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Beware 'spirit of partnership' clauses

3 Jul 13 Good faith clause may not always be so good, warns Kim Teichmann.

Kim Teichmann is a senior associate at law firm Thomas Eggar
Kim Teichmann is a senior associate at law firm Thomas Eggar

Partnering clauses and good faith clauses are popular as they are generally viewed as a step towards a better partnering ethos. But beware!

These clauses are not as innocuous as you may think. In the recent case of TSG Building Services PLC v South Anglia Housing Limited [2013] EWHC 1151 (TCC), such a clause cost the client a lot of money.

South Anglia Housing is a housing association responsible for 5,500 individual properties. It entered into a contract for building and maintenance services of those properties with the contractor TSG Building Services. The contract included as part of a clause, the phrase “the Partnering Team members shall work together and individually in the spirit of trust, fairness and mutual co-operation…”

As the contract progressed, the contractor became disillusioned by the level of work it was getting and the way it was being paid. The parties began discussing a different method of payment and then unexpectedly the housing association terminated the contract by relying on a termination at will clause, which allowed termination without reason.  

The unhappy contractor claimed a significant sum of £900,682 from the housing association, which it said was its damages suffered as a result of the wrongful termination. The housing association said that there was no such thing as wrongful termination under the contract, it was allowed to terminate for no reason, which it did. The contractor answered that this termination was wrongful because the termination at will clause had to be read in the light of the clause, which required the parties to act in a spirit of trust, fairness and mutual co-operation and it meant that there was an implied term not to terminate unless in good faith. 

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The housing association then found itself defending an adjudication claim for wrongfully terminating and it lost. It was ordered to pay the sum of £383,778.91 plus the adjudicator’s costs. However, that was not the end of the legal costs as the housing association then went to court to ask for a declaration about whether or not it had wrongfully terminated and the contractor tried to enforce the adjudication award in court. A very expensive affair!

The court found that the partnering clause did not affect the termination clause and that the termination was not wrongful. However, this decision was based on the way the partnering clause was drafted; it was limited to certain circumstances and did not apply to all dealings between the parties.

But what would have happened if the partnering clause had been general and was not limited to certain circumstances? The answer is that such a general clause could result in good faith provisions being implied in other clauses.

What this means for everyone is that if you have a clause that says that parties must be fair to each other, it may mean that the court interprets the “not such fair” clauses in a different way than it would otherwise have done. The lesson is that if you are not really being nice or fair, do not agree to a clause that says otherwise.    

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