Fussed about Trust? – A Brief Guide to Good Faith and NEC Clause 10

Fussed about Trust?

A Brief Guide to Good Faith and NEC Clause 10

Fussed about Trust? - A Brief Guide to Good Faith and NEC Clause 10

Author: Eugene Lenehan

February 2022


The relationship among members of a construction project team is as important as it is unpredictable, with every stage of a project providing abundant opportunity for misunderstanding and frustration. Studies have found that a low level of trust between clients and contractors leads to poor performance. All parties know it is beneficial to have a strong working relationship, but when problems occur, they are all too often met with adversarial finger pointing and a blame game.

So, what can be done to improve the relationship? Can the underlying contract help to build trust and avoid disputes?

Unlike most commercial contracts, standard forms of construction contract often include clauses that require the parties to act in good faith and/or in a spirit of trust and co-operation.

The NEC suite of contracts was the first standard form of construction contracts to include an obligation to act in a spirit of trust. This is the first clause of each NEC contract, generally clause 10. There has been uncertainty as to its precise effect. Although parties often do no more than pay lip service to such clauses, the courts are making it increasingly clear that a failure to comply with them can result in sanctions.

A close degree of co-operation between the parties is often required for a construction project to be successful. However, it is unrealistic to expect a contract to set out a definitive list of the ways parties must act, or not act, in order to be co-operative. To help overcome this, NEC contracts aim to encourage co-operative behaviour by inclusion of clause 10.

For many years there was much debate as to what affect, if any, clause 10 has. In including it within the NEC contract, the drafters clearly had laudable aims, no doubt hoping it would stifle adversarial behaviour. However, for years many commentators suggested that the clause was ineffectual, suggesting it could be removed from the contract without any affect. In contrast, there were many others that considered these were not empty words, often claiming that the obligation is similar to ‘good faith’.

The past few years has brought some certainty to this debate, and it is now clear that a contractual obligation to work “in a spirit of mutual trust and co-operation” is not merely an expression of good intent, without any binding effect. There have been several court decisions indicating that the obligation has substance, is similar to good faith and can be significant in how other parts of the contract are interpreted.

Latham and Construction Contracts

To understand why modern construction contracts include such obligations, we need to refer back to paragraph 5.20 of Sir Michael Latham’s 1994 Report, ‘Constructing the Team’, where he recommended as follows:

A statement should be written into Core Clause 1 that the employer and the contractor affirm that they both intend to establish a fair and reasonable agreement with each other to undertake the project in a spirit of mutual trust and cooperation, and to trade fairly with each other and with their subcontractors and suppliers ...”

Latham’s above recommendation was a reaction to the construction industry’s adversarial culture and an attempt to increase trust, co-operation and openness in construction projects.

The first standard form of construction contract to follow Latham’s advice was the NEC, when it published its second edition (NEC2) in 1995. Since then, other standard forms have followed suit. For example, the PPC 2000 (a partnering contract published by the Association of Consultant Architects) includes the following obligations:

  • Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual cooperation”.
  • In all matters … Partnering Team members shall act reasonably and without delay”.
  • Partnering Team members shall work together and individually … to achieve transparent and cooperative exchange of information … and to organise and integrate … as a collaborative team”.

Since 2009, JCT contracts includes the following optional clause:

The Parties shall 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 ...”.

I suspect it is a matter of time before the JCT changes this from being an optional clause to a standard clause. Look out for any changes in the next update to the JCT suite of contracts, which will probably be the JCT 2024.

There are also some less well-known contracts that have similar provisions, such as the ‘Be Collaborative Contract’ (BCC), published in 2003 by an organisation called ‘Collaborating for the Built Environment’ (which came about from a merger of the ‘Design Build Foundation’ and the ‘Reading Construction Forum’, an influential body that had been set up by the University of Reading). Clause 1.1 of the BCC provides as follows:

The Overriding Principle guiding the Purchaser and the Supplier in the operation of the Contract is that of collaboration: it is their intention to work together with each other and all other project participants in a co-operative manner in good faith and in a spirit of mutual trust and respect. To this end the Purchaser and the Supplier agree they will give to, and welcome from, the other, and the other Project Participants, feedback on performance and will draw each other’s attention to any difficulties and will share information openly, at the earliest practicable time. They will support collaborative behaviour and confront behaviour that does not comply with the Overriding Principle”.

