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

This judgment is in nine parts, namely:

This is an appeal against a judgment of Mr Justice Cranston (“the judge”), who held that both parties to a substantial commercial contract were entitled to terminate by reason of the conduct of the other party. The contract was for the provision of services to two hospitals. The main issues are (a) the effect of an express obligation to “co-operate … in good faith” and (b) whether there was an implied term that the employer would not act in an arbitrary, irrational or capricious manner in assessing the contractor’s performance.

The contractor was Compass Group UK and Ireland Ltd. The division of that company which was involved in this project traded under the name “Medirest”. I shall therefore refer to the contractor as “Medirest”. Medirest is claimant in the action and respondent in the Court of Appeal.

The Mid Essex Hospital Services NHS Trust is the body which engaged Medirest. I shall refer to it as “the Trust”. The Trust is defendant in the action and appellant in the Court of Appeal.

I shall mention three individuals in the course of this judgment. Mr Taylor was at the material time the operations director of Medirest. Mr Aitchison was the commercial director of the Trust. Mr Wright was responsible for hotel services at the Trust and he reported to Mr Aitchison.

When I come to set out the terms of the contract, I shall refer to the Centre of Effective Dispute Resolution as “CEDR”. I shall also correct two obvious typographical errors. The first error is in clause 5.9 of the conditions, where the text says “warning notices”, whereas clearly the phrase “service failure points” was intended. The second error comes in paragraph 1.3 of Part F of the Payment Mechanism. In the second line there is a reference to paragraph 5 of part C, whereas clearly the reference should be to paragraph 6 of part C.

The solicitors for both parties will feature in the narrative of the events. The solicitors for the Trust are Capsticks Solicitors LLP, to whom I shall refer as “Capsticks”. The solicitors for Medirest are DLA Piper UK LLP, to whom I shall refer as “DLA”.

After these introductory remarks, I must now turn to the contract which is the subject of this litigation.

On 1^st April 2008 the Trust and Medirest entered into a somewhat complicated contract, under which Medirest would provide catering and cleaning services for St John’s Hospital and Broomfield Hospital in Essex over a period of seven years. It was envisaged that during the seven year period both hospitals would be replaced by new facilities, which were being constructed on the Broomfield site.

The contract is contained in four separate documents. Document one contains the overarching agreement. This states that Medirest will provide the services set out in document four and that the Trust will make payment for those services. It also provides that the Trust has an option to extend the contract for a further three years.

Document two sets out background information concerning the plans and requirements of the Trust. Paragraph 5.1 of document two provides that while the two separate hospitals are in operation “the Contractor will be expected to provide and operate a helpdesk system to process requests and queries from the Trust regarding the Catering service.”

Document three sets out the conditions of contract. I shall refer to this document as “the conditions”. Clause 1 of the conditions sets out a number of definitions. These include the following:

“1.1.2

‘Beneficiary’ means any or all of:

(a)

the Department of Health and all agencies thereof (including NHS PASA);

(b)

GPs;

(c)

health service bodies referred to in Section 9 of the National Health Service Act 2006;

(d)

the Medical Research Council;

(e)

the Secretary of State for Health;

(f)

any care trust as defined in section 77 of the National Health Service Act 2006;

(g)

any NHS foundation trust listed in the register of NHS foundation trusts maintained pursuant to section 39 of the National Health Service Act 2006;

(h)

any body replacing or providing similar or equivalent services to the above;

(i)

any statutory successor to any of the above;

and ‘Beneficiaries’ shall be construed accordingly.

….

1.1.5

‘Contract’ means the agreement between the Trust and the Contractor comprising the Order, these terms and conditions and the schedules hereto, and the Specification, and for the avoidance of doubt all other terms, conditions or warranties other than any terms, conditions or warranties implied by law in favour of the Trust or the Beneficiaries are excluded from the agreement between the Trust and the Contractor unless expressly accepted in writing by the Trust’s Representative.”

Clause 2 of the conditions provides:

“Appointment

2.1

The Trust appoints the Contractor to provide the Services:

2.1.1

promptly (and in any event within any time targets as may be set out in the Service Level Specification) and in a professional and courteous manner so as to reflect and promote the image of the Trust and any Beneficiary;

2.1.2

strictly in accordance with the Service Level Specification and all provisions of the Contract;

2.1.3

in accordance with all applicable UK and European laws and regulations and Good Industry Practice; and

2.1.4

in accordance with the policies (including, when on any premises of the Trust or any Beneficiary or on any other premises where it works alongside the Trust’s or any Beneficiary’s staff, any racial discrimination and equal opportunities policies), rules, procedures and quality standards of the Trust and any Beneficiary as amended from time to time.

2.2

The Contractor accepts the terms of appointment as provided in Clause 2.1 in consideration of the Contract Price.”

Clause 3 of the conditions provides:

“Performance of the Services

3.1

Subject to Clause 17.1, the Contractor shall provide at its own expense all staff, equipment, tools, appliances, materials or items required for the provision of the Services to the Contract Standard.

3.2

To the extent that the Service Level Specification includes the date, format and method of delivery of the Services and Deliverables and/or the applicable performance measures, performance due-by dates, minimum performance levels and methods of performance measurement in respect of the Services, the Contractor will abide by the same.

3.3

Time shall be of the essence with regard to the obligations of the Contractor under the Contract.

3.4

If the Specification provides for performance of the Services in stages, the Contractor undertakes to perform the Services in strict compliance with the timetable for stages as provided in the Service Level Specification.

3.5

The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract. At all times in the performance of the Services, the Contractor will co-operate fully with any other contractors appointed by the Trust or any Beneficiary in connection with other services at the Location.

3.6

In addition to any more specific obligations imposed by the terms of the Contract, it shall be the duty of the Contractor to notify the Trust’s Representative of all significant changes to staffing, rates of pay or conditions of employment, or hours of work or other technological changes at least one month prior to the implementation of any such revised arrangements.

3.7

The Contractor shall provide information in a format, medium and at times specified by the Trust, related to the performance of the Services as may be reasonably required.”

Clause 5 of the conditions provides:

“Performance Measurement

5.1

In addition to any more specific obligations imposed by the terms of the Contract, it shall be the duty of the Contractor to provide the Services to the Contract Standard which in all respects shall be to the satisfaction of the Trust’s Representative.

5.2

The Contractor shall institute and maintain a properly documented system of quality control as set out in the Service Level Specification and which is to the satisfaction of the Trust’s Representative to ensure that the Contract Standard is met.

5.3

In addition to any other rights of the Trust and any Beneficiary under the Contract, the Trust’s Representative shall be entitled to inspect the Contractor’s quality control system referred to in Clause 5.2 above.

5.4

During the Term, the Trust’s Representative may inspect and examine the provision of the Services being carried out at the Location without notice at any time. The Contractor shall provide to the Trust all such facilities as the Trust may require for such inspection and examination.

5.5

The Contractor shall allow the Trust and any person, firm or organisation authorised by the Trust to have access to and to audit all records maintained by the Contractor in relation to the supply of the Services. The Contractor shall assist the Trust or any party authorised by the Trust (as the case may be) in the conduct of the audit.

5.6

If any part of any Service is found to be defective or different in any way from the Service Level Specification or otherwise has not been provided to the Contract Standard other than as a result of a default or negligence on the part of the Trust or any Beneficiary, the Contractor shall at its own expense re-perform the Services in question (without additional remuneration therefor) within such time as established by the Service Level Specification or such as the Trust or any Beneficiary may reasonably specify ….

