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Acting in good faith?

05/07/2012

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United Kingdom

Acting in good faith?

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The concept of acting in good faith has been around in some sectors for many years. For example, the good faith duty to disclose all known and relevant facts in insurance contracts is well understood.  However, it is now becoming increasingly common as an obligation included in commercial agreements whether in construction contracts, joint ventures or other projects. 

The obligation can be phrased in many ways, whether requiring the parties to work "in a spirit of mutual trust and co-operation" or "in good faith and a spirit of trust and respect". But what does this mean? I imagine most parties do not give much thought as to what it means on a daily basis.  It is often said that it is intended to set the tone of a project, rather than be seen as a strict term to be enforced.

The concept of acting in good faith first appeared in the first edition of the New Engineering Contract in 1993. It has since appeared in the JCT Constructing Excellence Contract and in the optional 'Supplemental Provisions' that appear in the schedules to the other JCT forms. The duty of good faith, it seems, is set to become a mainstay of the construction contract landscape.

The recent decision in Compass Group v Mid Essex Hospital Services now gives us slightly more guidance as to what a breach of good faith entails.  Whilst not a decision under a construction contract, construction professionals may well look at this as a yardstick on how not to act.

The contract in Compass Group was a public sector catering contract, which allowed the client to make deductions from service payments if the contractor failed to meet certain standards.  As the judge pointed out, some of the deductions made by the client were absurd.  For example, a deduction of £84,540 due to the presence of a one day old chocolate mousse (removed immediately by the contractor), and £96,060 for some three day old bagels (also immediately removed).  These and other deductions constituted a breach of contract, including a breach of good faith, and meant that the contractor was entitled to terminate.

Arguably, this raises more questions than it answers in a construction context. For example, if a notice of non-completion has been issued under a JCT, should an employer enforce its right to deduct liquidated damages if it knows the contractor is going to submit a valid claim for an extension of time? Or, if the contract states that a contractor has to submit a claim for an extension of time within 21 days of an event, or else, but it is submitted on the 22nd day, should an employer consider the contractor's submission despite its contractual right to ignore it?

Please do get in touch if you would like to know more. 

Chris Farrell is a solicitor in the Construction team at Fieldfisher Warehouse LLP 

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