Good Faith and Fair Dealing; What Does It Really Mean in Construction Contracts?

By Dr. Chandana Jayalath

The term good faith, bona fide in Latin, is used in many areas of the law but has special significance in law related to construction. It is expected that the parties to a contract will act in good faith and fair deal at all times. To meet this test, it is honesty that comes first in the conduct of the transactions in achieving a reasonable commercial standard of fair dealing in the trade. These standards are usually set out in form of specifications taken for granted in the industry. Accordingly, good faith incorporates both subjective elements by requiring honesty and objective elements by requiring adherence to standards. Although good faith and fair deal go together, it is bad faith, more easily recognizable so that a party may contest in a lawsuit when only a bad faith prevails. According to Lord Justice Bingham, good faith is in essence a principle of fair and open dealing where the parties should not deceive each other.

Some duties of good faith have found their way into construction contracts, for instance all tenderers are entitled to know all the grounds upon which their bids are to be assessed and this applies whether they are in public or private sectors. The rationale for imposing a duty in such circumstances is that the tenderer is called upon to make often significant expenditure. It is unfair to expect them to do so while material facts are withheld from them. Negotiations taken place in parallel when the contractor believes that it is the only party engaged in those negotiations is against the duty of good faith. This bid-shopping is not a fair deal by definition.

Many standard forms of contract have given emphasis in promoting good faith and fair dealing. The contractor is bound to give a notice at the earliest practicable opportunity whenever he came across something bad is likely, such as a physical obstruction that will hamper progress. The engineer is usually kept under obligation to address any claim, either pay it or deny it, within a reasonable time. The engineer must inform the contractor in writing precisely why and how it is denied with the provisions upon which it was relied. It is hoped the certifier must act honestly in spite of the fact that the certifier is often the agent of the employer. Also, the contractor is obliged to take steps to mitigate delays and apply his ‘best effort’ to minimize impact on time, albeit how much effort would amount to best effort is not known in exact terms. As such, there can not be technical excuses for breaching the contract or using the specific words of the contract to refuse performance when the surrounding circumstances or apparent understanding of the parties were to the contrary. Further, the engineer shall proceed to agree or determine any matter and shall consult with each party in an endeavor to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the contract, taking due regard to all relevant circumstances. In nutshell, parties should not aim to interpret an issue in vacuum but ‘play fair’ with each other without breaking their word.

A question of interest is when the parties are the masters of their own fate. Courts generally prefer adherence to the principles of freedom of contract. This means that parties are free to contract on their own terms as far as possible and these agreements should be upheld and enforced by the courts. However, when courts find unfair deals, courts may recommend incremental solutions rather than adopting a broad overarching good faith principle. For example, in relation to construction contracts, courts will commonly imply terms into the party’s contract to remedy unfair situation on the basis of the parties’ presumed intention. One example is that the contractor must do all work under the contract with proper skill and care which can not be contested in lawsuits.

According to Richard, Wilmot and Smith, a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirements of good faith and it causes a significant imbalance of the party’s rights and obligations. Accordingly, parties are not permitted to take undue advantage of the other party’s necessity, indigence, lack of experience, unfamiliarly of the subject matter of the contract, or weak bargaining position. The terms must be expressed clearly and legibly containing no concealed pitfalls or traps. A classic example is when penalty imposition (although it is labeled as liquidated damages sometimes) is unfair by the contractor. In some contracts, levying penalty starts according to a schedule of eventualities qualified already in the contract, for instance in a road project when the contractor delayed in commencing some designated trench work or even a section of asphalt work on chainage basis. There are cases where penalty is applicable in delay in either commencement or in completion of almost all the individual activities, shown in the bar schedule. A delay due to submission of a traffic management plan would even be a case for penalty in addition to usual delay in completion of whole of works and even sometimes the engineer has been given discretion to consider further penalty if he deems required. However this discretion has no legal effect, so is a ‘dummy’ clause that is non-enforceable when the other eventualities meet the ceiling limit. Courts may in these cases make this clause unenforeseable as it openly kills the concept of pre agreed genuine estimate of likely loss. More over, the contracts with full of penalty events that keep the contractor in a very inflexible setting that restricts him in managing the project is against the doctrine of fair dealing.

