Portsmouth and Ensign entered into a long term contract relating to Ensign’s maintenance and operation of highways. The contract contained a complicated service points clause and schedule, whereby Ensign was rewarded or penalised depending on how well it did. Portsmouth was facing financial pressures and decided it wanted to get out of the contract, so used the points mechanism to try to achieve this. One of the clauses – which related to the requirements on local authorities to continually try to obtain best value – referred to a duty of good faith in how the parties co-operated.
The matter went to expert determination after a dispute ensued over how Portsmouth was focusing on Ensign’s alleged breaches and the use of service points. The expert decided that Portsmouth had acted in bad faith, without mutual co-operation and unfairly. The matter then went to the High Court, which made declarations that there was no general duty to act in good faith. In taking into account the most likely contractual interpretation that applied commercial common sense, and following the 2011 Supreme Court case of Rainy Sky SA v Kookmin Bank, the Court ruled that the express duty of good faith in the contract did not apply generally across the contract but only in the specific situation to which that clause applied. There was also no implied duty of good faith to be inserted here either, and it followed the 2013 Court of Appeal decision in Mid Essex Hospital Services NHS Trust v Compass Group UK.
That said, the High Court did say that the award of service points involved an implied term to act honestly, on proper grounds and not in a manner that was arbitrary, irrational or capricious. Portsmouth should not have applied the same points regardless of the gravity of the breach, particularly as the reference in the schedule to a “maximum” number of points for each breach suggested that a discretion should have been exercised depending on the seriousness in each case.
Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP, comments: “The duty to act honestly and on proper grounds, although not expressed as a duty to act with good faith, has a similar effect.”