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Good Faith Clauses

26 February 2013. Published by Alex Badel, Senior Associate

There is no general doctrine of good faith in English law and it is not therefore implied into contracts.

Nevertheless, express good faith clauses sometimes appear in bespoke construction contracts, PFI concessions and some forms of standard construction contracts, particularly NEC3.

However, rarely do these provisions have any teeth and they are often interpreted very narrowly by the courts. The recent High Court decision in Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB) was therefore somewhat unexpected. 

In this case, the court found that a duty to act in good faith contained in a public sector hospital catering contract had been breached. The contract incorporated a mechanism that enabled deductions to be made from service payments in the event of performance failures by Medirest. The court found the way in which the Trust had calculated the performance deductions to be absurd and its failure to respond to Medirest's attempts to resolve the dispute were a breach of the duty to act in good faith.

Nonetheless, whilst Medirest was entitled to terminate the contract in accordance with an express termination provision, the Trust was also entitled to terminate the contract due to Medirest's accumulation of the relevant number of service failure points within a certain period. Therefore, neither party could succeed in their claims for post-termination losses.

The court favoured a broad interpretation of the duty to act in good faith on the grounds that the parties had entered into a long-term contract for the delivery of food and other services within a hospital, the performance of which required continuous and detailed co-operation between the parties. Indeed, the fact that the contract related to the provision of services to members of the public and hospital patients is likely to have had considerable bearing on the court's decision.

Care should therefore be taken when seeking to apply the principles of this decision. For example, the duty to act in good faith is unlikely to counter the strict time bars relating to notifications of Compensation Events and other process-driven requirements in NEC3 contracts. Nonetheless, there are often other contractual provisions which can be deployed to bring about the "right outcome", not least, in relation to disproportionate service failure calculations, perhaps unenforceable if the deduction could be construed as a penalty.