5.8

The Trust or any Beneficiary shall ascertain whether the Contractor's provision of the Services meets the performance criteria as specified in the Service Level Specification or, if the criteria are not so specified, meets the standards of a professional provider of the Services. Where such performance criteria or standards have not been met by the Contractor in the performance of the Services then the Trust shall be entitled to levy payment deductions against the monthly amount of the Contract Price payable to the Contractor in accordance with the terms of the Payment Mechanism. In addition, the Trust may by notice to the Contractor award Service Failure Points depending on the performance of the Services as measured in accordance with the Service Level Specification. Service Failure Points which are agreed or determined to have been awarded in circumstances where such award was not justified shall be deemed to have been cancelled.

5.9

Without prejudice to the Trust’s rights under Clause 28 and any other express rights under this Agreement, if the Contractor has exceeded the number of service failure points contained in Appendix D of the Payment Mechanism in any Contract Month then the Trust may give a written notice (a “Warning Notice”) to the Contractor setting out the matter or matters giving rise to such notice and containing a reminder to the Contractor of the implications of such notice. Any such notice shall state on its face that it is a “Warning Notice”.

5.10

Where the Contractor receives a Warning Notice from the Trust it shall arrange and attend a meeting with the Trust’s Representative within ten (10) Business Days. By the end of the meeting the Contractor shall have produced an agreed action plan with the Trust’s Representative. The Contractor shall implement the agreed action plan within the agreed timescales and shall undertake such monitoring and review as necessary to establish the effectiveness or otherwise of the action plan. The Contractor shall report back all findings to the Trust within the timescale identified within the action plan.”

In relation to clause 5.9 it should be noted that Appendix D of the Payment Mechanism specifies 220 service failure points as the threshold above which the Trust is entitled to serve a warning notice.

Clause 6 of the conditions provides:

“6.2

The only sums payable by the Trust or any Beneficiary to the Contractor for the provision of the Services shall be the Contract Price as calculated in accordance with the Payment Mechanism. All other costs, charges, fees and expenses of whatever kind arising out of or in connection with the Contract shall be the responsibility of the Contractor.

6.3

In accordance with the Service Level Specification and the Payment Mechanism, where the Contractor is required to provide Deliverables, the Trust or any Beneficiary shall be entitled to deduct a relevant element of the Contract Price in the event of failure to provide the Deliverables in accordance with the Service Level Specification.”

Clause 6.4 of the conditions provides for Medirest to render invoices following the end of each month. Clause 6.5 provides for the Trust to pay those invoices within thirty days.

Clause 26 of the conditions sets out a dispute resolution procedure. In the first instance there is to be a meeting between more senior representatives of both parties, who will attempt to resolve the matter in dispute. If that meeting does not achieve a resolution, then the dispute is to be referred to mediation under the auspices of CEDR. If the mediation does not result in resolution of the dispute, then either party can commence proceedings in court.

Clause 28.1 of the conditions sets out a number of different circumstances in which the Trust is entitled to terminate the contract. The only part of this clause which is relevant for present purposes is sub-clause 28.1.10, which provides:

“the Contractor has exceeded the number of Service Failure Points set out in Appendix D of the Payment Mechanism in any six (6) month rolling period.”

Appendix D of the Payment Mechanism specifies 1,400 service failure points as the threshold above which the Trust is entitled to terminate pursuant to clause 28.1.

Clause 28.2 of the conditions provides:

“The Trust and any Beneficiary shall be entitled to recover from the Contractor the amount of any Loss resulting from termination under Clause 28.1. For the purpose of this Clause, Loss shall include reasonable cost to the Trust and any Beneficiary of the time spent by its officers in terminating the Contract and in making alternative arrangements for the provision of the Services.”

Clause 28.3 entitles the Trust to terminate the contract by giving six months notice in writing. Termination under this clause, however, does not entitle the Trust to any of the financial benefits set out in clause 28.2.

Clause 28.4 provides:

“The Contractor may terminate the Contract in the following circumstance, by giving 1 month’s written notice:

28.4.1

if the Trust or any Beneficiary has committed a material breach of the Contract; and

28.4.2

the Contractor has brought the breach of Contract to the attention of the Trust’s Representative, and

28.4.3

the Trust or such Beneficiary has not corrected the said breach of Contract within a reasonable period of time.”

The final document which makes up the contract pack is document four. Part one of document four is entitled “Service Level Specification” and I shall refer to it as “the specification”. The specification is divided into sub-parts. The specification sets out numerous requirements with which the contractor must comply. Sub-part B of the specification sets out general requirements. Sub-part C of the specification sets out specific requirements.

I shall deal first with the general requirements. Clause 6.1 of sub-part B of the specification provides:

“The Contractor shall undertake sufficient performance monitoring to demonstrate that each Performance Parameter is achieved, and where not achieved the extent of any shortfall.”

Clause 7 of sub-part B of the specification sets out sixty performance parameters in the form of a table. Each of these performance parameters is given a number ranging from “GP01” to “GP60”. In respect of each parameter it is specified whether a performance failure is classified as “major”, “medium” or “minor”. A separate column sets out the remedial period which is allowed for a performance failure. The final column sets out how the performance of each parameter will be monitored.

One of the performance parameters in clause 7 deals with monthly reporting. This is parameter GP11, which provides:

“Monthly Reporting

The Contractor shall prepare a Monitoring Report and deliver it to the Trust within 5 Business Days after the Contract Month end. The Monitoring Report shall contain the following information in respect of the Contract Month just ended:

a)

the monitoring which has been performed by the Contractor in accordance with the Performance Monitoring Programme with a summary of the findings:

b)

a summary of all incidents and Ad-Hoc Service Requests reported to the Contractor or to the Helpdesk during the Contract Month including all Attendance/Completion/Make safe and Rectification Times and those achieved;

c)

a summary of all Performance Failures including the duration of each Performance Failure not responded to or rectified on time, with the time and date it commenced and the time and date it ceased;

d)

the relevant volume related data;

e)

the volume related adjustments to be made to the Service Payment in accordance with the Payment Mechanism;

f)

the deductions to be made from the Service Payment in respect of Performance Failures in accordance with the Payment Mechanism; and

g)

the number of Service Failure Points (SFP’s) to be awarded in respect of Performance Failures on a daily basis. This part of the report should also show the rolling total for the past six months and highlight any day in this period that the rolling six-month total breaches a SFP threshold.

The Trust shall notify the Contractor within 10 Business Days of receipt as to whether it accepts the contents of the Monitoring Report and shall provide full details of any matter which is not resolved. If the Monitoring Report is agreed by the Trust, the Contractor shall issue an invoice for the undisputed sum as described in the Payment Mechanism.

The outcome of any Dispute Resolution Procedures will be reflected in the first payment due after the resolution of the dispute.”

I turn next to the specific requirements. Clause 6 of sub-part C of the specification sets out forty nine performance parameters in the form of a table. Each of these performance parameters is given a number ranging from “SP01” to “SP49”. In respect of each parameter it is specified whether a performance failure is classified as “major”, “medium” or “minor”. A separate column sets out the remedial period which is allowed for a performance failure. The final column sets out how the performance of each parameter will be monitored.

Appendices A, B and C to sub-part C of the specification set out details of meals to be served, meal times and so forth.

Part three of document four is the Payment Mechanism, to which I have previously referred. The Payment Mechanism is divided into six parts and four appendices.

Part A of the Payment Mechanism contains four pages of definitions. These include the following:

“Deduction: means a deduction made from a Service Payment in accordance with this Payment Mechanism;

….

FM Service: means a facilities management service to be provided by the Contractor in accordance with this Agreement, being one of the services specified in the Service Level Specification;

….

Service Failure Points: means points allocated to the Contractor in respect of the occurrence of Performance Failures which are determined by the provisions set out in Part F of this Payment Mechanism and Appendix A;”

Part B of the Payment Mechanism sets out a formula for calculating the monthly service payments. This formula provides that there shall be subtracted from the sums otherwise due the total amount of deductions for performance failures, calculated in accordance with part C of the Payment Mechanism.

