How many service failure points for a day-old chocolate mousse?

A recent case in the English High Court is interesting on several counts:

The mousse that roared...

  • on the interpretation of an obligation on contracting parties “to cooperate with each other in good faith”;
  • on whether a contracting party who is given a discretion to act must do so in good faith and in a way that is not arbitrary, capricious or irrational;
  • on whether “material breach” means the same as “substantial breach”;
  • on shedding light into how a “challenging” commercial director in an NHS hospital trust (as well as his superior and subordinates) behaved in negotiations and in the overall management of a contractual relationship.

The case is Compass Group UK and Ireland Limited (trading as Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB), heard before Cranston J.  As a small peeve, why was this important contract law case heard in the general part of the Queen’s Bench Division and not in either the Commercial Court or the Technology and Construction Court?  As a result, IP Draughts missed the case report until someone else pointed it out.

The case concerned a contract to provide meals and catering services at two hospitals in Essex, England.  The contract included a mechanism for service failure points, and financial deductions that the Trust could make in the event of service failures.  This mechanism had been lifted from a private finance initiative (PFI) contract, and bolted on to a standard NHS procurement contract.

From the outset of the contract, Mr Paul Aitchison, the commercial director of the Trust, took a “challenging” approach in dealing with Medirest.  The judge found that this was, to some extent, justified, in view of the poor early performance of Medirest, which was subsequently corrected.  However, it was taken too far.  Among many examples of aggressive behaviour by the Trust that are cited in the judgment were “absurd” financial deductions for minor instances of non-compliance with service standards, which the Trust admitted in court were indefensible.  These included:

  • a box of out-of-date ketchup sachets found in a cupboard (but not used in the kitchen; there is a hint that this box may have been there since before Medirest took over the contract): £46,320
  • a one-day-old chocolate mousse, which was immediately removed: £84,540
  • some 3-day-old bagels belonging to staff or patients, also immediately removed: £96,060

Other, aggressive actions by the Trust included:

  • failing to respond to a constructive and conciliatory letter from Medirest.
  • requiring an action plan to correct defective performance, but failing to explain what had prompted this requirement and what the main concerns were.
  • when the action plan was accepted, demanding £587,207.67 in service failure payments, many of which were “absurd” as previously mentioned (IP Draughts’ impression from the judgment is that Mr Aitchison sent in this demand to apply commercial pressure and did not make sure that the amount of the demand was justified).
  • when Medirest eventually concluded that the relationship with Mr Aitchison had broken down and sought to speak with the Trust’s chief executive, the chief executive spoke only briefly to Medirest’s representative, with Mr Aitchison sitting in on the telephone conversation (unbeknown to Medirest), and followed it up with an unhelpful letter drafted for the chief executive by Mr Aitchison.
  • after several further, unsuccessful attempts to resolve the matter with Mr Aitchison, Medirest indicated in a telephone call with him that it would have to invoke the formal dispute resolution process, leading to a meeting between CEOs and then mediation.  Immediately after this call, Mr Aitchison issued a notice of termination of the contract.  In evidence, Mr Aitchison indicated that he did not intend to terminate; the notice was part of a process to resolve the dispute (!)
  • At an internal meeting of the Trust, Mr Aitchison expressed optimism that the dispute would be resolved, and that Medirest would try to avoid adverse publicity, which could result in it not winning further public service catering contracts.  Meanwhile, further financial deductions were now being made, now totalling £716,197.
  • After Medirest had issued a notice of material breach by the Trust, Mr Aitchison refused to enter into without prejudice negotiations until the notice had been withdrawn.

The case is worth reading, just to get an insight into how a senior commercial manager sought to exert commercial pressure on a contractor, and in the process caused the Trust to act in a manner that the judge described variously as absurd, non-responsive, arbitrary, capricious and irrational.  According to his LinkedIn profile, Mr Aitchison left the Trust in December 2011.

But there’s more!  The case is also interesting for the comments by the judge on the intepretation of various contract obligations.  In particular:

Cooperate in good faith

The contract required the parties to cooperate with each other in good faith.  Among other points discussed, the judge decided that this obligation required the parties:

  • not to take unreasonable actions which might damage their working relationship.
  • to conduct themselves with faithfulness to a common purpose (provision of an important service to patients on a long term basis), including fair dealing and acting consistently with justified expectations.
  • not just to have regard to their own interests.  There was a broad obligation on the Trust to act reasonably in conducting the contract, in particular not taking unreasonable actions which might damages the relationship with Medirest and thus undermine the purpose of the contract.

