The 1994 Latham Report ‘constructing the team’ recommended that contracts require the parties to work ‘in a spirit of mutual trust and co-operation’.  In response, standard form contracts started to include so called ‘good faith’ clauses.  Recently, in Compass Group UK and Ireland Limited (trading as Medirest) v Mid Essex Hospital Services NHS Trust, the Court of Appeal has urged caution in relying on such clauses and in how they are drafted.  The court also reminded us there is no general doctrine of good faith.  Any parties wishing to impose such a duty must do so expressly.

The parties entered into a contract under which Medirest was to deliver services to two Essex hospitals.  The Trust had the power to make deductions from monthly payments and award service failure points.  Both parties had a duty to 'co-operate with each other in good faith'.  When Medirest failed to properly monitor and record its failures, the Trust produced its own robust assessment which allocated 'absurd' service failure points and deductions.  The parties sought to terminate the contract on the basis of each other’s conduct.

At first instance, both parties’ termination notices were valid and, as both were entitled to terminate, neither could claim post-termination losses.  The Trust breached its good faith obligation and an implied term not to act in an arbitrary, capricious or irrational manner when exercising its discretion to award service failure points and make deductions.  Medirest exceeded the number of service failure points needed to trigger the Trust’s right to terminate.

Overturning the first instance decision, the Court of Appeal held:

  • the express obligation to 'co-operate with each other in good faith' specifically focused on two   purposes: 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 benefits of the contract.  The Trust was not in   breach of this obligation as it was not acting dishonestly and the awards and deductions were   irrelevant to these purposes.
  • the award of service failure points and making of deductions by the Trust was not discretionary; but   an absolute contract right.  As the Trust’s decisions were not discretionary the contract did   not contain an implied term not to act in an arbitrary, capricious or irrational manner.
  • the Trust’s award of an excessive number of service failure points, the only breach outstanding at   the time of Medirest’s termination notice, was not a material breach as Medirest did not dispute it   had incurred enough service failure points to trigger the Trust’s termination right.  Medirest’s   purported notice of termination was invalid.
  • the Trust was entitled to pursue its claim for financial relief because it had validly terminated the   contract and Medirest’s purported termination was ineffective.

Many hundreds of operational projects in the UK use similar mechanisms for applying service failure points against a service provider’s payment stream as compensation for poor performance.  This decision upholds such mechanisms and demonstrates that there is no quick way to dispute decisions made under them.