The Ketchup case and “Good Faith” clauses

19-08-2013 11:05

In 2012, the High Court heard a case between an NHS Trust and a catering company. The dispute involved numerous breaches of contract, including breach of a “good faith” clause. There is no general doctrine of good faith clauses, and any duty must be express in the contract. In this case, the parties were obliged to “co-operate…in good faith.” The contract contained clauses pertaining to a Service Level Specification; if the catering company did not meet certain performance criteria, the Trust would award Service Failure Points and could deduct a certain amount of money from the contract price. From March to June 2009 the catering company failed to meet the performance criteria and agreed to the subsequent financial penalties. However from July-September 2009, the NHS Trust made substantial deductions that exceeded the amount it was entitled to deduct: £46,320 for out of date ketchup, £84,450 for out-of-date mousse and £96,090 for bagels which were also out of date. The catering company argued that these deductions were far too high and that the Trust’s actions had breached the “good faith” clause. The Trust was found to be in breach of the clause due to the arbitrary and irrational way it had calculated service credits.

However, the Court of Appeal allowed for the Trust’s appeal, narrowing the High Court’s interpretation of the “good faith” clause. While it agreed that the Trust’s calculation of service points and financial penalties was ‘absurd’, and subsequently reduced them, it did not constitute a breach of the good faith clause. The good faith clause only pertained to cooperation, and the deductions made by the Trust were a separate issue to the cooperation between the parties. The Court of Appeal also found that the Trust had acted mistakenly rather than dishonestly, and held that it was not a repudiatory breach of contract to misinterpret a contract term.

Lord Justice Beatson did, however, stress the importance of not having clauses with general and ambiguous obligations of “cooperation” and “good faith”. While the personal relations did break down on either side, they did at all times co-operate efficiently with each other.

For advice on the construction of “good faith” clauses in contract, please contact James Bizley.

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