In times when the public sector is under ever increasing
budgetary pressure, there may be a temptation to view Performance
Mechanisms in longer term PPP contracts and FM contracts as a
potential source of income.
The recent High Court decision involving Mid Essex Hospital
Services NHS Trust and Medirest serves as a cautionary tale to
those tempted to apply the "stick" of the Performance
Mechanism to the detriment of the longer term contractual
It also underlines the futility of overly complex and penal
performance regimes which do not reflect legitimate concerns raised
by the poor performance of FM obligations.
In this case the High Court considered a general duty to
cooperate in good faith and the interface between a general duty to
cooperate in good faith and other contractual rights and
What is required in order to discharge an obligation to act in
good faith will turn on the circumstances of the contract. The
Court observes that where the contracting authority is a public
body, "the highest standards of behaviour" are required
in order to avoid adverse consequences for the public (patients in
Parties should not take unreasonable actions which might
"undermine the purpose of the contract"
The duty to cooperate in good faith applies to all contractual
rights and remedies, not just where there is an element of
The court found that "There is nothing wrong with a
challenging approach to managing a contract...so long as a party
deploys facts and common sense". The exercise of contractual
power in an arbitrary, capricious and irrational manner will invite
the criticism of the court and may (as in this case) be sufficient
to justify termination on the grounds of material breach.
Parties managing long term contractual relationships must pay
more than lip service to general obligations to cooperate in good
faith. Although it is tempting to use contractual remedies to
achieve results which are unpalatable to the other party and
potentially at odds with the "common purpose" in some
circumstances extreme behaviour may be sufficient to allow the
other party to terminate for material breach.
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.
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