It is fundamental that the parties are only bound to perform what is stipulated in the contract document they sign. Variation clauses for instance introduce much needed flexibility into somewhat rigid rules that otherwise govern the parties’ obligations arising under building contracts. Typically, the intent of the clause 51 is to enable the engineer to vary the works ‘under’ the contract and not ‘in’ the contract. We often find a clause vesting some powers on the engineer to form an opinion as to suitability and applicability of a new rate and the limit of enhancement of an existing bill rate. It will be an unfair deal when the engineer unilaterally fixes a rate for new work without giving the contractor a chance to negotiate. But the courts will interfere in agreements procured by the exertion of economic duress by one party on the other, if there is compulsion on, or a lack of practical choice to agree into a fair rate. If the nature and scope of omission renders the existing rates no longer appropriate, the engineer should use his power in good faith in order to adjust it to an appropriate extent in such a way that the contractor obtains a reasonable compensation. Another example would be a threat by a sub-contractor to withhold the delivery of a crucial piece of plant or equipment until an extension of time is granted or the sub-contract price is increased. Conversely, it might include a threat by a main contractor to refuse to grant the sub-contractor an extension of time (and to apply LDs for delay), unless the sub-contractor agrees to carry out a substantial variation at minimal cost.


It could also be unfair if the employer himself or another contractor carries out any omitted work without consent of the contractor or unless it can be proved that the contractor is technically or financially incapable of carrying out such omitted work. However in some contracts, we find the Employer has the right to omit a part of the scope and get it done by another contractor under a separate contract. Also, the existence of a variation clause does not entitle the engineer to make large scale or significant changes to the nature and scope of work. A variation order that deviates from the fundamental scope, nature, type or complexity of work contemplated by the parties at the time of tender would amount to an unfair deal. The engineer should not therefore introduce work outside the domain of the original job, which would cause hardship to the contractor financially as well as technically.

Contractors who find themselves with unattractive contract prices would find it arguable that a change introduced by the engineer fell outside the variation clause thus the payment for the change should be on a quantum meruit basis. In Blue Circle Industries v Holland Dredging Co (1987), the works involved dredging in Larne Lough in Ireland to enable larger vessels to dock. The tender referred to the dredged material being deposited in areas approved by the public authorities, the intention being to discharge the material excavated in suitable areas in the Lough. Larne Harbour Board rejected this proposal later and as a result an alternative plan was agreed to use the excavated material to form an artificial bird island. It was argued by the contractor that this was not a variation to the works within the confines of the contract but a separate contract in its own right. It was held that if the additional or varied work were so peculiar, so unexpected and so different from what any person reckoned to such an extent that it is not contemplated by the contract then it would constitute a separate contract. Hence, the construction of the bird island was wholly outside the scope of the original dredging contract and therefore constituted a separated contract. As such, when a large number of changes are instructed though they individually fall within the ambit of the variation clause, they can collectively have the effect of completely changing the scope of the works. This is referred to as either abandonment or cardinal change and deals with the situation where the employer makes excessive changes to a project beyond what the parties reasonably could have anticipated at the time the contract is entered into. Courts will look at a number of factors in helping to decide whether the changes have been excessive such as the size, nature, complexity, expected duration the number of changes, how many changes were anticipated when the project started, the magnitude of the work involved in the changes and the length of time in which such changes were made etc.

The clause 52.3 of FIDIC 4th edition stipulates that if it is found that the limit has been exceeded on the issue of the Taking-Over certificate for the whole of the works, the contract sum to be adjusted having regard to the contractor’s site and general overhead costs. This sub-clause allows the contractor and engineer to discuss and agree a lump sum addition or deduction to the contract price at the practical completion when the additions/deductions are more than 15% of the “effective contract price”. The burden of the proof on the loss lies upon the contractor who affirms, not the other who may deny. Hence, the details and calculation will entirely dependant on the technical reasons for the increase or decrease to the contract price. The whole idea is to compensate the contractor for any unabsorbed overhead component due to overwhelming decrease or increase of such work where his overhead would have been expended more and his profit would have been exhausted more in proportion to what he had planned and contracted with, and vice versa for the employer. It is also not reasonably inferable that the contractor has the right to refuse any variations beyond this limit, except in a circumstance where the instructed new work fell out of the contract domain because the additional work were so peculiar, so unexpected and so different from what was contemplated by the contract, as mentioned earlier.

The concept of good faith is also seen in the resolution of disputes where many of the standard forms contain clauses that refer disputes to arbitration. Codes of conduct mandate the use of ‘fairness’, ‘reasonableness’ and ‘impartiality’ at all times. Indeed, the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense. Accordingly, the tribunal must adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense so as to provide a fair means for the resolution of the matters to be determined. It also provides for the removal of an arbitrator where there are justifiable doubts as to his impartiality or if he does not use reasonable dispatch.

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