A decision from the Technology and Construction Court (TCC) in England last month, Matiere SAS v ABM Precast Solutions Limited [2025] EWHC 1434 (TCC), is a timely reminder of the importance of acting in good faith when there's an express contractual term obliging the parties to do so. In such cases, it's not a matter of 'anything goes' in business!
In that case, Matiere and ABM agreed to put together a joint bid for some work relating to the HS2 rail project. Matiere would design three 'cut and cover' tunnels required for the high-speed train. ABM would supply the precast concrete tunnel linings. There was no formal joint venture agreement, but the parties did enter into a number of agreements about the joint bid, and two of those included 'good faith obligations'. Their bid failed and ABM blamed Matiere. ABM alleged that Matiere had breached the good faith obligation and had thus caused ABM to lose the chance of a successful bid. Stated briefly, ABM alleged that various actions by Matiere had undermined ABM's position, in particular, in relation to a new permanent factory at Scunthorpe where ABM planned to manufacture the linings.
The judge indicated that good faith in the context of such a joint venture enterprise meant that the parties 'would act honestly with each other and would not conduct themselves in a manner which would be regarded as commercially unacceptable to reasonable and honest people'. It was also '… a contract in which the obligation includes keeping fidelity to the bargain'. In the circumstances, he found that 'Matiere's conduct viz a viz ABM in respect of undermining Scunthorpe was, on occasions, either dishonest or was of a type that would be regarded as commercially unacceptable to reasonable and honest people'. In the circumstances, he found that Matiere was in breach of the obligation of good faith it had expressly undertaken to ABM. Ultimately, however, ABM did not succeed in its multi-million-pound damages claim because the court found that it was unlikely that the bid would have succeeded for other reasons.
The position in Scotland
The outcome of the case in the TCC on the matter of good faith should come as no surprise to those operating in Scotland. While the TCC case may be argued to involve a particular type of collaborative contractual arrangement, the principle of good faith can extend beyond that particular type of contract. The effect of such 'good faith' clauses under Scots law, in what may be regarded as more traditional construction contract relationships - such as that of contractor and subcontractor - was most recently affirmed in a particularly trenchant way by the Scottish Appeal Court in the case of Van Oord UK Limited v Dragados UK Limited (5th October 2021).
That case dealt with a dispute under the NEC 3 conditions. The background was that Dragados was appointed main contractor to construct a new harbour at Nigg Bay. Dragados engaged Van Oord as its subcontractor to carry out the dredging works. Dragados then purported to transfer about one third of the dredging works to two other companies. Later, it informed Van Oord that it proposed to reduce the sum payable for Van Oord's remaining work under the 'compensation event' provisions of NEC. The ultimate reduction of the rate per cubic meter proposed by Dragados was significant -nearly 50%. The judge, at first instance, held that the transfer of work by Dragados was a breach of contract, which was accepted by Dragados at the appeal. He also concluded, however, that Dragados was entitled to reduce the rate for the remaining works.
Van Oord had tendered on a 'blended rate' on the basis that it would be carrying out all the dredging works. The rate averaged out the cost of easier and more difficult work. Dragados terminated the subcontract, and the dispute centred on how the work done by Van Oord was to be valued. Van Oord argued that Dragados was not entitled to reduce the amount payable to it consequent upon the instructions to reduce their work in breach of contract. It sought payment based upon the original rates.
The NEC3 conditions included the express obligation in Clause 10.1 that 'The Contractor and Subcontractor shall act as stated in this subcontract and in a spirit of mutual trust and co-operation'. While the judge, at first instance, concluded that 'this term did not add much', the Scottish Appeal Court took quite a different view. It stated that such a provision is 'not merely an avowal of aspiration. Instead, it reflects and reinforces the general principle of good faith in contract'. These words are, arguably, the most important in the whole decision because, believe it or not, the existence of a 'general principle of good faith in contract' in Scots law is somewhat controversial, even though in 1997, the House of Lords referred, in a Scottish Appeal, to 'the broad principle in the field of contract law of fair dealing in good faith'.
The existence and extent of the application of the principle of good faith has been the subject of debate for decades. Why? Basically, because it is argued that such a general principle is dangerous, as parties should be free to take action which protects their commercial interests in contractual matters and not be constrained by a principle which might restrict such action.
In the circumstances, the fact that the Scottish Appeal Court was at pains to state that there is a 'general principle of good faith in contract' in Scots law should not be regarded as some accidental throwaway. While it was significant for the Scottish Appeal Court to stress that such a general principle exists in Scots law, the extent and effect of the principle is still subject to much debate and will depend very much on the context in which it is suggested that the principle should be applied.
Helpfully, in that case, Lord Woolman, in delivering the opinion of the Court, indicated that Clause 10.1 aligns with three specific propositions recognised under Scots law:
(i) a contracting party 'will not in normal circumstances be entitled to take advantage of his own breach as against the other party',
(ii) a subcontractor is not obliged to obey an instruction issued in breach of contract, and
(iii) clear language is required to place one contracting party completely at the mercy of the other.
The first embodies what lawyers in Scotland call 'the doctrine of mutuality'. A party cannot enforce a contractual stipulation in its favour if it is the counterpart of another obligation which it has breached.
The court found that Clause 10.1 and other relevant provisions in NEC3 were counterparts. The provisions were drafted on the basis that they would be operated lawfully, not in breach of contract. Accordingly, unless Dragados fulfilled its duty to act in a spirit of mutual trust and co-operation, it could not seek a reduction in the Prices.
The main takeaways
We may see much greater use of express 'good faith' provisions in construction contracts of all kinds.
The obligation of 'good faith' is very much alive and kicking in commercial contractual relationships where there is an express contractual term requiring the parties to act in good faith. That said, even where there is no express term, the 'general principle of good faith in contract' recognised by the House of Lords and the Scottish Appeal Court may be held to operate even where there is no express contractual term. The principle may be relevant in certain situations, for example, where termination provisions are exercised. This is an area where we might see significant, and, for some, unexpected developments in Scottish contract law. Those developments may not come quickly but watch this space!
