary. The laws of trust prohibit a trustee from utilising the trust property for their own benefit, or acquiring any gain arising from the trust property for their own benefit, or detracting in any manner from the trust property to the prejudice of the beneficiary.

A trustee’s duties exist only in respect of the trust property held by the trustee for the benefit of the beneficiary. Because the parties to the NEC do not hold trust property for the benefit of the other party, core clause 10.1 obliges the parties to act in the ‘spirit of trust’. This obliges the parties to act as if they were each holding trust property for the benefit of the other, and to comply with the legal principles underlying the law of trust. The trust property in this case is the contractual and accrued rights of the beneficiary party in terms of the contract. These rights arise directly from the undertaking of the trustee party in core clause 10.1 to act ‘as stated in this contract’. It is in respect of these rights of the beneficiary party that the trustee party is prevented by its fiduciary duties from diminishing, or changing in any manner not provided for in the contract. In so complying with its obligations, the trustee party is acting as a quasi-trustee in relation to the contractual and accrued rights of the beneficiary party.

Core clause 10.1 is the only clause in the contract that is structured as a legal obligation: ‘The Employer, the Contractor… shall act… in… trust’ (own emphasis). To construe the word ‘trust’ in this clause as a social science term is to relegate the legal obligation in clause 10.1 to mere window dressing, an expression of good intent and unenforceable. This was not the intention of Sir Michael Latham in his report Contracting the Team being the joint review of the UK government and construction industry of the procurement and contractual arrangements in UK construction (Latham, 1994). In this report, Sir Michael advocates that the wording of the then NEC core clause 1 be amended to include an obligation on the employee and contractor ‘to undertake the project in the spirit of mutual trust and co-operation’ (Latham, 1994: paragraph 5.20 (4)). The purpose being ‘to change deep rooted cultural attitudes’ present ‘in the adversarial atmosphere’ in the construction industry (Latham, 1994: paragraph 5.20 (5)). This pervading amendment was introduced into core clause 10.1 in the second edition of NEC (November 1995). Sir Michael specifically recommended the use of the word ‘trust’ in the amendment; had he intended the word ‘trust’ to mean a general duty of ‘good faith’ he would have used these exact words in his report. The term ‘good faith’ or words with equivalent meaning would have been avoided precisely because they bring with them a lot of intellectual baggage, whereas the concept of a legal trust and its concomitant fiduciary duties are legally well established and certain. Black’s Law Dictionary (5th edition) defines ‘good faith’ as ‘an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage, and an individual’s personal good faith is concept of his own mind and inner spirit and, therefore, may not conclusively be determined by his protestations alone’ (Black, 1981).

Obliging each party to work in trust with the other renders each party secure in the knowledge that the other party may not do anything to the prejudice of such party’s rights. It is only once the parties are assured of this right that they can begin acting in co-operation with each other, and can fulfill the goal of completing the project in partnership and in strict compliance with the terms of their contract.

The legal concept of trust in the NEC does not involve one party having to put the interests of the other party ahead of its own interests, but it does prohibit a party from detracting from the contractual and accrued rights of the other party as specified expressly in the contract, in the same way as a trustee is prohibited from detracting from the trust property to the prejudice of the beneficiary.

In practice, this author has come across a number of cases where the project manager, or employer, or adjudicator has held that the assessment of a compensation event must be made as at the date of the assessment (no matter how late the assessment is made), and not as at the date of the compensation event first coming into existence. This error has resulted in parties being obliged to wade through voluminous site diaries, minutes, reports and correspondence, in an attempt to establish what took place on site after the advent of the compensation event. These complex and costly investigations, which are required in other construction contracts, are obviated in the NEC.

In the NEC, the compensation event is assessed as the effect of the compensation event on ‘the forecast Defined Cost of the work not yet done’ (NEC3, 2013: core clause 63.1). This is a right that accrues to the contractor in terms of the contract, on the advent of the compensation event, and the employer must not detract from this contractor’s right.

The NEC places the contractor, with regard to a compensation event, in the same position that the contractor was when he or she first forecast what the cost of completing the entire project would be and submitted a tender. It is from this right of the contractor that core clause 10.1 prevents the employer from detracting. This example illustrates the importance of the law of trust in the structure of the NEC.

There is still uncertainty about how the courts interpret ‘good faith’ clauses (Jackson, 2014). The recent trend seems reluctant to accept that such clauses add much to what the contract expressly provides, although some court decisions do accept that clause 10.1 has an impact, most notably Northern Ireland Housing Executive v. Healthy Buildings (Ireland) Limited [2014] when looking at the time bar clause. Words like ‘trust’ are difficult to apply and courts may well be reluctant to hold they give rise to specific obligations. This author would be surprised if the English courts would find that it gave rise to a fiduciary relationship or obliged a party to act as a trustee unless there were specific words to that effect, bearing in mind the reluctance to enforce a lower good faith obligation.