Good faith sounds like a useful requirement of parties in a contract, but whether such obligations will be enforced by the courts is less certain, says Alexander Crockford
Good faith obligations are increasingly common in construction contracts. For example the NEC Professional Services Contract obliges parties to ‘act in a spirit of mutual trust and co-operation’.
Such clauses are clearly intended to encourage a more collaborative approach on projects. However, what is less clear is the circumstances in which obligations to act in good faith will be enforced by the courts; and the steps parties should take to fulfil them.
Duty to negotiate in good faith
An agreement to negotiate or to agree is unenforceable, as there is a lack of certainty about either the steps the parties must take to seek to reach agreement or the terms on which any such agreement should be reached.
However, what is the position if a party agrees to negotiate in good faith?
In Petromec v Petroleo Brasileiro (2006), an obligation to negotiate the extra costs of upgrading an oil rig in good faith when the original specification was revised was found to be enforceable. The Court of Appeal expressed reluctance to declare unenforceable a clause which the parties had expressly agreed.
The court took a different view in Charles Shaker v Vistajet Group Holding SA, where a party had agreed to proceed in good faith and to use reasonable endeavours to agree four documents by a specific date. The court found that the obligation to negotiate in good faith was unenforceable because it was inherently inconsistent with the position of a negotiating party seeking to obtain the best terms for itself.
The courts reached different conclusions in these cases because in Petromec there were objective criteria by which the extra costs could be assessed in the absence of agreement (presumably by reference to the original specification). It was, therefore, easy to determine what parties acting in good faith would have agreed. In Charles Shaker, by contrast, there were no such objective criteria.
These cases show that the courts are likely to be reluctant to determine the negotiating position parties should take, and will only find a party to be in breach of an obligation to negotiate in good faith if there is a way to determine objectively what a party acting in good faith should have done.
Duty to co-operate in good faith
In Compass Group v Mid Essex Hospital Services NHS Trust the parties had entered into a facilities management contract, which included a clause enabling the Trust to make performance-related deductions from payments to the claimant. The Trust sought to deduct £46,320 because out of date ketchup sachets were found in a cupboard. The claimant argued that, in making deductions of this scale, the Trust was in breach of a separate clause requiring both parties to co-operate in good faith. The court found in the claimant’s favour.
This case involved extreme facts and a clause with the potential to yield absurd results, so it should not be interpreted as enabling parties to rewrite other contractual clauses on the basis that they might be viewed as unfair, just because the contract also contains an obligation to co-operate in good faith.
However, where a clause gives one party discretion when making a decision affecting the other, Compass Group indicates it should be interpreted in light of the good faith clause. The agreement gave the Trust discretion when calculating deductions. This did not inevitably lead to deductions on the scale of those made, so the good faith clause came into play.
Significant uncertainty remains about the impact on parties’ obligations of including good faith provisions in contracts. Architects should take legal advice and consult their insurers before agreeing to such obligations.
Alexander Crockford is a solicitor with Macfarlanes
Force majeure: For events beyond your control, force majeure can excuse you from contractual obligations
Force majeure can be used to excuse parties from some or all of their obligations if certain unexpected events occur which are beyond the parties’ control.
It is generally interpreted as covering events beyond ‘Acts of God’. It can include legislative interference, but is unlikely to cover economic changes that render a contract unprofitable.
However, determining what a force majeure clause covers will depend on the interpretation of the contract itself. For example, JCT contracts use force majeure as grounds for an extension of time, but also deal elsewhere with matters that might otherwise be thought to constitute force majeure events, such as war, fires, government action and adverse weather.
The impact of a force majeure event on parties’ obligations also depends on what the contract says. JCT contracts give the contractor an extension of time, and allow either party to terminate the contract if such an event occurs. However, if the contractor continues performing its contractual obligations, it is not entitled to loss and expense for doing so. Some contracts give parties the right only to suspend performance while the force majeure event persists, rather than to terminate altogether.