Co-operation and good faith duties

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Compass Group -v- Mid Essex Hospital Services NHS Trust [2012] EWHC781.  Queens Branch Division.

Facts

Compass had a contract for catering services to the Trust’s hospitals.  There was a system of “service failure points” which could be used to reduce payments from the Trust to Compass, and was intended to incentivise good performance.

Clause 3.5 of the contract however obliged the Trust and Compass to co-operate with each other in good faith and to take all reasonable action necessary for the efficient transmission of information and to enable the Trust to derive full benefit from the contract.

Unfortunately there were a number of minor failings such as some bread rolls were not fresh, some tomato ketchup sachets were beyond their sell by date as were some portions of chocolate mousse.  The Trust chose to take the harshest possible line with its service points and deducted £587,000.  Each sued the other for breach of contract.

Held

  1. The good faith and co-operation clause meant that the Trust was not entitled to simply operate the contract to its own maximum advantage without regard for the effect upon the other party.  The Trust’s actions were calculated to enforce the largest possible number of service failure points and create the biggest possible set off.  These actions were an abuse of its contractual powers.
  2. The duty to co-operate encompasses a duty to work together to resolve the sort of problems that are bound to arise in the course of a contract such as this and the duty requires the parties not to take unreasonable actions that might damage their working relationship.
  3. A promise to act in good faith imposes an objective standard of conduct to be demanded of both parties and this encompasses faithfulness to the common purpose of the contract.  Fair dealing, and acting consistently with justified expectations, go along with this duty.

Commentary

The traditional view of the law is in Rondel -v- Worsley in which the House of Lords famously remarked there was no duty of good faith in English contract law.  The parties are entitled in each case to exercise their contractual rights to their own advantage without regard for the adverse consequences on the other party.

Once a clause imposing good faith or a duty of co-operation is accepted by the parties,that rule goes out of the window.  Good faith imposes a broad obligation upon each party to act reasonably in conducting the contract, to forbear from simply exercising its rights without regard for the consequences and also to forbear from unreasonable actions which might damages its relationship with the other side and undermine the common purpose of the contract.

This case has major implications for the interpretation of the parties’ rights and duties under NEC3: viz., “act in a spirit of mutual trust and co-operation”.

This is a first instance decision of the High Court, and looks certain to be challenged.  For the time being, however it represents the best and most up to date guidance on how parties should behave under NEC3.

For more information, help or advice please contact Rob Langley on 0191 211 7975 or email[email protected].