Nearly a year ago, IP Draughts reported on a case in the English High Court, Compass Group UK and Ireland Limited (trading as Medirest) v Mid Essex Hospital Services NHS Trust  EWHC 781 (QB), which was heard before Mr Justice Cranston.
The decision in the High Court
The case was fascinating for the light it threw on how a hospital procurement manager behaved in a “challenging” manner with a supplier of catering services. The contract included a provision for “service failure points” – effectively fines – for non-compliance with service standards. According to Cranston J, the procurement manager deducted an “absurd” amount for minor failures. For allowing a chocolate mousse to be in a fridge one day after its use-by date, the supplier was fined £84,540. By the time the contract had come to an end, the fines had amounted to over £700,000.
Cranston J held that the hospital’s behaviour was in breach of a duty of good faith under the contract. In particular:
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.
The case raised a number of interesting contract law points, but this posting will focus just on the issues of whether a party is required to act in good faith and not in an “arbitrary, capricious or unreasonable manner”.
By way of background, the extent to which national courts imply obligations of good faith into contracts varies between jurisdictions. Civil law jurisdictions tend to make good faith an important part of the obligations of contracting parties. US laws focus on this subject to a lesser extent. English law is at the far end of the spectrum, with no general principle of good faith in contracts; however, English case law in recent years has started to nibble away at the absolutist position, and IP Draughts had viewed Cranston J’s decision as further developing the law in this area.
The decision in the Court of Appeal
In essence, the Court of Appeal has rejected Cranston J’s push towards more general obligations of good faith and reasonableness in the operation of contracts, and has reasserted the traditional approach of the English courts.
Jackson LJ, who gave the lead judgment in the Court of Appeal, dealt with the issues in two main stages: (1) was there an implied term to act reasonably (and if so, was there a breach of that term), and (2) was there a breach of an express obligation of good faith that was contained in clause 3.5 of the contract?
Implied duty to act reasonably
Jackson LJ reviewed the case law on the question of whether, when a party has a discretion, he must exercise that discretion in a way that is not arbitrary, capricious or unreasonable. He concluded that those cases deal with the situation where a party can choose from a range of options and when doing so they should act in a reasonable way. In the present case, there was no range of options. Rather, there was a calculation to be made as to the number of service failure points to be “awarded”. This calculation might be done correctly or incorrectly, but it was not a matter of discretion. Therefore the case law on the exercise of discretion was not relevant. There was no need to imply any term that the hospital should act reasonably. If the hospital calculated the points incorrectly, the supplier could challenge the calculation through a dispute resolution mechanism.
Thus, Jackson LJ firmly rejected the idea of any general obligation on a party to act reasonably in a long-term contract.
Contractual duty of good faith
The clause in question read as follows:
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.
In the words of Jackson LJ: “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.”
So, where should one stick the caesuras? [Please don’t interrupt, Mr Pettifog!]
According to counsel for Medirest, the clause should be interpreted as if punctuated in the following way:
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.
Whereas counsel for the hospital trust argued for the following interpretation:
The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as 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.
(For contract drafters, the lesson is obvious: put in numbering and indentation, and the ambiguity disappears!)
Thus according to the supplier, the obligation of good faith was a general one that applied to all aspects of the parties’ interactions under the contract. Cranston J had agreed with this interpretation.
According to the hospital trust, the obligation of good faith was not a general one, and was limited to acting in good faith in respect of the purposes described in items (1) and (2). Jackson LJ agreed with this interpretation.
Jackson LJ also rejected a submission by counsel for the supplier, that there was an implied duty of good faith under the contract, and that clause 3.5 should not be interpreted in a way that reduced that implied obligation. In Jackson LJ’s view there was no general duty of good faith in contracts, except in certain special categories of contract; in his words, “if the parties wish to impose such a duty they must do so expressly.”
In IP Draughts’ view, Jackson LJ was too brief and dismissive in his discussion of whether there was an implied duty of good faith. This is an important point for contract drafters and case law in recent years has suggested a trend towards implying such a duty. IP Draughts seems to recall that an entire book has been written about good faith in English law contracts.
It is instructive to read the judgment of Lewison LJ on this point. Lewison LJ agreed with the conclusion and reasoning of Jackson LJ but added some brief comments of his own. At paragraph 141 of the judgment, Lewison LJ commented:
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.
Beatson LJ, the third of the Court of Appeal judges in this case, commented briefly (at paragraph 154) that in a detailed contract of this kind:
…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.
The overall conclusion that IP Draughts draws from the Court of Appeal’s judgments is that aggressive and uncooperative behaviour by a contracting party does not breach any general contractual duty under English law. There is no general obligation on the parties to a long-term contract to work together in a reasonable way. IP Draughts hopes that the case is appealed to the Supreme Court and that we can hear Lord Neuberger and his colleagues’ views on the developing law in this area.
The old guard versus the new?
Finally, please indulge IP Draughts for airing the scurrilous thought that this is a contest between judicial personalities.
The judge in the case, Cranston J, has a distinguished commercial law pedigree. According to Wikipedia, after undergraduate degrees in Australia, he obtained an LLM from Harvard, and both a DPhil and a DCL from Oxford. He was an academic lawyer for many years, including two stints as a professor of commercial law at the London School of Economics.
He was a Labour Member of Parliament 1997 to 2005, and was the Solicitor General of England and Wales from 1998-2001. Thus, he had a relatively short political career (8 years) compared with his distinguished career as an academic lawyer and cannot fairly be dismissed as a political judge.
Mmm… someone with these credentials should be able to analyse a contract and apply English law to it in an appropriate manner, you might think. Yet several features of this CV make IP Draughts think “outsider”. He was born and grew up in Australia, he was a Labour Party politician, and he was an academic. The vast majority of English judges are former practising barristers. [Good grief, says Mr Pettifog. An Aussie, a socialist and a university teacher! Is there nothing to be said in the man’s favour?]*
Senior judges say they want to open the judiciary to a wider range of talented people, and they sometimes cite academia as a place they might look for this diversity. The experience is not always a comfortable one. The example of Baroness Hale shows that academics-turned-judges can – how can one put this delicately – act as useful grit in the oyster of judicial life.
By contrast, when IP Draughts thinks of Sir Rupert Jackson, who gave the lead judgment in the Court of Appeal, he thinks “Establishment figure”. Rightly or wrongly, he doesn’t think “contract law guru”.
So, can the overturning of Cranston J’s contractual analysis be fairly regarded as a senior member of the Establishment stamping down on a bumptious outsider? Unfortunately the theory doesn’t stack up, as the other two judges in the Court of Appeal agreed with Jackson LJ’s conclusions.
IP Draughts would have much preferred Lewison LJ, who was one of those other two judges, to have given the lead judgment on a case about contract interpretation, but it was not to be. Lewison LJ is a former Patents Court judge and the distinguished author of a practitioner text book, Interpretation of Contracts, that IP Draughts greatly admires.
Slowly, English law is developing a concept of good faith in contracts, but at times it seems to be “two steps forward, one step back“. The Court of Appeal’s judgments in this case feel like one step back, although they are probably better characterised as rejecting Cranston J’s step forward.
* The rest of the IP Draughts team dissociates itself from Mr Pettifog’s inappropriate remark. An appointment has been made for him to receive remedial diversity training from the firm’s Equality and Diversity Officer, Dr Sonja Konscientz, pursuant to Chapter 2, IB(2.2) of the SRA’s Code of Conduct 2011. Let us hope he keeps the appointment this time.