Part C of the Payment Mechanism includes the following provisions:

“ENTITLEMENT TO MAKE DEDUCTIONS

1.1

If at any time during the Term a Performance Failure shall occur the Trust shall, subject to paragraph 1.2 below, be entitled to make Deductions from the Service Payment in respect of that Performance Failure.

….

3.1

Subject to paragraphs 1 and 2 of this Part C, the amount of the Deduction in respect of a performance Failure shall be as follows:

3.1.1

in the case of a Minor Performance Failure, the sum of £5, index-linked;

3.1.2

in the case of a Medium Performance Failure, the sum of £15, index-linked; and

3.1.3

in the case of a Major Performance Failure, the sum of £30, index-linked.

….

6.

REMEDIAL PERIODS

6.1

On the occurrence of a Performance Failure, a period shall apply, within which the Contractor shall demonstrate to the reasonable satisfaction of the Trust that it has either remedied the Performance Failure or, where the period is marked with an asterisk in the Service Level Specification, has taken appropriate steps to prevent the recurrence of the Performance Failure. This period is referred to below as the “Remedial Period”. The lengths of the Remedial Periods shall be:

6.1.1

as stated in the Service Level Specification in respect of the relevant Performance Failure; or

6.1.2

where no Remedial Period is stated in the Service Level Specification in respect of a Fault that has a Rectification Time, the Remedial Period shall be of the same duration as the Rectification Time.

6.2

If before the expiry of the Remedial Period the Contractor demonstrated to the reasonable satisfaction of the Trust that it has remedied the Performance Failure or, as applicable, has taken appropriate steps to prevent the recurrence of the Performance Failure, no further Deduction shall be made in respect of the Performance Failure, otherwise a further Deduction shall be made of the appropriate amount (as described in paragraph 3 above) and a further Remedial Period or Periods of equal duration shall apply (and, if appropriate, Deductions shall continue to be made) until such time as:

6.2.1

the Contractor shall demonstrate to the reasonable satisfaction of the Trust that it has remedied the Performance Failure or, as applicable, taken appropriate steps to prevent the recurrence of the Performance Failure; or

6.2.2

the Trust notifies the Contractor that the Trust no longer requires the relevant FM Service.”

Part F of the Payment Mechanism provides:

“1 SERVICE FAILURE POINTS

1.1

Service Failure Points shall be awarded for every Performance Failure deemed or actual which occurs during the Term unless such matters are disregarded pursuant to paragraph 4 of Part C and further disregarding any Performance Failure which is attributable to the occurrence of an event of Force Majeure.

….

1.3

For the avoidance of doubt when awarding Service Failure Points, where a further Performance Failure is deemed to have occurred in accordance with paragraph 6 of Part C, because Rectification is not carried out or, in the case of Performance Failures to which a Remedial Period applies the Performance Failure has not been remedied prior to the expiry of the Remedial Period, the appropriate number of Service Failure Points shall be awarded in respect of each such Performance Failure, even though they arise from the same circumstances.

1.4

Service Failure Points and Performance Failures

1.4.1

The number of Service Failure Points which shall be awarded in respect of each Performance Failure shall be the number of Service Failure Points attributable to the Performance Failure Category allocated to the Performance Failure as set out in Appendix A of this Payment Mechanism.

1.6

Total Monthly Service Failure Points

The contractor shall calculate the total number of Service Failure Points awarded in each Contract Month.

APPENDIX A

Service Failure Points

Category	SPFs
Minor Performance Failure	2
Medium Performance Failure	6
Major Performance Failure	20

The contract in the present case was derived from two different sources. The first source was a standard NHS contract. The second source was the procedure found in PFI contracts for service failures and deductions. The judge observed that the cobbled together nature of the contract did not assist its use by either party. I agree. The package of contract documents contains some puzzles and inconsistencies which gave rise to conflict between the parties.

Having identified the relevant contract terms, I must now turn to the facts.

Under the terms of the contract, the first three months were a “bedding-in” period. This meant that Medirest was protected against deductions or other penalties. During this period there were serious shortcomings in the service provided by Medirest. There were insufficient staff, in particular not enough team leaders. There was a drop in the standard of maintenance and cleanliness of ward kitchens.

Medirest’s monitoring was also deficient during the initial period. Medirest did not record performance failures. Nor did Medirest prepare monthly monitoring reports as it was obliged to do under performance parameter GP11, set out in clause 7 of sub-part B of the specification.

The Trust responded to Medirest’s failures by adopting a challenging and robust approach. There was a meeting in early July 2008 at which Mr Wright of the Trust suggested a format for Medirest’s monitoring reports.

Medirest failed to produce any monitoring reports before the end of July. It produced the first monitoring report on 7^th August. That report was inadequate in that it only covered July, not the three preceding months.

In accordance with the penultimate paragraph of performance parameter GP11 the Trust responded disputing the contents of Medirest’s monitoring report. At a meeting on 13^th August 2008 the Trust presented its own calculations in respect of July. This showed 3,264 service failure points and deductions of £3,570.

These calculations caused surprise to the management of Medirest, who referred the matter to their lawyers. The Trust for its part proceeded to carry out its own monitoring every month and to assess Medirest’s performance on an extremely harsh basis. Relations between the parties rapidly deteriorated.

The monitoring reports which the Trust prepared for August and September 2008 were totally different from the monitoring reports prepared by Medirest for those months. The Trust’s monitoring reports included some assessments which were absurd. I set out nine examples:

Medirest, on the other hand, was also producing deficient monthly monitoring reports. There were many respects in which Medirest’s service was unsatisfactory, but Medirest did not trouble to include these performance failures in its monthly reports. Also Medirest failed to provide and operate a helpdesk system, as required by paragraph 5.1 of document 2.

On 27^th November 2008 there was a meeting between the senior management on both sides. This meeting was not as productive as either party had hoped. One beneficial consequence, however, was that immediately after the meeting Medirest implemented the helpdesk facility.

On 10^th December 2008 Medirest sent a conciliatory letter to the Trust. Medirest accepted that it had incurred more than 1,400 service failure points in the preceding six months. This would entitle the Trust, if it saw fit, to terminate the contract under clause 28.1. Medirest stated that it would work extremely hard to improve its performance over the coming months.

Although Medirest was incurring a high number of service failure points under the contract, the actual catering service was proceeding satisfactorily. A survey carried out for the period October to December 2008 indicated a high level of patient satisfaction with both the food and the service by Medirest staff.

On 12^th December 2008 the Trust served a warning notice under clause 5.10 of the conditions. This triggered an obligation upon Medirest to attend a meeting with the Trust and also to produce an agreed action plan.

During December 2008 Medirest prepared and sent to the Trust a draft action plan. The parties met on 5^th January 2009, as required by clause 5.10. As a result of discussions during and after that meeting, on 15^th January 2009 Medirest issued the final version of the action plan. The Trust formally accepted the action plan by letter dated 27^th January 2009.

By the end of January 2009 the contract was operating in a more satisfactory manner. Medirest was delivering the required catering and cleaning services. It was also monitoring its own performance and preparing monthly reports as required by performance parameter GP11. Although there was an improvement, things were not perfect. Medirest obtained a report on its catering from a health and safety expert. This report revealed areas where improvement was required. Medirest sent a copy of that report to the Trust, but omitted the critical two pages which identified where improvements should be made.

During 2009 Medirest was duly monitoring its own performance and submitting monthly reports. The Trust was also monitoring Medirest’s performance and preparing its own set of monthly assessments. In respect of the months January to August 2009, the parties’ respective assessments of the number of service failure points incurred were far apart. Even on Medirest’s assessment, however, the total number of service failure points in the preceding six month period exceeded the threshold figure of 1,400.

The shortcomings in performance which attracted service failure points also entitled the Trust to make deductions from its monthly payments to Medirest. There were heated negotiations between the parties as to the extent of the deductions which should be made. On 11^th March 2009 Medirest proposed that the Trust should make four monthly on account deductions of £20,000 each, pending determination of the correct figure. On 26^th March the Trust agreed to this course. The Trust duly made those deductions from the next four monthly payments.

