The need for good faith in outsourcing contracts

14 August, 2012

Earlier this year, in the case of Compass Group UK and Ireland Limited (trading as Medirest) v Mid Essex Hospital Services NHS Trust, the High Court considered a clause in an NHS outsourcing contract for catering services which obliged the parties to “cooperate with each other in good faith”. The contract allowed for deductions to be made from service payments due to the service provider in the event that it failed to meet the service levels under the contract.  On various occasions the NHS Trust deducted service credits and awarded service points which the service provider argued were grossly miscalculated. These service credits included a £46,320 deduction for out of date ketchup sachets which were found at the back of a cupboard.

The court found the outsourcing contract, by its nature, “required continuous and detailed cooperation between the parties at number of levels if it was to work smoothly” and it was in this context that the court interpreted the good faith clause.  The court held that the NHS Trust has exercised its contractual power in an arbitrary, capricious and irrational manner and that this constituted a material breach of the contract.

It seems that in recent years some large organisations have begun taking a more aggressive, procurement-style approach to the negotiation and ongoing management of outsourcing contracts. Whilst this case turned on its specific facts, it illustrates the importance of using cooperation and dialogue to resolve problems which will inevitably occur in long-term outsourcing contracts and emphasises the need to avoid taking an overly aggressive approach to contract negotiation and management.

With this in mind, we have prepared an article outlining some of the key considerations (PDF) which should be taken into account when drafting a successful outsourcing contract.