Court of Appeal's opinion on good faith clauses
In our February blog we reported on Compass Group UK and Ireland Ltd (trading as Medirest) v Mid Essex Hospital Services NHS Trust  EWHC 781 (QB) and the implications of the decision on the duty to act in good faith.
The case was appealed and the Court of Appeal gave their judgment on 15th March 2013 in which the decision at first instance was overturned.
The Court of Appeal was clear that there is no general implied contractual obligation to act in good faith and any specific term imposing such a duty will be narrowly construed. Further, discretions involving absolute contractual rights are unlikely to be the subject of an implied term, whereas those involving an assessment or a choice as to a range of options are likely to be. Whilst the obvious reaction of practitioners may be to exclude such an implied term, Jackson LJ warned that doing so would be "extremely difficult".
The case related to the long term hospital catering and cleaning contract between Medirest and Mid Essex Hospital Services (the "Trust"). The Court of Appeal considered whether the judge at first instance was correct to find that the Trust's conduct constituted a breach of its obligation to "cooperate in good faith" and whether there was an implied term in the contract that it would not act in an "arbitrary, capricious or irrational manner" when exercising its power to make deductions from monthly payments.
The Court of Appeal reiterated that there is no general doctrine of good faith in English law and if parties to a contract wish to impose such a term they must do so expressly. It was decided that the test of whether a party acted in good faith was objective, dependent on the context and would involve considering whether reasonable and honest people would find the conduct of a party commercially unacceptable. The Court of Appeal decided that the "good faith" requirement in the contract between Medirest and the Trust meant "working together honestly to achieve the stated purposes of the contract". The Court of Appeal found that the Trust had not breached this requirement with its conduct.
The Court of Appeal further held that the Trust's discretion to award itself payment deductions and service failure points was not subject to an implied term that such discretion would not be exercised arbitrarily, capriciously or irrationally. Discretion in this context does not involve a simple decision as to whether or not to exercise a contractual right. Rather, it must involve making an assessment, or choosing from a range of options, taking into account the interests of both parties to a contract. Lord Justice Jackson found that although the contract allowed the Trust discretion to make deductions from monthly payments, it was not the same as the discretion allowed in the case law he had considered. He also distinguished it from the other cases by stating that the Trust is a public authority delivering vital services to vulnerable members of the public which could not be criticised if it found cause to award the full number of service failure points and make deductions.