Relations between the management on both sides steadily deteriorated. On 12^th July the Trust proposed that deductions of £20,000 per month should continue to be made. Medirest rejected this proposal and suggested activating the dispute resolution procedure. On 23^rd July the Trust unilaterally deducted £137,834 from its monthly payment to Medirest.

By this stage the Trust was maintaining that the total deductions which it was entitled to make amounted to £711,037. A large part of this sum was referable to the excessive assessments of minor breaches in August and September 2008. The total deductions claimed for the nine items set out in paragraph 44 above amounted to £584, 640.

On 27^th July there was an acrimonious telephone conversation between Mr Aitchison of the Trust and Mr Taylor of Medirest. Immediately after that telephone call Mr Aitchison sent notice of termination to Medirest pursuant to clause 28.1 of the conditions. Mr Aitchison stated in the notice that Medirest had incurred 82,470 service points in the preceding six months. Mr Aitchison did not consult the Trust board before sending the notice, but nothing turns on this omission.

On 5^th August there was a meeting between the parties to discuss the question of deductions. They did not reach agreement. On 10^th August Mr Aitchison informed Medirest that the total outstanding deductions amounted to £716,197 and that the Trust would make deductions of £106,032 from its next five monthly payments to Medirest.

Mr Aitchison’s threat was not an empty one. On 20^th August the Trust deducted £106,032 from its monthly payment to Medirest.

Medirest took the view that the Trust’s conduct over the last year had been utterly unreasonable and that this deduction was the last straw. On 28^th August Medirest’s solicitors, DLA, sent a letter to the Trust pursuant to clause 28.4.2 of the conditions. In this letter DLA alleged that the Trust had committed material breaches of contract by awarding excessive service failure points and making excessive deductions. In the final section of their letter, DLA required the Trust to do the following by 4^th September 2009:

“1.

to withdraw the existing monitoring information;

2.

to produce amended monitoring information to reflect information supplied by Medirest and to calculate the amount the Trust genuinely believes to be due from Medirest at this juncture;

3.

to pay to Medirest the unlawful deduction made in respect of the August 2009 invoice payment; and

4.

to confirm that the Trust will make no further deductions pending the agreement of the items set out at point 2 referred to above. For the avoidance of doubt, Medirest confirms that in the event that the parties are not in the position to agree the level of deductions, the matters hold be addressed pursuant to clause 26 of the Conditions which set out the dispute resolution procedure.”

The Trust was also taking legal advice during this period. The Trust rapidly appreciated the error of its ways. Its solicitors, Capsticks, sent a conciliatory letter on 4^th September 2009 and sought an extension of time.

By letter dated 7^th September 2009 DLA extended the deadline for compliance to 10^th September. DLA also amended Medirest’s third requirement so as to include repayment of the deduction made in July, as well as the August deduction.

On 9^th September 2009 Capsticks sent a letter to DLA making substantial concessions. They stated the following:

On 10^th September 2009 Medirest received the Trust’s payment of £243,875.53 in respect of sums previously deducted. Unfortunately neither this payment nor the statements in Capstick’s letter assuaged Medirest’s wrath. By letter dated 10^th September DLA gave notice to the Trust pursuant to clause 28.4.3 of the conditions that the Trust had failed to withdraw its monitoring information or to produce corrected monitoring information by the extended deadline. Accordingly Medirest was terminating the contract on one month’s notice. Medirest later extended its termination date to 27^th October 2009.

On 21^st September 2009 the Trust issued a spreadsheet containing its revised monitoring information. This substantially reduced the Trust’s previous assessment of service failure points and deductions. The parties were still some way apart on these matters, but the gulf was much narrower than before. The Trust contended that as at the end of July Medirest had incurred 104,828 service failure points and deductions totalling £191,620.87. Medirest contended that it had only incurred 12,904 service failure points and deductions of £30,290. Despite these differences between the parties, one important matter was common ground. During the preceding six months Medirest had incurred more than 1,400 service failure points. Thus on any view the Trust was entitled to terminate under clause 24.1 of the conditions.

On 8^th October 2009 the Trust withdrew its July notice of termination. At the same time it issued a new notice of termination under clause 28.1, which would take effect on 23^rd October. The parties then agreed that termination would take effect on 23^rd October, without prejudice to whose termination of the contract was effective.

Medirest’s catering and cleaning services duly came to an end on 23^rd October 2009. Both parties maintained that they had validly terminated the contract. Each party maintained that it had substantial financial claims against the other. In order to resolve these issues Medirest commenced the present proceedings.

By a claim form issued on 23^rd July 2010 Medirest claimed against the Trust substantial damages for breach of contract. This claim was based upon the premise that Medirest had validly terminated the contract pursuant to clause 28.4 of the conditions.

The Trust defended Medirest’s claim and put forward a substantial counterclaim. The essence of the Trust’s case was that Medirest’s purported termination was ineffective. It was the Trust who had effectively terminated the contract. Accordingly the Trust was entitled to substantial sums under clause 28.2 of the conditions and also substantial damages.

The action was tried before Mr Justice Cranston over eight days during February 2012. The judge handed down his judgment on 28^th March 2012. I would summarise the judge’s conclusions in seven propositions as follows:

The Trust was aggrieved by the rejection of its counter claim for substantial post termination losses. Accordingly the Trust has appealed to the Court of Appeal.

By an appellant’s notice dated 17^th April 2012 the Trust appealed against the judgment of Mr Justice Cranston on four grounds. These were:

The fourth ground of appeal seems to me to be of purely academic interest. Nobody suggests that Medirest accepted the Trust’s repudiatory breach, if such existed.

This appeal was heard on 19^th and 20^th February 2013. Mr James Collins QC leading Mr Siddharth Dhar, appeared for the Trust. Robert Howe QC, leading Mr James Willan, appeared for Medirest. I am most grateful to counsel for the excellence of their oral and written submissions.

The first three sentences of paragraph 86 of the judgment are a crucial part of the judge’s reasoning. These sentences read as follows:

“The absurdity of such calculations [viz the Trust’s calculations in August and September 2008] was a breach of clause 3.5. It also constituted an exercise of the Trust’s contractual power under clause 5.8 and the Payment Mechanism in an arbitrary, capricious and irrational manner. The Trust’s submissions that all that was involved were calculations does not accord with the reality.”

The judge’s finding that the Trust had a discretion under clause 5.8 of the contract conditions led to his finding of an implied term and breach of that term (propositions (ii) and (iii)). These findings, in turn, played a crucial role in the judge’s conclusion that the Trust had breached clause 3.5 (proposition (i)). Thus the judge’s finding of an implied term is integral to his analysis of Medirest’s breach of the express term contained in clause 3.5.

I have therefore come to the conclusion that the best way to tackle the issues in this appeal is to begin by considering whether the contract contained the alleged implied term.

In relation to proposition (ii), the judge relied upon the following authorities: Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The “Product Star”) [1993] 1 Lloyd’s LR 397, Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287, [2005] ICR 402, Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, [2008] 1 Lloyd’s LR 558 and JML Direct Ltd v Freestat UK Ltd [2010] EWCA Civ 34. I must therefore review these and any other relevant authorities.

In The “Product Star” the charter-party provided that the vessel should not be required to proceed to any port which the master or owners in their discretion considered dangerous. The charterers wished the vessel to proceed to the port of Ruwais, but the master and owners refused on account of war risks. Both the Commercial Court and the Court of Appeal held that this refusal was a breach of contract. Leggatt LJ, with whom Balcombe and Mann LJJ agreed stated the relevant principle as follows at page 404:

“Where A and B contract with each other to confer a discretion on A, that does not render B subject to A’s uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably. That entails a proper consideration of the matter after making any necessary inquiries. To these principles, little is added by the concept of fairness: it does no more than describe the result achieved by their application.”

