Good Faith in Construction Contracts

Good Faith in Construction Contracts

Introduction

For many countries, the concept of good faith constitutes a key component of their civil code. For instance, to the European Court of Justice, good faith constitutes a “principle of civil law”, while the French Civil Code incorporates good faith provisions in its contract implementation. English law is, however, governed by a common law system as opposed to a civil code. Accordingly, the position of the principle of good faith relies on precedent and is thus less clear. The issue of good faith has come under scrutiny in recent years going on the recent case laws such as Mears Ltd v Shoreline and Portsmouth City Council v Ensign Highway, among others. The essay endeavours to use these and other relevant case laws to illustrate the court's reluctance to apply to express good faith provisions. 

            There is also no generally accepted definition of "good faith" in English law as it relates to performing contracts as the elements of a duty of good faith are largely dependent on its context. However, the courts have given varied interpretations such as acting in keeping with the terms of the contract, being faithful to a generally agreed purpose, and acting in line with the expectations of parties under the contract.  

            English law, unlike other jurisdictions such as France, Australia, and the United States, has failed to acknowledge the principle of good faith as it relates to contracting parties. In these other jurisdictions, the law acknowledges an overriding principle that contracting parties ought to exercise good faith in their actions. The position of the English courts depends in part on concerns that a decision on what constitutes the actual obligation is likely to be subjective and vague.

Modern case law as it relates to the construction of contracts acknowledges that when parties enter into a contract, they do so based on an unspecific common understanding of matters of fact that the parties are knowledgeable about, as well as shared norms and values, such as honesty.  The parties bound by a contract, therefore, take such understandings for granted, as opposed to having these spelled out in the contract.

            Whereas contracting parties in jurisdictions governed by a Civil Code have an obligation to 'act in good faith' English law implies a 'duty of good faith' to contracting parties in its jurisdiction. From a historical context, however, the principle of 'good faith' has not found application in contracts under English law. This was acknowledged by the High Court in its judgement on Interfoto v Stilleto: 'English law has, characteristically, committed itself to no overriding principle [of good faith] but has developed piecemeal solutions in response to demonstrable problems'. Since that judgement, however, various cases have depended on implied duties of good faith, though the court has failed to acknowledge the general duties implied.

            Mid Essex Hospital v Compass Group was one such instance where the Court needed to mull over the principle of 'good faith'. In its ruling, the High Court held that the Contractor and the Trust should exercise good faith, cooperate and assume reasonable action as required to enable both parties to benefit fully from the contract. However, this decision was overturned by the Court of Appeal which while finding the payments demanded to be excessive and establishing the validity of the good faith clause, also noted that the obligation did not hinder the working of the payment mechanism and that the obligation did not encompass all the conduct that the contract specified. Rather, the judgement indicated that the obligation entailed honesty and cooperation in order to realise the two stated purposes. The Court of Appeal thus ruled in favour of the NHS Trust based on the argument that the original decision by the High Court hinged on a broad application of the good faith clause, even though the contract had just expressly stated the obligation in express terms.

            The decision in Mears v Shoreline offers additional useful guidance on the principle of 'good faith' as it relates to construction contracts. The dispute involved repair and maintenance work that Mears had been contracted to do by Shoreline under the NEC3 Term Service Contract. Both parties deviated from the stipulated pricing mechanism of the contract. Thereafter, Shoreline was concerned about an overpayment amounting to £300,522.03 and deducted the money from the amount owed to the contractor. The contractor was opposed to the deductions and hence initiated legal proceedings, terming the action as estoppel, a misrepresentation, and a contravention of TSC (Term Service Contract) clause 10.1.

             Judge Akenhead ruled that there was estoppel both by representation and convention and as such, Shoreline could not hold back the deduction. Nonetheless, the court was opposed to the position held by the contractor that neither party to the contract could change their legal relationships through their conduct as spelled out by clause (12.4). However, clause 10.1 requires parties to a contract to demonstrate cooperation and trust, but this should not hinder either party from revoking an express contractual term that both parties had willingly entered into. This case has implications for construction contracts to the effect that in case parties to a contract willingly deviate from the contractual mechanisms for a definite duration of time, the courts will not hesitate to apply the alternative approach by interpreting it as having been established in the contract.

            Elsewhere in Portsmouth City Council v Ensign Highways Ltd, the court held that the council was under no overriding obligation to exercise good faith while granting service points. However, the contract which both the council and Ensign had entered into contained an implied term that required PCC to exercise honesty in its actions, as opposed to acting in an irrational, capricious, or arbitrary manner. PCC had entered into a PFI contract with Ensign in which the contractors would undertake maintenance work of PCC's road network. The contract stipulated that in case Ensing contravened its contractual obligations, PCC would be completed to award service points. The contract also contained a provision that compelled the parties to cooperate, and act in good faith and in a fair manner with each other. PCC experienced funding cuts from the central government and the contract became unaffordable. This compelled PCC to pursue financial concession from Ensing, in addition to granting maximum service points for defaults made by the contractor.

            Ensing was opposed to the deductions as they contravened the terms of the contract. Experts established that PCC had not exercised mutual cooperation, and had acted unfairly and in bad faith. This compelled PCC to seek court declarations regarding how it had handled its contractual obligations. In its ruling, the court established that while PCC did not have a principle obligation to act in good faith, there was an implied term to the contract that required PCC to act honestly, and not to act in an irrational, capricious, or arbitrary manner.

Conclusion

            Commercial contracts contain the 'good faith' clause as a generally implied term. However, construction contracts frequently contain express terms to the contract that requires parties to the contract to exercise cooperation, collaboration, honesty, and mutual trust in executing the contract. Where disputes have arisen, the courts have shown a reluctance to initiate a wide interpretation of the “good faith” obligations. There is a need therefore for parties to a contract to ensure they expressly identify their expectations in the contract. Parties should further exercise caution in their dependence on the duty of confidence and mutual trust as a yardstick with which to change the contractual terms via conduct.

Bibliography

Books

Adriaanse, John, Construction Contract (Palgrave Macmillan 2016)34.

Bailey, Julian, Construction Law (CRC Press 2016)185.

ter Haar Roger, Laney Anna and Levine Marshall, Construction Insurance and UK Construction Contracts (CRC Press 2016)394.

Chappell David, Construction Contracts: Questions and Answers (Routledge 2015)27.

Case Laws

Interfoto Picture Library v Stilletto [1989] QB 433.

Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC)

Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200

Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC)

Online Articles

Birketts,' Cornerstone: Estoppel and good faith in construction contracts: Stick to the contract, or face the consequences' (2017)

British Institute of Facilities Management,’ Getting Started with the NEC3' (2015) 

Patterson, Richard and MacDonald, Molt, 'Using NEC Contracts to Manage Risk and Avoid Disputes' (2012)

Scott, Paul,' Good faith revisited' (2014)