Practical Law

I’ll let you into a secret. While I’ve no doubt that partnering contracts can forge effective working relationships, it doesn’t follow that disputes won’t arise. I know I won’t be popular with certain sectors of the construction industry for saying so, but it’s true. Indeed, earlier this year, I was the adjudicator in a dispute under one of the popular standard forms of partnering contract.

“…spirit of trust, fairness and mutual cooperation”

One thing that struck me at the time of the adjudication was that the parties simply relied on the traditional obligations under the contract. Neither party alleged that there was any breach of the partnering obligations, such as the obligation for the partnering team members parties to:

“…work together and individually in the spirit of trust, fairness and mutual cooperation for the benefit of the Project.”

That may be because both parties suspected that they were themselves in breach of this obligation, so it was better not to make accusations of breaches by the other party. Also, it may not have made any difference to the outcome of the adjudication if I’d found out that there were breaches of this provision, but it would have been interesting to see the parties’ arguments.

In my opinion, the breach of a partnering obligation is unlikely to change the outcome of many adjudications. For example, it is unlikely to change the fact that a piece of work is defective or change the value of a variation. However, it could be relevant where the behaviour of the parties is a factor, such as in determining claims for certain compensation events or whether a repudiatory breach of a contract has been committed.

And that brings me on to the chocolate mousse…

Compass Group v Mid Essex Hospital Services

Chocolate mousse features in the judgment in Compass Group UK v Mid Essex Hospital Services NHS Trust, which I think is a must-read case for any party to a contract containing an obligation of good faith, such as many partnering contracts.

Compass was to provide catering services at various hospitals run by the Trust. The parties’ contract contained:

• An obligation for the parties to:

“…co-operate with each other in good faith and [to] take all reasonable action as is necessary for the efficient transmission of information and instructions to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract.”

• Provisions for service failure points to be scored against Compass, together with corresponding financial deductions.

During the early stages of the contract, the Trust alleged that there were multiple service failures. It allocated an enormous amount of service failure points and made equally enormous financial deductions. The Trust eventually terminated the contract.

While Compass accepted that the service failure points entitled the Trust to terminate the contract, it argued that they had been given by the Trust in breach of its duty of good faith, and this amounted to a repudiatory breach of the contract on the Trust’s part.

Breach of duty of “good faith”

The matter came before the High Court. Cranston J favoured a broad interpretation of the good faith obligation because the parties had entered a long-term contract, the performance of which required continuous and detailed co-operation between the parties at a number of levels if it was to work smoothly.

Examples of the financial deductions made by the Trust included:

• £46,320 for ketchup sachets that were three months out of date, despite Compass only being one month into the contract and the sachets not being a brand Compass used.
• £71,055 for cleaning issues identified on 4th August 2008 which, despite Compass rectifying the same day, the Trust treated as continuing until December 2008.
• £84,540 for a one day old chocolate mousse that was immediately removed.
• £96,0610 for some three day old bagels belonging to staff or patients, and also immediately removed.

Cranston J described the Trust’s financial deductions as “patently absurd”, and said that on no reading of the contract were they even “remotely possible”. Importantly, he also determined that these deductions were in breach of the duty of good faith and this amounted to a repudiatory breach of the contract:

“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 very heart of what was meant to be a long term contract requiring cooperation. As [Compass] put it in argument, the sword of Damocles remained suspended over it. At any time the Trust might start to enforce its claimed deductions, or levy yet further irrational deductions. After many months of complaints it had refused to accept that its approach was fundamentally flawed. So there was a repudiatory breach.” (Paragraph 107, judgment.)

What do I take from this?

There is no doubt in my mind that this case could prove a useful authority for parties alleging breaches of obligations of good faith in construction contracts, particularly where they are long term construction contracts (such as maintenance agreements). However, I would sound the following notes of caution:

• The standard of behaviour required by “good faith” clauses is likely to differ in each individual case.
• Compass v Mid Essex is an example of extreme behaviour that was sufficient to constitute a breach of the duty of good faith resulting in a repudiatory breach of contract. While many parties to construction contracts might think that the actions of the other party are in bad faith, there is unlikely to be such examples of extreme behaviour in most cases.