Medirest Case Update: English Court of Appeal narrows obligation to cooperate in good faith

We previously discussed the case of Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust[2012] EWHC 781 (QB) as part of our Technology and Outsourcing Hot Spots series. In particular, we highlighted the case as an example of how a failure to cooperate in good faith and an overly aggressive insistence on strict contractual performance can destroy an effective business relationship.

The High Court decision was interesting because the learned Judge held, inter alia, that there was a breach of a general obligation on the part of both parties to cooperate in good faith. Clause 3.5 of the outsourcing contract provided that,

“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.”

However, the English Court of Appeal has since overturned the High Court decision in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200. In so doing, they also narrowed the High Court’s reading of Clause 3.5.

Facts and holding of the High Court

Medirest entered into a contact with the Trust for Medirest to provide facilities management, including catering services to the hospital. Under the terms of the contract, in return for services rendered in accordance with certain service level benchmarks, the Trust agreed to pay the Contract Price (on a yearly basis and subject to indexation).

The High Court held that a general obligation to cooperate in good faith pursuant to Clause 3.5 accorded with commercial sense, especially in the context of long term contracts (see paragraph [25] and [27]).  Furthermore, this obligation included a duty on the part of both parties to work together to resolve any problems which cropped up as part of that long term relationship.

“25. Medirest and the Trust had entered a long term contract for the delivery of food and other services within a hospital, the performance of which required continuous and detailed cooperation between the parties at a number of levels if it was to work smoothly. In those circumstances, it is highly likely that the parties intended that there should be a general obligation that they should cooperate in good faith with each other. The only limitation to that general obligation would be that it would be limited to the performance of the contract.

27. …any lack of cooperation in the relationship in this context could have significant ramifications for patient well-being. The duty to cooperate necessarily encompassed the duty to work together to resolve the problems which would almost certainly occur from time to time in a long term contract of this nature [citation omitted]. It also necessarily required the parties not to take unreasonable actions which might damage their working relationship”

However, from an early stage (barely a week into the contract) the Trust’s commercial director took a “challenging” and unhelpful approach to the way the contract was performed by Medirest. Severe financial penalties were imposed for minor infractions and the High Court held that these “were patently absurd” and displayed a lack of “fact and common sense” (see paragraph [85]). For example, a single box of out of date ketchup attracted 30,860 service points and a deduction of £46,320 (to put this into context, the contract provided that service failure points of more than 1,440 justified a termination of the contract by the Trust).

The end result was that both parties separately terminated the contract within 18 months of its commencement in what was to have been a long term contract. Each party claimed that they were entitled to terminate the contract and that the other party had repudiated the contract. Each party also claimed substantial post termination losses.

The English High Court considered that the effect of the Trust’s conduct was to damage, and ultimately to destroy, the working relationship with Medirest. The High Court found against the Trust on the following terms (see paragraph [69]):

i) The Trust’s conduct…constituted a breach of its obligation to “co-operate … in good faith” under clause 3.5 of the conditions (see paragraphs 82 to 87).

ii) The Trust had a power under clause 5.8 of the contract conditions and the Payment Mechanism to make deductions from monthly payments and to award service failure points. There was an implied term that, in exercising this power, the Trust would not act in an arbitrary, capricious or irrational manner (see paragraphs 12, 45 and 86).

iii) In breach of the implied term the Trust exercised its power under clause 5.8 and the Payment Mechanism in an arbitrary, capricious and irrational manner.

iv) Medirest’s termination notice under clause 28.4 was valid. This would, absent the Trust’s notice of termination, have brought the contract to an end on 27th October 2009.

v) The Trust’s termination notice under clause 28.1 was also valid. This was because Medirest had exceeded the threshold of 1,400 service failure points in the preceding six months. This notice brought the contract to an end on 23rd October 2009.

vi) The Trust was in repudiatory breach of contract until 21st September 2009. Medirest did not, however, terminate for repudiatory breach.

vii) Since both parties were entitled to terminate, neither could succeed in its substantial claims for post termination losses.

Decision of the Court of Appeal

The Court of Appeal allowed the appeal by the Trust. It unanimously held that the Trust was entitled to terminate the contract pursuant to Clause 28.1 and claim for damages pursuant to that termination (see paragraph [129]). Interestingly, while Jackson LJ wrote the controlling opinion, the other two law lords also wrote separate concurring opinions.

No implied term

Clause 5.8 read,

“5.8 The Trust or any Beneficiary shall ascertain whether the Contractor’s provision of the Services meets the performance criteria as specified in the Service Level Specification or, if the criteria are not so specified, meets the standards of a professional provider of the Services. Where such performance criteria or standards have not been met by the Contractor in the performance of the Services then the Trust shall be entitled to levy payment deductions against the monthly amount of the Contract Price payable to the Contractor in accordance with the terms of the Payment Mechanism. In addition, the Trust may by notice to the Contractor award Service Failure Points depending on the performance of the Services as measured in accordance with the Service Level Specification. Service Failure Points which are agreed or determined to have been awarded in circumstances where such award was not justified shall be deemed to have been cancelled.”

