Despite what the Court of Appeal decided recently, isn’t a doctrine of good faith what the industry desperately needs?

Ann Minogue

Both Rupert Choat and Rachel Barnes have in these columns looked at the recent decision of the Court of Appeal in Compass Group UK and Ireland vs Mid-Essex Hospital Services NHS Trust in the context of terms requiring the parties to co-operate “in good faith”.

Why do I think that aduty to co-operate and act in good faith would improve the construction industry?

The trial judge in Compass had construed the contract as imposing a general obligation on both parties to co-operate in good faith. This was consistent with another decision in Yam Seng Pte Limited vs The International Trade Corp Ltd where the trial judge suggested that traditional hostility under English law to good faith obligations was “misplaced”. He noted that English law was “swimming against the tide” as a general duty of good faith is recognised in the US, Australia and Scotland as well as most civil law systems.

But the Court of Appeal in Compass has recently refused to construe the contractual provision to affect all obligations under the contract. It also refused to imply a term to the effect that the Trust would not act in an arbitrary, irrational or capricious manner when administering the contract.

Standing back from the cases and the law on implied terms, if there were ever to be legislation for the construction industry isn’t a doctrine of good faith what it needs? Would it not perhaps improve practices in the industry more than the Housing Grants, Construction and Regeneration Act 1996?

What are the arguments against a general duty to act in good faith? It is said that:

  • Since the duty is so dependent on context, its effects would be uncertain. But endless debate about implied terms resulting in conflicting and overturned decisions is not conducive to certainty anyway
  • It is vague and unworkable. But surely no more vague and unworkable than the use of implied terms to try to divine what the parties actually intended?
  • It is incompatible with negotiations to say that they must be carried out in good faith since that prevents parties from striking an arms-length bargain. But we are talking here about a duty of good faith applying after the contract had been executed.

Why do I - in common (unusually) with the authors of the NEC - think that a duty to co-operate and act in good faith would improve the construction industry? A couple of examples:

  • How often do you hear quantity surveyors saying they slightly under-value work on interim certificates to ensure there is an adequate cushion “in case things go wrong”? Obviously over-valuation could result in the quantity surveyor being sued if, for example, an insolvency intervenes, but deliberate under-valuation is an insidious way of undermining cashflow.
  • The practice indulged in by most contractors of inflating claims, particularly by adding global claims for so-called “disruption” and intimidatory threats of serial adjudications might be toned down if the contractor is subject to an express duty of good faith?

But the real problem does not arise under the contract itself. At least with a signed contract both parties have an agreed set of rules that will ultimately be enforced by an adjudicator or the courts. Serial under-payment can be challenged as, ultimately, a bad claim can be defeated. In my view, the real problem lies in pre-contract negotiations.

There is no contract under which to impose duties of good faith when parties are tendering or negotiating contracts and yet this is where bad faith abounds.

So, to take an example, if there are known issues with the condition of existing structures to be incorporated in the works that cannot be seen on inspection, some teams will keep quiet and let the contractor price on the basis that he takes the risk. What is the point of this? If the risk occurs, the contractor will try to recover its money or if ultimately it cannot do that, it will go bust. How much more responsible to produce a risk register identifying the risks for tendering contractors so that they can price them accordingly. But how many teams do that? And even where they do, does the industry really reward them for their integrity?

In this bandit country of pre-contract dealing, there is little regulation. Deliberate misrepresentation is dealt with by Misrepresentation Act 1967. Negligent misrepresentation/mis-statement carries legal consequences, though liability can be excluded and in the construction arena often is. There is the possibility of criminal sanctions - the Bribery Act 2011, the Theft Acts and so on. But how rarely are those who act in bad faith really brought to justice?

Ann Minogue is a construction partner in solicitor Ashurst