Ian Yule looks at how the courts have interpreted clauses on good faith and co-operation in long-term maintenance contracts like PFI
PFI may be past its peak, but various cases have come to court in the last few years involving long-term maintenance contracts, including PFIs. Three cases in particular are worth noting. They have featured issues such as whether terms should be implied about co-operation, how “good faith” clauses should be construed, and whether the long-term purposes of the contract should affect its interpretation.
The first case, Mid Essex Hospital Services NHS Trust vs Compass Group UK and Ireland Ltd (t/a Medirest) (2013) involved a seven-year catering and cleaning contract, which had been “cobbled together”, as the court put it, from NHS and PFI precedents. The trust was allowed to impose (or “award”) service points which were, in effect, penalties for poor performance. The court found that the service points due each month were capable of exact calculation, but that the trust had a discretion to impose less. The question then was: in exercising this discretion, was the trust under an implied duty not to act in an arbitrary manner? No, said the court – such a term was not necessary to make the contract work. The trust was free to exercise its discretion.
The courts seem reluctant to imply terms that require the parties to co-operate or to act in good faith. And if such clauses are actually in the contract, courts may restrict their application
The contractor Medirest also wanted to rely on a specific term in the contract requiring the parties to co-operate with each other in good faith. But that clause was very limited, the court said. It did not apply generally, but only to certain matters such as the transmission of information.
The court reached a similar conclusion about a “good faith” clause in Portsmouth City Council vs Ensign Highways Ltd (2015). This featured a 25-year PFI contract for the repair of the council’s highways network. Again, the court said that the good faith clause did not apply to the whole of the agreement, but only to the part relating to “best value”.
There was a further point. The parties’ representatives had actually agreed in court that there should be an implied term to regulate the council’s actions when it imposed service points. They asked the court to decide the wording. The court’s draft favoured the council. It was simply required to act honestly and not in an arbitrary, irrational or capricious manner. Yet again, therefore, the court took a restrictive approach.
Perhaps the most interesting of the three cases is Amey Birmingham Highways Ltd vs Birmingham City Council (2018), which was discussed by Tony Bingham earlier this year. The contract required Amey to maintain Birmingham’s roads for some 25 years. After a few years, the council found that Amey was leaving some roads unrepaired. This course of action was based on an ingenious interpretation of the contract that, according to Amey, meant it was not obliged to update the pre-contract condition surveys. On Amey’s argument, any updating, and consequential repair work, would require a change order – and further payment.
Ingenious arguments designed to take advantage of the complexity of these long-term maintenance contracts will be frowned upon
The court described this as a “bizarre” state of affairs. It rejected Amey’s interpretation. Amey was obliged to regularly update the records so that it was repairing all of the roads in the network, not just those shown on original surveys.
There has been some academic debate about “relational” contracts of this nature, where two parties are bound to work with each other over a long period of time. Are they subject to special rules of interpretation? The court declined to get involved in this debate. However, the leading judge noted that these contracts are usually enormously lengthy and often contain oddities and errors. The parties, he said, should adopt a reasonable approach in accordance with the long-term purposes of the contract. They should not be trying to “maximise their own gain”.
Two points seem to emerge from these cases on long-term maintenance contracts. The first is that the courts seem reluctant to imply terms that require the parties to co-operate or to act in good faith. And if such clauses are actually in the contract, courts may restrict their application to specific matters.
The second is that a party that pays some regard to the length of time that the contract will run for, and bears in mind its overall objectives, is likely to find a judge or adjudicator more receptive to its case. Ingenious arguments designed to take advantage of the complexity of these contracts will be frowned upon.
Ian Yule is a construction and engineering partner in Shoosmiths