UK: Good Faith And Long Term Contracts

Last Updated: 8 June 2012
Article by Mark Alsop

Compass Group UK & Ireland Limited (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)

This case involved a contract for the provision by Medirest of catering and other services to the Trust. The contract was for seven years, extendable by the Trust for a further three years. There were provisions for the Trust (a) to award service failure points, with 1400 over six months entitling the Trust to terminate and (b) to make deductions for failure to meet service levels.

The key parts of the contract for consideration were the following:

  • "3.5. The Trust and the Contractor will cooperate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract."
  • "Beneficiary" was widely defined to include the Department of Health, GPs and various health bodies.
  • Implied terms in favour of Medirest were excluded.

In the beginning (April to August 2008 approximately), Medirest's level of service was poor. After that, the services were provided to the required standard without complaint – a patient survey indicated a very high level of patient satisfaction from October to December. Medirest also failed to set up a helpdesk until November 2008 and failed initially to carry out self-monitoring and reporting as required by the contract. There was a meeting in January 2009, at the end of which the Trust, despite the improved performance, provided a schedule showing an enormous number of service failure points and proposed deductions of as much as half the service fee. By way of example, an out of date box of ketchup sachets was found in a cupboard. These were removed immediately – and were not the type of sachets provided by Medirest, but the Trust calculated a fee deduction of £46,320. There was no temperature on refrigeration display in a ward (because, as the judge found, the fridge was being defrosted), but the Trust sought to deduct £94,830. There were out of date bagels which belonged to a patient or staff and were removed immediately. The proposed deduction for this was £96,060. The figures showed 52,908 service failure points and £590,117 deduction in fees for the second half of 2008, which amounted to about half the fees payable for the period. The equivalent figures from Medirest were 18,822 service failure points and £37,365 in deductions. For six months after delivering the schedule, the Trust refused to take into account Medirest's protestations. Medirest served a notice of material breach in August 2009, after which (presumably following legal advice) the Trust reduced its demands considerably and repaid large sums that it had previously deducted. Nonetheless, Medirest issued notice of termination in September. In October, the Trust exercised its own notice of termination on the grounds that Medirest had accrued too many service failure points (which Medirest acknowledged). The contract terminated by agreement at the end of October 2009.

The main question for decision was the extent to which the obligations in clause 3.5 imposed duties on the Trust which it had breached.

The High Court (Mr Justice Cranston) found in favour of Medirest as follows:

