Cooperation is what you need: Part 2 - Outsourcing: Customer breach of duty of good faith decision reversed

Cooperation is what you need: Part 2 - Outsourcing: Customer breach of duty of good faith decision reversed

Published:

The Court of Appeal has allowed an appeal to be brought by Mid-Essex Hospital Services NHS Trust against Compass Group UK and Ireland Limited T/A Medirest (Medirest) on the grounds that the High Court judgment made in 2012 should be overturned.

Arguments of the parties

Medirest had initially argued in the High Court case that:

  • it had a claim against the Trust for substantial damages for breach of contract claiming that the Trust had breached its obligation to co-operate in good faith under the contract
  • the Trust had breached an implied term not to act in an arbitrary, capricious or irrational manner; Medirest asserted that the Trust breached this term when determining how many service failure points to award and what deductions (from payments to Medirest) to be made in respect of seemingly minor service failures

The Trust appealed the High Court decision on four grounds:

  • it argued that it was not in breach of the clause which purported to contain a duty to co-operate in good faith
  • it was not in breach of any implied term
  • it asserted that Medirest was not entitled to terminate the contract for breach of contract
  • that the High Court judge was wrong to find that the Trust was in repudiatory breach of contract

Court of Appeal decision

  • Duty to cooperate in good faith - the judges decided that the clause containing the obligation to cooperate in good faith was to be interpreted so that the obligation was not general but limited to two specific purposes, namely; the efficient transmission of information and instructions; and enabling the Trust to derive full benefit from the contract.

The judges agreed in this case that the obligation to co-operate in good faith meant that the parties had to work together honestly, endeavouring to achieve the two stated purposes. The parties were found to have cooperated effectively in terms of the delivery of the services to the patients, therefore the breakdown in relationship at management level did not qualify as a breach of the stated purposes, as it did not affect the services.

  • Implied term - the judges agreed that the contract contained precise rules of how service failure points were to be awarded and what deductions were due therefore there was no room for discretion. As such, there was no justification for an implied term for the Trust not to act in an arbitrary, irrational or capricious manner when assessing those matters. The Trust only had discretion in relation to whether or not to exercise an absolute contractual right, to award or deduct.
  • Breach of contract - the awarding of an excessive number of service failure points was found not to be a material breach sufficient enough to terminate the contract. The reason the judge provided for that finding was that even on Medirest's calculation of the service failure points that should have been attributed to Medirest's breaches, the Trust would still have been entitled to terminate the contract. The excessive amount awarded did not affect the issue that Medirest was in breach of the contract for incurring too many service failure points.
  • Repudiatory breach - the judges confirmed that the Trust had not committed a repudiatory breach of contract on the basis of the above.

What does this change in decision mean?

Even long term collaborative outsourcing arrangements which last for several years, do not always generate a general duty of good faith if the contract provisions suggest otherwise.

The decision shows that the court has tried to narrow the scope for the ability to claim breach of a duty of good faith. A breach of a duty is not to be established lightly.

However, the specific circumstances in the case may have caused the judges to take a stricter view, as the Trust was a public authority delivering a vital service to vulnerable patients.

What should you do?

Cooperation and effective communication are still advisable to prevent any problems in relation to an outsourcing contract for the running of daily operations.

Ensure that provisions which govern the assessment of service levels are not too complicated and open to misinterpretation. It needs to be agreed expressly, in advance, whether discretion is to be used to determine the level of service being provided. Or, that specific conditions are to be followed, without discretion.

To be effective, contractual duties need to be expressed clearly and are not to be limited, as in this case, by specified purposes. If the intention is to have a wider, more general meaning then the duty needs to stand alone.

Also as recommended by one of the judges themselves: "Care must be taken not to construe a general or potentially open-ended obligation such as the obligation to 'cooperate' or to 'act in good faith' as covering the same ground as other more specific provisions."