The New Engineering Contract’s requirement to act in a spirit of mutual trust could penalise over-zealous suppliers just as easily as slack clients

ian yule

Some facilities management contracts run more smoothly than others. The one in Compass Group UK Ltd (trading as Medirest) vs Mid Essex Hospital Services NHS Trust went badly wrong, as Tony Bingham has noted. Certainly when a public authority gets to the stage where it levies performance-related deductions of over £46,000 because of one box of out-of-date sachets of ketchup, one can assume the contract is not working as intended.

This case involved a private finance initiative-style catering contract, though it was not actually procured under PFI. The decision is likely to be of some relevance to the building industry in general, and not just those involved in long-term facilities management, services or PFI-type maintenance contracts.
This is because of what the court had to say about a “good faith” clause that was in the contract. Such clauses can be found in many partnering-style building contracts, and, in a slightly different form, in the New Engineering Contract.

The clause required the parties to “co-operate with each other in good faith” and to “take all reasonable action as [was] necessary for the efficient transmission of information and… to enable the trust to derive the full benefit of the contract”.

The contract requires parties to act in a spirit of mutual trust - a good faith obligation. Commentators have said this is a statement of intention but courts may take a wider view

Medirest, the supplier, said this clause barred the deductions that the trust was making. These ran to hundreds of thousands of pounds for relatively minor failures. The trust said the clause did not involve a “general wishy-washy duty to be nice in all communications”.

The judge looked at the clause and its context. It concerned the performance of a long-term, complex contract involving the provision of an important service to members of the public, the patients and visitors to a hospital. The trust therefore was in a real sense pursuing a common purpose with Medirest, which was benefiting the rest of the public. Fair dealing and acting consistently with justified expectations were part of that. The clause, he said, imposed a broad obligation on the trust to act reasonably. That ruled out “absurd calculations” of the sort the trust was making.

Although it seems ridiculous to deduct £11,000 because a supervisor has not signed off a cleaning schedule, one might ask: if this is what the contract allowed, what was the trust doing wrong? Surely they were entitled to enforce the terms of the payment mechanism, however harsh, and despite the good faith clause?

The answer is that, in effect, the judge looked at the payment mechanism in the light of the good faith clause. The payment mechanism did not inevitably lead to deductions of this size, he said. The language of the payment schedule was discretionary, not mechanistic. It was not intended to produce this kind of result.

So the judge was not using the good faith clause to rewrite the contract in Medirest’s favour. More generally, the decision will not entitle anyone to demand that a court apply such a clause to rescue them from a bad bargain.

How might the Compass Group case be applied to building contracts, and to the New Engineering Contract in particular? The opening clause of that contract requires the parties to act “in a spirit of mutual trust and co-operation” - a good faith obligation by any other name. Commentators have often said that this is nothing more than a statement of intention. However, it may be that courts will be prepared to take a wider view.

For example, project managers using NEC forms of contract often complain of being bombarded by daily contractors’ notices warning about delay events and changes to the works. The problem for employers is that if just one of these notices is not responded to, other clauses may be triggered, entitling the contractor to time and money.

Suppose there was a barrage of such notices where no effort was made to recognise the employer’s difficulties - and perhaps where it appeared that a contractor was deliberately trying to overwhelm the project manager. Using the Compass Group case as support, it might be possible to persuade a court that a contractor’s actions amounted to a failure to act in a spirit of mutual trust and co-operation. In other words, a lack of good faith.

Ian Yule is a partner at Weightmans