The Court of Appeal found that there was no implied term to the Trust’s power pursuant to Clause 5.8 that “the Trust would not act in an arbitrary, capricious or irrational manner in relation to awarding service failure points” (See paragraph [90] and [95]). Crucially, the Court of Appeal held that the Trust’s entitlement to award the full number of service failure points and the full deduction from the payments due to Medirest was “an absolute contractual right” (see paragraph [91]).

In this regard, the Trust’s discretion “simply permit the Trust to decide whether or not to exercise an absolute contractual right” (see paragraph [91]). In other words, it was only in a situation where the Trust awarded more service failure points than was warranted or made a larger deduction than it is contractually entitled to, that it would have been in breach of the contract (see paragraph [92]).

Lord Justice Lewinson further held that such an implied term would make it “a breach of the contract to misinterpret the contract“. This was legally wrong as it would not generally be a breach of contract merely to assert rights which the contract does not confer (see paragraph [141] citing Kenny v Preen [1963] 1 QB 499).

It is worth noting that the Court of Appeal agreed with the examples adduced by the High Court as to “absurd” awarding of service failure points during the period of August and September 2008 (see paragraph [44]). As explained below, this was a breach of Clause 5.8. The Court of Appeal highlighted the fact that even though parties disagreed about the correct number of service failure points to be awarded, Medirest accepted that there were at least 1440 service failure points to be awarded i.e. the threshold for which the Trust was entitled to terminate the outsourcing contract (see paragraph [52]).

No duty to cooperate in good faith save for stated purposes

The Court of Appeal found that the Trust did not breach Clause 3.5 and that the High Court was wrong in its overly broad construction of the clause.

The problem with Clause 3.5 was that “[t]he first sentence of Clause 3.5 contain[ed] a jumble of different statements, set out in an incoherent order“. This resulted in the clause having a very malleable meaning “depending upon where one place[d] the caesuras and what imaginary punctuation one insert[ed]” (see paragraph [97]).

In this respect, the Court of Appeal “reminded [itself] that there [was] no general doctrine of ‘good faith’ in English contract law” and that if parties wished to impose such a duty, they had to do so expressly (see paragraph [105]). As a result, it preferred the Trust’s construction of Clause 3.5 in which the general duty to cooperate was only in respect of the two stated aims of (a) the efficient transmission of information and instructions and (b) enabling the Trust or any beneficiary to derive the full benefit of the contract (see paragraph [106] and [107]). The true construction of Clause 3.5 was therefore that “[t]he parties [would] work together honestly endeavouring to achieve the two stated purposes” (see paragraph [112]).

Lord Justice Lewinson also held that Clause 3.5 could be read no more than as “a duty to co-operate in good faith“. Accordingly, since the unilateral deductions by the Trust were not  matters requiring any cooperation, there could be no breach of Clause 3.5 (see paragraph [146]).

Lord Justice Beatson considered that “[t]he scope of the obligation to co-operate in good faith in [C]lause 3.5 must be assessed in the light of the provisions of that clause, the other provisions of the contract, and its overall context” (see paragraph [151]). He further held that,

“The recent decision in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), decided since the judge’s decision, was relied on by Mr Howe QC. In that case, Leggatt J gave extensive consideration to the question of implying a duty of good faith into a contract. His discussion emphasised that “what good faith requires is sensitive to context”, that the test of good faith is objective in the sense that it depends on whether, in the particular context, the conduct would be regarded as commercially unacceptable by reasonable and honest people, and that its content “is established through a process of construction of the contract”: see paragraphs [141], [144] and [147]. See also paragraph [154]. Those considerations are also relevant to the interpretation of an express obligation to act in good faith.”

Lord Justice Beatson stressed that where there were detailed provisions to cover the issue in dispute, courts should be cautious in reading general obligations broadly so as to cover the same grounds as the detailed provisions. He held that insofar as the outsourcing agreement was “a detailed one which makes specific provision for a number of particular eventualities…care must be taken not to construe a general and potentially open-ended obligation such as an obligation to “co-operate” or “to act in good faith” as covering the same ground as other, more specific, provisions, lest it cut across those more specific provisions and any limitations in them” (see paragraph [154]).

The Court of Appeal considered that while the Trust had erroneously made larger deductions of amounts than they were entitled to deduct in July and August 2009, those breaches had been cured by the Trust returning the wrongfully deducted monies to Medirest before 27 October 2009 (see paragraph [115]). In other words, the breach had already been cured before Medirest issued its notice to terminate the outsourcing contract.

