News & Media
September 24, 2017

Clause 10.1 – trust is not good faith

Clause 10.1 – trust  is not good faith

In his decision in Costain Limited v Tarmac Holding Limited 2017 (see here), the Hon Mr Justice Coulson appeared to tie himself in knots in his passing interpretation of clause 10.1 of the NEC3 Engineering and Construction Contract (ECC). 

After initially agreeing that the legal term ‘trust’ in clause 10.1 should be taken to mean exactly that, he then says it really means the more flaky ‘good faith’, which is a major departure from the original intention of clause 10.1.

In paragraph 29 of his judgment, Coulson initially appears to accept the principles to be used for interpretation of clause 10.1 as summarised by Lord Neuberger in Arnold v Britton [2015] UKSC 36. These include the importance of the language used and its natural meaning. 

In paragraphs 120-124 Coulson then seems to contradict the principles, interpreting ‘mutual trust and co-operation’ as being in parallel with ‘obligations of good faith’ – even though he accepts good faith has little legal meaning. 

Legal obligation

Clause 10 is the only clause in NEC contracts which is structured as a legal obligation. To construe the word ‘trust’ in as a social science term of ‘good faith’ is to relegate the legal obligation in clause 10.1 to mere window dressing, an expression of good intent, and unenforceable. 

Certainly it was not the intention of Sir Michael Latham in his 1994 report Constructing The Team. He advised changing the then NEC core clause 1 to include an obligation on the parties to undertake the project in a ‘spirit of mutual trust and co-operation’. The purpose was to change the then ‘deep rooted cultural attitudes’ of the UK construction industry – and the amendment was duly introduced into core clause 10 of the NEC second edition in 1995. 

The legal concept of trust in the NEC does not involve a party having to put the interests of the other party ahead of its own interests, but it does prohibit each party from detracting from  the contractual and accrued rights of the other party as specified in the contract. This is the same way as a trustee is prohibited from detracting from the trust property to the prejudice of the beneficiary.

Behaving as trustees

As NEC parties do not hold trust property for the benefit of the other party, clause 10.1 obliges them to act in the ‘spirit of’ trust. This obliges them to act as if they were each holding trust property for the benefit of the other, and to comply with the legal principles underlying the law of trust. The ‘trust property’, in the case of NEC, is the contractual and accrued rights of each party in terms of in the contract. 

The rights arise directly from the undertaking of each party in clause 10.1 to act, ‘as stated in this contract’. It is in respect of these rights of the beneficiary party, that the other party (the trustee party) is prevented, by its fiduciary duties, from diminishing, or changing in any manner not expressly provided for in the contract. 

While the judge’s comments on clause 10.1 would not have affected the outcome of the case, NEC users need to be aware of continuing uncertainty regarding its legal interpretation. My advice would be to follow Lord Neuberger and Sir Michael Latham, take ‘trust’ at face value and so act responsibly with regard to each other’s contractual rights.
 
POSTED BY TERRENCE DAVIS, LINDSAYKELLER, SOUTH AFRICA
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