Abstract

One of the most important recent developments in English contract law has been the increasing willingness of the English courts to imply a duty of good faith into certain commercial contracts. This recent trend is a departure from the previous English position that there is no such duty. This blog explores the origins and importance of this recent development in the context of construction-related projects and disputes.

Historic Positions in Common Law and Civil Code Jurisdictions 

Until relatively recently, a significant differentiating feature between contract law in England and civil code jurisdictions was their differing approaches to the implication of good faith obligations. 

On the one hand, the position in England was clear: in most commercial contracts, there was no implied duty of good faith (with contracts of insurance being a notable exception to that rule). On the other hand, in civil code countries (such as most continental European countries) the position was clear; there was (broadly speaking) an implied duty of good faith in most commercial contracts. 

From the perspective of the English courts, historically, the idea of an implied duty of good faith was seen as somewhat vague and woolly, and potentially contrary to the principle that the parties should be bound by the terms of their agreement (and only those terms, subject to any other recognised implied terms arising through common law or statute). From a civil code perspective, an implied duty of good faith reflected the Roman law principle that contracts rested on good faith and were enforced by good faith actions. 

Although historically there was no implied good faith obligation in most English law contracts (outside the insurance context), there are a number of common law principles that had the effect of reducing the ability of one party to a contract to act outside the spirit of an agreement. By way of example, in a construction contract, it is well-established that the parties owe each other a duty of mutual cooperation in furtherance of the aims of the contract. The archetypal expression of the duty of mutual cooperation is that an employer shall give the contractor access to site in order to complete the works. It is also well-established that a party to an agreement governed by English law is prohibited from profiting from the party’s own breach of contract. Further, a range of well-established equitable remedies are available in English law (that is, remedies that are within the prerogative of the court, and which, subject to rules carefully defined in case law, protect one party against the other’s unconscionable conduct).

The Practical Importance of Good Faith Obligations 

It remains the case, however, that a contractual good faith obligation does add something to a construction contract that is not necessarily available through the application of other legal principles. This is important in practice for a number of reasons, key amongst them the fact that a good faith obligation has the potential to colour the way in which a tribunal views a dispute. In particular, experience suggests that an advocate may seek to rely on a good faith obligation in order to encourage a tribunal to construe a contract purposively (that is, to give effect to its underpinning purpose) rather than to take a purely black letter law approach focusing solely on the express contractual terms. 

The fact that a good faith obligation in a construction contract must be intended to add something to the parties’ substantive obligations, as opposed to being mere fluff, is demonstrated by the way in which the English courts have addressed express obligations of this kind in the NEC suite of standard form construction contracts. The NEC3 suite was launched in 2005 and has been used in England and internationally on a variety of projects, which in England often involve government agencies or state-related contracts (notably the construction contracts for the London 2012 Olympics and the extension of the London underground railway). The updated NEC4 suite was introduced in 2017. Clause 10.1 ofNEC3 provides:  “the [parties] shall act as stated in this contract and in a spirit of mutual trust and cooperation.”; similar wording is included at Clauses 10.1 and 10.2 of the NEC4 suite.  

Clause 10.1 of the NEC3 suite was considered by the English High Court inCostain Ltd v. Tarmac Holdings Ltd. [2017] EWHC 319 (TCC). In that case, Tarmac supplied concrete to Costain pursuant to contracts in the NEC3 suite. Costain started court proceedings against Tarmac because of alleged defects in the concrete. Tarmac then applied to stay the court proceedings on the grounds that there was an arbitration clause which required notice of a dispute to be given within a defined period (which Costain had missed). Costain argued that Tarmac was in breach of Clause 10.1 of the NEC3 suite because Tarmac had failed to flag the time bar element of the clause to Costain. Although the court rejected Costain’s argument that there was an overarching duty for Tarmac to actively stress the time bar to Costain, the court did accept (at paragraph 124) that Tarmac “could not do or say anything which lulled [Costain] into falsely believing that the time bar….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 [Tarmac] to correct a false assumption obviously being made by [Costain], either that…[the time bar clause]…was not going to be operated or that the time bar provision was not going to be relied on.” 

Although the judge inCostain was at pains to stress the limited nature of the good faith obligation in that case, it is clear that he felt that the contractual term in question was intended to add something substantive to the agreement and was not merely an empty expression of good intentions. 

Depending on the circumstances, it is commonly the case that one side to a dispute involving a construction contract will see a potential advantage if good faith obligations are held to be at play. However, the NEC suite that was the subject matter ofCostain is somewhat unusual among standard forms in providing for an express term of “mutual trust and cooperation”. Parties attracted by good-faith arguments therefore often attempt to argue that there is an implied obligation of good faith, notwithstanding the lack of an express term.

Recent English Developments on Implied Good Faith Obligations 

The argument that English law construction contracts are subject to implied good faith obligations takes its inspiration from a line of relatively recent authority, which holds that certain long-term contracts reliant on mutual cooperation require good faith obligations to be implied into them in order to give effect to the parties’ intentions. 

