Leap of Faith – How Enforceable is Good Faith? (Van Oord v Dragados (2021))

The Inner House of the Court of Session has recently published a case that mainly focuses on how good faith is interpreted in NEC3 contracts. Good faith is an essential component in the NEC3 contract, a contract typically used in public civil engineering works.

Facts

• Dragados had been tasked with completing dredging work on Nigg Bay, Aberdeen.
• Dragados decided to withdraw the simpler parts of the sub-contract works and re-distribute these to different sub-contractors.
• Dragados later attempted to decrease the amount due per the sub-contract by 49.2% through the compensation event provisions.
• The sub-contract was terminated, when a large amount of work was unfinished and the valuation of the termination account could not be agreed on by the parties.
• Van Oord looked for payment at the original bill rate for the incomplete work. However, Dragados argued that a reduced rate was applicable due to a contract compensation event provision.

The Decision

In the Outer House of the Court of Session it was determined that under the sub-contract Dragados should not be able to exclude and transfer the works to other individuals as this would result in a breach of contract. When heard in the Inner House, Van Oord alleged that Dragados had intentionally utilised the contract to suit their interests. Dragados requested that the bill rate balance the cost of the more straightforward works against those that were more challenging. This had been agreed to by Van Oord on the basis that said works were completed. The situation became unbalanced when the simpler works were transferred by Dragados to other sub-contractors. This left Van Oord with an unfair portion of more challenging works for the rate they were being paid.

Impact on Good Faith

The Inner House paid particular attention to clause 10.1. The court stated this clause “reflects and reinforces the general principle of good faith in contract” and is not “merely an avowal of aspiration” as it has previously been described.

Significantly, the court recognised that the duty to act in good faith aligns with three propositions which have developed from past cases concerning this subject:

1. A contracting party will not in normal circumstances be able to take advantage of its own breach against another party. 
2. A sub-contractor is not obligated to obey an instruction issued in breach of contract.
3. Clear language is required to place one contract party completely at the mercy of another.

The court concluded that the obligation of good faith under clause 10.1 was a contractual counterpart of clause 63.10. As a result of this, Dragados were unable to pursue a price reduction unless the duty to act in good faith had been fulfilled.

Closing Thoughts

Prior to this decision, good faith had been considered more of a toothless obligation. However, in this case, the highest court in Scotland has now confirmed that this should be considered a binding obligation not a mere statement of aspiration when using an NEC contract. What this means therefore, is that particularly in Scotland, parties may face consequences should they fail to follow their duty of good faith in the operation of the NEC contract.

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.