When duty calls: Costain provides further guidance on good faith

Costain Limited v Tarmac Holding Limited [28.02.17]

Parties to a contract must first of all act within its rules, and, secondly, within the ‘spirit’ of those rules where there is a duty of good faith. Whilst the parties must not ‘game the system’ or improperly exploit the position, this does not prevent them from acting in their own interests.

Background

Culturally, the concept of good faith, which is crucial to the general operation of the NEC standard forms of contract, is alien to English common law. This case is timely guidance on the extent of the duty of good faith in an NEC standard form, especially for contractors and professionals (and their insurers).

The NEC form of contract has been favoured over the JCT suite of contracts for a number of years. It is now the pre-dominant standard form in public sector contracts.
Framework agreements allow public sector bodies to comply with EU procurement rules. Costain was appointed to The Department for Transport’s Framework Contract for public transport projects. Tarmac was appointed to a similar framework agreement in respect of the supply of concrete.

The government engaged Costain to design a concrete crash barrier on the M1. Costain procured the supply of concrete from Tarmac. Each “call-off” under the government’s Framework Contract incorporated both the terms and conditions for the NEC Framework Contract (the Framework) and the NEC Supply (Short) Contract (the Supply Contract) (together the Framework and the Supply Contract being the Sub-Contract).

The barrier was defective. The parties agreed that this was caused by sub-standard concrete supplied by Tarmac, but they disagreed on the scope of the repair works. The Framework and the Supply Contract each contained separate dispute resolution clauses.

Conflicting dispute resolution clauses

Clause 93.3(1) of the Supply Contract required:

  •  A dispute to be notified to the other party within four weeks of becoming aware of it.
  • Thereafter, a dispute to be referred to an adjudicator within four weeks.

If the parties were unsatisfied with the adjudicator’s decision, the Supply Contract required the parties to arbitrate. If a party failed to comply with the timescales, the right to refer the dispute to adjudication or arbitration was lost (the Time Bar).

In contrast, the Framework allowed a dispute to be referred to adjudication “at any time”. It contained no arbitration requirement and it did not include the Time Bar.
As is common in NEC standard forms, clause 10 of the Supply Contract, provided that “… [the parties] … shall act as stated in this contract and in the spirit of mutual trust and co-operation”. This is widely construed in the industry as a duty of good faith.

The arguments

During the pre-action exchanges, Tarmac contended Costain had failed to comply with the Time Bar. Costain, which had the benefit of legal advice, argued that:

  • The Time Bar did not apply because the Framework allowed the parties to adjudicate, arbitrate or to litigate; or
  • To the extent that it did apply:
  • Tarmac was estopped from relying on the Time Bar because its lawyers impliedly represented that Tarmac wished to litigate.
  • In circumstances where Tarmac had not agreed a form of dispute resolution, the overarching duty of “good faith” prevented it from relying on the Time Bar.

Tarmac referred the dispute concerning the interpretation of the Sub-Contract to adjudication. The adjudicator found for Tarmac and held that the dispute in respect of the cost of repairs to the barrier was time-barred. Costain commenced proceedings in the Technology and Construction Court for damages. Tarmac applied to stay the court proceedings on the basis that the Supply Contract required the parties to arbitrate – in effect, preventing Costain’s claim for damages.

His Honour Mr Justice Coulson was asked to make a finding on a number of issues, including:

  • The construction of the dispute resolution clauses in the Sub-Contract.
  • Costain’s argument that Tarmac was estopped from relying on the Time Bar.
  • The operation of clause 10 requiring “mutual trust and co-operation”.

The decision

Mr Justice Coulson dismissed Costain’s contention that the Sub-Contract allowed the parties to adjudicate, arbitrate or to litigate. He found that the parties had expressly agreed to include both the Framework and the Supply Contract in the Sub-Contract, which gave rise to divisible obligations. The Framework applied to the parties’ wider dealings, whilst the Supply Contract dealt with the quality of the concrete.

The judge upheld the construction and applicability of the dispute resolution clause, including the time bar, in clause 93(1) of the Supply Contract. He concluded that it reflected the commercial intentions of the parties to have two mutually exclusive procedures for determining disputes. He also rejected Costain’s estoppel arguments.

The judge agreed with academic analysis that clause 10 equated to an obligation of good faith (see paragraph 2-004 - Keating on NEC3 (First Edition 2012). He noted that Tarmac’s lawyers had been silent on the Time Bar, but that this was not “sharp practice” or a breach of clause 10.

He approved comments in a leading Australian case that:

  • What constitutes good faith will depend on the circumstances.
  • Good faith does not require parties to put aside self-interest or give rise to fiduciary duties.
  • Normal business behaviour is permitted, but the court will have to evaluate whether the party has acted unconscionably or capriciously. This may require the court to consider motive.
  • The duty of good faith requires parties to have “regard to the legitimate interests of both parties in the enjoyment of the fruits of the contract as delineated by its terms” (Automasters Australia PTY Limited v Bruness PTY Limited [2002]).

The rejection of Costain’s arguments allowed Tarmac to rely on the Time Bar and to defeat the substantial claim for damages.

Comment

The judgment reinforces that the parties to a contract must first of all act within its rules, and, secondly, within the ‘spirit’ of those rules where there is a duty of good faith. Whilst the parties must not ‘game the system’ or improperly exploit the position, this does not prevent them from acting in their own interests.

In this case, the judge’s perception of Tarmac’s conduct was important. The decision helpfully clarifies that a tactical silence on limitation does not equate to bad faith.

This is a complex and developing area of law. Parties that encounter issues on site may benefit from taking early legal advice where issues arise under the NEC form of contract. Insurers may see the financial benefit of early intervention.

Read other items in Professions and Financial Lines Brief - May 2017

Read other items in the London Market Brief - June 2017