Blog: Self-Interest v Mutual Trust and Co-Operation – court issues guidance on NEC3 contracts
The Technology and Construction Court (TCC) has recently issued a useful decision in relation to NEC3 terms. For Harper Macleod’s John McHugh, the case provides a welcome guideline as to how far the obligation to act in the spirit of mutual trust and co-operation in NEC3 goes, and the importance of timescales set out in NEC contracts.
In our last update, we highlighted the imminent launch of NEC4. However, many existing projects are of course still governed by the NEC3 suite of standard contracts, and this will remain the case during the transition period during which NEC4 is adopted.
The facts of the case
The court dealt with a dispute between Costain Ltd and Tarmac Holdings Ltd.
Costain was carrying out works on the M1 and had engaged Tarmac to supply the concrete. The concrete supplied by Tarmac was defective. The parties were in dispute about what the remedial solution should be. Tarmac was only willing to meet cost of its proposed remedial scheme.
The parties’ contract incorporated the NEC Framework Contract (2005) as amended by the Framework Contract Z Conditions and the NEC3 Supply Short Contract. The dispute resolution clause (in the Supply Short Contract) provided for adjudication (followed by arbitration) on condition that any referral to adjudication had to take place within four weeks of the referring party becoming aware of the grounds for dispute. If this did not happen within four weeks, the contract provided that the right to refer to adjudication would be lost.
A second clause (in the Framework Contract) permitted adjudication “at any time”.
The contract also provided that the parties agreed to act “in the spirit of mutual trust and co-operation”.
After an exchange of correspondence and a period of more than four weeks having elapsed, Costain sought to refer the dispute to adjudication. Tarmac indicated that the right to adjudicate had been lost because of the passage of time.
Tarmac then referred to an adjudicator the question of whether the right to adjudicate had been lost. The adjudicator agreed with Tarmac’s view that the right had been lost because of the delay of over four weeks.
Costain then referred the matter to the TCC. Costain relied on the mutual trust and co-operation provision to argue that the parties were obliged when a dispute crystallised to reach an agreement among themselves as to which dispute resolution format should apply to the dispute. Secondly, Costain argued that the mutual trust and co-operation clause created an obligation upon Tarmac to highlight to Costain the four-week time limit and to ensure that Costain were not under any misapprehension that the four-week time limit would not be insisted upon.
The court rejected Costain’s arguments. It considered that the apparently contradictory clauses specifying, on the one hand, a four-week time limit for adjudication and, on the other, adjudication at any time should be understood to complement one another. This dispute arose in relation to the supply of the concrete so it should be the Supply Short Contact term which applied (ie including the four-week time limit).
The court found that that the broad interpretation sought to be placed upon the mutual trust and co-operation clause would force a party such as Tarmac to disregard its own self- interest, which seemed to the court to be a leap too far. The court considered that the obligation went far enough to oblige a party to correct an incorrect assumption by the other that the four-week time limit would not be insisted upon, but did not create a positive obligation to advise and highlight to the other party the existence of the time limit.
This case provides a welcome guideline as to how far the obligation to act in the spirit of mutual trust and co-operation in NEC3 goes.
It is clear that the obligation does not displace a party’s right to rely upon the specific and detailed terms of the contract.
The court’s decision is consistent with a general reluctance on the part of the courts to rewrite parties’ contracts for them. If the obligation was treated as a broad licence for the court to achieve what it thinks is a “fair” result in any given dispute, then that would undermine parties’ confidence in their own contracts. It would be undesirable for courts to attempt to do this. The courts cannot know the commercial realities behind the parties’ agreement and the allocation of risk and pricing agreed by the parties that may lie behind the contract.
This decision also acts as a reminder for parties and their advisers to be aware of the importance of timescales set out in NEC contracts. As in this case, if the timescales are not met, the party will lose its rights.