Neutral citation: Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC)

NEC contract topics: mutual trust and cooperation, clause 10.1

Form of contract: NEC3 Framework Contract (2005), NEC3 Supply Short Contract.

Main areas of law: statutory framework for arbitration under the Arbitration Act 1996, estoppel, waiver, abandonment.

 

Costain entered into a subcontract with Tarmac dated 7 February 2014 for the supply of concrete for a concrete safety barrier on the M1 motorway, between junctions 28 and 31. The subcontract was based on two NEC3 forms: the NEC3 Framework Contract (2005), amended by “Z” clauses, and the NEC3 Supply Short Contract, also amended.

In April 2015, concerns were raised about the quality of the concrete. Following several months of discussions and correspondence, a dispute arose in October 2015 regarding the appropriate remedial works. Tarmac proposed limited remedial measures at its cost. Costain rejected those and advanced a significantly more extensive scheme, estimated at around £6 million. Clause 93.3 of the NEC3 Supply Short Contract contained strict time-based requirements for referring disputes to adjudication. Tarmac initiated adjudication proceedings, asserting that Costain had failed to refer the dispute in time. The adjudicator agreed, holding that the dispute had crystallised in October 2015 and that Costain had missed the applicable notification and referral deadlines.

Clause 10.1 of both the NEC3 Framework Contract and the NEC3 Supply Short Contract required the parties to act in a spirit of mutual trust and cooperation. Costain sought to elevate this clause as a basis to argue that Tarmac had acted unfairly by relying on the clause 93 time bar, particularly after engaging in the pre-action protocol process and responding to correspondence without earlier asserting the time bar.

Costain commenced proceedings in the Technology and Construction Court. Tarmac applied for a stay under section 9(1) of the Arbitration Act 1996, arguing that the dispute fell within an arbitration agreement under clause 93.

 

The court was required to determine whether clause 93 of the NEC3 Supply Short Contract constituted an arbitration agreement under the 1996 Act and whether the dispute fell within the scope of that agreement. Costain advanced several arguments against the stay, including that the clause was inoperative due to estoppel, waiver, or abandonment.

Costain claimed that the presence of two dispute resolution regimes, one in the Framework Contract and another in the Supply Contract, meant that it could choose litigation. It also maintained that the parties' conduct suggested a shared understanding that arbitration need not apply. The court was also asked to consider whether participation in the pre-action protocol process and exchanges between solicitors amounted to a representation by Tarmac that it would not enforce the time bar or rely on clause 93.

 

Mr Justice Coulson held that clause 93 of the NEC3 Supply Short Contract did constitute a valid and binding arbitration agreement. He emphasised that while the parties had signed one overall subcontract, that agreement deliberately incorporated two distinct sets of contractual terms. The Framework Contract governed the procurement process and incorporated a permissive adjudication clause with no reference to arbitration. The Supply Short Contract governed the actual supply of concrete and set out a mandatory two-stage dispute resolution process: adjudication subject to strict timing requirements, followed by arbitration.

The court concluded that this structure was intentional and commercially sensible. The obligations under each contract reflected different aspects of the commercial relationship. Disputes under the Framework Contract were subject to adjudication and court proceedings. Disputes under the Supply Contract were subject to adjudication and arbitration. The judge rejected Costain’s argument that the parties could choose the forum after a dispute arose. Such a construction was described as commercially unworkable, inconsistent with the express wording of clause 93, and contrary to the requirement for certainty in dispute resolution procedures.

On the timing issue, the court accepted that the dispute crystallised by 19 October 2015 and that Costain had failed to initiate adjudication within the timeframe required by clause 93.3. The adjudicator’s decision on this point was valid and binding. The court therefore stayed proceedings pursuant to section 9(1) of the 1996 Act.

The court undertook a detailed examination of clause 10.1 and its practical limits. Drawing on the commentary in Keating on NEC3 and cases such as Mears v Shoreline (2015) and Automasters Australia v Bruness (2002), the judge held that the obligation is not equivalent to a duty of general fairness, nor does it convert the parties into fiduciaries. It may prevent active deception or conduct that improperly exploits the other party, but it does not prevent reliance on valid contractual rights.  Mr Justic Coulson stated:

 

"Taking the obligation of mutual trust and co-operation (or even good faith) at its highest, it meant that, in the present case, the defendant could not do or say anything which lulled the claimant into falsely believing that the time bar in clause 93 was either non-operative or would not be relied on in this case."

 

Costain’s argument that clause 10.1 created a duty for Tarmac to disavow clause 93 or alert Costain to its reliance on the time bar was firmly rejected.

The judge found that Tarmac had said nothing misleading, and there was no mutual understanding that clause 93 would be waived. Even if there had been silence from Tarmac, the mutual trust clause did not create a duty to act against interest or to forgo reliance on a contractually agreed limitation. Importantly, the court stressed that the mutual trust obligation should not be interpreted in a manner that undermines certainty in contractual relationships. Parties must be able to rely on agreed procedures without being second-guessed by vague standards of conduct. The duty to cooperate must be reconciled with, and not used to contradict, the express terms of the contract. Where the contract imposes a specific time bar and dispute resolution regime, compliance with that regime is not a breach of clause 10.1.

 

The judgment reinforces the importance of understanding and complying with the dispute resolution mechanisms embedded within NEC contracts. Clause 93 of the NEC3 Supply Short Contract imposes a mandatory structure and a strict timetable. Failure to adhere to these requirements may permanently preclude the parties from pursuing a claim.

Practitioners should take note that where different NEC contract forms are used concurrently within one agreement, each form may carry its own dispute resolution regime. As this case shows, courts will respect that division. The presence of more than one pathway to resolve disputes does not necessarily create optionality unless clearly stated.

The decision also clarifies that the mutual trust and cooperation clause at 10.1, although a distinctive feature of NEC contracts, does not override express contractual terms, including time bars and mandatory procedures. It does not impose a duty to act contrary to a party’s commercial interest, nor can it be used to neutralise the effect of clear language agreed between the parties. While clause 10.1 may imply duties of reasonableness and candour in limited circumstances, it cannot be used to transform an unsuccessful estoppel argument into a successful one.