A key modern case in this regard is the English High Court case ofYam Seng v. International Trade Corp Ltd [2013] EWHC 111 (QB). In that case, which concerned a long-term distribution agreement, Leggatt J (as he then was) held that certain types of contract (so-called “relational contracts”) should be seen as a special category of agreement giving rise to an implied duty of good faith. Leggatt J characterised such “relational contracts” as requiring “a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.” 

Further guidance as to the meaning of a ‘relational contract’ was given in a more recent English High Court case,Bates v. Post Office [2019] EWHC 606 (QB), which concerned long-term contracts between the UK Post Office and its postmasters. The court held that those long-term contracts were “relational” contracts and that the right to terminate them was therefore governed by implied obligations of good faith.Bates is especially important from a construction law perspective because the presiding judge, Fraser J, is the judge in charge of the specialist English court dealing with construction and engineering disputes (the Technology and Construction Court). 

InBates, Fraser J formulated the following non-exhaustive list of characteristics that are relevant to determining whether a contract is a “relational” one or not, and therefore subject to an implied obligation of good faith (at paragraph 725 of the judgment): 

1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.

2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.

3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.

4. The parties will be committed to collaborating with one another in the performance of the contract.

5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.

6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.

7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.

8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.

9. Exclusivity of the relationship may also be present. 

Many of theBates characteristics set out above are common features of contracts for construction projects. This is especially true of major construction projects, which often span a period of months or years and require a significant degree of cooperation and interaction between the parties. This suggests that in construction disputes involving English law contracts, an increasingly common point that will be fought over will be whether there is an implied duty of good faith, and, if so, its scope. 

From a non-contentious construction lawyer’s perspective, point 1 of Fraser J’s list inBates set out above gives rise to the possibility that the parties to a construction contract may seek in express terms to exclude the implication of a duty of good faith. Whilst that is potentially a neat way of dealing with the issue, it can be foreseen that such an approach is capable of striking the wrong note at the outset of the contractual relationship and may therefore be unattractive. In light of those difficulties, if there is an attempt to address the issue through broader and less-targeted drafting that deals with implied terms more generally, then care must be taken to avoid unintended consequences (such as excluding the longer established implied term of mutual cooperation discussed above).

Future Developments 

It should be stressed that the recent developments in English law with regard to the implied duty of good faith have yet to be considered in detail at the appellate level in the English courts. Further, whilstYam Seng,Bates and similar cases have found that the implied duty of good faith has arisen on the facts of those cases, there have been a number of other English High Court decisions that have been unwilling to find such a duty on the particular facts of the cases in question. By way of example, inTAQA Bratani Limited & others v. Rockrose [2020] EWHC 58 (Comm), the High Court held that just because a contract is defined as a “relational” one, does not mean that the parties will automatically owe each other an implied duty to act in good faith. The contract inTAQA Bratani was a long-term joint operating agreement for an oil field, and the court held that the express terms of that contract dealing with termination left no room for the implication of a defined term of good faith. 

The relatively recent development of the law in this area and the paucity of appellate authority means that there is considerable room for argument on the specific facts of any particular case as to whether good faith obligations are engaged, and, if so, what the effect of those obligations are in practice. 

This is important because it means that lawyers advising on English law contracts are finding it more difficult than was previously the case to advise with certainty as to the terms that can be implied into the contract and how the other terms of the contract would be construed by a tribunal. This is particularly problematic given that English law takes pride in providing certainty as the meaning and enforceability of contractual terms. 

It remains to be seen how the English appellate courts will address these issues. As discussed above, the implication of good faith obligations stands in stark contrast to the previous English position. Further, the implication of such a term arguably stands in opposition to the general approach that English law takes to the implication of defined terms, which is that a term shall only be implied if a reasonable reader of the contract at the time it was made would consider the term “so obvious as to go without saying or to be necessary for business efficacy.”:Marks and Spencer plc v. BNP Paribas [2015] UKSC 72. It is arguable that squaring this fairly restrictive approach to the implication of terms with current trends towards the implication of good faith obligations is difficult. 

It therefore remains to be seen what the future holds for the development of English law in this area. An important feature of that future development is that the UK Supreme Court has (since 2020) included amongst its members Lord Leggatt, the judge who earlier in his career heard theYam Seng case discussed above. The legal community therefore anticipates that there may be important guidance from the UK Supreme Court in relation to these issues in the coming years, should a suitable case present itself.

About the Authors

Mr. Gautam Bhattacharyya is a Partner at Reed Smith LLP. He is a member of Reed Smith’s global board, its Executive Committee, and is the former managing partner of Reed Smith’s Singapore office. He also chairs Reed Smith’s India Business Team. 

Mr. Liam Hart is a Senior Associate at Reed Smith LLP.

Editorial Team

Managing Editor: Naman Anand

Editor in Chief: Aakaansha Arya and Akanksha Goel

Senior Editor: Nutan Keswani

Associate Editor: Hamna Viriyam

Junior Editor: Deepa Shrisha

Preferred Method of Citation

Gautam Bhattacharyya and Liam Hart “Good Faith Provisions in English Law Construction Contracts – Recent Developments” (26 October, 2021)

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