In a recent update, we highlighted the forthcoming launch of the NEC4 suite of contracts. However, until its introduction, projects will continue to be let and governed by the NEC3 suite of standard contracts.
The recent judgment in Costain Limited (“Costain”) v Tarmac Holdings Limited (“Tarmac”) [2017] has provided a welcomed insight as to the scope and obligations the mutual trust and co-operation clause imposes upon parties.
Clause 10.1 states that the parties “shall act as stated in this contract and in a spirit of mutual trust and co-operation”.
The Contract
Pursuant to a sub-contract agreement, Costain engaged Tarmac to supply concrete for work to be carried out on the M1 motorway. The parties’ contract incorporated the NEC Framework Contract (2005) as amended by the Framework Contract Z Conditions (“Framework Contract”) and the NEC3 Supply Short Contract (“Supply Short Contract”).
The Supply Short Contract dispute resolution clause provided for adjudication (followed by arbitration). This was conditional on the basis that any referral to adjudication had to take place within four weeks of the referring party becoming aware of the grounds for dispute. If this was not carried out then the right to adjudicate would be lost. On the other hand, the Framework Contract permitted adjudication “at any time”.
The conditions of contract included the mutual trust and co-operation clause 10.1.
The Dispute
Whilst it was common ground between the parties that the concrete was defective a dispute arose concerning the scope of the remedial works. After an exchange of correspondence and a period of more than four weeks having elapsed, Costain referred the question of whether the time bar applied to adjudication. The Adjudicator held that it did and as a result, Costain issued proceedings claiming damages of £5.8 million.
Amongst other issues the court specifically analysed whether clause 10.1 required Tarmac to bring to Costain’s attention the effect of the time bar to adjudication which was inimical to Costain’s claim.
The Decision
On the facts, the court held that it did not. In reaching its decision, the court accepted that there was a parallel between the second limb of the clause and good faith obligations. The following summary provided in F & C Alternative Investments (Holdings) Limited v Barthelemy (Nos. 2 and 3) [2011] was approved:
“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.”
In addition, the court approved a passage in Keating on NEC3, which permits the parties to “maintain their legitimate commercial interests” but not “so that their words and deeds [are] attempts to improperly exploit” the other party. That said, however, the court was reluctant to agree with Keating’s further suggestion that there was a “more general obligation to act fairly”. The court stated that such an obligation could be too subjective and extremely difficult to apply in practice.
Comments
The decision provides clarity that even at its highest, the mutual trust and co-operation clause does not extend a parties obligation to act against its own self-interest. Although, it should be borne in mind that it does suggest that parties should not seek to “improperly exploit” the other party or take advantage of another’s false assumption for its own benefit. That said, however, it will remain to be seen in practice as to how far a party to a contract will be required to go in ascertaining another parties understanding in order to meet its obligations under this clause.
In addition, this decision acts as a stark reminder for parties to be aware of the importance of abiding by timescales set out in contracts.