Exercise discretion

Under the contract, the Trust was entitled to calculate service failure points and impose financial deductions.  The judge considered that the following words of Leggatt LJ in an earlier case (Abu Dhabi National Tanker Co v Product Star Shipping Limited [1993] 1 Lloyd’s 397) had been accepted by “overwhelming authority” in subsequent cases and therefore represented the law:

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 arbitrarity, capriciously or unreasonably.

Meaning of material breach

The judge considered the meaning of a clause entitling a party to terminate the contract if the other party is in “material breach”.  The main point that IP Draughts found of interest in this section of the judgment is the judge’s citing of comments by Sir Andrew Morritt C in Fitzroy House Ltd v Financial Times Ltd [2006] EWCA Civ 329.  That case concerned breaches of a property lease and most of the Court of Appeal’s judgment is probably only of interest to property lawyers.  However, Sir Andrew did make the following comment:

The words “substantial” and “material”, depending on context, are interchangeable.

IP Draughts’ sense is that the judge in the present case was trying to find a justification for analysing whether the breaches by Medirest and the Trust were substantial (was he more comfortable with using that word?), and used the above comment as a link in his chain of logic.  It remains to be seen whether these adjectives are treated as synonyms in future cases.

Judge’s conclusions

Medirest terminated the contract on the grounds of the Trust’s material breach, under a termination clause that allowed such breach, and also claimed that it was entitled to terminate on the grounds of the Trust’s repudiatory breach of contract.  In the judge’s words:

In my view the Trust’s material breaches of contract, including the obligation to cooperate in good faith, constituted a serious and continuing breach of its critical obligations, which went to the heart of what was meant to be a long term contract requiring cooperation… After many months of complaints it had refused to accept that its approach was fundamentally flawed.  So there was a repudiatory breach.

IP Draughts’ comments

In the course of our firm’s work, we have seen an aggressive, procurement-style approach to contract negotiation and management by a number of organisations, including Government departments, NHS Trusts, major telecommunications companies, and even some universities.  This case should act as a reminder that being overly aggressive can back-fire, and that the courts are willing to protect the little guy as well as the major customer, even if the contract is expressed in very one-sided terms.

3 Comments

Filed under Commercial negotiation, Contract drafting

3 responses to “How many service failure points for a day-old chocolate mousse?

  1. Vicky Clark

    In relation to discretion, this case and the line of cases it cites, does suggest that in relation to matters requiring consent, the words which are often used in English law cases, “not to be unreasonably withheld” add very little. Where there is an intention to enable a party to act entirely without reference to reasonableness (for example, if consent must be sought by one party to publish the other party’s confidential information), it suggests that specific words are required, such as, “in relation to which consent, X is entitled to act unreasonably”. I’m not sure, however, how well that would go down in negotiations.

    In relation to the Cussler case and its implications, referred to by Ken Adams in his article, I can perhaps understand making any waiver of an implied duty of good faith unenforceable in standard term contracts or in contracts with consumers. But in negotiations between parties that are advised by lawyers, shouldn’t they be free to express an absolute right to refuse consent in relation to certain matters?

    • Vicky, on your first point, this has been in the back of my mind since I read this case. But I seem to recall there is other case law suggesting that in taking the consent decision one may take one’s own interests into account. Perhaps a more palatable way of putting it than referring to acting unreasonably is to state that the party giving consent is only required to take into account its own interests and not that of the other party. My instinct is to refer to “agreement” rather than “consent” to try to distance oneself from case law on consent, but it may be a forlorn hope.

      I agree with your second point, and my guess is that the English courts would be more amenable to an explicit denial of good faith obligation than a US court would, partly because good faith is less firmly entrenched in contract law in England.

  2. Mark: I think the judge’s conclusions were reasonable. Coming up with a reasoned distinction between “material” and “substantial” would be hopeless. And yes, it’s generally accepted that discretion granted under a contract doesn’t mean discretion to be unreasonable. Things get interesting when drafters try to draft around that. In case anyone’s interested, here’s a link to my 2011 article on that topic: http://www.koncision.com/wp-content/uploads/2011/06/Whittling-Away-at-Duty-of-Good-Faith.pdf. Ken

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