Commercial Contracts and the Duty to Act in Good Faith

The duty to act in good faith is often synonymous with contracts for insurance, although it is a common term contained in a variety of commercial contracts. Most people will understand the term to mean a duty to act honestly, to disclose all material information and not to do anything which would prevent the contract from being properly performed.

In the case of Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust (2012), a Hospital Trust entered into an agreement with Medirest in 2008 under which it would be provided with catering services. The contract contained a detailed service level specification and imposed penalties on Medirest for failing to meet these, namely the ability of the Trust to withhold payments due to Medirest. Crucially, the contract contained a clause for the parties to cooperate with each other and to act in good faith.

The contract provided for a three-month bedding in period during which time Medirest would not be penalised for failing to meet the service levels specified under the contract, although Medirest assumed this meant it was not required to report to the Trust on its performance during this time. A number of out-of-date items were brought to Medirest’s attention during this time and duly removed in the presence of Trust staff. Despite this, however, the Trust calculated that deductions of over £500,000, comprising over half of the service fees payable, had been incurred by Medirest.

The Trust had interpreted the contract to mean that multiple service credits became due for each minor failure. This meant that the service credit in respect of a box containing out of date ketchup sachets increased from £30 to over £45,000 and the service credits in relation to out-of-date mousse increased from £30 to over £80,000. Medirest calculated its service credits amounted to less than £40,000, arguing that the Trust was aware of the breaches having been remedied or of the steps taken to remedy the breaches.

The withheld payments led to Medirest serving a notice of material breach of the terms of the contract on the Trust, threatening to terminate the contract if the withheld sums were not paid. The Trust responded by paying the withheld sums but without reissuing the service credit schedule, leading to Medirest serving its notice of termination. The Trust also served its own termination notice and the parties agreed that the contract would come to an end on a mutually agreed date.

The High Court was asked to determine whether Medirest had been entitled to terminate the contract. In order to answer this question, the court needed to determine whether the Trust had acted in good faith pursuant to the contract. The court held that the Trust had acted in breach of this duty, with the judge describing its calculation of service credits as “patently absurd” and “indefensible”. The court also noted that the Trust had failed to respond to Medirest’s attempts to settle the matter amicably and had therefore destroyed the relationship between the parties.

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