Paragraph 2.1.1 of the guide to the ‘BCC’ explained the above ‘Overriding Principle’ as follows:

“analogous to the ‘overriding objective’ to be found in Rule 1.1 of the new Civil Procedure Rules (which provides that, in the interpretation of the Rules, the overriding objective will be to enable the courts to deal with cases justly). The Overriding Principle is intended to sit above all the other contractual obligations and, in the event of any dispute, any court or adjudicator or other forum to which the dispute is referred shall take account of the Overriding Principle and of the parties’ adherence to it when making any award”.

It is therefore clear that modern standard construction contracts include a clear emphasis on cooperation and collaboration, giving importance to the wider relationship between the parties and not merely the usual legal obligations expressly provided for in the contract.

NEC Clause 10

Clause 10 is the first clause in the NEC contracts. It contains two separate obligations. Everyone named and involved with the contract are to act:

  1. as stated in the contract; and
  2. in a spirit of mutual trust and co-operation”.

The Parties must do both, not one or the other.

NEC3 provides the above two obligations in one single clause (10.1), whereas NEC4 splits this into two separate clauses, with the obligation to act in a spirit of mutual trust and co-operation becoming clause 10.2.

There has never been anything controversial or unclear about the first obligation, but that is not the case for the second obligation.

There have been a few court cases that have provided guidance on how to interpret NEC clause 10. These include:

  • Mears Ltd v Shoreline Housing Partnership Ltd [2013] EWHC 27 (TCC), [2013] EWCA Civ 639, [2015] EWHC 1396 (TCC)
  • Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017] NIQB 43.
  • Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC); [2017] BLR 239
  • Van Oord UK Limited v Dragados UK Limited [2021] CSIH 50

Details of these cases are provided further below.

Comparison with the JCT Approach

Although JCT contracts have emulated the NEC, with a provision similar clause to clause 10, many have suggested this is merely a ‘box-ticking’ exercise by the JCT. Regardless of whether that is a fair criticism, there are two distinctions which might be made between the JCT and NEC:

  1. The JCT clause, for the Parties to work in “a co-operative and collaborative manner, in good faith and in a spirit of trust and respect”, is an optional clause (found in the supplemental provisions); and
  2. Given that JCT contracts are far more prescriptive than the NEC, setting out more detailed obligations, there is less need for JCT contracts to include such an over-arching trust clause. For example, in respect of termination, JCT contracts state that any notice should not be given “unreasonably or vexatiously”.

Good Faith

Given that NEC clause 10 has been likened to a ‘good faith’ obligation, it is important to understand what is meant by ‘good faith’.

‘Good faith’ originated from Roman law, but there is still no consensus on its precise meaning. Wikipedia defines it as: “a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction”. Synonyms for good faith include sincerity, openness, candour, genuineness, honesty, probity and straightforwardness.

In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, Bingham L.J. attempted to explain not only what good faith means, but also how it is typically a feature of civil law systems:

‘‘In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognises and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle which any legal system must recognise; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as “playing fair,” “coming clean” or “putting one’s cards face upwards on the table.”

Unlike the UK, many foreign jurisdictions are based on civil law that have long recognised a general obligation to act in good faith when making and performing contracts. For example:

  • Under French Law, Articles 1134 and 1135 of the Civil Code specify that agreements must be executed in good faith.
  • In German law it is a fundamental principle that every party has to act in good faith when exercising its rights and performing its obligations, as provided at section 242 of Germany’s Civil Law Book, the ‘Bürgerliches Gesetzbuch’.
  • Italian law contains a general clause on good faith, found at article 1175 of the Italian Civil Code. Article 1337 of the Italian Civil Code also states that parties shall behave in good faith during negotiations and formation of the contract.

UK law (which has three distinct legal jurisdictions: England and Wales, Scotland and Northern Ireland) is based on common law. Common law systems trace their history to England, whereas civil law systems trace their history through the Napoleonic Code (officially the Civil Code of the French) to Roman law. Unlike civil law jurisdictions, common law has generally arisen through custom and been created by judges, by virtue of being stated in their written judgements.

It should be noted that a general doctrine of good faith is not limited to civil law jurisdictions. For example, Australian courts have been known to imply broad duties of good faith into commercial contracts, and in the case of Bhasin v Hrynew 2014 SCC 71 the Supreme Court of Canada recognised a “general organizing principle” of good faith and introduced a “general duty of honesty in contractual performance”.