In Horkulak the claimant recovered damages for breach of contract against his former employer, representing loss of earnings. Under his contract of employment he had been entitled to a discretionary bonus. The Court of Appeal held that the lost bonus should form part of the damages. It was an implied term, based on the common intention of the parties, that there would be a genuine and rational exercise of the discretion by the employer: see paragraph 30 of the judgment of the court.

In Socimer a contract for the sale of assets between banks entrusted the task of valuation to one party. The Court of Appeal noted that the contract conferred on one party a power to make decisions which would have an effect on both parties. Accordingly, the contract was subject to an implied term. Rix LJ (with whom Lloyd and Laws LJJ agreed) noted that the decision-maker’s discretion was limited as a matter of necessary implication. He was obliged to act honestly. Also there was “need for the absence of arbitrariness, capriciousness, perversity and irrationality”: see paragraph 66.

In JML Direct the defendant operated a satellite television service and the claimant was a provider of television shopping channels. It was agreed that the claimant should have two of its shopping channels on the defendant’s platform and that the defendant would have discretion in the allocation of logical channel numbers. Both the trial judge and the Court of Appeal held that, in exercising its discretion, the defendant was under an implied obligation not to act in an arbitrary, irrational or capricious manner. Moore-Bick LJ, with whom the Master of the Rolls and Toulson LJ agreed, added at paragraph 14:

“Such an obligation is likely to be implicit in any commercial contract under which one party is given the right to make a decision on a matter which affects both parties whose interests are not the same.”

In each of the above cases the implied term was intrinsic. The contract would not make sense without it. It would have been absurd in any of those cases to read the contract as permitting the party in question to exercise its discretion in an arbitrary, irrational or capricious manner. By reference to Baroness Hale’s classification in Geys v Société Générale [2012] UKSC 63 at [55], [2013] ICR 117, that implied term falls into the first category.

An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is permitted to exercise such a discretion, there is an implied term. The precise formulation of that term has been variously expressed in the authorities. In essence, however, it is that the relevant party will not exercise its discretion in an arbitrary, capricious or irrational manner. Such a term is extremely difficult to exclude, although I would not say it is utterly impossible to do so. Certainly clause 1.1.5 of the conditions in the present case is not effective to exclude such a term, if it is otherwise to be implied.

The question therefore arises whether clause 5.8 of the conditions in the present case confers a discretion such as to give rise to that implied term. The judge held that it did. The Trust contends that the judge was wrong to do so.

Mr Collins submits that the judge erred in holding that the Trust had a discretion in relation to the awarding of service failure points or the making of deductions. The contract contains precise rules as how service failure points and deductions should be calculated. This leaves no room for any discretion. Accordingly there can be no implied term requiring the Trust not to act in an arbitrary, irrational or capricious manner when assessing these matters.

Mr Howe resists this argument and seeks to support the judge’s analysis. He submits that clause 5.8 confers a clear discretion on the Trust. Mr Howe points in particular to two parts of clause 5.8. First, there is the phrase “the Trust shall be entitled to levy payment deductions”. Secondly, there is the phrase “the Trust may by notice to the contractor award service failure points”.

As both counsel acknowledged, there is an inconsistency between the wording of clause 5.8 and the wording of document four. Clause 5.8 states that the Trust makes decisions about service failure points and deductions. It also appears to say that the Trust has a discretion in this regard. Document 4 on the other hand states precisely the opposite. The Payment Mechanism in conjunction with the specification sets out distinct rules for calculating service failure points. These rules leave no room for discretion. Furthermore performance parameter GP11 says that it is Medirest, not the Trust, which has to do these calculations.

The inconsistencies between document three and document four are at first sight confusing. Counsel have helpfully cited all the usual authorities governing the construction of contracts, starting with Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. I hope that I shall be forgiven if I do not embark upon a lengthy recitation of those authorities, replete with quotations.

I have read and re-read the contractual provisions which are in issue, fully bearing in mind the other terms of the contract and, more generally, the commercial context. In my view there is only one sensible way to construe these provisions. This is as follows:

Against this background, the question arises whether there is an implied term that Trust would not act in an arbitrary, capricious or irrational manner in relation to awarding service failure points or making deductions.

The discretion which is entrusted to the Trust in relation to service failure points and deductions in the present case is very different from the discretion which existed in the authorities discussed above. The Trust is a public authority delivering a vital service to vulnerable members of the public. It rightly demands high standards from all those with whom it contracts. There may, of course, be circumstances in which the Trust decides to award less than the full amount of service failure points or to deduct less than it is entitled to deduct from a monthly payment. Nevertheless the Trust could not be criticised if it awards the full number of service failure points or if it makes the full amount of any deduction which it is entitled to make. The discretion conferred by clause 5.8 simply permits the Trust to decide whether or not to exercise an absolute contractual right.

There is no justification for implying into clause 5.8 a term that the Trust will not act in an arbitrary, irrational or capricious manner. If the Trust awards more than the correct number of service failure points or deducts more than the correct amount from any monthly payment, then that is a breach of the express provisions of clause 5.8. There is no need for any implied term to regulate the operation of clause 5.8.

Mr Howe points out that clause 6.2.1 of part C of the Payment Mechanism requires Medirest to demonstrate certain matters “to the reasonable satisfaction of the Trust”. He submits that this involves an element of discretion. It must be implied that the Trust will not exercise this discretion in an arbitrary, irrational or capricious manner.

I do not accept this submission for two reasons. First, the qualification of “satisfaction” by the word “reasonable” makes the test objective, rather than subjective. Secondly, clause 6.2.1 contains its own control mechanism, viz “the reasonable satisfaction of the Trust”. There is no need for a further or different control mechanism, as set out in the suggested implied term.

Let me now draw the threads together. The interpretation of clause 5.8 and the Payment Mechanism is as set out in paragraph 89 above. The implied term which the judge found and which Mr Howe supports does not exist. Accordingly the judge’s finding that the Trust was in breach of the implied term cannot stand. Reverting to my earlier summary of the judge’s judgment, I would reject propositions (ii) and (iii).

I turn next to the express term contained in clause 3.5 of the conditions.

The first sentence of clause 3.5 contains a jumble of different statements, set out in an incoherent order. It has different possible meanings, depending upon where one places the caesuras and what imaginary punctuation one inserts. Medirest contends that the sentence should be read as if it had the following punctuation and numeration:

“The Trust and the Contractor:

(1)

will co-operate with each other in good faith; and

(2)

will take all reasonable action as necessary:

(a)

for the efficient transmission of information and instructions; and

(b)

to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract.”

The Trust contends that the sentence should be read as if it had the following punctuation and numeration:

“The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as it necessary:

(1)

for the efficient transmission of information and instructions; and

(2)

to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract.”

The judge preferred Medirest’s reading of the first sentence of clause 3.5. He noted that the Trust and Medirest had entered into a long term contract for the delivery of food and other services within a hospital. The performance of this contract would require continuous and detailed co-operation. He considered that it accorded with commercial common sense for there to be a general obligation on both parties to co-operate in good faith.

The judge then turned to the content of this obligation. He concluded that this provision referred to how the parties should conduct themselves in the course of performance. He held that this term had an objective character. It qualified how the duty to co-operate was to occur. See paragraph 33 of the judgment.

The judge then went on to review the Trust’s conduct in relation to awarding service failure points and levying deductions. He held that this conduct constituted a breach of the obligation to co-operate in good faith imposed by clause 3.5. That breach was “material” for the purposes of clause 28.4 of the contract conditions. It was also repudiatory.

Mr Howe supports the judge’s interpretation of clause 3.5. He submits that this is highly likely to be the intention of the parties. He draws attention to a number of cases in which an obligation to co-operate in good faith has been implied by the courts. In this case there is an express term to that effect. The court should not read it down.

