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Good Faith Clauses – Ignore Them At Your Peril

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

In 2008, Mid Essex Hospital Services NHS Trust awarded Medirest a contract to supply catering services for seven years. Payment for the catering services was by way of monthly payments, which could be reduced in the event of service failures as defined under the contract. If the caterers exceeded 1,400 service failures in any six-month period, the Trust was entitled to terminate the contract. In addition, the Trust could terminate the contract if Medirest failed to perform any ‘material obligation’ under it without providing a satisfactory remedy. Medirest was entitled to terminate the contract if the Trust committed any material breach of the contract terms.

The contract contained a ‘good faith’ clause, which bound the two parties to take ‘all reasonable action necessary’ to cooperate and provide information to one another to enable the contract to be properly performed.

The two parties soon began to argue about the number of service failures and the corresponding reductions in payments the Trust should make. As a result, the relationship deteriorated.

Within 16 months of the commencement of the contract the Trust was claiming more than £700,000 in deductions and advised Medirest that more than £100,000 would be deducted from its monthly payment for each of the next five months.

Medirest considered the Trust’s actions to represent a material breach of the contract and issued a termination notice. It commenced legal proceedings against the Trust for its post-termination losses. The Trust counterclaimed.

The arguments revolved mainly around the good faith clause. The court held that the Trust had not behaved reasonably, having taken an over-zealous approach to the calculations of ‘service failure points’ and failing to respond positively when Medirest raised issues with the calculations. Its unwillingness to respond to Medirest’s reasonable objections violated its obligation to act in good faith.

Medirest was therefore entitled to terminate the contract and to claim damages from the Trust.

“Taking a confrontational approach to performance failures in a contract can often be counterproductive. We can assist you in ensuring that contractual disputes do not spiral out of control.”

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