Definition of material breach: Reining in good faith obligations

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Mid-Essex Hospital Service NHS Trust –v- Compass Group (2013) BLM, Court of Appeal

We mentioned this case in our newsletter of January 2013.  The High Court Judge had imposed a general duty of good faith upon the parties so that where the hospital trust had exercised its rights to impose swingeing and disproportionate penalties on the Facilities Management Contractor for trivial breaches such as out of date tomato sauce sachets, the Trust was held to be defeating the shared objective and therefore acting in bad faith.

The Court of Appeal Held:

  1. The clause which incorporated good faith only related to the instances given in that clause and should not be used as a general gloss affecting other specific provisions for specific obligations.
  2. The contract contained provisions entitling termination in the event of material breach of contract.  The court ruled that a material breach was one which was “substantial and not trivial”, but did not need to be so serious as to amount itself to a repudiatory breach of contract

Comment

The Appeal Judges were at pains to point out that they were not overruling the Yam Seng Decision that the duty of good faith may be implied by law as a necessary characteristic of certain categories of contract, such as relational contracts, including distribution agreements.  Nevertheless the Court disapproved the broad approach adopted by High Court in the Compass case.  Beatson LJ observed that in a situation where a contract makes various specific provisions for what the parties’ specific rights and duties are, then care must be taken not to interpret a general, potentially open-ended obligation, such as an obligation to “co-operate or act in good faith” as covering the same ground.  It was important not to cut across the more specific provisions so as to change the way they worked.

Does this threaten the interpretation with clause 10.1 of NEC3 (the parties shall act in the spirit of mutual co-operation and good will)?

We think not.  Clause 10.1 is clearly intended to condition the performance of all the other clauses in NEC3, which is why it is the only clause which is written as “shall”; by contrast all the other clauses are written in the present tense as descriptive activities.

For more information, help or advice on any construction issue please contact Rob Langley on 0191 211 7975.