Mid-Essex Hospital Services NHS Trust v Compass Group UK  EWCA Civ 200
In Mid-Essex Hospital Services NHS Trust v Compass Group UK, the English Court of Appeal considered whether to imply a term such that a party’s discretion under a particular term of the contract could not be exercised in an “arbitrary, capricious or irrational manner”. The court held that there was no justification to imply such a term. The court reasoned that the relevant clause in the contract was sufficiently clear, and there was no need for any implied term to regulate its operation.
The court also considered the scope and effect of a provision requiring contracting parties to “co-operate with each other in good faith”. In this regard, the court held that the obligation of good faith in the contract was not a general one which qualified or reinforced all of the obligations on the parties. Instead, the obligation of good faith was specifically focused upon the two purposes included in that particular provision.
The Mid-Essex Hospital Services NHS Trust (the “Trust”) engaged a division of Compass Group UK (“Medirest”) whereby the latter would provide catering and cleaning services for a hospital over a period of seven years. The contract between the parties was concluded in 2008 (the “contract”). Shortly thereafter, Medirest’s performance in several areas fell short of the level required by the contract and incurred “service failure points” (“SFPs”) under the contract.
Medirest incurred more than 1,400 SFPs in the first six months of the contract. As a result of the SFPs incurred by Medirest, the Trust and Medirest agreed that the Trust would deduct £20,000 a month from its contractual payments to Medirest for a period of four months. It did this, with the deductions concluding with the June 2009 payment. Medirest proposed a return to the full contractual amount from July 2009 onwards but this was rejected by the Trust which insisted that it was entitled to make further deductions of £711,307. The Trust deducted £137,834 from its July 2009 payment to Medirest, and then on 27 July 2009 purported to terminate the contract with Medirest, arguing that Medirest had incurred 82,470 SFPs over the previous six months.
Medirest challenged the calculations of the SFPs by the Trust, alleging that they were flawed. Medirest invoked a clause in the contract which provided that it had the ability to terminate the contract in the event of a material breach by the Trust. The Trust thereafter undertook to repay the July and August deductions and to review its process for evaluating Medirest’s performance. Medirest received the above amounts from the Trust, but thereafter notified the Trust that it was terminating the contract. The Trust withdrew its earlier July notice of termination and issued a new notice that was to have effect from 23 October 2009. Medirest agreed that the termination would take effect on that date.
Both parties claimed that they had validly terminated the contract and also that they each had substantial financial claims against the other. Medirest commenced legal proceedings to claim damages against the Trust for breach of contract. The Trust counterclaimed, arguing that Medirest’s purported termination was ineffective and that it was the Trust which had effectively terminated the contract and was therefore entitled to substantial payments per the contract as well as damages.
Decision of the High Court
The High Court held that Medirest had been entitled to terminate the contract as the Trust had committed material breaches of the contract, including a breach of Clause 3.5 which imposed on the Trust an obligation to cooperate in good faith with Medirest (the “good faith obligation”). The High Court also found that the discretionary power provided to the Trust under Clause 5.8 of the contract (to levy payment deductions against the monies that the Trust was contractually obliged to pay Medirest and to award SFPs against Medirest) was subject to an implied term that such discretionary power could not be exercised in an “arbitrary, irrational or capricious manner” (the “implied term”).
The Trust appealed to the Court of Appeal.
Decision of the Court of Appeal
In allowing the Trust’s appeal, the Court of Appeal considered the question of whether there was an implied term that the Trust would not act in an arbitrary, capricious or irrational manner in relation to awarding SFPs or making deductions under Clause 5.8 of the contract. The court disagreed with the decision of the High Court in this regard, and held that there was no justification to imply into Clause 5.8 a term that the Trust will not act in an arbitrary, irrational or capricious manner. The court reasoned that Clause 5.8 was sufficiently clear, and there was no need for any implied term to regulate its operation.
In relation to the good faith obligation, the Court of Appeal disagreed with the decision of the High Court, and held that the obligation of good faith as set out in Clause 3.5 was not a general one which qualified or reinforced all of the obligations on the parties in all situations where they interact. Instead, the Court of Appeal held that the obligation in Clause 3.5 to cooperate in good faith was instead specifically focused upon the two purposes included in that provision, namely, the efficient transmission of information and instructions and enabling the Trust or any beneficiary to derive the full benefit of the contract. The Court of Appeal therefore limited the scope of the contractual good faith obligation and held that it therefore had not been breached.