Mr Collins invites this court to take a different view. He submits that if the parties had intended to impose a general duty to co-operate with one another in good faith, they would have stated this in a stand alone sentence with a full stop at the end. They did the opposite of that in clause 3.5.

Mr Collins also points out that this is a very detailed contract, where the obligations of the parties and the consequences of any failings have been spelt out in great detail. Commercial common sense therefore does not favour a general overarching duty to co-operate in good faith.

In addressing this question, I start by reminding myself that there is no general doctrine of “good faith” in English contract law, although a duty of good faith is implied by law as an incident of certain categories of contract: see Horkulak at paragraph 30 and Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) at paragraphs 120-131. If the parties wish to impose such a duty they must do so expressly.

I turn now to the construction of clause 3.5 of the conditions in the present case. Both parties have advanced powerful arguments. Nevertheless, after weighing up the competing submissions of counsel, I have come to the conclusion that the Trust’s reading of clause 3.5 is correct. The obligation to co-operate in good faith is not a general one which qualifies or reinforces all of the obligations on the parties in all situations where they interact. The obligation to co-operate in good faith is specifically focused upon the two purposes stated in the second half of that sentence.

Those purposes are:

The reference to “any beneficiary” in the second purpose adds little to clause 3.5, regardless of how that clause is construed. The term “beneficiary” is defined in clause 1.1.2 of the conditions. It includes the Department of Health, the Medical Research Council and other bodies. Significantly, the definition does not include patients. None of the identified beneficiaries derives any direct benefit from Medirest’s catering or cleaning services. I have come to the conclusion that the words “or any beneficiary” add nothing of significance and do not assist in the construction of the clause. The second stated purpose really means that the Trust should receive the full benefit of the contract. The benefit of the contract is that the catering and cleaning services should be delivered to the patients and the wards, for which the Trust is responsible.

I turn next to the content of the duty to co-operate in good faith, limited as it is by the two stated purposes. It is clear from the authorities that the content of a duty of good faith is heavily conditioned by its context. In Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1, [2003] 1 AC 469 insurers alleged that shipowners had failed to observe “utmost good faith” (as required by s. 17 of the Marine Insurance Act 1906) in the presentation of a claim. The Commercial Court judge, the Court of Appeal and the House of Lords all rejected that defence. Lord Scott, with whom Lord Steyn and Lord Hoffmann agreed, held that in the particular context the duty of utmost good faith required no more than that the insured should act honestly and not in bad faith: see paragraph 111.

In Street v Derbyshire Unemployed Workers’ Centre [2004] EWCA Civ 964, [2005] ICR 97 the appellant was dismissed for making allegations of misconduct against her senior manager. The allegations were unfounded, but the appellant relied upon s. 43G of the Employment Rights Act 1996, which provided protection for whistleblowers. The employment tribunal rejected the claim for unfair dismissal, as did the Employment Appeal Tribunal and the Court of Appeal. It was held that, although the appellant reasonably believed in the substantial truth of her allegations, she had not acted “in good faith” as required by s. 43G (1) (a). Auld LJ, with whom Jacob and Wall LJJ agreed, explained the meaning of “good faith” as follows at paragraph 41:

“Shorn of context, the words “in good faith” have a core meaning of honesty. Introduce context, and it calls for further elaboration. Thus in the context of a claim or representation, the sole issue as to honesty may just turn on its truth. But even where the content of the statement is true or reasonably believed by its maker to be true, an issue of honesty may still creep in according to whether it made with sincerity of intention for which the Act provides protection or for an ulterior and, say, malicious, purpose. The term is to be found in many statutory and common-law contexts, and because they are necessarily conditioned by their context, it is dangerous to apply judicial attempts at definition in one context to that of another. ”

There is a helpful illustration of these principles in CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch). In that case the parties entered into a joint venture agreement to acquire Chelsea Barracks with a view to its development. A sale and purchase agreement between the parties imposed an obligation upon both of them to act “in utmost good faith”. Vos J held at paragraph 246 that, having regard to the context, the content of this obligation was:

“to adhere to the spirit of the contract, which was to seek to obtain planning consent for the maximum Developable Area in the shortest possible time, and to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties. ”

In the context of clause 3.5 of the conditions the obligation to co-operate in good faith in my view means the following. The parties will work together honestly endeavouring to achieve the two stated purposes.

I turn now to the question whether the Trust was in breach of clause 3.5 by awarding excessive service failure points or making excessive deductions from monthly payments. I shall deal first with deductions. The four £20,000 deductions which the Trust made between March and June 2009 were clearly not breaches of contract. Medirest agreed to those deductions.

The substantial deductions which the Trust made in July and August 2009 fall into a different category. They were not agreed by Medirest and they exceeded the true amount which the Trust was entitled to deduct. In making these deductions the Trust was acting in breach of clauses 5.8, 6.3 and 6.5 of the conditions. The Trust was also acting contrary to the various provisions of the Payment Mechanism concerning deductions which I have set out in Part 2 above. On the other hand these unilateral deductions were not breaches of clause 3.5 of the conditions. I say this for two reasons:

The Trust was, therefore, in breach of clauses 5.8, 6.3 and 6.5 (but not 3.5) of the conditions and of the relevant provisions of the Payment Mechanism between 23^rd July and 10^th September 2009. On the latter date the Trust repaid to Medirest all of the sums which it had wrongfully deducted. Therefore the Trust effectively cured these breaches of contract before Medirest served its notice of termination under clause 28.4 of the conditions.

I turn now to the Trust’s conduct in awarding service failure points. On the facts as found by the judge the Trust persisted in awarding an excessive number of service failure points throughout the period August 2008 to September 2009. This was a breach of the express provisions of clause 5.8 of the conditions. It was not, however, a breach of clause 3.5 of the conditions. I say this for two reasons:

The judge held that the Trust’s award of an excessive number of service failure points constituted a breach of the implied term. He relied upon this breach of the implied term as supporting his conclusion that the Trust was in breach of clause 3.5: see paragraphs 86 and 87 of the judgment. For the reasons set out in Part 6 above, I do not consider that there was such an implied term. Accordingly this basis for finding a breach of clause 3.5 falls away.

In reciting the history of the dealings between the parties the judge has identified some instances where the management of Medirest acted unreasonably and many more instances where the management of the Trust acted unreasonably. The Trust’s managers were aggressive in meetings and intemperate in their correspondence. Nevertheless, as the judge found at paragraph 71 of his judgment, this did not affect the services which Medirest were providing. There were no significant problems with those services from late January 2009 onwards. The parties agreed to keep their dispute about service failure points and deductions separate from the delivery of services to the wards. In that respect the parties were successful.

It is clear from the findings of the judge that the parties did co-operate effectively on all matters concerning the delivery of services to the hospital patients. In so far as information needed to pass between the parties to facilitate the delivery of services to patients, that information was duly transmitted. The Trust received the full benefit of the contract in the sense that patients were given meals at the proper times and the wards were kept clean.

I therefore come to the conclusion that, despite the breakdown of personal relationships at management level, there was no breach of clause 3.5 on either side. With reference to my earlier summary of the judge’s judgment, I therefore disagree with proposition (i).

The only continuing breach of contract by the Trust on 10^th September 2009, when Medirest served its termination notice, was the Trust’s award of an excessive number of service failure points, contrary to clause 5.8 of the conditions. I must now consider whether that continuing breach enabled Medirest to terminate the contract.

For the reasons set out in Parts 6 and 7 above, I conclude that on 10^th September 2009 the Trust was not in breach of clause 3.5 of the conditions. Nor was the Trust in breach of any implied term. Furthermore by 10^th September 2009 the Trust had repaid all sums wrongfully deducted.

