A commercial decision has been overturned on appeal all the way to the Inner House of the Court of Session, in a case which has been turned on its head due to reconsideration of an obligation within the contract to work in “a spirit of mutual trust and co-operation”. Previous decisions had placed relatively little importance in this term, but the final decision in this case has shown the difference such wording can make in a commercial agreement, where a party’s conduct allegedly falls short of this standard.
The contract
Dragados was the main contractor in a harbor expansion project. Dragados then engaged Van Oord UK Ltd as a sub-contractor to carry out the dredging required, to a value of £26.4m.
The contract was based on a standard model contract used in the engineering industry. The work was to be billed according to a set rate for the volume of earth moved, but there was also a series of provisions setting out when and how this rate could be adjusted. The work involved was complex and even where a price is pre-agreed, it is common to have a mechanism in place to accommodate the various changes in circumstances which may occur.
The dispute
However, shortly after work had begun with the harbor expansion, Dragados contracted approximately a third of the volume of this work to two other sub-contractors. Notably, one of these new sub-contracts was made only 10 days after Van Oord began working.
Further to this drastic cut in the amount of work involved for Van Oord, Dragados engaged the price adjustment provisions of the contract. This amendment to the payable rate would have eventually amounted to an almost 50% reduction, by Dragados’ own calculation.
Van Oord had not only lost out on a large volume of work - they were now facing the prospect of being paid at half-price for the work remaining. They took the case to the courts, on the basis that Dragados had misled them and had manipulated the contract terms. They asked the courts to prevent the new sub-contractors from proceeding, but the order sought by Van Oord was not granted.
In a series of decisions, it was held that even if Dragados had been in breach of the contract by bringing-in the additional sub-contractors, it would be excessively inconvenient for those new parties involved to hinder the fulfilment of their contracts. Since the other sub-contractors were to go ahead with their portions of the work, it was decided that Dragados was ultimately entitled to make use of the price adjustment provisions in relation to the work remaining for Van Oord, regardless of whether Dragados’ conduct was misleading as alleged.
The appeal
The Inner House took a markedly different approach on appeal. While previous decisions had not put much stock in the small section of the contract which required the parties to act in mutual trust and cooperation – treating it more as a statement of aspiration – the Inner House looked at it differently. They held that this wording not only restated a pre-existing obligation to deal in good faith, but rather reinforced it.
The court went further and decided that this obligation to act in mutual trust and cooperation was connected directly to every other part of the contract. Every action had to be taken with this standard in mind. So, if Dragados broke this one term, it could not benefit from any other.
In the end, this wording about mutual trust and cooperation was not fluff. It was a contractual term as essential as any other. If Dragados had failed to adhere to it, it could not then engage the price adjustment mechanism at Van Oord’s expense.
What effect could this decision have?
The Inner House signaled a clear break with the previous reasoning used in the case, through the seriousness with which it treated this obligation to act in a spirit of mutual trust and cooperation, which some may have been used to looking at as fluff wording, included only as a matter of course.
Going forward, it may be dangerous to dismiss or overlook such phrases, and careful consideration should also be given to drafting, even when using industry-standard templates. Where already agreed to, parties subject to such wording should think closely as to whether they are living up to the standards set.
