Implied term of good faith ruling: Over £9 million in damages awarded to council
Our experts examine a case that looks at contractual termination rights and the implied term of good faith. Mr Justice Pepperall handed down judgment recently in Essex County Council v UBB Waste (Essex) Limited [2020] EWHC 1581, ruling that Essex County Council (Essex CC) was entitled to terminate a 25 year contract for the processing of household waste following a dispute with UBB Waste over the performance of a mechanical biological waste treatment plant in Basildon.
Mr Justice Pepperall accepted that there was a term of good faith to be implied into the 25 year contract, but rejected the notion that contractual termination rights were required to be exercised within a reasonable time, holding that such a term was not to be implied into the contract.
Relevant facts
On 31 May 2012, Essex CC entered into a contract with UBB Waste for the design, construction, financing, commissioning, operation and maintenance of a 417,000 tonne capacity mechanical biological waste treatment plant in Basildon to process the county’s household waste. It was said to be worth £800 million over its lifetime. A 25 year contract was agreed between the parties under the private finance initiative.
The Tovi Eco Park facility was subsequently built and had the arrival of its first residual waste in November 2014. The plant failed however to pass acceptance tests which were part of the commissioning process. It was required to pass such tests before the extended planned services commencement date of 12 July 2015 yet failed to do so by this date, or by the acceptance longstop date of 12 January 2017.
Essex CC contended that UBB failed to design and construct the facility to the standard required to render it capable of passing the acceptance tests. It argued that UBB’s failure to attempt to pass the acceptance tests by the longstop date was an event of contractor default, subsequently seeking damages and a declaration that it was entitled to terminate the contract pursuant to clause 67 of the contract.
UBB, on the other hand, argued that the facility would have passed the acceptance tests had it received the type of waste it expected to under the terms of the contract. It reasoned that the performance of the facility was critically dependent on the composition of waste and that Essex CC had failed to engage properly with them in the review process to deal with the composition issues by agreeing necessary modifications to the plant and requisite acceptance tests. It argued it was entitled to an extension of time for passing such modified acceptance tests.
It further denied that Essex CC was entitled to terminate the contract, and instead argued that Essex CC was in breach of contract, counterclaiming damages in excess of £77 million, in addition to declaratory and injunctive relief. It also claimed compensation in respect of the temporary cessation of deliveries in February 2017 following the discovery of suspected asbestos at the facility. UBB alleged Essex CC had failed to act in good faith in their attempts to terminate the contract, submitting this amounted to ‘termination for convenience dressed up as termination for contractor default.’
The court's decision
Awarding Essex CC damages in the sums of £9,038,428 to the end of February 2019 and continuing losses at £99,563 per month, Mr Justice Pepperall held that UBB was in breach of contract and Essex CC was therefore entitled to terminate the relationship.
He concluded that:
- UBB made a number of serious design errors, resulting in the construction of a facility that simply could not pass the acceptance tests. UBB’s major error was in its overestimate of the density of the waste, resulting in the facility being significantly undersized for the quantity of waste it should have been able to process;
- UBB’s arguments that Essex CC failed to act in good faith in attempts to negotiate a solution were without foundation, whatever the changes in the financial and political landscape since the authority initially procured the facility. He deemed it ‘hopeless’ to suggest Essex CC was under a contractual obligation to agree fundamental changes to the contract and acceptance tests to keep the project on track.
Such damages were however awarded not for UBB’s design and construction failings, but for UBB breaching the contract by unilaterally modifying the plant and thereby operating a modified plant in breach of planning permission, causing Essex CC to incur additional costs.
Mr Justice Pepperall did additionally find however that UBB was entitled to compensation in the sum of £745,234 in relation to the cessation of deliveries following the discovery of suspected asbestos, highlighting that consistency of supply was an employer risk under the contract.
Comment
Implied term of good faith
Mr Justice Pepperall decided that a term requiring each party to act in good faith could hereby be implied as this was a relational contract, due to the following factors:
- the long term nature of the contract;
- the high level of communication and co-operation required between the parties;
- indications of the parties’ intention that their roles be performed with integrity, and with trust and confidence in each other.
Applying these principles in the given case, Mr Justice Pepperall dismissed the allegation that Essex CC had breached the implied term of good faith.
This decision provides useful guidance as relational contracting is increasing as a result of large scale investment resulting in the need for long term commitments. The judgment shows that it is possible to exclude such a duty through express terms, however this will likely require more than an entire agreement or sole remedy clause as was the case here.
Time limit to exercise termination rights
Mr Justice Pepperall also rejected the argument that all rights of termination must be exercised within a reasonable time after such a right arises, holding that such a term should be tested against the usual principles of implying a term into a contractual relationship. This therefore provides helpful authority that there is no general principle that a right to terminate be exercised within a reasonable time.
Expert witnesses – conflicts of interest
Finally, it is important to note Mr Justice Pepperall’s heavy criticism of UBB’s use of a technical expert witness in the given case. The company for which the said expert witness was managing director had previously advised UBB in relation to the earlier design and construction phases of the project. Mr Justice Pepperall commented that the expert should have recognised there was a conflict of interest and had failed to distinguish between his provision of consultancy services and role as an expert witness.
This article has been co-written by Vikki Sidaway and Susie Dryden.
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