Good Faith and the UK

A universal duty to act in good faith is not automatically implied into UK contracts. The courts in common law jurisdictions, such as England and Wales, do not accept that an obligation of good faith should be implied generally into commercial or other contracts. However, there are typically three ways in which a duty of good faith can be incorporated into contracts:

  1. Parties can include good faith as an express clause in their contracts.
  2. Some statutory provisions introduce good faith into aspects of English contract law.
  3. The courts imply good faith into some contracts.

Where parties choose to expressly incorporate good faith into their contracts, or the concept is implied by statute, the courts invariably enforce such clauses. The main controversies regarding the role of good faith in English law have arisen in instances where there have been efforts to imply the concept into contracts generally. The courts of England and Wales tend to remain unyielding in their opposition to good faith as an overriding concept.

The courts have always considered that parties should be entitled to negotiate freely between themselves and contract as they desire, without worry of interference from the courts. The historical reluctance of the courts to imply a general duty of good faith is also due in part to concerns that doing so would undermine contractual certainty.

In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, Bingham L.J. explained as follows:

English law has, characteristically, committed itself to no such overriding principle [as good faith] but has developed piecemeal solutions in response to demonstrated problems of unfairness. Many examples could be given. Thus equity has intervened to strike down unconscionable bargains. Parliament has stepped in to regulate the imposition of exemption clauses and the form of certain hire-purchase agreements. The common law has also made its contribution, by holding that certain classes of contract require the utmost good faith, by treating as irrecoverable what purport to be agreed estimates of damage but are in truth a disguised penalty for breach, and in many other ways.”.

Although UK law does not have a general, overriding duty to act in good faith, this does not mean that this is never an issue for our courts. A duty to act in good faith is recognised for certain types of contract:

  • Insurance contracts are considered contracts of utmost good faith, requiring complete honesty and full disclosure of all vital facts by both parties (insured and insurer). This is because they involve a promise to pay compensation in the event of an insured risk occurring.
  • Mortgages: A property mortgagee must exercise powers in good faith.
  • Employment: The courts have regularly held that there is an implied term requiring employers and employees to act in good faith.
  • Joint ventures: There is an implied duty of honesty and good faith in contracts for joint ventures (which are commercial arrangements in which two or more parties agree to pool their resources to accomplish certain goals).
  • Partnership: The foundation of the law of partnership is the duty of good faith between partners.
  • Company directors: Under section 172(1) of the Companies Act 2006 provide that “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”.
  • Agency: An agent must act honestly and not let his own interests conflict with those of his principal. Pursuant to Regulation 3(1) of the Commercial Agents (Council Directive) Regulations “In performing his activities a commercial agent must look after the interests of his principal and act dutifully and in good faith”.

In addition, over the past few decades, EU law has inserted principles of ‘good faith’ into consumer law (e.g., the Unfair Terms in Consumer Contracts Regulations 1999), providing individuals with protection in their dealings with businesses. It is also clear that the Courts will enforce express contractual terms that parties are to act in good faith.

From a construction law context, the case of London Borough of Merton v Leach (1986) 32 BLR 51 made it clear that the English courts do not recognise any general implied duty of good faith. In this case, Vinelott J said:

Although the courts will imply a duty to do whatever was necessary in order to enable a contract to be carried out, the requirement of good faith has not been incorporated into English law”.

Several standard forms of construction contracts include express obligations to act in good faith or with a spirit of trust. These standard forms do not provide any definition for such terms. Consequently, the somewhat imprecise language means there is substantial uncertainty as to how such contractual obligations may be applied.

Good Faith and Case Law

As explained above, the judge in the Interfoto case described the duty to act in good faith as “playing fair,” “coming clean” or “putting one’s cards face upwards on the table.” In the more recent case of Bates v Post Office Ltd (no 3) [2019] EWHC 606 (QB), the judge said that where good faith is implied into a contract it:

does 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”.

In Astor Management AG & Anr v Atalaya Mining Plc & Others [2017] EWHC 425 (Comm), the judge said:

A duty to act in good faith, where it exists, is a modest requirement. It does no more than reflect the expectation that a contracting party will act honestly towards the other party and will not conduct itself in a way which is calculated to frustrate the purpose of the contract or which would be regarded as commercially unacceptable by reasonable and honest people”.

