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3 July 2012

Can you rely on ‘good faith’ clauses?

Steeles Law Head of Real Estate Michael Fahy considers the recent decision of Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB) on ‘good faith’ clauses.

The Facts

Mid Essex Hospital Services NHS Trust (“the Trust”) entered into a seven year contract with Medirest for the provision of catering services. The agreement required Medirest to comply with minimum service levels and provided that discretionary fee deductions could be made by the Trust in the event that these standards were not met.

The contract also included a ‘good faith clause’ which stated:

“The Trust and the Contractor 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”.

Breach of Good Faith

Medirest argued that the Trust had unfairly exercised its discretion to levy payment deductions, the total of which came to £590,117.67. Some of the specific examples provided by Medirest included a deduction of £46,320 in respect of a box of out-of-date ketchup sachets and £84,540 for a one day old chocolate mousse.

When Medirest approached the Trust to discuss the calculations, it was asserted that the Trust refused to cooperate or partake in negotiations. Medirest eventually served a notice to terminate for breach of the contractual obligation to act in good faith.

Held

The Court held that the Trust’s contractual power to award service failure points and make deductions had been exercised in an “arbitrary, capricious and irrational manner”.  The unjustifiable calculations were described by the Court as “patently absurd” and “produced in the most cavalier fashion”.

In addition to this, the Trust failed to respond positively and stood by their calculations when Medirest protested the deductions and sought to resolve the dispute. Its actions ultimately led to a “poisoning of the relationship” with Medirest and as such, Medirest was entitled to terminate the contract for material breach.

Comment

Contrary to what had been previously thought, good faith clauses are legally enforceable and breach of the same can entitle a party to terminate the contract. However, if Medirest had not succeeded in showing the court evidence of the Trust’s bad faith, then Medirest would itself have been in breach of contract for wrongful termination. It is therefore not a remedy for the faint hearted!

If you require advice on any issues raised in this article please contact Michael Fahy on 020 7421 1720 or mfahy@steeleslaw.co.uk