We recently reported on two High Court cases considering the potential for good faith and mutual trust and cooperation type obligations to apply in a construction context (see our previous Law-Now here).Completing the proverbial string of buses arriving at once, a decision of the TCC decided last month has considered similar issues in a PFI context. This case provides another example of the court’s reluctance to allow express obligations of good faith to impinge upon other express terms of a contract.

Portsmouth City Council v Ensign Highways

PCC and Ensign entered into a PFI agreement (the “Agreement”) for the long term rehabilitation, maintenance and operation of PCC’s highway network by Ensign. The Agreement incorporated a regime for the awarding of “Service Points” for breaches by Ensign of its obligations. A schedule to the Agreement set out a large number of “Default Events” for which Service Points could be awarded and, against each Default Event, a “Maximum Event Value”. The accumulation of Service Points could have serious consequences for Ensign: over 225 points in a 12 month period would amount to an event of default under its financing documents and over 250 points in a 12 month period would give PCC a right to terminate the Agreement.

PCC was under a statutory duty – known as the “Best Value Duty” – to secure continuous improvement in the way its functions were exercised. To fulfil this duty, the Agreement included at clause 44 a requirement for Ensign to make continuous improvement and an entitlement for PCC to advise Ensign of areas in which it considered such improvements could be made. Clause 44 also provided for five yearly “Best Value Reviews” between the parties. In a further sub-clause, the parties agreed in general terms to “deal fairly, in good faith and in mutual co-operation with one another”

Ensign argued that this express obligation of fair dealing and good faith applied beyond clause 44 to the Agreement as a whole, including the Service Point regime. Alternatively, Ensign argued for an implied term governing PCC’s ability to award Service Points to the effect that, when issuing Service Points, PCC’s representative had to hold the balance between the parties fairly, and to act in a manner which was independent, impartial, fair and honest.

PCC’s policy in relation to Service Points, for the first decade of operation, was to issue Service Points monthly and to make the amount dependent on its view of the gravity of the breach. In early 2014, however, PCC changed its policy and levied 4 ½ months’ worth of Service Points all at once, and in each case for the relevant Maximum Value.

Much of the judgment concerns where the Service Point regime, correctly interpreted, applied on a sliding scale basis depending on the gravity of the breach, or whether the “Maximum Event Value” was a fixed tariff. The judge found it was the former. Hence an element of discretion was given to PCC as to the level of Service Points to be applied in any situation. The judge went on, however, to consider the parties’ arguments around good faith and implied terms.

Good faith clause not of general application

Although the express good faith obligation in clause 44 was couched in general terms, the court found that it could not be extended to apply to other clauses in the Agreement. In particular:

  • The court could not find anything in the language of the clause in question or in the rest of the Agreement that would indicate either expressly or impliedly that the good faith duty was to apply more widely than to clause 44 alone.
  • The Agreement contained a number of other clauses which contained specific and narrow obligations of good faith or similar obligations to use reasonable endeavours. This indicated that where a good faith obligation was considered necessary, the parties had provided for such an obligation accordingly.
  • The good faith obligation was necessary to make the Best Value Duty provisions of clause 44 workable, otherwise Ensign would have no duty to properly consider and discuss Best Value proposals made by PCC. There were no other clauses in the Agreement which required good faith obligations to make them work and in some cases such an obligation would be non-sensical. For example, the court considered there to be “no room … for the imposition of any duty of good faith” in relation to termination provisions in the Agreement regarding non-payment. 

The court drew support from the recent Court of Appeal decision in Mid Essex Hospital Services NHS Trust v Compass Group and noted the warning given by Beatson LJ that “… care must be taken not to construe a general and potentially open-ended obligation such as an obligation to ‘co-operate’ or ‘to act in good faith’ as covering the same ground as other, more specific provisions, lest it cut across those more specific provisions and any limitations in them”.

The court also followed the Compass decision in deciding that PCC owed no implied duties to Ensign in relation to the making of a decision whether or not to award Service Points.

However, the operation of the contract in the present case differed from that in the Compass case in that rather than Service Points being awarded on a fixed tariff basis they applied on a sliding scale basis. As a result, PCC had a discretion as to the number of Service Points to award where a maximum number of points had been specified. Both parties had accepted that an implied term should govern the exercise of that discretion, but differed on the content of that implied term. The judge did not accept Ensign’s formulation in its entirety: PCC’s decision was not required to be fair and impartial (PCC was not to be treated as akin to a third party contract administrator in this respect). However, PCC was required to act honestly and on proper grounds and not in an arbitrary, irrational or capricious manner.

In adopting this approach, the judge was following a long line of cases establishing the principle of implying a term to the effect that a party exercising a discretion when making a decision must act honestly and properly and not irrationally and capriciously. Examples of such cases includeBalfour Beatty Construction Engineering Ltd v Docklands Light Railway back in 1996, Socimer International Bank v Standard Bank London in 2008 and more recently Bluewater Energy v Mercon. This again illustrates the point made in our previous Law Now on this topic – that there will often be an established principle of English law that will assist a party without that party having to resort to arguments around good faith.

Conclusions

As noted in our previous law-now, the courts appear to be giving a robust application to the Court of Appeal’s decision in Compass, both in keeping a tight rein on the implication of good faith obligations and with regard to the proper approach to interpreting express good faith obligations. The present decision is yet another case in the same direction and suggests that, for all the argument and debate they encourage, express good faith obligations may not provide the broad and open ended protection that is often hoped for.

As this case shows, parties are likely to have more success in incorporating good faith obligations individually, on a clause-by-clause basis and with appropriately tailored drafting, rather than by the use of an overarching, “one size fits all” clause.

This case also illustrates the point that a party will often be more successful in relying on an established principle of English law in aid of its position rather than trying to adopt a position based on general good faith principles.

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References: Balfour Beatty Construction Engineering Ltd v Docklands Light Railway [1996] C.L.C 1435; Socimer International Bank v Standard Bank London [2008] EWCA Civ 116 Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCABluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC)Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC).