In Part 1 of this article (published in the Engineers Journal on July 10, 2020), I discussed what an obligation to co-operate means and what the scope of a co-operation clause might be. Part 2 now deals with the impact an obligation to co-operate may have on an employer's other rights and obligations in a public works contract.

Review of current case law

As the law of good faith is relatively new in Irish and UK common law jurisdictions, the body of law dealing with this topic is relatively limited. However, the consensus is that an express obligation of good faith will have little or no impact on an employer's other expressed terms.

In Costain v Tarmac(1), the judge found that an expressed term of good faith was no more than a duty to co-operate. However, the court did accept that the good faith provision had the effect of preventing a party exploiting the other party.

In TSG v South Anglia(2), the courts found that an expressed obligation to act in good faith did not restrict a parties other expressed rights. The judge said that other express terms could not be fettered by an obligation to act in good faith.

In Portsmouth v Ensign(3), where an expressed obligation of good faith was found to exist, the court said it is to be read alongside other contract provisions and those other provisions will be deemed to exclude the good faith obligation where they are clear in what is required or where a different value is given to inform the nature of those other obligations(4).

However, in Healthy Buildings(5), the courts when considering the interpretation of clause 61.3 of the NEC PSC form of contract, which sets out the time bar for notified claims, suggested that consideration should be given to the overarching obligation of good faith under clause 10.1.

To unfairly time bar claims which would otherwise defeat the parties reasonable expectations may be seen as a breach of a parties obligation to act in good faith.

So, after reviewing the above case law, one might ask what would be the reason for including and expressed obligation of good faith if it has little or no effect. However, as found in Healthy Buildings(6), obligations of good faith may have an impact where an employer has to use his discretionary powers.

What impact does an ‘overarching’ obligation of good faith have on contractual discretion?

Riley(7) says that in a relational contract, the overarching obligation of good faith will assist in the interpretation of other obligations, especially those obligations which involves the exercise of some discretion.

Construction contracts could be regarded as being a relational type contract(8). Riley says that "Good Faith requires that discretions be exercised for the purposes intended by the mutual agreement of the parties, and not opportunistically or arbitrarily…"

McKendrick(9) says that an obligation of good faith will impose some different standard on a person when using its discretionary powers. First, the discretion must be exercised honestly.

Second, it must be exercised for the purpose for which it is given, and it must not be exercised improperly. Third, the discretion must not be exercised arbitrarily, and fourthly it must not be exercised unreasonably.

In a recent high court case of Mid Essex v Compass Group, (10)it was decided that if a relational contract contained an overarching obligation to act in good faith, then it could impact on how the employer used his discretionary powers. The facts of this case are as follows:

• The contract contained a mechanism which enabled deductions to be made by the employer from service payments in the event of performance failures by the contractor.
• The employer made these deductions because performance failures occurred, where for example, chocolate mousse was found out of date by one day. The total value of deductions came to £716,197 due to service failures.

The findings of the High Court were as follows:

• The contract contained an overarching good faith obligation;
• This obligation imposed a broad obligation on the employer to act reasonably in conducting the contract by not taking unreasonable actions;
• The employer's contractual entitlement to make deductions from service payment due to the contractor were regarded as discretionary;
• The court found that the way the deductions were calculated was absurd;
• This behaviour was deemed in breach of the employer's obligation to act in good faith.

Conclusion

UK law as it currently stands suggests that an ‘overarching’ obligation of good faith will have little or no impact on the parties other expressed terms which are clearly written. Irish law will likely follow its common law cousins.

However, where the expressed terms give discretionary powers to an employer, an ‘overarching’ obligation of good faith may impose a higher standard of fairness to be achieved by the employer.

This good faith obligation may oblige the employer to take into account the interests of the other party in line with the parties agreed intentions when interpreting these other provisions and when using these discretionary powers.

Irish and UK common law is regarded as being restrictive (11) when interpreting a good faith provision when compared with the remaining European civil law countries. It will, therefore, be interesting to see how the law of good faith develops in Ireland as it is now the only common law jurisdiction in the EU after Brexit.

For more information on this insight, please contact MCDR at +353 86 7816358 or email peter@mcdr.ie. More details about MCDR and the services it provides can be found on www.mcdr.ie

References

1) [2017] EWHC 319 (TCC).
2) [2013] EWHC 1151 (TCC).
3) [2015] EWHC 1969 (TCC).
4) Ibid [83] and [93].
5) Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2014] NICA 27.
6) Ibid.
7) Joellen Riley ‘Siblings but not twins: Making sense of ‘mutual trust’ and ‘good faith’ in Employment Contracts’, 36 Melb. U.L. Rev 521 [2012].
8) David Christie, ‘How can the use of “Mutual trust and cooperation’ in the NEC 3 suite of contracts help collaboration?’, [2017] ICLR, page 99.
9) Larry A Dimatteo and Martin Hogg Ewan McKendrick, Comparative Contract Law, Ch 10, [2016].
10) [2012] EWHC 781 QB
11) Leggat J in his decision in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] said that the UK legal system was swimming against the tide when it came to the law of good faith.