The Court of Appeal also held that such a breach (wrongful deduction) would not have breached Clause 3.5 in any event for two reasons (see paragraph [114]). First, there was no required finding that the Trust had acted dishonestly as opposed to mistakenly. Second, the deductions did not relate to the two stated purposes and therefore did not fall within the purview of Clause 3.5.

The Court of Appeal concluded that “despite the breakdown of personal relationships at management level, there was no breach of clause 3.5 on either side” (see paragraph [120]). This was because the parties did in fact co-operate efficiently on all matters concerning the delivery of services to the hospital patients (see paragraph [119]). Notwithstanding the “instances where the management of Medirest acted unreasonably and many more instances where the management of the Trust acted unreasonably“, these issues in dispute were kept separate (and successfully so by agreement of the parties) from the delivery of outsourced services to the hospital ward (see paragraph [118]).

 Trust entitled to terminate and Medirest not entitled to do so

Essentially, the Trust was entitled to terminate the contract whereas Medirest was not entitled to do so. This was because there was (a) no term to be implied that the Trust “would not act in an arbitrary, capricious or irrational manner in relation to awarding service failure points“, (b) no breach of Clause 3.5, (c) the Trust had remedied its previous breaches and (d) the sole unremedied breach in respect of the excessive awarding of service failure points was not a “material” breach by the Trust so as to permit Medirest to terminate the outsourcing contract on the basis of Clause 28.4.

In respect of point (d), the Court of Appeal found that the Trust was in fact in breach of Clause 5.8 by awarding an excessive number of service failure points and that this was the sole unremedied breach at the time that Medirest sought to invoke Clause 28.4 to terminate the contract (see paragraph [115] and [121]).

However, the excessive awarding of service failure points by itself was not a material breach so as to entitle Medirest to terminate the outsourcing contract. There were two key reasons. First, all service failure points up till March 2009 including the excessive assessments made in July and August 2008 were time expired. Presumably, this was because parties had concluded an agreement in March 2009 that the award of service failure points was warranted, but that parties only had to come to a determination on the correct number of points. Second, Medirest accepted that it had incurred more than 1,400 service failure points, which permitted the Trust to terminate pursuant to Clause 28.1 in any event (see [127] and [143]).

Good faith in the common law

The concept of good faith sits rather uneasily within the common law framework. The Singapore Court of Appeal in Ng Giap Hon v Westcomb Securities Pte Ltd and others, [2009] 3 SLR(R) 518;[2009] SGCA 19 has explicitly rejected the proposition that there is a general implied duty of good faith between contractual parties (see the very extensive discussion of good faith in the common law in paragraphs [43] to [60]).

In contrast, in the case of HSBC Institutional Trust Services (Singapore) Ltd (trustee of Starhill Global Real Estate Investment Trust) v Toshin Development Singapore Pte Ltd, [2012] SGCA 48, the Singapore Court of Appeal upheld a contractual agreement to negotiate in good faith in the context of a rent review clause. The Singapore Court of Appeal held at paragraph [45] that “the concept [of good faith] is reducible to a core meaning”.

“At its core, the concept of good faith encompasses the threshold subjective requirement of acting honestly, as well as the objective requirement of observing accepted commercial standards of fair dealing in the performance of the identified obligations. This encompasses a duty to act fairly, having regard to the legitimate interests of the other party”

Furthermore, good faith forms part of the rules of equity which is part of the (common) law. For example, many maxims of equity have good faith as an embedded concept e.g. he who comes into equity must come with clean hands, ex turpi causa, in pari delico etc.

In this respect, the common law also accepts the so-called “prevention principle” i.e. “no person [can] take advantage of his own wrong, so that one party [can]not be allowed to rely on such a provision where the occurrence of the event was attributable to his own act or default“, see Evergreat Construction Co Pte Ltd v Presscrete Engineering Pte Ltd, [2006] 1 SLR(R) 634; [2005] SGHC 224 at [51]. See also Alghussein Establishment v Eton College [1991] 1 All ER 267, [1988] 1 WLR 587 for a case where the wrong-doer sought to take advantage of a clause to achieve a benefit under the contract (as opposed to terminating a contract). In that case, the precondition to the operation of the clause was the direct result of its own breach of the contract.

Conclusion

The English Court of Appeal’s decision does not detract from the fact that the failure to cooperate in good faith and an overly aggressive insistence on strict contractual performance can destroy an effective business relationship. However, the Court of Appeal’s decision is a timely reminder that (generally) the parties’ obligations are strictly determined by the contractual obligations that they have entered into.

A general contractual exhortation that parties are to cooperate or act in good faith will not operate to render specific contractual terms null and of no effect. Commercial parties entering into long term contracts which require that parties cooperate in good faith should take the time and effort to consider what cooperation in good faith entails and how that can be translated into contractual language.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
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