Co-operation and compulsion

The recent case of Sanderson Limited v Simtom Food Products Limited [2019] EWHC 442 (TCC) has brought the implied duty to co-operate into sharp focus because the court vindicated Sanderson's termination of a contract and claim for damages when Simtom failed to co-operate with Sanderson's efforts to perform the contract.  Although the project concerned the provision of IT services rather than construction activity, the duty of co-operation in the performance of a contract for services can apply to construction contracts.

Sanderson entered in to a contract to supply its IT services to Simtom, a manufacturer of cooking sauces, curry pastes, chutneys, pickles and chilli sauces.  The contract was entered into in November 2014, and a draft implementation plan was prepared. In the period March – June 2015 meetings and workshops were held to better allow Sanderson to understand Simtom's requirements and provide IT training to its employees.  It was envisaged that Sanderson's 'Unity F8 System' would, in time, encompass Simtom's sales and purchase orders, stock control, recipe management and quality control and financial management. However, in July 2015 it was agreed to postpone implementation until September 2015.  September 2015 came and went and in February 2016 the parties agreed to re-start the project in 2017. Emails were exchanged emails during January – March 2017, in which Sanderson maintained the parties had agreed to re-start the project on 1 February 2017, but Simtom said the parties had only agreed to re-start 'around that time'.  By March 2017 nothing had been agreed so, on 28 April 2017, Sanderson's solicitors wrote to Simtom saying that they had repudiated the contract, that Sanderson accepted that breach and was therefore ending the contract.  Sanderson then claimed damages for breach of contract, and Simtom counterclaimed, alleging that Sanderson had failed to exercise reasonable skill and care in the performance of those services it had provided, contending that Sanderson's termination of the contract was itself a repudiation, and seeking damages equivalent to part of what it had already paid to Sanderson.

The court briefly examined the duty to co-operate.  This included an old House of Lords (HL) case Mackay v Dick and Stevenson (1881) 6 Ap Cas 251 at 263 which concerned construction plant. Mackay agreed to buy from Dick and Stevenson ‘a steam navvy of novel construction’, on condition that it achieved excavation of a given quantity of clay in a fixed time during a trial-run on a “properly opened-up face” at a certain railway cutting. Mackay did not make the ‘opened up face’ available to enable the trial to be carried out.  Mackay then rejected the excavator and Dick and Stevenson sued successfully for the price.  The HL heard Mackay's appeal, which failed. Lord Blackburn said:

I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances.

This is the basis for an implied term to prevent one contracting party frustrating the performance of an obligation by the other contracting party where it was dependent on the first party's conduct. Such an implied term is a corollary of the express terms of the contract; think of the painting of a portrait – the subject of the portrait agrees to pay, and the artist agrees to paint, but it is easy to see the necessity for an implied term that the subject must also sit for the artist too.  

In Sanderson, such an implied term was found to exist:

"The Contract required close collaboration between the parties to define the Defendant's business requirements, identify the action necessary to digitise and automate the Defendant's production and accounting processes, implement the Claimant's electronic system and ensure that the Defendant's employees were properly trained in the use of the system. In the absence of specific contractual provision requiring the parties to co-operate with one another in this way, a duty to do so would be implied…. It also survives the recent guidance of the Supreme Court in Marks & Spencer v BNP Paribas [2016] AC 742 in which the tests of necessity and obvious inference have been re-stated. In the absence of express contractual provision to the contrary, I am thus satisfied that a duty of co-operation is to be implied in the present case."

When it came to the breach of it, the court drew on case law concerning the abandonment of contracts and said:

"The Defendant did not expressly renounce the Contract. The question is thus whether, by words or conduct, it evinced an intention to abandon and refuse to perform its obligations under the Contract. For this purpose, a contracting party is to be treated as having refused to perform its obligations if it evinces an intention to perform but "only in a manner substantially inconsistent with [its] obligations and not in any other way, … The same is true if it refuses to perform unless the innocent party complies with conditions not required by the Contract,… The overall question is thus to be addressed by "looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party" and asking whether "the contract-breaker has clearly shown an intention to abandon and altogether refuse to perform the contract….

In failing to agree to a kick-off meeting to restart the project, Simtom was in repudiatory breach of contract because it failed to cooperate in efforts to restart the project after the agreed year-long suspension. 