In the case of Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) it was suggested that good faith should have the following meaning:

What good faith requires is sensitive to context. That includes the core value of honesty. In any situation it is dishonest to deceive another person by making a statement of fact intending that other person to rely on it while knowing the statement to be untrue. Frequently, however, the requirements of honesty go further. For example, if A gives information to B knowing that B is likely to rely on the information and A believes the information to be true at the time it is given but afterwards discovers that the information was, or has since become, false, it may be dishonest for A to keep silent and not to disclose the true position to B. Another example of conduct falling short of a lie which may, depending on the context, be dishonest is deliberately avoiding giving an answer, or giving an answer which is evasive, in response to a request for information

In some contractual contexts the relevant background expectations may extend further to an expectation that the parties will share information relevant to the performance of the contract such that a deliberate omission to disclose such information may amount to bad faith”.

Good Faith v ‘spirit of mutual trust and co-operation.

The cases of Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC) and Van Oord UK Limited v Dragados UK Limited [2021] CSIH 50 have both compared good faith to the NEC duty to act in a spirit of mutual trust and cooperation.

In Costain v Tarmac, Coulson J agreed with academic analysis (contained in the textbook ‘Keating on NEC3’ by David Thomas) that clause 10 equated to an obligation of good faith.  Keating on NEC3 refers to the Australian case of Automasters Australia PTY Ltd v Bruness PTY Ltd [2002] WASC 286, which made the following four points:

  1. What is good faith will depend on the circumstances of the case and the context of the whole contract.
  2. Good faith obligations do not require parties to put aside self-interests; they do not make the parties fiduciary.
  3. Normal reasonable business behaviour is permitted but the court will consider whether a party has acted reasonably or unconscionably or capriciously and may have to consider motive.
  4. The duty is one ‘to have regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms.

David Thomas explained that he considers mutual trust means acting in a trustworthy way, being able to trust the other party and having regard to the other party’s interests, but not having to put them above your own.

The judge in Costain v Tarmac also said that the term of mutual trust and cooperation suggests that:

whilst the parties can maintain their legitimate commercial interests, they must behave so that their words and deeds are ‘honest, fair and reasonable, and not attempts to improperly exploit’ the other party.”

Mears Ltd v Shoreline Housing Partnership

In this case, it was held that the obligation to act in a spirit of mutual trust and co-operation could not prevent a party from relying on any express terms of the contract. (However, the judge used estoppel to get to the same result).

Shoreline Housing Partnership Limited (“Shoreline”) engaged Mears Limited (“Mears”) to carry out on-going building repair and maintenance to several thousand social housing properties. Mears’ tender price was significantly lower than other tenders. As a result, Shoreline hoping to achieve savings of around £1m a year by awarding the contract to Mears.

The parties intended to enter an NEC3 Term Service Contract (TSC), incorporating Option C (target contract with price list). However, Mears started work (in July 2009) some six months before the contract was signed.

The tender was priced on the basis that, for each individual task, Mears would charge on a cost plus a percentage for profit and overheads, and then applying a ‘pain/gain share’ every six months, reconciling against the contractual Schedule of Rates which specified the value of each type of task. Mears would benefit from a further payment which reflected the extent to which the cost-plus fee pricing was lower than the value price. Alternatively, if the cost-plus fee pricing was greater than the value, Mears would owe the difference to Shoreline.

However, it became clear that the payment mechanism set out in the Contract did not meet Shoreline’s needs. The price list contained hundreds of different items of work and it was very difficult for Shoreline’s staff to identify the appropriate prices for jobs based on the information given to them by tenants calling to request repairs.

As a solution to this problem, Mears and Shoreline agreed a simplified system of composite rates would be used by Shoreline’s staff when allocating work to Mears. These composite rates would then represent both the sum charged by Mears and the sum to be paid by Shoreline i.e., there would be no six-monthly reconciliation.

For a six-month period, the parties proceeded to operate the Contract on this basis, during which over 13,600 orders were placed by Shoreline, and paid for using the composite rates. In parallel to this, contract negotiations continued with Shoreline assuring Mears that there was no need to amend the express terms of the Contract to reflect the system of composite rates.

