The High Court has found that a provider of catering services was entitled to terminate its contract with an NHS Trust for material breach, on grounds that the Trust breached its contractual duty to act in good faith.
Mid Essex Hospital Services NHS Trust entered into a seven year contract with Compass Group UK and Ireland Limited t/a Medirest, for the provision of facilities management, including catering services, under a service credit regime.
The contract obliged the parties to 'cooperate with each other in good faith and [to] 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."
The contract's payment mechanism enabled the award of service failure points and payment deductions in the event of performance failures by Medirest.
Medirest objected to the way in which service failure points had been calculated, and to aspects of the Trust's conduct in relation to implementation of the agreement.
Various attempts were made to resolve these issues, without success, and Medirest served a notice to terminate for breach of the contractual obligation to act in good faith.
Medirest interpreted the good faith obligation as a general obligation. The Trust argued for a narrower construction, whereby the obligation was qualified by the two purposes that followed; namely, the efficient transmission of information and instructions, and to enable the Trust to derive the full benefit of the contract.
The court held that the duty to cooperate in good faith was a general obligation, and that the Trust's contractual power to award service failure points and make deductions had been exercised in an 'arbitrary, capricious and irrational manner'.
As such, Medirest was entitled to terminate the contract for material breach.
The judge gave numerous examples of the Trust's 'absurd calculations' of service failure points. These included a mousse that was 24-hours out of date, for which the Trust attempted to claim a deduction of £84,450; and some out-of-date ketchup sachets which attracted 30,860 service failure points and a deduction of £46,320, even though there was no evidence as to when the sachets had been brought into the kitchen.
The Trust failed to provide any details of how the service failure points and deductions had been calculated, and it took a long time to provide the underlying calculations despite Medirest's requests.
A number of the calculations were 'patently absurd', and on no reading of the payment mechanism were they even remotely justifiable.
Whilst the payment mechanism provided for the award of service failure points and deductions, the contractual language conferred a discretion, most likely for the reason that this was a long-term and complex contract.
In support of his decision that the Trust was in breach of the contractual duty of good faith, the judge referred to the ample case law confirming that discretion must not be exercised in an arbitrary, capricious or irrational manner.
In addition to the unjustifiable calculations, the Trust failed to respond positively when Medirest protested the calculations and sought to resolve the dispute, and its actions led to a 'poisoning of the relationship' with Medirest.
The court concluded that the Trust had taken a mechanical approach to the exercise of its discretion, which appeared contrary to the purpose of the payment mechanism (i.e. to curb performance failure), and suggested an attempt to generate discounts on service payments.
What does this mean?
Contractual duties of good faith are often included in agreements in relation to specific issues.
General duties of good faith are perhaps less common, other than for long-term, collaborative outsourcings such as this one.
The judgement in Medirest is a useful illustration of the courts' approach to a duty of good faith, and the exercise of discretion in this context, and could have implications for outsourcing contracts.
What should you do?
Whilst this case turned on specific facts, it serves as a reminder that, whilst a challenging approach to managing a contract is acceptable, tact and common sense should always prevail. It emphasises the importance of cooperation and dialogue to resolve problems which will inevitably occur in a long-term contract of this nature.
(Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust  EWHC 781 (QB).)