Medicrest, a catering company, contracted with a NHS Trust for the provision of catering services for an initial term of seven years, primarily for providing services to patients of a hospital. The contract included a mechanism which allowed the Trust to award “service failure points” when Medicrest failed to meet the specifications when providing the service. These service failure points permitted the Trust to make corresponding deductions from the contract price. This type of provision is common in such contracts, as a way to encourage suppliers to provide an excellent service. The contract also placed a duty on the parties to “co-operate in good faith”.
The Trust monitored Medicrest’s performance through inspections. Several issues were picked up, such as out of date ketchup and chocolate mousse in the kitchen. The Trust calculated the service failure points that had been incurred as a result of these failures. Despite the ketchup not being a brand Medicrest used and the fact that the offending items were immediately disposed of, the service failure points awarded for these failures equated to an impressive £46,320 for the ketchup, and a staggering £84,450 for the mousse, leaving a sour taste in Medicrest’s mouth.
The relationship broke down, resulting in the Trust serving notice to terminate based on the level of service failures. Medicrest argued that it also had the right to terminate the contract, claiming that the Trust materially breached the contract by not co-operating with them in good faith.
The court rejected the Trust’s argument that this duty to act in good faith should be applied narrowly, favouring Medicrest’s view that it pervaded the whole contract. The meaning of “good faith” was considered by the court to be coloured by the commercial nature of the contract. The parties’ relationship was long-term and demanded “continuous and detailed co-operation” at all levels, to ensure that the highest standards of service were provided to the public. The Trust’s absurd calculations and uncooperative behaviour had the effect of “poisoning” this relationship. It had therefore failed in its duty to co-operate in good faith.
Although the facts of this case are quite extreme, it highlights the potential impact of a good faith clause. Such clauses can be useful to reflect the commercial reality that the parties need to work together for the contract to work in the real world. However, they can constrain a party’s ability to terminate, enforce a service credit regime or withhold consent to certain actions which are subject to approval. Good faith clauses should therefore be given as much attention as other contract terms, and be avoided unless there are specific good reasons for including them.