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

An implied term restraining arbitrary, capricious or irrational conduct arises where a party has a contractual discretion requiring an assessment or choice affecting both parties’ interests. It is not implied where the contract fixes the relevant calculation and gives a party only the choice whether to exercise an absolute contractual entitlement.

An express duty to co-operate in good faith takes its meaning from its contractual context. It does not create a general duty governing all interactions where it is confined to specified purposes. A contractual right to terminate for a material breach requires a substantial and serious breach, rather than one of little consequence.

The Trust engaged the contractor under a seven-year contract to provide catering and cleaning services at two hospitals. The contract contained a service-failure-points and payment-deduction mechanism. It also permitted the contractor to terminate on one month’s notice for an unremedied material breach by the Trust.

The Trust made excessive assessments of service failure points and deductions. It later repaid the disputed deductions, but continued to maintain an excessive points assessment. The contractor purported to terminate under clause 28.4. The Trust maintained that it had instead validly terminated because the contractor had exceeded the contractual points threshold.

Cranston J held that both parties had validly terminated. The Trust appealed. The central issues were the scope of the express good-faith co-operation clause, whether an implied restriction governed the Trust’s powers, and whether any continuing breach was material.

1. Appeal allowed unanimously. The contractor’s purported termination under clause 28.4 was invalid. The Trust was entitled to pursue financial relief on the basis that it had terminated under clause 28.1.

2. The implied restriction identified in The “Product Star” [1993] 1 Lloyd’s LR 397 and the other discretionary-power authorities applies where the contractual power entails an evaluative choice or assessment between competing interests. Here the service-level specification and Payment Mechanism prescribed the number of points and deductions. That calculation admitted of only one correct answer. The Trust had discretion only whether to award the correctly calculated points or make the correctly calculated deductions. No implied term against arbitrary, capricious or irrational conduct was necessary.

3. The good-faith obligation in clause 3.5 was confined to co-operation for two stated purposes: efficient transmission of information and instructions, and enabling the Trust to obtain the contract’s benefit. In context, it required the parties to work together honestly to achieve those purposes. It was not a general obligation governing every contractual interaction. Excessive points assessments and wrongful deductions breached the specific payment provisions, but did not breach clause 3.5. The wrongful deductions had in any event been repaid before the termination notice.

4. A material breach for clause 28.4 means a substantial and serious breach, though not necessarily a repudiatory one. The remaining excessive points assessment was not material. Earlier assessments were time expired; the contractor had in any event exceeded the 1,400-point termination threshold; any points above that threshold had no contractual effect; and the Trust was reviewing its assessments.

5. The judge’s findings of an implied term, breach of clause 3.5, valid termination by the contractor, and repudiatory breach by the Trust were set aside. Counsel were to agree the consequential order.

• Court of Appeal (Civil Division). The Trust’s appeal was allowed: [2013] EWCA Civ 200 .
• High Court, Queen’s Bench Division. Cranston J had held that both parties were entitled to terminate the contract and neither could recover post-termination losses. The Court of Appeal reversed that conclusion.