UK: Good Faith Obligations In Long-Term Contracts

Last Updated: 18 April 2012
Article by Paul Smith and Sarah-Jane Archdale

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:

  1. Its "absurd calculations of service failure points"; and
  2. 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. 

Reference: Compass Group UK and Ireland Ltd v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.