Good faith obligations are more and more common within English contracts, despite there being a general uncertainty over what this obligation entails and what responsibility it places on those parties who sign up to it. The recent case of Compass Group UK and Ireland Ltd (trading as Medirest) and Mid Essex Hospital Services NHS Trust [2012] examined the right to terminate a contract for an alleged breach of a good faith obligation, thereby providing some further clarification on this issue.
Key Contractual Terms
Medirest and Mid Essex Hospital Services NHS Trust ("the Trust") entered into a contract for the provision of catering services on 1 April 2008. The term of this contract was seven years, extendable at the Trust's discretion for a further three years. The Trust appointed Medirest as its contractor to perform various catering services in accordance with the service level specifications and for the provision of these services the Trust agreed to pay an annual service payment. The annual payment was split into monthly instalments which could be reduced by way of deductions for performance failures. In addition the Trust could award service failure points for poor performance measured in accordance with the service level specification.
The contract provided for certain termination rights for both parties. Importantly in this case the Trust could terminate if Medirest exceeded 1,400 service failure points in any six month rolling period or where there had been a material failure by Medirest to perform any material obligation, provided such failure had not been remedied to the Trust's reasonable satisfaction. Medirest was entitled to terminate the contract where the Trust had committed a material breach of the contract.
Clause 3.5 imposed a duty on both parties to cooperate in good faith as set out below:
"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."
Performance Issues
During 2008 there were problems with Medirest's performance and the number of service failure points that entitled the Trust to terminate was exceeded. The timeline of events is broadly as follows:
- In January 2009 the Trust stated that 52,908 service failure points had been incurred and that performance deductions had reached £587,000 for the period of July to December 2008. These calculations included a deduction of £46,320 for a box of out of date ketchup sachets and £84,450 for a one day old mousse. This figure was contested by Medirest, whose own assessment for the same period came to 18,822 service failure points and deductions of £37,000.
- In July 2009 the Trust withheld payment of £137,834. Medirest offered £150,000 to settle the deductions, however this proposal was rejected by the Trust.
- In August 2009 the trust informed Medirest that deductions now exceeded £716,000 (despite a recognised improvement in the performance) and as a result reductions of £106,032 would be made on a monthly basis over 5 months. In this same month the trust withheld £106,362.
- On 28 August 2009, Medirest gave the Trust notice of material breach and the Trust repaid the deductions made from the July and August invoices. However, by this point the relationship between the parties had deteriorated.
- On 10 September 2009, Medirest issued a termination notice (expiring 27 October). On 8 October the Trust also issued a notice of termination with effect from 23 October and both parties agreed the termination would take effect on this date.
- Medirest brought a claim for post termination losses and the Trust counterclaimed for the same.
Obligation to Co-operate in Good Faith
The court considered what was expected from an obligation to cooperate in good faith, recognising that cooperation required parties to work together, or to act in conjunction with another person. The precise scope of a duty to cooperate depends on the circumstances and the nature of the contract concerned. In a long-term contract such as the facilities contract between Medirest and the Trust, the duty to cooperate required the parties to work together constantly, at all levels of the relationship, otherwise performance of the contract would be impaired. The court acknowledged that the duty to cooperate encompassed the duty to work together to resolve the problems, requiring the parties not to take unreasonable actions which might damage their working relationship.
Two cases were noted as helpful when evaluating the contractual duty of good faith:
- In Berkeley Community Villages v Pullen [2007] Morgan J considered the case of Bropho v Human Rights & Equal Opportunity Commission [2004] where Morgan J concluded that good faith meant a duty to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose and to act consistently with justified expectations.
- In CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] Vos J adopted Morgan J's approach, but added that the meaning of the obligation of utmost good faith had to "take its colour from the commercial nature of the contract", he also agreed with the position put forward in Manifest Shipping Co v Uni-Polaris Shipping Co [2001] that without bad faith there could not be a breach of duty of good faith.
In this instance the duty of good faith was combined with a duty "to take all reasonable action necessary" to enable the efficient transmission of information and derive the full benefit of the contract. The court held that this imposed a broad obligation on the Trust to act reasonably, which included not taking unreasonable actions which might damage the relationship with Medirest the purpose of the contract.
The Court's Findings
It was held that the Trust's behaviour had not been reasonable and their conduct damaged the working relationship with Medirest, thereby breaching its good faith obligations under clause 3.5.
It was found that the Trust's breaches revolved around two key issues:
- Its "absurd calculations of service failure points"; and
- A failure to respond positively when Medirest raised issues with the Trust's calculations and sought to resolve the dispute.
While it was accepted that Medirest had been in breach of the contract in 2008 this was not seen as justification for the Trust's actions in 2009 at a time when the services where being carried out to the Trust's satisfaction. It was the "making and sustaining of these claims" despite Medirest's reasonable objections that constituted a breach of the Trust's good faith obligations and "went to the heart of the commercial viability of the contract and gravely damaged the necessary working relationship between the parties".
Commercial Implications
This case demonstrates the sensitivity required when balancing competing interests under a facilities management contract that contains a good faith obligation: one being a desire to ensure that the contract is performed in such a way so as to ensure that performance is maximised; the second being the longer term objective of the contract itself and the working relationship of the parties. Recognising this potential conflict is important when signing up to a good faith obligation. This does not mean that poor performance should be ignored and it is arguable that in order to achieve the contractual objectives performance must be evaluated and if necessary parties held to account, however, as this case shows this must be done within the realms of what is reasonable. It was noted by Mr Justice Cranston that there "is nothing wrong with a challenging approach in managing a contract, even with a contract containing a clause such as 3.5 ... so long as a party deploys fact and common sense".
Therefore, while the challenging financial circumstances many clients currently find themselves in may lead them to search for opportunities to reduce their costs, the overly enthusiastic operation of a performance and payment mechanism with their service provider may not be the most successful. Those clients that have outsourced the provision of some or all of their non-clinical services (including those with PFI Contracts) may therefore want to check the basis on which sanctions for poor performance may be exercised.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 10/04/2012.
