In May 2012 we reported on the High Court's decision in Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust (2012).  At first instance, the Court found for Medirest.  It found that a contract term obliging the parties to "co-operate with each other in good faith" imposed a general obligation on the parties to co-operate in good faith with one another.  The Court also found that the contract contained an implied term not to act in an "arbitrary, capricious or irrational" manner.  The decision at first instance has now been reversed by the Court of Appeal, paving the way for Mid Essex (the "Trust") to pursue a substantial counterclaim against Medirest.

Recap of the facts

The Trust engaged Medirest, a catering supplier, to provide restaurant, in-patient and ancillary catering services at its hospitals.  The contract was for an initial term of seven years, extendable for a further three years at the Trust's discretion.  Both parties agreed to co-operate with each other in the following terms:

"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 and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract." (Clause 3.5)

The Contract set out a service level specification, and provided a mechanism whereby the Trust could deduct sums from its monthly payments to Medirest for failures to meet the specified standards.  The Trust could also apply 'service failure points' for such failures.  If a certain number of service failure points was accrued in a rolling six month period, the Trust had the right to terminate the Contract.  Medirest had an express right to terminate the Contract by notice to the Trust that the Trust had materially breached the Contract.

The Contract commenced in April 2008, but by early 2009 relations between the parties were strained.  Although patient safety was not at risk and patient satisfaction with the catering service had in fact improved since Medirest took over the catering provision, the Trust sought to deduct over half of the price payable under the Contract for the second half of 2008 on account of certain service failures.  Medirest made overtures to the Trust to compromise on the deductions claimed, but these were rejected out-of-hand by the Trust.  Later in 2009 the Trust revised its calculation of deductions from over £700,000 to under £200,000, but by this point the relationship had already soured.

Medirest served notice of termination on the basis that the Trust had materially breached the Contract in the way it applied deductions for service failures.  The Trust in turn served notice of termination on Medirest on the basis that Medirest had exceeded the permitted number of service failure points.

The parties agreed a termination date, and each claimed against the other for post-termination losses.

Decision at first instance

The Judge at first instance found as follows:

  • In the context of the Contract, Clause 3.5 imposed a general obligation on the parties to co-operate in good faith with one another, and this necessarily required the parties not to take unreasonable actions which might damage their working relationship.
  • 'Good faith' did not just mean an absence of bad faith, but acting in a manner faithful to the common purpose of working together to resolve the problems which would occur in a long-term contract such as this one.
  • On the facts, the Trust was entitled to terminate the Contract on the basis of the service failure points which Medirest had accrued.
  • However, the Trust had sought to make deductions which were "patently absurd" and had applied the deduction mechanism in an "arbitrary, capricious and irrational" manner and had thereby acted in breach of an implied term of the Contract, that implied term being that in exercising its power to make deductions from monthly payments and to award service failure points, it would not act in an arbitrary, capricious or irrational manner.
  • Medirest had been entitled to terminate the Contract when it did and the Trust had been in repudiatory breach of the Contract during 2009.

Court of Appeal decision

The Court of Appeal has overturned the first instance decision, making a number of key findings.

First, the Contract did not contain the alleged implied term.  Jackson LJ, giving the leading judgment, analysed the authorities on which the Judge at first instance had relied.  He concluded that in each of those cases, the implied term was intrinsic – the Contract would not have made sense without it and it would have been absurd in any of those cases to read the contract as permitting the party in question to exercise its discretion in an arbitrary, irrational or capricious manner.  Jackson LJ concluded, in contrast, there was no justification for implying into the relevant clause a term that the Trust would not act in this way.  If the Trust awarded more than the correct number of service failure points or deducted more than the correct amount from any monthly payment, that would constitute a breach of the express provision of the Contract.  There was no need for any implied term to regulate the operation of that clause.

Jackson LJ then considered whether the obligation to act in good faith set out in clause 3.5 of the Contract was in fact a general obligation, as concluded by the Judge at first instance.  He concluded that it was not and that it was specifically focussed upon the two purposes stated in the relevant clause, namely (i) the effective transmission of information and instructions; and (ii) enabling the Trust or any Beneficiary to derive the full benefit of the Contract.

The Judge then considered the content of the duty to co-operate in good faith, limited as he had found, to those two stated purposes.  It was clear from the authorities that the content of a duty of good faith is heavily conditioned by its context and he therefore considered the relevant context, concluding that it required the parties to work together honestly endeavouring to achieve the two stated purposes.  On this basis, he concluded that the Trust had not acted in breach of clause 3.5 of the Contract.  Whilst its actions in making excessive deductions from monthly payments constituted a breach of other terms of the Contract, those breaches had been effectively cured by the Trust before Medirest served its notice of termination of the contract.  As to awarding excessive service failure points, this did not amount to a material breach entitling Medirest to terminate the Contract.

For all of the above reasons, the Court of Appeal allowed the Trust's appeal against the first instance judgment, entitling it to pursue its claim for financial relief on the basis that it had terminated the Contract and Medirest's purported termination of the contract was ineffective.

Comment

This recent decision is interesting in a number of respects.  First, it highlights the difficulties in seeking to imply terms into a contract where the express terms of the contract suffice.  The case also serves as a reminder that there is no general doctrine of good faith in English contract law.