Costain Ltd v Tarmac Holdings Ltd

The Facts – Mutual Trust and NEC

Costain engaged Tarmac for the provision of the concrete to construct a concrete safety barrier on the M1 motorway. Tarmac were engaged using the NEC3 Supply Short Contract (SSC).

Upon construction, it was found that the barrier was defective. Both parties agreed that this was the result of contaminated concrete supplied by Tarmac.

Costain brought adjudication proceedings concerning the scope of the appropriate remedial works; however, Tarmac successfully relied upon a time-bar provision to defend the claim.

Subsequently, Costain advanced its’ proceedings in the Technology and Construction Court (TCC).

Tarmac resisted the proceedings on the basis that the correct forum under the contract was arbitration, relying upon s. 9 (1) of the Arbitration Act 1996.

Whilst the crux of this case relates to the enforceability of the contractual arbitration provisions, the real area of interest is how the overarching obligation of clause 10.1 of the NEC3, to “act in a spirit of mutual trust and co-operation”, was addressed by the court. This is perhaps the most well-known clause of the NEC and has been widely written about, but rarely considered by the courts.

The Mutual Trust Provision

Keating on NEC3 states that “the obligation of clause 10 has a “gap filling” role as the fall back guidance where there is no specific regulation of how parties should behave in particular circumstances”.

One of Costain’s positions was that the arbitration agreement was rendered “inoperative” due to the legal principle of estoppel. Put simply, Costain argued that Tarmac had an obligation under the contract to state its intention to rely on the time-bar restriction of clause 93. Tarmac made no such representation and Costain submitted it should be prevented from relying on the clause. To bolster the point, Costain also argued Tarmac was in breach of the ‘mutual trust’ provision.

Lord Justice Coulson rejected the submission, firstly finding that the estoppel position had no merit.

The court went on to consider whether clause 10.1 would have changed its decision.

In considering the extent of the obligation, the court approved of the approach taken in Keating on NEC3 which draws parallels between the ‘mutual trust’ provision and the obligations of ‘good faith’. Paraphing Keating, the court noted that:

“Parties can maintain their legitimate commercial interests [but] they must behave so that their words and deeds are honest, fair and reasonable, and not attempts to improperly exploit the other party”.

On the facts of this case, the court found that the obligation of mutual trust and cooperation meant:

• “[Tarmac] could not do or say anything which lulled [Costain] into falsely believing that the time bar…was either non-operative or would not be relied on”
• “…it would extend to a positive obligation on the part of [Tarmac] to correct a false assumption obviously being made.”
• Nothing more was required as this would have required Tarmac to put aside its own self-interest.

The court found that Tarmac had not misled Costain and did not have any obligation to notify it of its intention to use clause 93, as it would have been against its own commercial self-interest to do so.

Therefore, on the facts of this case the obligation of mutual trust in clause 10.1 did not “turn an otherwise unsuccessful assertion of estoppel…into a successful one”

 Points to Note

The court’s interpretation of the NEC’s ‘mutual trust’ provision raises the following interesting points:

• The obligation to act “in a spirit of mutual trust and co-operation” does not require a party to sacrifice their own commercial interest.
• The court was “uneasy” with the obligation to act “fairly”, as the term is subjective and difficult to police.
• Whilst the assertion of estoppel based on the ‘mutual trust’ provision was unsuccessful in this case, there is perhaps an indication that clause 10.1 may be used in the right circumstances to assert a successful estoppel.
• The terminology in this case provides a useful benchmark for behavior and could be relied upon if it can be demonstrated that a party has acted improperly or in a misleading manner.
• The remarks that clause 10.1 can extend to a positive obligation to act could give real ‘teeth’ to the clause, making it more imposing and less of a ‘gap-filler’.

As the construction industry moves towards more relational forms of contracts, with an emphasis on collaboration, mutual trust and co-operation, the implications of this case may have far-reaching commercial and legal implications.

A full transcript of the case can be read here.

 

_{An article written by Alexandre Dansette and Tom Lamb}