Guidance on the nature and scope of "mutual trust and cooperation" under NEC3 contracts

Guidance on the nature and scope of "mutual trust and cooperation" under NEC3 contracts

The recent decision in Costain Limited v Tarmac Holdings Limited [2017] EWHC 319 (TCC) has provided some useful guidance on the concept of "mutual trust and cooperation" under the NEC3 suite of contracts.

Background

Costain engaged Tarmac to supply concrete for works to the new central reservation on the M1 motorway. In April 2015 it became apparent that the concrete was defective and the parties engaged in correspondence in accordance with the pre-action protocol (as it was then). In October 2015 a dispute arose concerning the appropriate remedial scheme to remedy the works. Tarmac proposed a remedial regime and agreed to undertake the works set out in their regime. Costain rejected this proposal and proposed a scheme which was significantly (c. £6M) more expensive, which in turn was rejected by Tarmac.

Initially, the dispute surrounded which remedial scheme was appropriate. On 13 November 2015 Costain's solicitors asked Tarmac to agree to refer the dispute to the TCC notwithstanding that the Supply Contract called for disputes to be resolved by arbitration or adjudication. Tarmac agreed to take instructions and then wrote again at the end of November to advise that the claim was now out of time. From this point onwards the dispute quickly became concerned with which dispute resolution procedure the parties were required to follow.

The Dispute

The problem arose because there were two contracts governing the relationship between the parties, a NEC3 Framework Agreement (2005), which dictated how Costain should chose its sub-contractors and a NEC3 Supply Short Contract ("the Supply Contract") which dealt with the actual supply of concrete. The former included a right to adjudicate at any time, whereas the latter contained a right to adjudicate within strict time limits and an agreement to arbitrate if the parties were not content with the adjudicator's decision. The Supply Contract also provided that if a dispute was not referred to adjudication within the set time limits then neither party was permitted to subsequently refer it to adjudication or arbitration.

Costain disputed the applicability of the dispute resolution clause in the Supply Contract and argued that because of the mutual trust provision existing in both contracts, it was envisaged that when a dispute arose, the parties would agree between themselves which of the possible dispute resolution procedures should be adopted to deal with the particular dispute. Tarmac referred the issue to adjudication. The adjudicator found in favour of Tarmac and decided that the dispute resolution procedure under the Supply Contract should apply. He concluded that as Costain had not referred the remedial scheme dispute to the adjudicator within the relevant time limit, it could not pursue its claim against Tarmac. Costain subsequently issued proceedings in the TCC.

The mutual trust provision

The case came before Mr Justice Coulson upon Tarmac's application to stay the proceedings under s.9(1) of the Arbitration Act 1996 ("the Act") on the basis that there was a valid arbitration agreement in the Supply Contract. Costain sought to challenge Tarmac's application by arguing that the arbitration agreement was "null and void [or] inoperative" for the purposes of s.9(4) of the Act.

The judge reached the "firm conclusion" that Tarmac's interpretation of the contract was the correct one and rejected Costain's approach as "impractical, uncertain and commercially unworkable". The correct dispute resolution procedure for disputes concerning the supply of concrete was, therefore, that set out in the Supply Contract.

The judge's analysis of the mutual trust provision arose when considering Costain's estoppel argument, which was deployed (along with a number of other arguments) to contend that the arbitration agreement in the Supply Contract was "inoperative".

Costain attempted to argue that by responding to the letter of claim, Tarmac had effectively represented that it was not relying on either the arbitration provision or the time bar. Costain also argued that Tarmac had a further duty to speak out with respect to the contractual positions concerning arbitration and the time bar.

Costain relied firstly on the principles set out the cases of Spiro v Lintern, The 'Henrik Sif' and The 'Stolt Loyalty' (where it was clear that someone was operating under a misapprehension) and secondly on the NEC3 mutual trust provision (cl. 10.1 of the Supply Contract).

The judge dismissed Costain's arguments based on previous case law because he found that Costain's solicitor understood that the contract required arbitration, hence the 13 November letter. Furthermore there was no representation by Tarmac or common understanding that the parties would not arbitrate or that Tarmac would not rely on the time bar. Finally, he concluded that Tarmac had done nothing wrong; it has never suggested that it might waive its right to rely on the dispute resolution procedure in the Supply Contract.

The judge then considered whether the mutual trust provision would affect his analysis.

The following is a summary of his conclusions:

• The judge agreed with the commentary in Keating on NEC3 that the meaning of the mutual trust and cooperation obligation was that one party could not improperly exploit the other.
• However, he doubted Keating's suggestion that the clause imposes a general obligation to act fairly as this is an entirely subjective concept, which in reality would be uncommercial and impossible to police.
• He agreed with Akenhead J's observations in Mears v Shoreline that the obligation cannot be used to prevent a party relying on any express term of the contract.
• The judge said that at its highest, the obligation means that a party could not do or say anything which lulled the other party into falsely believing something, in this instance, that the time bar was non-operative.
• The judge reviewed all the cases on contractual good faith, the general principle of which is that there is no obligation on a party to put aside its own self-interest, and said this principle is applicable to the mutual trust and cooperation obligation.
• His view was that the mutual trust provision does little more than express a term which might in any event be implied in construction contracts as per Merton LBC v High Stanley Leach.
• Finally, he said that the mutual trust provision could not be used to transform an unsuccessful plea of estoppel into a successful one.

Lessons

Usefully the case confirms that in practice the obligation of mutual trust and cooperation requires the parties to do no more than act in accordance with terms that would be implied into the contract in any event. Importantly, the obligation does not oblige a party to put aside its own self-interests and it will not prevent a party from relying upon any express term of the contract.

Whilst the case does not in fact establish any new case law, it serves as a compelling reminder that the mutual trust and cooperation obligation does not require parties to act any differently under NEC3 than with other forms of construction contracts and should not be held as an axe to discourage a party in circumstances where it may have a valid claim.

If you woud like to discuss this topic in more detail please contact Harriet Sykes.