You've got to have faith

You've got to have faith

Brexit update - where are we now?

The UK and the EU have recently been at loggerheads, each accusing the other of breaching good faith clauses in the Brexit Withdrawal Agreement. In short, the EU claims the UK is in breach by introducing the Internal Market Bill, which undermines its obligations under the Northern Ireland Protocol, and has started the dispute resolution process by sending a letter of formal notice. The UK, in its turn, claims the EU is in breach by imposing restrictions as a prerequisite to even a basic free trade agreement, which it did not require for other countries.

While a headline-worthy fallout, the dispute should also serve as an important reminder to all companies that "good faith" should be properly understood before entering into a contract. What, therefore, should the world of construction learn from this ordeal to save businesses the pain of a good faith stand-off? 

What is a good faith clause?

A good faith clause is used where a close degree of co-operation is required for the contract to be successfully performed. However, it is difficult to set out all the ways the parties must act or not act in relation to all the terms. A duty of good faith is intended to catch any conduct that goes against the bargain made by the parties, and to encourage the parties to act in a fair and honest way.

Standard form contracts

A number of the standard form construction contracts include express provisions that set out how the parties are expected to behave. For example, clause 10.1 in the NEC form of contract requires the parties to act in a "spirit of mutual trust and co-operation". The JCT Standard Form has an optional provision at Schedule 8 for "collaborative working", which provides that the parties will "work with each other and with other project team members in a co-operative and collaborative manner, in good faith and in a spirit of trust and respect." 

While such sentiment is laudable, such clauses have had limited judicial scrutiny and the nature of the somewhat imprecise language means there is considerable uncertainty as to how they may be applied. Similar "aspirational" wording is found in partnering contracts, with the parties required to work towards common goals and benefits. Such obligations are perceived as having little contractual force, and it is felt that such express terms go no further than the general obligation to co-operate, which is implied into construction contracts. 

Significantly, any overarching duty will not automatically apply to all obligations in a contract. For example, the duty to act in good faith would not generally extend to an express term permitting termination on notice. 

An implied duty?

In the absence of an express obligation, an universal duty to act in good faith will generally not be implied into a construction contract. The exception is where there is a "relational" contract. It is not entirely clear what a relational contract is, but in Sheikh Al Nehayan v Kent [2018] EWHC 333 ((Comm)) Lord Justice Leggatt said it is one where: 

"the parties are committed to collaborating with each other, typically on a long-term basis, in ways which respect the spirit and objectives of their venture but which they have not tried to specify, and which it may be impossible to specify, exhaustively in a written contract". 

Generally, such contracts will be long-term, involving a high degree of communication, co-operation and predictable performance and possibly involve a degree of investment by one or both parties in the venture. A PFI contract has been considered a "paradigm example" of a relational contract and similarly the implied duty could extend to some joint venture agreements and other operation and maintenance contracts, depending on the precise terms. However, a general duty will not be implied if it is contrary to an express term, or where there is a carefully negotiated contract between two sophisticated parties and each contract has to be considered on its particular facts.

Difficulties in interpretation

The good faith duty is not easy to define. However, again in Sheikh Al Nehayan, Leggatt LJ summarised it as: 

"an obligation to act honestly and with fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained". 

He caveated it by saying the obligation of fair dealing was not a demanding one and did no more than require a party to refrain from conduct, which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people. 

Looking at caselaw, the duty appears not to vary with the words used (whether "utmost good faith", or "absolute faith" or so on). However, it does depend on the wording of the whole clause, and the commercial context in which it is drafted. This means how a good faith clause will be interpreted will vary from case to case, so it is hard to say what actions may constitute a breach of good faith. 

There is however some useful guidance to be drawn from the caselaw, as courts will look at what the good faith duty is expressed to apply to (limiting its effect to that extent only) and a general term requiring the parties to act in good faith will not be interpreted to cover the same ground as other, more specific provisions or to cut across them. This means that the exercise of termination or any other explicit rights set out in the contract will not be a breach of good faith.

In addition, good faith obligations do not mean that a party needs to give up a freely negotiated financial advantage clearly embedded in the contract, and will not be taken to create new obligations that would otherwise need to be the subject of a new express term. Finally, a clause requiring the parties to act in good faith does not create a duty to prefer the interests of the other contracting party, rather to "recognise and to have due regard to the legitimate interests of both parties in the enjoyment of the contract". 

Clearly, a duty to act in good faith does not mean that a party to a construction contract has to put aside its own self-interest when operating the contract. This was specifically considered in Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC) where it was argued that Tarmac was in breach of the obligation to act "in a spirit of mutual trust and co-operation" for failing to point out to Costain that it was going to be time barred for bringing a claim in adjudication. The court found that the obligation "would go further than the negative obligation not to do or say anything that might mislead" and would extend to a positive obligation to correct a false assumption that the time bar provision would not be relied on. However, the obligation did not go beyond that, otherwise this would effectively require a party to act against its own interests, which was a step too far. 

Navigating the good faith minefield

Because of the uncertainties involved with good faith clauses, it is always best to avoid them and instead to set out in the contract what actions are required or not permitted. However, while the principles in the NEC and JCT forms may lack contractual "teeth", on a purely commercial basis the inclusion of such wording may (with the right parties) be a factor that can contribute to a positive outcome for a project.

If a good faith clause is wanted - because it would be too impractical to cover off all the actions that would otherwise need to be set out (or there is a concern that some may be missed) - then, to reduce the uncertainty, you can limit the effect of good faith obligations to particular clauses rather than the whole contract. 

If you are concerned that your contract might be found to be a relational contract and that the court may imply a good faith duty, you can include a term that no duty of good faith applies to the contract. However, this is unlikely to go down well with the other party and will require close co-operation and may indeed deprive you of a potential remedy. An alternative is again to include good faith terms in relation to certain clauses only, as the courts will not then imply a good faith obligation in relation to other clauses in the contract. 

First published in Estates Gazette

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