In the construction context, a lack of co-operation is most frequently cited in delay and disruption claims, where non-co-operation allegedly results in the inability to carry out the works in a "regular and orderly‟, or "expeditious and economic‟ manner.  However, the case law on implied obligations to co-operate in these circumstances is decidedly mixed.  In London Borough of Merton v Leach (1985) 32 BLR 51 (Ch) it was held that there were implied terms of the contract that (a) Merton would not hinder Leach in his execution of the contract work; and (b) that each party would do whatever was necessary in order to enable a contract to be carried out (per Mackay v. Dick, above). In that case, it was held that this meant the architect should provide correct information concerning the work and Merton as the employer would be liable for the architect's failure to do so.   Conversely, in Nala Engineering v Roselec [1999] CILL 1534 (TCC), although the delay and disruption encountered was exceptional and loss-making, the contention that there was an implied term to protect the 'efficient and economic' carrying out of the works was rejected.   The implied term contended for did not meet the test of business efficacy and nor was the term so obvious as to 'go without saying'.  A similar contention for an implied term, that a contractor would permit a subcontractor to right to carry out its works “in a regular and orderly manner” or “in a regular and sequential manner to enable completion within 27 weeks”, was rejected in Floods of Queensferry Ltd v Shand Construction Ltd (unreported, TCC, Judge Humphrey Lloyd QC, 30 March 1999).  While there were implied terms concerning non-hindrance or mutual co-operation, those contended for conflicted with the express terms of the sub-contract. Therefore, the only term concerning co-operation which could be implied was the fundamental term that “[Shand] was not to hinder or prevent [Floods] from carrying out its work”.  

The duty of co-operation has come under renewed scrutiny recently thanks to core clause 10.1 in the NEC3 suite: ”the Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation”.  However, the main focus of those cases where this clause (or clauses like it) feature have been termination (TSG Building Services Plc v South Anglia Housing Ltd [2013] EWHC 1151 (TCC)), payment terms (Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC)) and dispute resolution provisions (Costain Ltd v Tarmac Holdings [2017] EWHC 319 (TCC)).  In these cases, any duty to co-operate has taken second place to express terms dealing specifically with those issues. This is consistent with the above precedents, but also means there has been no judgment on the remedies for a breach of the duty of co-operation alone.

What does this mean for you or your business?

This is where Sanderson breaks new ground; there were no express terms which required either party to attend meetings, so Sanderson's decision to terminate required a careful analysis of the situation, and some confidence, since all too often termination can backfire against a party which terminates a contract when it is not entitled to do so.   In vindicating Sanderson's move in terminating the contract, the court has endorsed termination as a valid response to a breach of one of the 'softer' species of contractual obligation.  We believe this is the first time that a court has been able to consider a breach of an implied term of co-operation in isolation from express terms, rule that non-co-operation is repudiatory conduct, and endorse termination as a valid course of action in response to it.

Whether an implied term to co-operate will apply will depend on what the parties have contracted to achieve, and until now this has largely been confined to 'non-hindrance', a 'negative' obligation only. However, Sanderson v Simtom suggests that courts are ready to imply terms which include 'positive' obligations to see that something is done by taking active steps  (unless to do so contradicts an express term).  The case also suggests that the courts will support an innocent party which terminates a contract in the face of persistent non-co-operation.

The courts have recently been shining a light on "relational contracts", in which the parties commit to long term relationships, which in the construction context would include frameworks and PFI contracts.  Here, the parties' conduct is likely to be judged not only by their respective promises but also by the longevity of their intended relationship, and how they have agreed to address events that may arise during that relationship.  Indeed, the good faith obligations owed to sub-postmasters by the Post Office was recently adjudicated on by lead TCC judge  Mr Justice Fraser in Bates v Post Office (No.3) [2019] EWHC 606 (QB)   (which will be the subject of a forthcoming article). 

What do you need to be doing now?

English courts in general are likely to remain sceptical towards such concepts as 'mutual trust', co-operation' and 'good faith' for the time being, but the drive to change the culture in construction means the TCC is getting to grips with these doctrines.   The prevalence of express terms, and the priority afforded to them for the sake of certainty, means stand-out cases like Sanderson v Simtom are likely to remain infrequent.  The best way to get the benefit of a duty to co-operate is to specify a positive obligation to co-operate, as core clause 10.1 of the NEC suite does.  Also, consider modifying other express clauses in order to add 'muscle' to the obligation, such as requiring the employer to promote 'regular and orderly' or 'efficient and economic' performance of the works.