Mid-Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd

The Court of Appeal allowed the Trust's appeal. The court held that the judge at first instance was wrong to imply into the contract a term that the Trust would not exercise any contractual powers (in particular those under clause 5.8 and the Payment Mechanism) in an arbitrary, irrational or capricious way. The Payment Mechanism and the specification supplied objective rules for calculating Service Failure Points and deductions, and those express rules obviated the need for the implied constraint found by the judge.

The court also held that clause 3.5's express obligation to "co-operate ... in good faith" is not a general gloss on every contractual right but is limited to the two stated purposes in that clause: (i) efficient transmission of information and instructions and (ii) enabling the Trust or a beneficiary to derive the full benefit of the contract. The Trust's contested awards of Service Failure Points and the unilateral deductions did not amount to a breach of that limited good faith obligation.

Because the Trust had, by 10 September 2009, repaid the wrongful deductions and (on the facts found) the excessive Service Failure Points were largely time-expired or without contractual effect, Medirest's notice of termination under clause 28.4 was not founded on a subsisting material breach. The Trust was entitled to treat the contract as terminated under clause 28.1 and the appeal was allowed.

Background and parties:

• The Trust engaged Medirest (a division of Compass Group) under a seven year contract from 1 April 2008 for catering and cleaning services at two hospitals. The contract comprised four documents including general conditions and a detailed Service Level Specification with a Payment Mechanism allocating Service Failure Points (SFPs) and deductions.
• Key contractual provisions included clause 3.5 (co-operation in good faith), clause 5.8 (entitlement to levy deductions and to award SFPs), and clause 28 (various termination rights, including 28.1 termination for exceeding SFP thresholds and 28.4 contractor termination for material breach).

Procedural posture and relief sought:

• Medirest commenced proceedings claiming damages on the basis that it had validly terminated under clause 28.4. The Trust counterclaimed, asserting that it had validly terminated under clause 28.1 and was entitled to post-termination relief.
• The action was tried before Mr Justice Cranston, who found both parties entitled to terminate; the Trust appealed to the Court of Appeal.

Issues before the Court of Appeal:

1. Whether there was an implied term preventing the Trust from exercising contractual powers (SFP awards and deductions) in an arbitrary, irrational or capricious manner;
2. Whether clause 3.5 imposed a general obligation of co-operation in good faith that covered the Trust's conduct in awarding SFPs and making deductions;
3. Whether Medirest validly terminated under clause 28.4 for a material breach by the Trust.

Court's reasoning and outcome:

• On implied term: the court applied the necessity test and prior authorities on limits to contractual discretions. It concluded the Payment Mechanism and specification provided objective, express rules for calculating SFPs and deductions, so there was no need to imply a general limitation of the kind found by the trial judge.
• On clause 3.5: the court construed the clause by reference to its text and context and limited its scope to the two purposes stated (efficient transmission of information/instructions and enabling the Trust or beneficiary to obtain the contract benefit). The contested SFP awards and the unilateral deductions were not conduct falling within those purposes and thus did not breach clause 3.5.
• On termination: by 10 September 2009, the Trust had repaid the wrongful deductions and the excessive SFPs were largely time-expired or without contractual effect; accordingly the continuing breach, if any, was not a material breach within clause 28.4 and Medirest's termination was ineffective. The appeal was allowed and the Trust was held entitled to pursue termination and remedies under clause 28.1.

Subsidiary findings: the court accepted there had been unreasonable conduct on both sides at management level and breaches of express clauses (for example, unlawful deductions under clauses 5.8/6.3/6.5), but these did not amount to a continuing material breach enabling Medirest to validly terminate under clause 28.4.

Appeal allowed. The Court of Appeal held that (1) there was no implied term that the Trust must not exercise its contractual powers to award Service Failure Points or levy deductions in an arbitrary, irrational or capricious manner because the Payment Mechanism and specification provided objective, express rules; (2) clause 3.5's obligation to co-operate in good faith is limited to the two stated purposes in the clause and did not cover the Trust's contested SFP awards or deductions; (3) Medirest's termination under clause 28.4 was not founded on a subsisting material breach and was ineffective, and the Trust was entitled to pursue its position under clause 28.1.

Appeal from the High Court, Queen's Bench Division (Mr Justice Cranston, HQ10X02821, judgment 28 March 2012). This Court of Appeal decision: [2013] EWCA Civ 200 (15 March 2013).