The High Court’s 28th March 2012 judgement in Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust sheds some interesting light on the meaning of good faith in commercial contracts.

On 1 April 2008, the parties entered into a standard form NHS contract for the provision of catering services in two hospitals for a term of 7 years (extendable at the sole option of the Trust for a further 3 years). The contract required Medirest to comply with the performance due-by dates, minimum performance levels and methods of performance measurement specified in a Service Level Agreement, and provided for service credits and payment deductions in the event of service failures. It also contained a provision requiring the parties to co-operate with each other in good faith, and to take all reasonable action as was necessary for the efficient transmission of information and instructions to enable the Trust and any other beneficiary to derive the full benefit of the contract.

In August 2008, Medirest was surprised to receive a calculation from the Trust showing 3,264 service failure points in the previous month and consequent deductions of £3,570. The Trust began its own monitoring and uncovered further, relatively minor, performance failures by Medirest which, in the judge’s words, “featured ad nauseam” in the course of the trial. On the basis of this monitoring, the Trust began to calculate service failure points and deductions. It asked for Medirest’s proposals to rectify these matters and warned of possible termination.

Medirest attempted to be conciliatory, and things seemed to improve for a while but, in December 2008, the Trust served a formal warning notice, expressed in very general terms, which triggered an obligation on Medirest to produce an action plan. Medirest asked for some clarification of the issues the Trust was concerned about but, unhelpfully, the Trust simply replied that the action plan needed to address Medirest's failure to meet contractual requirements. A plan was produced, which the Trust’s commercial director gave to his team to review, telling them they had 2 days to "pull it to bits".

The Trust formally accepted the action plan, but its covering letter also listed the total number of service failure points during each of the preceding 6 months, which, according to its calculations, resulted in deductions totalling £587,207.67 – a huge escalation from the previous claim for £3,570 the previous August and amounting to more than 50% of the contractual fees for the period.

For example, during August 2008, the Trust found in a cupboard a box of ketchup sachets (of a brand not used by Medirest) which was 3 months out of date, a box of butter sachets with no use-by date in the fridge, some bagels belonging to patients or staff which were 4 days out of date, two spoons wedging open fire doors, and a mousse which was one day out of date. In each case, the offending items were removed immediately.

Medirest's legal department requested a breakdown to enable the figures to be verified, and the Trust provided a spreadsheet which identified each alleged performance failure, the KPI alleged to have been breached, the ward where it occurred, and the calculation of the service failure points and deductions. These included £46,320 for the ketchup, £96,060 for the bagels, £43,612 for the spoons, £94,830 for the butter sachets and £84,450 for the mousse.

Medirest disputed the basis of calculation, claiming that a performance failure did not exist until the Trust had notified Medirest of it, and ended when the Trust was aware that the failure has been remedied. According to Medirest’s calculations, the service failures totalled 18,822 and the deductions only £37,365.

During this period, Medirest continued to provide the services, and Trust accepted there were no further problems.

A year later, the Trust produced a revised spreadsheet, which was not much different from its original one because the Trust did not agree with Medirest’s interpretation. Indeed, some of the service failure points and deductions actually increased. However, in September 2009, after taking legal advice, it sent revised monitoring data, which reduced the deductions from over £700,000 to under £200,000. For example, the deductions for the ketchup and mousse were reduced from £46,320 and £84,450 to £30 each, the deduction for the butter sachets was reduced to £990, the deduction for the spoons from £43,612 to £690, and the deduction for the bagels from £96,060 to £12,990.

Negotiations continued, but made little progress and, on 10 September 2009, Medirest gave notice terminating the contract. On 8 October 2009, the Trust did the same, and it was agreed that termination would take effect on 23 October 2009 without prejudice to whose termination of the contract was effective.

The judge held that the Trust was entitled to terminate the contract because Medirest had accumulated the requisite number of service failure points within the relevant period, but that Medirest was also entitled to do so because the Trust was in material breach of contract, so neither party could succeed in their substantial claims for post termination losses.

The judge decided that the clause which obliged the parties to co-operate with each other in good faith should be read as imposing both a general obligation to co-operate in good faith, and also a more limited obligation to take all reasonable action as necessary for the two purposes contained in the clause (i.e. the efficient transmission of information and to enable the Trust and any other beneficiary to derive the contract's full benefit). He rejected the Trust’s narrower construction that the Trust had no duty to co-operate in good faith except for the two specified purposes.

This was a long term contract, which would require continuous and detailed co-operation between the parties at a number of levels if it was to work smoothly, and the parties had to work together to resolve the problems which would almost certainly occur from time to time. They could not take unreasonable actions which might damage their working relationship. Any lack of co-operation would adversely affect the delivery of the contractual benefits, and so could have significant ramifications for patient well-being.

The judge held that, as a public body, the Trust had to maintain high standards of behaviour and devote itself to the public good, and could not act in an entirely self-interested manner, but that it had instead acted in a manner calculated to impose the largest possible service failure points, irrespective of the lack of justification. Its “patently absurd” calculations of service failure points were produced in the “most cavalier fashion”, and were “not even remotely possible” on any reading of the contract. This amounted to a breach of the Trust’s contractual duty to co-operate with Medirest in good faith, and it was difficult to imagine behaviour which was more likely in practice to result in a breakdown in their relationship.

This case may be an extreme example, but it shows that a duty to co-operate in good faith can have real meaning. There is nothing wrong with being tough, but common sense is required, and the Trust had not shown this when it exercised its contractual rights in an arbitrary, capricious and irrational manner.