The recent case of Compass Group UK and Ireland Limited (t/a Medirest) v Mid Essex Hospital Services NHS Trust  provides a useful reminder of duties to co-operate in good faith in long term services contracts.
The claimant, Medirest, provided facilities management to the healthcare market. It entered into a seven year contract to provide catering services to the defendant NHS Trust. The contract obliged the parties to cooperate in good faith. The operation of a service credit mechanism in the contract (by which the Trust could levy payment deductions for failure to meet contractual performance criteria) led to the souring of the relationship between the parties with the result that within 18 months both parties purported to terminate the agreement.
The Trust could terminate by serving written notice should there be a material failure by Medirest to perform certain material obligations subject to a 30 day opportunity to remedy. The Trust could also terminate if Medirest exceeded the specified number of service failure points in any six month rolling period.
There were a number of issues in the first few months of the agreement followed by a number of performance failures uncovered by the Trust which included the following:-
- a box of out of date ketchup sachets was found in a cupboard. It was removed immediately on being discovered.
- A cleaning schedule was not signed off.
- A refrigeration display was missing its temperature details when it was checked.
- Individual butter sachets were found in the fridge with no use by date. They were with their box.
- A one day out of date mousse was found which was removed immediately.
After various exchanges, the Trust wrote to Medirest in January 2009 setting out the service failure points for the period July 2008 to December 2008 but with no back up detail. The Trust proposed to deduct £587,207.67 from Medirest – over half of the whole service fee payable by the Trust for the six months to which it related. When a breakdown was eventually provided it included deductions of £46,320 for the ketchup, £71,055 for the cleaning schedule, £94,830 for the temperature display, £94,830 for the butter and £84,450 for the mousse. Medirest’s attempts to resolve matters failed and not surprisingly the parties’ relationship deteriorated rapidly.
Medirest gave the Trust a notice of termination on 10 September 2009. The Trust issued its own notice of termination (having previously served and then withdrawn an earlier notice) on 23 October 2009. Medirest extended its termination date (with the Trust’s agreement) to 27 October 2009. The parties then agreed termination would take effect from 23 October 2009 without prejudice to whose termination of the contract was effective. Shortly prior to the termination the Trust provided a revised schedule of the deductions claiming just under £200,000.
The duty to co-operate
One of the questions which the court had to consider was the extent to which the operation of the payment mechanism by the Trust was in breach of the obligation to co-operate. The relevant clause 3.5 provided:
"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 … to derive the full benefit of the Contract."
The Trust argued that the clause should be interpreted narrowly and did not mean that there was a general duty imposed on it. Instead it argued it was under no duty to co-operate except for the purposes specifically mentioned and that this duty only arose if its failure to co-operate hindered Medirest’s performance. The judge disagreed and found that:
"The precise scope of the duty to co-operate will take its content from the circumstances and the nature of the contract concerned. In a long-term contract … the duty to cooperate necessarily required the parties to work together constantly, at all levels of the relationship, otherwise performance of the contract would inevitably be impaired…The duty to co-operate necessarily encompassed the duty to work together to resolve the problems which would almost certainly occur from time to time in a long term contract …It also required the parties not to take unreasonable actions which might damage their working relationship.
…There is nothing wrong with a challenging approach in managing a contract, even with a contract containing a clause such as 3.5…so long as a party deploys fact and common sense."
He went on to decide that the effect of the Trust’s conduct from the first part of 2009 was to damage the relationship with Medirest. The breaches revolved around the "absurd" calculations of service failure points which the Trust conceded were in many respects indefensible and the Trust’s failure to respond positively when Medirest sought to resolve matters. The fact that Medirest had itself been in breach of contract during the previous year by exceeding the number of service failure points did not justify the Trust’s breaches.
The judge held that the absurdity of the calculations by the Trust was a breach of clause 3.5 and also an exercise of the Trust’s contractual powers in an arbitrary, capricious and irrational manner. There was a failure to co-operate in good faith to try to resolve problems arising in the course of the contractual relationship. The refusal by the Trust to back down on items which had been reasonably disputed by Medirest went to the heart of the commercial viability of the agreement, gravely damaging the parties’ working relationship.
The judge concluded that Medirest was entitled to terminate the contract when it did – the Trust’s last minute attempts to revise the figures to more reasonable levels were too late as the notice of termination had already been served. However, he found that the Trust was also entitled to terminate the contract because Medirest had accumulated the requisite number of service failure points within the relevant period. The Trust’s notice expired first and so that was the notice which was effective in bringing the contract to an end. As both parties were entitled to terminate the contract the judge found that neither could succeed in their substantial claims for post termination losses.
The case concerned an express duty of cooperation but it serves as a useful reminder of what the court will expect of parties in long term relationships, particularly where service credits are involved:-
- Parties are entitled to manage contracts in a challenging way but must do so by deploying common sense.
- Parties should not ignore dispute escalation clauses in contracts which are designed to resolve disputes during the course of the contract.
- Parties must ensure that they do not exercise their contractual powers in an arbitrary, capricious or irrational manner.
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