Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust

An express obligation to co-operate in good faith in a long-term commercial contract requires conduct consistent with the contract’s common purpose, fair dealing and justified expectations. It may require parties to work together to resolve problems and to avoid unreasonable conduct damaging their relationship.

A contractual discretion to award deductions or service-failure points must be exercised rationally, in good faith and consistently with the purpose for which it was conferred. Materiality is assessed objectively in context. Persistent irrational calculations and demands may amount both to material breach and, where sufficiently serious, repudiatory breach.

Medirest supplied catering and related facilities-management services to an NHS Trust under a seven-year contract. The contract contained an express duty to co-operate in good faith and a payment mechanism allowing deductions and service-failure points for performance failures.

Disputes arose over monitoring, the calculation of deductions and the Trust’s demands for substantial payments. The Trust purported to terminate after Medirest exceeded the contractual service-failure threshold. Medirest subsequently alleged material breach and served its own termination notice. The central issues were the scope of the good-faith obligation, the legality of the Trust’s calculations and contractual powers, the effectiveness of the termination notices, and several ancillary payment claims.

1. Good faith and co-operation. Clause 3.5 imposed an express obligation on both parties to co-operate in good faith in performing the contract. Its content depended on the long-term, complex and public-service context. It required faithfulness to the common purpose, fair dealing, consistency with justified expectations, and reasonable efforts to resolve problems. The Trust could not pursue its own contractual interests in a manner which damaged the relationship or undermined the benefits owed to patients and other beneficiaries.
2. Contractual powers. The power under clause 5.8 to award service-failure points and levy deductions was discretionary. It was not a merely mechanical calculation. The Trust was required to exercise it rationally, honestly and in good faith, consistently with the purpose of curbing performance failures. The implied restriction on arbitrary, capricious or irrational exercise was not excluded by the contractual exclusion of implied terms.
3. The Trust’s grossly excessive and indefensible calculations, demands for payment, refusal to engage constructively with Medirest’s objections, and maintenance of unjustified claims breached clause 3.5 and constituted an abuse of its contractual powers. Medirest therefore validly terminated for material breach. The breaches were also initially repudiatory, but the repudiatory breach was abated by the later revised schedule before repudiation was accepted.
4. The Trust’s termination notice was valid notwithstanding that it specified a future termination date. Clause 28.1 did not require immediate termination, and a future date was commercially necessary to arrange continuity of hospital catering. The Trust was entitled to terminate because the contractual service-failure threshold had been exceeded.
5. Medirest’s notice complied with clause 28.4.2, which required the breach to be brought to the Trust’s attention but did not require pleading-level particulars. The first notice to expire was the Trust’s notice, so the contract ended on 23 October 2009. Neither party recovered substantial post-termination losses because both had been entitled to terminate.