SHOULD YOU KEEP FAITH IN ‘GOOD FAITH’ CLAUSES?
The relevance and power of good faith agreements in today’s industry
Clauses requiring the parties to act in ‘good faith’ and in the ‘spirit of mutual trust and co-operation’ (or some variation thereof) are provisions seeking to promote smooth contract management, maintain commercial relationships and prevent disputes. These clauses are particularly relevant considering the notable industry shift towards alliancing, partnering and collaboration. However, what power do these clauses truly hold – particularly under NEC and JCT forms of construction contracts?
What is ‘good faith’?
The meaning of a good faith clause is highly dependent on the context in which it applies. One consistent feature is that a good faith obligation invokes an obligation to act with honesty. It also appears accepted that such an obligation requires the parties not to act in bad faith, i.e. it prohibits conduct that reasonable and honest people would regard as commercially unacceptable (but not necessarily dishonest). Justice Vos described an express duty of good faith as an obligation “to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties”.
The Latham Report 1994, which led to widespread industry reform, advocated for fairness to all, teamwork and a healthier atmosphere, and collaboration is a key theme of the government’s construction playbook.
Good faith obligations are particularly relevant in construction. The Latham Report 1994, which led to widespread industry reform, advocated for fairness to all, teamwork and a healthier atmosphere and collaboration is a key theme of the government’s Construction Playbook. English law does not recognise a general duty of good faith which applies to all contracts, but courts have established that an implied duty of good faith exists in relational contracts.
These are contracts said to require a ‘high degree of communication, cooperation and predictable performance based on mutual trust and confidence’. Given the nature of construction contracts, it is possible that this could apply in the construction context, though it is likely to be very dependent on the contractual arrangement. The court has described a 25-year PFI contract as a ‘paradigm example’ of such a relational contract. In any event, courts will recognise a good faith style obligation when expressly included in the contract.
Good faith in standard forms
The inclusion and application of good faith style provisions varies between NEC and JCT standard forms of construction contract.
NEC
Co-operation and collaboration have always been at the heart of NEC contracts. One of the first core clauses of the NEC4 suite requires the parties to act ‘in a spirit of mutual trust and cooperation’ and similar principles are found throughout. Although the NEC revolves around various procedures and notices, the good faith provisions fit alongside these. The NEC even includes optional clause X12 (multiparty collaboration) which links bilateral contracts together between parties on the same project, adding partnering obligations and seeking collaboration between parties to achieve the overall objective. It is clear, therefore, that ‘good faith’ principles are a cornerstone of NEC contracts and are intended to feature consistently throughout the contract.
JCT
Historically, good faith clauses remained absent from main terms of the JCT contract forms and existed instead as an optional supplemental provision for collaborative working. However, within the 2024 contract suite, the JCT has taken a different approach. A new article has been inserted to the effect that the parties are to work ‘in a co-operative and collaborative manner, in good faith and in a spirit of trust and respect’. This appears to be in response to the government’s Construction Playbook. Despite this addition, these principles are arguably less fundamental than under the NEC. There are no further notable changes within the JCT forms seeking to align the contract conditions with this new article.
It is clear, therefore, that ‘good faith’ principles are a cornerstone of NEC contracts and are intended to feature consistently throughout the contract.
More generally, JCT continues to apply a more traditional and strict drafting style, in contrast with the NEC where discussion between the parties features heavily within various processes, and drafting is less legalistic. The clauses and their impact may, therefore, differ.
Furthermore, whilst the theme of collaboration and cooperation features more clearly through the NEC, the JCT 2024’s clause does include an obligation to support collaborative behaviour and address non-collaborative behaviour. The specific ‘good faith style’ obligation here is arguably wider as a result. In both the NEC and JCT, the good faith style obligation is general in nature. It is not, for example, attached to any specific obligations. This can impact their application by the courts.
The court’s view
The court’s assessment of these general good faith obligations involves a difficult balance of encouraging co-operation whilst retaining certainty and seeking to enforce express terms. In a construction context, the JCT 2024 is too new to have been subject to judicial scrutiny. However, the good faith style obligation within the NEC has been considered.
More generally, JCT continues to apply a more traditional and strict drafting style, in contrast with the NEC where discussion between the parties features heavily within various processes, and drafting is less legalistic.
In Costain Ltd v Tarmac Holding Ltd, the court agreed with a summary that it is a form of contractual duty which requires the obliger to have regard to the interests of the obligee, while also being entitled to have regard to its own self-interest when acting and that a party’s actions must not be attempts to improperly exploit the other party.
The obligation’s practical impact in Costain meant that, at most, the defendant could not do or say anything which lulled the claimant into falsely believing that a contractual time bar was either non-operative or would not be relied on, neither of which were found in the case. The same obligation was considered briefly in Mears Ltd v Shoreline Housing Partnership Ltd. However, the court noted that this obligation to act in a spirit of mutual trust and co-operation would not prevent either party from relying on the express terms of the contract.
The Scottish case of Van Oord UK Ltd v. Dragados UK Ltd seemed to go further. Here, the Inner House stated that the clause in the NEC3 subcontract requiring the parties to act in a spirit of mutual trust and cooperation was not merely an avowal of aspiration but instead reflects and reinforces the general principle of good faith in contract.
Despite the decision in Van Oord, English courts do not appear willing for a general ‘good faith’ style obligation to stand in the way of a party relying on an express contractual right.
The effect was that the good faith obligation and clause 63.10 of the NEC3 subcontract (on which the contractor relied) were counterparts. Unless the contractor had acted in the spirit of mutual trust and cooperation, the contractor could not reduce the prices (as envisaged in clause 63.10). This Scottish case does not contain detailed analysis, but it may still be persuasive and provides an indication that this obligation could be interpreted more widely than courts have previously been willing to accept.
Relying on good faith
Whilst the courts recognise express good faith clauses, parties to construction contracts should not place undue reliance on them. Despite the decision in Van Oord, English courts do not appear willing for a general ‘good faith’ style obligation to stand in the way of a party relying on an express contractual right. This is the case even under the NEC forms, where collaboration features heavily. Parties should look instead to include clear express contract terms which reflect their intentions for the contract. Unless and until there are serious shifts in the law, including potentially on ‘relational contracts’, good faith is likely to be limited in scope.