  • Construction of clause 3.5. Medirest argued that the duty to cooperate in good faith in clause 3.5 was a separate obligation from the obligation to take all reasonable action. The Trust maintained that cooperation in good faith applied only to the two purposes at the end (i.e. the transmission of information and to enable the Trust to derive the full benefit of the contract). The judge applied the Rainy Sky principle and held that the commercial common sense construction favoured Medirest. There was a long term contract for the delivery of food and other services within a hospital, the performance of which required continuous and detailed cooperation between the parties if it was to work smoothly. In the circumstances, it was highly likely that the parties intended there should be a general obligation that they should cooperate in good faith with each other in all respects. However, the judge said he did not need to decide this point because the Trust was in breach of the separate duties anyway.
  • Duty to cooperate in good faith. Even on the Trust's reading, it was not open to the Trust to operate the clause in a self-interested manner. It had to cooperate in good faith with Medirest not only to secure the benefit of the contract for itself but also secure the benefit of the contract for the "Beneficiaries". Any disruptions for failure to cooperate in good faith would adversely affect the delivery of those benefits, benefits which ultimately accrued to patients. The duty to cooperate necessarily encompassed the duty to work together to resolve the problems which were almost certainly incurred from time to time in a long term contract of this nature.
  • Meaning of good faith. The Trust argued that the duty to cooperate in good faith could only be breached by behaviour undertaken in bad faith. The judge rejected this. Clearly such conduct was caught, but additionally the term had an objective character. It concerned the performance of a long term, complex contract, involving the provision of an important service to members of the public, patients and visitors. In deriving the full benefit of the contract for itself and the Beneficiaries, the Trust was in a real sense pursuing a common purpose with Medirest of benefit to the public. The objective standard of conduct demanded in this case of both parties primarily encompassed faithfulness to this common purpose. Fair dealing and acting consistently with justified expectations were, in a sense, corollaries of that.
  • Discretion and good faith in the calculation of service point failures. The authorities showed that the obligation not to exercise a discretion in an arbitrary, irrational or capricious manner was likely to be implicit in any commercial contract under which one party was given the right to make a decision which affected both parties whose interests were not the same. The Judge considered that there was an aura of commercial unreality in the Trust's argument that, whatever the Trust's calculation of service failure points etc, there would be no impact on Medirest unless a deduction was actually made from the monthly payment. It was unlikely that reasonable commercial parties would have contracted on the basis that the Trust could make absurd calculations with serious threatened consequences and still be regarded as co-operating in good faith. The contractual powers to make payment deductions and award service failure points were drafted as entitlements and not obligations, i.e. a discretion. Reasonable persons would interpret the clause as conferring on the Trust a power to act consistently with a purpose of curbing performance failure and not to generate discounts on service payments.
  • Did exclusion of implied terms extend to implied obligation to exercise a discretion properly? No. The Privy Council in the Belize case held that the implication of a term was not an addition to the instrument, but only spelt out what it meant. It is impossible to preclude the implication of types of terms which are necessary to give business efficacy and which give effect to what the parties must be taken to have meant.
  • Effect of the Trust's conduct. The effect of the Trust's conduct was found to damage and ultimately to destroy the working relationship with Medirest. The Trust's actions were in breach of its duties under clause 3.5 to cooperate in good faith etc. The Trust's breaches revolved around first, its absurd calculations of service failure points and secondly, its failure to respond positively when Medirest protested the calculations and sought to resolve the dispute. There was nothing wrong in a challenge approach when managing a contract, so long as the party deploys tact and commonsense. These qualities are absent in important calculations in the spreadsheets provided by the Trust. There was also a breach by reason of exercise of power in relation the service failure points and deductions in an arbitrary, capricious and irrational manner.
  • Termination by Medirest. The Trust argued that Medirest had not identified a breach of cl 3.5 in its termination notice. The Court said that the clause did not require the clauses breached to be specified. The breaches by the Trust were material – it was "difficult to imagine, in practice, behaviour more likely to result in a breakdown in the relationship with Medirest than that which the Trust adopted". The Trust acted in a manner calculated, at least objectively, to impose the largest possible service failure points irrespective of the lack of justification. The value attributed to the service failure points was a substantial proportion of the contract turnover and there was no sign that the Trust did not intend to continue with excessive calculations. It was impossible for Medirest to continue to work with a party doing this. The behaviour created substantial uncertainty as to whether Medirest would be paid for its services. The Trust remained in material breach which was not remedied.
  • Termination by the Trust. Medirest argued that the Trust was not entitled to terminate because it did so from a future date. It could not keep the contract alive for any period it wished. The Court rejected the argument. The Trust was allowed to terminate by serving notice and the termination clause was not prescriptive as to the amount of notice to be given. The nature of the contact was supportive of the right of the Trust to terminate with effect from a future date because immediate termination would give it no time to make alternative arrangements and put patients at risk. The Trust had therefore terminated properly.
  • Repudiatory breach. Even though it terminated for material breach, Medirest argued that it had been entitled to terminate for repudiatory breach – that was relevant because if it had been so entitled, the Trust would only be able to recover nominal damages for post-termination losses. The Court distinguished between termination for material breach and termination for repudiatory breach, the latter being one which deprives a party of substantially the whole benefit of the contract. The Trust's material breaches of contract constituted a serious and continuing breach of its critical obligations which went to the very heart of what was meant to be a long term contract requiring co-operation levels. Thus, there was repudiatory breach. However, by the time that Medirest came to terminate, the Trust had greatly reduced the amounts claimed and had entered into a more sensible dialogue with Medirest. At the time of termination, therefore, Medirest was no longer being deprived of substantially the whole benefit of the contract. This meant that it was no longer entitled to terminate for a repudiatory breach.

Comment

There is no new law in this case. The decision depended on an analysis of the wording of this particular contract, with a relevant factor being that ultimately the behaviour of the parties could adversely affect the well-being of the public. However, one can imagine that some of the general remarks might be applied in a wider context – there were indications, for instance, were that an obligation to co-operate in good faith or something similar might be implied wherever there is a long term contract that depends on the cooperation of the parties to operate smoothly, particularly if third parties would otherwise be affected. Certainly, the long term nature of the contract was relevant to the reasoning on several of the issues.

The addition of the words "and Beneficiaries" in clause 3.5 was no doubt intended to widen the scope of Medirest's obligations. But in practice it had an equivalent effect on the Trust and was a substantial reason why the Trust had to act reasonably – an unintended consequence?

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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