What are the facts of the case?
Compass Group UK and Ireland Limited (trading as Medirest) and Mid Essex Hospital Services NHS Trust (the Trust) entered into a long term outsourcing agreement for the provision of catering services. The Agreement required Medirest to comply with minimum service levels and provided for service credits and payment deductions in the event of failures.
The agreement also contained a provision requiring the parties to co-operate with each other in 'good faith':
"The Trust and [Medirest] 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 to enable the Trust [...] to derive full benefit of the contract"
The Trust went about awarding service failure points and making deductions from the monthly payments made to Medirest. It took an aggressive approach. For example, the Trust sought to make a deduction of £46,320 for one box of out-of-date ketchup sachets (making repeated deductions month on month).
Medirest objected to both the way in which the service credits had been calculated and the Trust's conduct under the agreement. Medirest eventually terminated the contract on the basis that the Trust was in breach of its contractual obligations to act in 'good faith'.
What was the decision from the court?
It was held that the agreement contained a general contractual duty to act in good faith. Specifically, the Trust breached its duties of 'good faith' and abused its contractual powers by awarding itself excessive service credits. The judgement made it clear that the purpose of service credits was to make sure performance was at a satisfactory level rather than providing a discount on the fees payable.
On the facts, the court was in little doubt that the Trust's calculation of the service failure points was both "absurd" and "cavalier". The service level calculations were (by the Trust's own admission), "in many respects indefensible", but the Trust nevertheless sought to withhold payment based on these calculations and didn't respond positively when Medirest tried to resolve the dispute. Therefore, Medirest was entitled to terminate the agreement.
What seems to have been crucial to the court's decision was its finding that where a party can exercise discretion in the use of a contractual provision, then that discretion must be exercised honestly and in "good faith", it should not be exercised "arbitrarily, capriciously or in an irrational manner". The Trust had discretion when applying the service credit regime but didn't apply the regime in an appropriate manner – it had simply gone too far, and its behaviour was viewed by the court to be unreasonable, and sufficiently unreasonable to be in breach of the good faith obligation.
What's the significance of all this?
'Good faith' does mean something and can allow a party to take legal action. It can be a useful step in trying to ensure parties are motivated to work together. Equally, it should not be agreed to lightly.
But although this specific case shows it can mean something, it is also not completely clear just what it means. Medirest had to carefully gather its evidence of why it considered the Trust had not acted in good faith. If Medirest had not managed to show that, then Medirest would itself have been in breach of contract for wrongful termination. Therefore it is only an approach which is going to be attractive where the "bad behaviour" is pretty clear cut.
If you are seeking to create a collaborative relationship in a contract, using a specific 'good faith' obligation might be part of the solution. But it does need more than that to genuinely create a collaborative environment. Other key ingredients include a structured approach to governance, retaining on both sides the involvement of key senior people with a vested interest in the success of the arrangement, a financial model which seeks to create a 'win win', internal escalation, and review mechanisms.
However in many contracts there is no need for, or any expectation of collaboration. Converting warm sales patter into a contractually binding 'good faith' concept may be dangerous.
The court's decision must also have been motivated by a desire to encourage contracting parties to try and make a success of the contract. Parties involved in an outsourcing can't simply ignore each other when issues start to arise.