UK: Keeping The (Good) Faith In Long Term Service Contracts

A recent case of repudiatory breach by an NHS Trust may have implications for long term outsourcing/PFI contracts.

There is no general concept of good faith under English law on the basis that firstly it is inconsistent with freedom of contract, and secondly it is a nebulous concept and not easily defined. However, in a recent case involving an express duty of good faith, one of the contracting parties' behaviour was so unreasonable as to be not only in breach of its express duty to act in good faith, but in fact amounted to a repudiation of the contract.

The case in question - Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB) - arose out of a hospital catering contract. Clause 3.5 of the contract obliged the parties 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 enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract."

The definition of "Beneficiary" was widely drawn to include the Department of Health, GPs and various health organisations. The contractor, Medirest, contended that the clause should be read to mean that there was both (1) a general obligation to co-operate in good faith and (2) a more limited obligation to take all reasonable action as was necessary for the two purposes contained in the clause (transmission of information and deriving full benefit of the Contract). The Trust countered that it had a narrower meaning, such that the good faith obligation only applied to the two purposes contained in the latter half of the clause, and thus there was no wider obligation to co-operate in good faith beyond the specific purposes described.

At clause 5.8 of the contract was a mechanism allowing deductions to be made in the event of service failures by Medirest. Under the provisions of the clause, the Trust could monitor the performance of its contractor, and levy payment deductions for service failures:

"5.8 The Trust or any beneficiary shall ascertain whether the Contractor's provision of the Services meets the performance criteria as specified in the Service Level Specification or, if the criteria are not so specified, meets the standards of a professional provider of the Services. Where such performance criteria or standards have not been met by the Contractor in the performance of the Services then the Trust shall be entitled to levy payment deductions against the monthly amount of the Contract Price payable to the Contractor in accordance with the terms of the Payment Mechanism. In addition, the Trust may by notice to the Contractor award Service Failure Points depending on the performance of the Services as measured in accordance with the Service Level Specification. Service Failure Points which are agreed or determined to have been awarded in circumstances where such award was not justified shall be deemed to have been cancelled."

Medirest was entitled to terminate the contract if the Trust was in material breach of the contract. The Trust was entitled to terminate the contract if 1400 service failure points were awarded, and in other circumstances.

During the contract the Trust levied payment deductions and awarded service failure points at various stages, purportedly pursuant to clause 5.8. Medirest objected to the basis on which these were calculated, and other aspects of the Trust's conduct. After attempts to resolve their differences, both parties served a notice to terminate.

On the issue of good faith, Cranston J found for the contractor, noting that performance of the contract required "...continuous and detailed co-operation between the parties at a number of levels if it was to work smoothly". He commented that:

"In a long-term contract such as this the duty to cooperate necessarily required the parties to work together constantly, at all levels of the relationship, otherwise performance of the contract would inevitably be impaired."

He also found that the language of clause 5.8 conferred a discretion, rather than an obligation, on the Trust to make deductions or award service failure points. The purpose of the clause was to manage performance failure, not to generate discounts on payments. He went on to hold that the effect of the Trust's conduct was to damage and ultimately destroy its working relationship with Medirest. As a consequence, he found that Medirest was entitled to terminate the contract, and that not only was the Trust in material breach, but that its conduct amounted to a repudiatory breach. Cranston J cited various examples of the Trust's unreasonable conduct, including an assertion that a box of out-of-date ketchup sachets found in a cupboard (but of which there was no evidence that they had ever been brought onto a ward) attracted 30,860 service failure points and a deduction of £46,320 simply on the basis that they were out-of-date. The Trust also claimed a deduction of £84,450 for a chocolate pudding that was 24 hours out-of-date.

The case clearly turns on its own particular facts and in particular the express obligation of good faith. However, most long term contracts, including PFI contracts include express obligations to co-operate so where there is extreme behaviour such as in this case in relation to the deductions, this case should serve as a warning that such behaviour could be taken as a repudiatory breach by the other party.

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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