The Contract was signed by Mears in December 2009 without any amendment to the payment mechanism. By January 2010, Shoreline had realised that the composite rate system was not achieving the savings it had anticipated. A dispute arose and Shoreline alleged that the use of the composite rate system had resulted in an overpayment to Mears in excess of £300,000.

Mears commenced legal proceedings against Shoreline seeking a declaration that Shoreline was not entitled to recover the alleged overpayment on the basis that Shoreline:

  1. was estopped from doing so by an estoppel by convention and/or an estoppel by representation; and
  2. was acting in breach of clause 10.1 of the Contract.

The court rejected Mears’ argument that the clause 10.1 duty could prevent Shoreline from relying on an express term of the contract. However, the court nevertheless found for Mears. The judge held that there was an estoppel (“most obviously by convention but also by representation”) and that the evidence supported a shared understanding that the composite rates system was to apply.

This case made it clear that parties cannot use NEC clause 10’s duty of mutual trust and cooperation to trump other terms of the contract.

Northern Ireland Housing Exec v Healthy Buildings (Ireland) 

This case involved the NEC3 Professional Services Contract, in respect of which the Northern Ireland Housing Executive (“the Employer”) engaged Healthy Buildings (“the Consultant”) as an asbestos survey consultant. The Employer gave an instruction changing the scope of the works and the parties disagreed how this compensation event should be valued. As a result, the Northern Irish High Court was ultimately called upon to determine whether the compensation event was to be assessed based on actual cost or forecasted cost.

The court concluded that the compensation events should be assessed on the basis of actual cost. In coming to this conclusion, the judge considered the principle of contractual interpretation, which requires the contract to be interpreted as a whole and acknowledged the need to consider “other factors”, including the extent to which the defendant’s conduct aligned with the duty to act in a spirit of mutual trust and co-operation. He stated as follows:

First of all, it is a cardinal principle of contractual interpretation that one should look at the agreement overall. This particular contract begins with the agreement that the employer and the consultant shall act “in a spirit of mutual trust and co-operation”(10.1). It seems to me that a refusal by the consultant to hand over his actual time sheets and records for work he did during the contract is entirely antipathetic to a spirit of mutual trust and co-operation”.

Costain v Tarmac 

In this case, Tarmac supplied concrete to Costain pursuant to the NEC3 Framework Contract Conditions (“NEC3 FC”) and the NEC3 Supply Short Contract Conditions (“NEC3 SST”).

Clause 10.1 of NEC3 FC provided:

The Employer and the Supplier shall act as stated in this contract and in the spirit of mutual trust and co-operation.”

NEC3 FC provided (at clause 93) strict time limits for commencing adjudication (Please see our article on “A Brief Guide to UK Construction Adjudication”) and arbitration. Costain subsequently brought court proceedings in the TCC, in respect of defects found in the concrete. Tarmac applied to stay the court proceedings, on the grounds that there was an arbitration clause.

Tarmac also claimed that Costain could not pursue any adjudication or arbitration, because it had missed the time limit. In this respect, Costain argued that Tarmac was in breach of clause 10.1, by allowing Costain to fall into this trap. The court rejected this submission, with paragraphs 119 – 124 of the law report explaining as follows:

“119 … It appears that the claimant maintains that, even if (as I have found) the defendant said or did nothing which ‘crossed the line’ (i.e. made a representation that was inconsistent with the point they subsequently took) the defendant was in breach of clause 10.1 in any event. This rather startling submission means that, in essence, the claimant must argue that, as a result of the mutual trust obligation, the defendant had an express obligation to point out to the claimant the nature, scope and potential effect of clause 93 (including the time bar) … In any event, for the reasons set out below, I reject that submission.
120.   In Keating on NEC3 (First Edition 2012) at paragraph 2-004, a parallel is drawn between ‘mutual trust and cooperation’ and obligations of ‘good faith’. The authorities dealing with ‘good faith’ are mainly from outside the United Kingdom, because good faith has not been, at least until recently, a concept that has gained much traction in the English common law. One of the leading Australian cases on the topic is Automasters Australia PTY Limited v Bruness PTY Limited [2002] WASC 286 which, as set out in Keating NEC3 is authority for the following propositions:

(1) What is good faith will depend on the circumstances of the case and the context of the whole contract.

