In this case, the court found that there was no overriding obligation on the council (PCC) to act in good faith when awarding service points, but there was an implied term that PCC should act honestly, and not in a way that was arbitrary, irrational or capricious. The dispute arose out of a long term PFI contract which PCC entered into with Ensign for maintenance of its road network. The contract provided for the award of service points where Ensign was in breach of its obligations. The points to be awarded were contained in a schedule to the contract, which gave a "maximum event value" for each default event listed. Within the 'best value' provisions of the contract there was a provision obliging the parties to act "fairly, in good faith and co-operation" with each other.
Following funding cuts from central government, PCC decided the contract was becoming unaffordable, and as well as seeking financial concessions from Ensign, started awarding the maximum amount of service points for every default. Ensign decided the deductions were contrary to the terms of the contract and referred the matter to expert determination, where the expert found that PCC had acted in bad faith, without mutual co-operation and unfairly. PCC then sought declarations from the court concerning performance of its contractual obligations.
The court found that the service point values in the contract schedule were maximum values that could be awarded, and not a fixed tariff. There was no overriding obligation on PCC to act in good faith, but when awarding service points a term was to be implied that PCC was to act honestly, on proper grounds and not in a manner that was arbitrary, irrational or capricious. In interpreting the contract, the court followed the "Rainy Sky" approach (where the Supreme Court decided that ambiguous drafting should be construed so that commercial purpose prevails over linguistic niceties) of adopting the interpretation which made the most commercial sense. The case confirms the court's continued reluctance to interpret "good faith" obligations too widely.
To view the full text of the decision, please click here.