What does the duty to act “in the spirit of mutual trust and co-operation” really mean?

In Costain v Tarmac, the TCC set out useful guidance on the application of the duty of good faith and clause 10.1 of the NEC3 conditions.

The court found that Costain had not made out its case on estoppel in relation to Tarmac’s limitation defence, but it went on discuss whether the existence of a mutual trust and cooperation obligation (which the court likened to an express duty of good faith) affected that assessment. In this case on the facts it did not, but it shows that the court will consider such duties.

The judgment is of interest because although NEC3 is one of the most prevalent forms of contract in the construction industry (particularly as far as government infrastructure projects are concerned), there has been relatively little case law showing how the courts will apply the duty to act “in the spirit of mutual trust and co-operation” and/or express obligations of good faith generally.

Costain v Tarmac

Costain instructed Tarmac to supply concrete for a vehicle restraint system on the M1 pursuant to a sub-contract. The sub-contract incorporated the NEC3 Framework Contract Conditions (NEC3 FC) (which governed the seeking of quotations) and the NEC3 Supply Short Contract Conditions (NEC3 SST) (which governed the supply of concrete).

The two contracts had different dispute resolution provisions:

• The framework agreement said that the parties could adjudicate at any time.
• The supply contract contained a stricter dispute resolution provision. It included an adjudication provision with a restricted timetable and a time bar, and a second stage arbitration provision (clause 93).

Both sets of contract conditions included the usual NEC3 duty to “act in the spirit of mutual trust and co-operation” at clause 10.1.

The parties’ dispute

When Costain issued proceedings in the TCC seeking damages of £5.8 million, Tarmac applied for a stay under section 9 (1) Arbitration Act 1996 on the basis that there was an arbitration agreement and the appropriate tribunal was arbitration. It argued that clause 93 applied to the dispute because it related to the supply of concrete under the supply contract. Accordingly, it said that Costain was out of time to bring a claim as it had not been referred to adjudication in time.

In response, Costain raised various arguments, including that the arbitration agreement was “inoperative” such that the court should not stay the proceedings (under section 9(4)). Part of this argument was that Tarmac was estopped from relying on the time bar provision.

What did the court decide?

Tarmac’s application was successful and the proceedings were stayed. Giving judgment, Coulson J found that the arbitration agreement was not inoperative and the existence of the mutual trust and cooperation obligation did not alter that. Therefore, Costain was out of time to bring a claim.

One of the strands of Costain’s argument that the arbitration agreement was inoperative was that Tarmac had a duty to speak out in relation to its intention to rely on the limitation provision in clause 93, rather than stay silent and rely on it. It said that Tarmac’s conduct meant that it was estopped from relying on that limitation defence.

The judge considered the authority concerning the circumstances in which there may be a duty to speak out and it agreed with the following commentary:

“… the parties are not expected to ‘nursemaid’ their opponents, at least where they are well used to commercial litigation, otherwise the client might well ask which side his lawyer is on. It is therefore submitted that the application of the duty to speak, to parties in legal proceedings, in Pacol and the Stolt Loyalty was exceptional and triggered only by their special facts. Alternatively, it is submitted that the duty will be imposed only where one party has been guilty of sharp practice in the conduct of the litigation.”

Tarmac relied on two limitation cases in support of its argument that it should not be estopped from relying on a limitation defence. One of these was Fortisbank SA v Trenswick, where the court held that the claimant must establish the following to demonstrate waiver or estoppel in a limitation case:

• A “clear, unequivocal, unambiguous and unconditional promise by the insurers that they will not raise the defence… The focus has to be on whether or not they were giving up that right”.
• That the conduct is not equivocal (silence and inaction are equivocal).
• That, objectively viewed, the representation or promise was a promise not to raise a limitation defence.
• That it altered its position to its detriment.

In Costain, the judge found that:

• There was no representation that the parties would not arbitrate or that Tarmac would not rely on its rights in relation to the time bar clause in clause 93. Therefore, Costain had not made out that essential element needed to establish estoppel.
• Tarmac did nothing wrong, underhand or unfair, and so there was no “sharp practice” (which the court noted may be sufficient to defeat the estoppel argument on its own).
• Costain’s solicitors had not known about the mandatory nature of the time bar in clause 93 as they had (wrongly) assumed that the supply contract was a construction contract that carried a statutory right to adjudicate “at any time“. Thus, they would not have known that Tarmac had a right to give up and could not have accepted the withdrawal of abandonment of it, either by way of a representation or a common assumption.
• Even if he was wrong on these points, Costain suffered no detriment as a result of any representation or common assumption. Costain’s solicitors knew before expiry of the time bar of the requirements of clause 93.

What is good faith and what does it mean in practice?

In his judgment, Coulson J drew a parallel between “mutual trust and cooperation” and obligations of “good faith” and went on to consider whether the duty of good faith and the existence of clause 10.1 made any difference to his analysis of estoppel.

He turned to Keating on NEC3 for guidance on what a duty of good faith is. It says that a good faith obligation is one:

“… to have regard to the legitimate interests of both parties in the enjoyment of the fruits of the contract as delineated by its terms.”

Keating on NEC3 goes on to say that the authorities suggest that a mutual trust and cooperation obligation will mean that parties must act in a way which is:

“… honest, fair and reasonable, and not attempt to improperly exploit the other.”

The judge agreed that such a duty would mean that a party is prevented from improperly exploiting the other party. However, he said that he was:

“… uneasy about a more general obligation to act ‘fairly’; that is a difficult obligation to police because it is so subjective.”

He went on to conclude that if he took the obligation “at its highest”, this meant that:

“… the defendant could not do or say anything which lulled the claimant into falsely believing that the time bar in clause 93 was either non-operative or would not be relied on in this case. For this purpose, I am also prepared to accept that this obligation would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied on. But beyond that, on any view of clause 10.1, there can have been no further obligation, because otherwise the provision would have required the defendant to put aside its own self-interest…

In the present case, I find that the defendant did and said nothing about clause 93 which was or could have been misleading… There was therefore no reason for the defendant to believe that the claimant was making any false assumption at all…

Accordingly I reject the suggestion that, on the facts of this case, the obligation in clause 10.1 can somehow turn an otherwise unsuccessful assertion of estoppel (either by representation or by convention) into a successful one.”

This indicates that substantiating a breach of a mutual trust and cooperation or good faith obligation will likely be easier than demonstrating an estoppel without such a provision. Indeed, in Costain, the court suggested that, where there is such a duty, a defendant may have to take positive steps to correct another party’s misunderstanding of a particular state of affairs (which it would otherwise not have to do absent that duty).

Practice points

As we said at the start, NEC3 is one of the most prevalent forms of contract in the construction industry, particularly as far as government infrastructure projects are concerned. Despite that, there has been relatively little case law showing how the courts will apply the NEC3 duty to act “in the spirit of mutual trust and co-operation” and/or express obligations of good faith generally.

While in Costain, the existence of clause 10.1 did not ultimately alter the court’s assessment of the claim, it demonstrates that express good faith / mutual trust and cooperation provisions (which the court appears to treat the same) are not toothless and will be given considered.

During the life of a project, it will be important for parties to consider carefully whether an obligation of good faith or mutual trust and cooperation imposes a positive obligation on them to act in a way that they otherwise would not have to (in particular, they should be careful to avoid “sharp practice”). Likewise, when it comes to disputes, careful consideration will need to be given as to whether such an obligation will change a party’s prospects of succeeding in its claim.

This article was first published on Practical Law’s Construction Blog, here.