(2) Good faith obligations do not require parties to put aside self-interests; they do not make the parties fiduciary.

(3) Normal reasonable business behaviour is permitted but the court will consider whether a party has acted reasonably or unconscionably or capriciously and may have to consider motive.

(4) The duty is one ‘to have regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms.’ ”

121.  Keating goes on to say that, in the light of that authority and other cases concerned with implied terms in employment contracts, the term of mutual trust and co-operation suggests that, whilst the parties can maintain their legitimate commercial interests, they must behave so that their words and deeds are “honest, fair and reasonable, and not attempts to improperly exploit” the other party. Or as it is described in another Australian case, Overlook v Foxtel (2002) Aust Contract R 90-143, “a party is precluded from cynical resort to the black letter”.

122.  For completeness, I note that, in F & C Alternative Investments (Holdings) Limited v Barthelemey (Nos. 2 and 3) [2011] EWHC 1731 (Ch) Sales J (as he then was), when dealing with an obligation of utmost good faith, referred to another Australian case (Macquarie International Health Clinic PTY Limited v South West Area Health Service [2010] NSWCA 268, and said that:

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.”

123.  I respectfully agree with that summary. I agree too with the passage in Keating about not improperly exploiting the other party, although I am a little uneasy about a more general obligation to act ‘fairly’; that is a difficult obligation to police because it is so subjective. Further, it might be said that the mutual trust provision does little more than say expressly what Vinelott J thought was implied into all construction contracts: see Merton LBC v High Stanley Leach (1986) 32 BLR 51

124.  Taking the obligation of mutual trust and co-operation (or even good faith) at its highest, it meant that, in the present case, the defendant could not do or say anything which lulled the claimant into falsely believing that the time bar in clause 93 was either non-operative or would not be relied on in this case. For this purpose, I am also prepared to accept that this obligation would go further than the negative obligation not to do or say anything that might mislead; it would extend to a positive obligation on the part of the defendant to correct a false assumption obviously being made by the claimant, either that clause 93 was not going to be operated or that the time bar provision was not going to be relied on. But beyond that, on any view of clause 10.1, there can have been no further obligation, because otherwise the provision would have required the defendant to put aside its own self-interest”.

Van Oord v Dragados

The most recent court decision is Van Oord UK Limited v Dragados UK Limited [2021] CSIH 50, a Scottish appellate court decision that considered various issues, including when an instruction to omit works and give them to others will amount to breach of contract, how an instruction to omit works is assessed under the NEC, and the application of the NEC3 duty to act “in a spirit of mutual trust and cooperation”. The court stated as follows:

In our view clause 10.1 is not merely an avowal of aspiration. Instead it reflects and reinforces the general principle of good faith in contract”.

The Court based its decision on the Scots law doctrine of mutuality whereby:

“A party cannot enforce a contractual stipulation in its favour, if it is the counterpart of another obligation which it has breached”.

The Court decided that a right to reduce the Prices under clause 63.10 was a counterpart of the clause 10.1 obligation to act “in a spirit of mutual trust and co-operation”. Hence, the consequence of Dragados breaching clause 10.1 would be that clause 63.10 could not be enforced.

It will be interesting to see if the courts of England and Wales follow this Scottish decision, but the writer believes that they will.

This decision continues a trend of greater emphasis for good faith in commercial contracts.


The duty to act in a spirit of mutual trust and co-operation is at the heart of the NEC contracts.

In terms of the NEC conditions, there is still some uncertainty of precisely what the concepts of “mutual trust” and “co-operation” entail, which have often been argued to involve a more confined implication than the broader good faith concept. Whilst the courts have yet to engage in a detailed analysis of the clause 10 duty, the courts have likened the duty to good faith.

There is no consensus on the precise meaning of ‘good faith’, but one court decision described it as an obligation that requires parties to refrain from conduct that in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.

The courts have not provided detailed analysis on behaviours or actions which may or may not constitute a breach of the duty to act in a spirit of mutual trust and co-operation. However, one court decision held that a refusal to hand over records of actual cost in respect of compensation events was in breach of the duty.

One aspect of the NEC obligation does appear to be clear and that is it will never trump other terms of the contract. The parties must first of all act within its rules, and, secondly, within the spirit of those rules.

Final Thought

The only thing that will redeem humanity is cooperation”.
Bertrand Russell

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