No overriding duty to act in good faith but implied term to act honestly and on proper grounds

August 3, 2015

A recent Technology and Construction Court case has determined an issue of contract interpretation relating to the awarding of service points under a PFI contract. In Portsmouth City Council v Ensign Highways Ltd [2015] the court held that there was no overriding objective on the council to act in good faith when awarding service points but there was an implied term that the council had to act honestly and on proper grounds and not in a manner that was arbitrary, irrational or capricious.

Facts

PCC and Ensign entered into a PFI contract in 2004 for the maintenance and operation of PCC’s highway network. Under the contract Ensign would be entitled to a monthly fee less any deductions made by PCC for breaches of the contract. These deductions would be calculated by reference to series of ‘service points’ which were set out under the contract. PCC had treated the service points as being a discretionary range with a minimum and maximum level.

After a number of years and cuts in central government funding, PCC engaged an external consultant to negotiate financial concessions from Ensign and its funders and embarked on a strategy of awarding Ensign the maximum amount of service points for every default.

This led to a dispute between the parties and consequently Ensign referred the issue for expert determination in line with the contract. The expert found that PCC had acted in bad faith, without mutual consideration and unfairly. PCC subsequently commenced legal proceedings.

It was held that:

– The service point values set out in the contract were maximum values that could be awarded for a particular breach and were not fixed tariffs that were to be applied by PCC irrespective of the severity of the breach in question.

– There was no overriding obligation to act in good faith, but there was an implied term that PCC would act honestly, on proper grounds and not in a manner that was arbitrary, irrational or capricious.

Comment

This judgement raises a number of interesting issues:

– The court followed the Rainy Sky approach to contract interpretation by adopting the interpretation that most accorded with commercial common sense.

– It shows the reluctance of the judiciary to interpret express obligations to act in good faith too widely. The implied term to act honestly and on proper grounds though avoiding the traditional concerns surrounding the implied duties to act in good faith, have a very similar effect in practice.

– This dispute undoubtedly stems from the current economic climate, with public authorities under increasing budget constraints. The consistent approach of the Technology and Construction
Court judges on this topic is of reassurance.