On 10^th September 2009, when Medirest served its notice of termination, there was only one continuing breach of contract which the Trust had failed to correct. This was the award of an excessive number of service failure points, contrary to clause 5.8 of the conditions. The question therefore arises as to whether this was a “material” breach of contract within clause 28.4.1.

Counsel have cited a number of authorities in relation to the meaning of “material breach”. For present purposes I only need refer to two of those authorities. In Dalkia Utilities Services plc v Celltech International Ltd [2006] EWHC 63 (Comm), [2006] 1 Lloyd’s Rep 599 the claimant agreed to provide electricity and steam to a large paper mill which the defendant was constructing. Clause 14 of the agreement provided that the claimant could terminate if the defendant was in material breach of its obligation to pay. The claimant successfully terminated pursuant to that provision. In commenting on the operation of that clause Christopher Clarke J observed at paragraph 102:

“The sums involved were neither trivial nor minimal. Celtech’s continued failure to pay them was serious. In assessing the materiality of any breach it is relevant to consider not only of what the breach consists but also the circumstances in which the breach arises, including any explanation given or apparent as to why it has occurred.”

In Fitzroy House Epsworth Street (No. 1) Ltd v Financial Times Ltd [2006] EWCA Civ 329, [2006] 1 WLR 2207 a lease contained a break clause which the tenant could exercise if it had “materially complied” with its obligations. The tenant was in breach of its repairing obligations in certain respects, but the Court of Appeal upheld a decision that the tenant was still entitled to exercise its right under the break clause. Sir Andrew Morritt C, with whom Jacob and Moore-Bick LJJ agreed, stated at paragraph 24 that the test for “material compliance” was objective, not subjective. At paragraphs 35-36 the Chancellor elaborated on the meaning of “material” as follows:

“35.

… But I see no justification for attributing to the parties an intention that the insertion of the word 'material' was intended to permit only breaches which were trivial or trifling. Those words are of uncertain meaning also and are not the words used by the parties.

Nor is it, in my view, of any assistance to consider whether the word 'material' permits more or different breaches than the commonly used alternatives 'substantial' or 'reasonable'. The words 'substantial' and 'material', depending on the context, are interchangeable. The word 'reasonable' connotes a different test.”

Reverting to the present case, I must consider what “material breach” means in the context of clause 28.4.1 of the conditions. In my view this phrase connotes a breach of contract which is more than trivial, but need not be repudiatory. Clause 28.4 has the drastic effect of allowing Medirest to cancel a long term contract on one month’s notice. Having regard to the context of this provision, I think that “material breach” means a breach which is substantial. The breach must be a serious matter, rather than a matter of little consequence.

Against this background, was the Trust’s award of an excessive number of service failure points, contrary to clause 5.8 of the conditions, a “material breach” within clause 28.4.1? In this regard four matters should be noted. First, all service failure points awarded up to March 2009 were time expired. This included the nine excessive assessments made in July and August 2008, which I have identified in Part 3 above. Secondly, in relation to the most recent six month period, it was not disputed that Medirest had incurred more than 1,400 service failure points. Thus the Trust was entitled to terminate pursuant to clause 28.1. Thirdly, in so far as the Trust had awarded or purported to award points in excess of 1,400, these additional points had no contractual effect. Fourthly, the Trust had made it clear by 10^th September that it would be reviewing its previous award of service failure points.

In my view, having regard to all those circumstances, as at 10^th September 2009 the Trust’s breach of clause 5.8 in awarding an excessive number of service failure points did not amount to a “material breach” within clause 28.4.1. In the result, therefore, Medirest was not entitled to terminate under clause 28.4 and its purported notice of termination was invalid. Reverting to my summary of the judge’s judgment, I disagree with proposition (iv).

For the reasons set out in Part 6, 7 and 8 above, I would allow the Trust’s appeal. The Trust is entitled to pursue its claim for financial relief on the basis that it has terminated the contract pursuant to clause 28.1 of the conditions and Medirest’s purported termination is ineffective.

I would also set aside the judge’s finding that the Trust had committed a repudiatory breach of contract (proposition (vi)). This is not a matter of any practical significance, but both parties have asked that it be dealt with.

If my Lords agree, the judge’s order will have to be revised to reflect these findings. I leave it to counsel to agree an appropriate form of order.

I am grateful to Lord Justice Jackson for his comprehensive description of the facts and the issues on this appeal. I agree with both his conclusion and his reasoning. But since we are differing from the judge; and in tribute to the excellent submissions of Mr Howe QC, I would like to add a judgment of my own.

The ultimate issue on this appeal is whether Medirest was entitled to terminate the contract in reliance on an unremedied material breach of contract by the Trust. So the first question is whether there was a breach of contract at all. The judge found that there were two breaches of contract: a breach of the duty to co-operate in good faith under clause 3.5; and a breach of clause 5.8 as the result of an arbitrary or capricious exercise of contractual discretion.

Underpinning both these findings was the judge’s finding that the manner in which the Trust calculated what it said it was entitled to award as Service Failure Points (“SFPs”) and what it was entitled to levy by way of Deductions was absurd. I deal first with clause 5.8. It provides, so far as material, as follows:

“The Trust or any Beneficiary shall ascertain whether the Contractor’s provision of the Services meets the performance criteria as specified in the Service Level Specification… Where such performance criteria or standards have not been met by the Contractor in the performance of the Services then the Trust shall be entitled to levy payment deductions against the monthly amount of the Contract Price payable to the Contractor in accordance with the terms of the Payment Mechanism. In addition, the Trust may by notice to the Contractor award Service Failure Points depending on the performance of the Services as measured in accordance with the Service Level Specification. Service Failure Points which are agreed or determined to have been awarded in circumstances where such award was not justified shall be deemed to have been cancelled.” (Emphasis added)

Part C paragraph 1.1 provides that in the event of a Performance failure the Trust is “entitled to make Deductions from the Service Payment in respect of that Performance Failure”.

Mr Collins QC accepted on behalf of the Trust that where one party to a contract has a discretion to exercise which will potentially impact upon the contractual rights and entitlements of another party to the contract the courts are more willing than heretofore to interpret the provisions conferring that discretion as being subject to implicit limits. Thus where one party to a contract has a discretionary power to decide whether a port is safe (The Product Star (No 2) [1993] 1 Lloyd’s Rep 397); or discretion to decide whether an employee should be paid a bonus, and if so how much (Horkulak v Cantor Fitzgerald International [2005] ICR 402; Khatri v Cooperative Centrale [2010] EWCA Civ 397); or discretionary power to raise interest rates (Paragon Finance plc v Nash [2002] 1 WLR 685) an arbitrary or capricious exercise of discretion will be invalid. Indeed in some cases a failure to exercise a discretion or an arbitrary or capricious exercise of discretion will amount to a free-standing breach of contract sounding in damages (Horkulak v Cantor Fitzgerald International). But the rationale for interpreting discretionary powers as subject to implicit limitations is that without such limitations the discretion would be unfettered; or, as Leggatt LJ put it in The Product Star (No 2), the exercise of the power would be the decision maker’s “uninhibited whim”. It is, therefore, a necessary control mechanism.

By contrast, Mr Collins said that in our case there is no need for a control mechanism of this kind. Here, he said, the Trust had no discretion. He accepted that the language of this clause (unlike others) was expressed in terms of entitlement rather than obligation. But he said that there was no real discretion either in awarding SFPs or in the number of SFPs awarded. The language used was no different from clause 6.1 which said that Medirest “may” charge the Trust the contract price. Clearly that was not a discretion in any real sense: the parties plainly expected Medirest to charge what it was entitled to charge. Moreover, as he pointed out, GP11 (which was part of the performance specification) required Medirest itself to calculate SFPs.

