In times when the public sector is under ever increasing budgetary pressure, there may be a temptation to view Performance Mechanisms in longer term PPP contracts and FM contracts as a potential source of income.
The recent High Court decision involving Mid Essex Hospital Services NHS Trust and Medirest serves as a cautionary tale to those tempted to apply the "stick" of the Performance Mechanism to the detriment of the longer term contractual relationship.
It also underlines the futility of overly complex and penal performance regimes which do not reflect legitimate concerns raised by the poor performance of FM obligations.
In this case the High Court considered a general duty to cooperate in good faith and the interface between a general duty to cooperate in good faith and other contractual rights and entitlements.
Key points:
- What is required in order to discharge an obligation to act in good faith will turn on the circumstances of the contract. The Court observes that where the contracting authority is a public body, "the highest standards of behaviour" are required in order to avoid adverse consequences for the public (patients in this case).
- Parties should not take unreasonable actions which might "undermine the purpose of the contract"
- The duty to cooperate in good faith applies to all contractual rights and remedies, not just where there is an element of discretion
- The court found that "There is nothing wrong with a challenging approach to managing a contract...so long as a party deploys facts and common sense". The exercise of contractual power in an arbitrary, capricious and irrational manner will invite the criticism of the court and may (as in this case) be sufficient to justify termination on the grounds of material breach.
Comments
Parties managing long term contractual relationships must pay more than lip service to general obligations to cooperate in good faith. Although it is tempting to use contractual remedies to achieve results which are unpalatable to the other party and potentially at odds with the "common purpose" in some circumstances extreme behaviour may be sufficient to allow the other party to terminate for material breach.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
