In March of last year, the courts held that a hospital trust's conduct to its contractor was so unreasonable that it was in breach of the express duty to act in good faith in their contract, and this amounted to a repudiation of the contract. While the case turned on its own facts, a number of long term contracts, particularly in PFI/PPP do include such an obligation of good faith, and the decision had served as a warning that extreme behaviour (in this case by the NHS Trust) could be interpreted as a repudiatory breach.
However, the decision has recently been overturned, with the Court of Appeal finding that the original judge had taken the wrong approach to the good faith obligation contained within the contract (Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2013] EWCA Civ 200).
By way of reminder, the contract in question concerned provision
of catering and cleaning services by Medirest to the Trust. Under
clause 3.5 of the contract the parties were obliged to co-operate
in good faith:
"3.5 The Trust and the Contractor will co-operate with each
other in good faith and will take all reasonable action as is
necessary for the efficient transmission of information and
instructions and to enable the Trust or, as the case may be, any
Beneficiary to derive the full benefit of the Contract."
The contract included mechanisms for Medirest to monitor and
report on its performance, and where performance failures occurred,
the Trust was entitled to award service failure points, and to make
deductions from the payments due to Medirest. The level of
deductions that the Trust was entitled to make were set out by
reference to the different categories of performance failure.
The court noted that Medirest's reporting was haphazard and
deficient, and that it failed to report performance failures. The
Trust carried out its own monitoring every month and indulged in
what the court described as 'extremely harsh' assessments
of Medirest's performance, which resulted in significant
deductions and the award of a high number of service failure points
for relatively trivial incidents (including the now-famous out of
date ketchup sachets and chocolate mousse). Relationships at
management level broke down, and both parties purported to
terminate the contract.
In the original judgment the Judge found that the Trust's conduct constituted a breach of the 'good faith' obligation under clause 3.5. In doing so the Judge implied another term into the contract, that the Trust would not make deductions/award service failure points "...in an arbitrary, capricious and irrational manner", and found that the Trust had acted in breach of this implied term.
However, on appeal Lord Justice Jackson found that there was no
need to imply this term into the contract. In particular, he
concluded that such a term would only be necessary if the Trust was
exercising discretion in levying deductions or in awarding service
failure points. In fact he found that the contract contained
"precise rules" for determining the level of service
failure points incurred and in calculating the amount of deductions
due. The exercise involved did not require the Trust to exercise
discretion. The only discretion available to the Trust under the
relevant contractual provisions was whether or not to make
deductions or to award service failure points, and not the level of
those deductions or the number of service failure points.
Therefore, no further term need be implied into the contract.
In relation to clause 3.5, the 'good faith' clause, Lord
Justice Jackson commented that it was a 'jumble' but found
that it should be read as follows:
"The Trust and the Contractor will co-operate with each other
in good faith and will take all reasonable action as is
necessary:
(1) for the efficient transmission of information and
instructions; and
(2) to enable the Trust or, as the case may be, any Beneficiary to
derive the full benefit of the Contract."
Thus the good faith obligation was specifically limited to the two
purposes stated. Lord Justice Jackson noted that there is no
general doctrine of good faith in English contract law and that any
such duty is "heavily conditioned by its context". He
found that the Trust had breached its contractual obligations
regarding the awarding of service failure points and the making of
deductions, but that there was no evidence that it was acting
dishonestly in doing so. Further, the Trust had effectively
"cured" these breaches of contract by repaying the
wrongly deducted sums. As a result, Medirest was not entitled to
terminate the Contract, and its notice of termination was
invalid.
Lord Justice Beatson, agreeing with Lord Justice Jackson, noted
that the test of good faith is objective, in that it depends on
whether the conduct in question would be regarded as commercially
unacceptable by reasonable and honest people. He went on to comment
that clause 3.5 should be reviewed in the light of the provisions
of that clause, the other provisions in the contract, and its
overall context. He found that the original judge "gave
insufficient weight to the other provisions of the contract and, to
this extent did not take sufficient account of the context of
clause 3.5". As the excessive deductions and service failure
points put the Trust in breach of the relevant clauses of the
contract, it was not necessary to give clause 3.5 a wider
meaning.
The original judgment was hailed in the PFI context as showing
that parties to a PFI agreement had obligations to act reasonably
to each other, and that "good faith" obligations in a
contract were not just empty words. This court of Appeal judgment
is in some ways disappointing, in that it reverses this. This
latest judgment counters the perception that recently the English
courts have been more open-minded to the concept of a general
obligation to act in good faith, and makes it clear that any such
express term will be interpreted carefully, in the context of the
entire contract and the commercial relationship between the
parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.