I see no reason to depart from the language of entitlement in which clause 5.8 and Part C paragraph 1.1 are expressed. Thus in my judgment it was up to the Trust to decide whether or not to levy payment deductions; and whether or not to award SFPs. But that was the extent of the Trust’s decision making power under the contract. If the Trust decided to award SFPs, the contract itself, through the medium of the Payment Mechanism, provided for the number of SFPs to be awarded. Either the Trust was right or wrong in its application of the contract terms to the facts of the case. It had no discretion to exercise as regards the maximum number of SFPs to be awarded. The judge did not find that in deciding to award SFPs the Trust had made an arbitrary or capricious decision. Rather, he decided that the absurdity of the Trust’s position was in the number of SFPs that it awarded. Likewise in the case of Deductions, the contract itself provided for their calculation.

Thus the contract provides by its express terms for the number of SFPs to be awarded. Equally it also provides by its express terms for the amount of a Deduction that the Trust is entitled to levy. Mr Howe QC relied on paragraph 6.1 which brought a performance failure to an end where the failure had been remedied “to the reasonable satisfaction” of the Trust. However, in my judgment this provision militates against the implied term rather than in favour of it. Where the contract itself expressly provides the control mechanism, especially where the control mechanism is an objective test, there is no warrant for implying a different one.

If the Trust misinterprets the express terms of the contract or if it is unreasonable in its non-satisfaction then it will not be entitled to award the SFPs it claims to be entitled to award, or to levy the Deductions that it claims to be entitled to levy. But that is because the express terms prevent it from doing so: not because of any implicit limitation. The suggested term thus fails the test of necessity.

In effect the judge has implied a term that makes it a breach of contract to misinterpret the contract. In my judgment it is not generally a breach of contract merely to assert rights which the contract does not confer. In Kenny v Preen [1963] 1 QB 499 one of the questions was whether a landlord had committed a breach of the covenant for quiet enjoyment by asserting that the tenancy had come to an end. Pearson LJ said:

“The judge accepted Mr. Sheridan's first contention that a mere challenge by the landlord to the tenant's title, a denial by him of her title, would be sufficient to constitute a breach of the covenant. I am not able to adopt the judge's view on that point. We are not concerned in this case with a denial of the tenant's initial title by virtue of the letting, and I am not considering whether or not that could be a breach of the covenant. In this case the landlord was asserting that the tenant's title, her right to possession of the premises, although initially valid, had been wholly determined by a notice to quit. In my judgment, a landlord by merely making that assertion, however wrong he may be, does not commit a breach of covenant. He is entitled to make that assertion, at any rate if he believes it to be true, frequently, emphatically and even rudely. He is entitled also to threaten proceedings in the courts for possession and damages.”

In my judgment the judge was wrong in holding that there was an implied term in the manner that he formulated.

If action is taken on the basis of the assertions, then the actions themselves may well amount to a breach. But in the present case in so far as the Trust did act on its assertion that it was entitled to make Deductions, it repaid the amounts deducted following the “cure letter”. The SFPs that the Trust awarded had no continuing consequences because, as Lord Justice Jackson has explained (a) they were, for the most part, time expired and (b) even on Medirest’s own calculations sufficient SFPs had been incurred as to justify the Trust in terminating the contract. There was, therefore, no material breach still subsisting when Medirest purported to terminate the contract.

Clause 3.5 of the contract provides, so far as material:

“The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract.”

It is common ground that a detailed syntactical analysis of the wording of the clause will not provide an answer to the point that divides the parties. The question is whether clause 3.5 imposes a general duty of co-operation in good faith or a more limited duty. Mr Howe stressed that this was a long-term contract for the supply of services in a hospital; and that it would require interaction between employees of Medirest and the Trust at all levels in the hierarchy. In such a contract there were bound to be things that went wrong from time to time; and co-operation would be necessary at a practical level to find solutions. As against that, Mr Collins pointed to the judge’s finding that the dispute over SFPs and Deductions did not affect the day to day provision of services, which the parties had agree should be hived off from the financial dispute.

It seems to me to be clear that whatever the scope of the duty it can be no more than a duty to co-operate in good faith. My difficulty is to see in what sense the unilateral decision by the Trust to award SFPs or to assert a right to levy Deductions (or even the actual levying of Deductions) is something that requires co-operation at all.

Mr Howe also argued that properly interpreted the second limb of clause 3.5 imposed on the Trust a duty not to act unreasonably in the exercise or purported exercise of its rights under the contract; and in particular imposed on the Trust an obligation not to make unreasonable claims. In my judgment, however, that is simply not what the clause says. First, it is concerned with taking action, not making claims. Second, the action concerned is action for limited purposes. Third, I do not consider that a positive obligation to take all reasonable action necessarily entails a negative obligation not to make unreasonable claims.

Accordingly, like Lord Justice Jackson I conclude that Medirest was not entitled to terminate the contract when it purported to do so. I, too, would allow the appeal.

I also agree that Medirest was not entitled to terminate the contract when it purported to do so, and would allow the appeal. Since we are differing from the judge’s careful judgment, I wish to add some observations about clause 3.5.

The recent decision in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), decided since the judge’s decision, was relied on by Mr Howe QC. In that case, Leggatt J gave extensive consideration to the question of implying a duty of good faith into a contract. His discussion emphasised that “what good faith requires is sensitive to context”, that the test of good faith is objective in the sense that it depends on whether, in the particular context, the conduct would be regarded as commercially unacceptable by reasonable and honest people, and that its content “is established through a process of construction of the contract”: see paragraphs [141], [144] and [147]. See also paragraph [154]. Those considerations are also relevant to the interpretation of an express obligation to act in good faith.

The scope of the obligation to co-operate in good faith in clause 3.5 must be assessed in the light of the provisions of that clause, the other provisions of the contract, and its overall context. As to the first of these factors, I respectfully agree with Jackson LJ (at paragraphs [106] – [108]) that the content of the obligations to co-operate in good faith is to be determined by reference to the two purposes specified in the clause. Those purposes are the efficient transmission of information and instructions and enabling the Trust or any beneficiary to derive the full benefit of the contract. The judge had regard to those purposes, stated (see paragraph [27]) that the second one was “crucial”, and (see paragraph [34]) regarded those purposes as “broad”. He also had regard to the third of the factors and accepted (see paragraph [27]) that the scope of the duty to co-operate takes its content from “the circumstances and the nature of the contract concerned”.

My observations concern the second factor. Jackson LJ, in paragraphs [114] – [116] of his judgment, recognised the role of the other provisions of the contract in ascertaining the meaning of clause 3.5. In the section of his judgment (paragraphs [23] – [35]) considering the meaning of clause 3.5 and whether it was breached, the judge did not refer to the other clauses of the contract. It was perhaps because of this that he regarded (see paragraph [34]) the stated purposes in clause 3.5 as “broad”, and, in the light of that breadth, concluded that the Trust had breached clause 3.5 by awarding excess service failure points and making excessive deductions from the monthly payments. In my judgment, his approach meant that, in determining the scope of the obligations under clause 3.5, he gave insufficient weight to the other provisions of the contract and, to this extent did not take sufficient account of the context of clause 3.5.

As awarding excessive service failure points and making excessive deductions from the payments put the Trust in breach of clauses 5.8, 6.3 and 6.5 of the contract, it was not necessary to give clause 3.5 a wide meaning which meant that these matters also constituted a breach of that provision. Absent a wide meaning to clause 3.5 and a broad interpretation of the two stated purposes, awarding excessive service failure points and making excessive deductions from payments were not relevant to the two stated purposes for the reasons given by Jackson LJ at paragraphs [114] and [116] of his judgment.

The contract in the present case is a detailed one which makes specific provision for a number of particular eventualities. The specific provisions include clauses 5.8, 6.3 and 6.5. In a situation where a contract makes such specific provision, in my judgment care must be taken not to construe a general and potentially open-ended obligation such as an obligation to “co-operate” or “to act in good faith” as covering the same ground as other, more specific, provisions, lest it cut across those more specific provisions and any limitations in them.