England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		28/03/2012

Mr Justice Cranston :

I. INTRODUCTION

1. At the heart of this claim is a clause in a long-term facilities contract which obliged the parties, inter alia, to cooperate in good faith. The contract incorporated a mechanism which enabled deductions to be made from service payments in the event of performance failures by the party to the contract providing the service. Calculations made in accordance with this mechanism led to a poisoning of the relationship between the parties so that within eighteen months both sides purported to terminate the contract.
2. The contract was entered on 1 April 2008 between the claimant, Medirest, and the defendant, Mid Essex Hospital Services NHS Trust ("the Trust"). Medirest, is part of the healthcare division of Compass UK & Ireland Ltd, which in turn is part of an international group. Medirest delivers facilities management, including catering services, to the healthcare market. As the name suggests the Trust is an NHS hospital in one of the home counties of England. It offers acute and community based services. At the relevant time it operated two hospitals, Broomfield and St John's, but it was part-way through a PFI project to build new facilities at the Broomfield site to replace St John's Hospital.
3. The trial of the claim took place over eight days. I heard evidence from seven witnesses. There were very few disputes of fact having any real bearing on the outcome of the case. Four witnesses gave evidence for Medirest. Mr Gernon was Medirest's catering manager located at the Trust. Prior to the contract Mr Gernon worked for the Trust, transferring to Medirest until the contract ended. He is again with the Trust. I found Mr Gernon to be impressive in his evidence, much of which was not challenged in cross-examination. Mr Cage (a general manager) and Mr Taylor (an operations director) were Medirest managers above Mr Gernon. Both had other responsibilities besides the contract with the Trust. Mr Cenci is the managing director of Medirest. On the whole there was nothing during the trial which led me to doubt the quality of the evidence given by these witnesses.
4. There were three witnesses for the Trust. Mr Wright was responsible for hotel services at the Trust and Mrs Brown was his manager. As with the Medirest witnesses there were occasional blemishes in the evidence of Mr Wright and Mrs Brown but not such as to cast any shadow over it as a whole. Mr Aitchison was the commercial director of the Trust, to whom Mr Wright and Mrs Brown reported. As I explain in the judgment Mr Aitchison must accept prime responsibility for the unfortunate situation in which the Trust now finds itself. In addition to these three witnesses, there were two witnesses for the Trust who were not called. Mrs May was the chief executive of the hospital at the relevant time, although in June 2009 she moved from the Trust to another job in the NHS. Because her daughter was ill Mrs May's evidence was tendered under the Civil Evidence Act 1995. In fact her evidence went only to peripheral matters. A matron at the Trust, Mrs Ali, did not need to give evidence. Her statement underlines the importance of cleaning and food hygiene in hospitals but in my view has no real bearing on the matters in issue. In the course of the evidence mention was made of two other members of the Trust's staff, Ms Mitchell, the facilities performance manager, and her subordinate Kerri Nepean, who began with the Trust in November 2008.

II. THE CONTRACT

Outline

5. The contract was for the provision of catering services to the Trust mainly for patients but also covering other aspects such as the restaurant, hospitality and vending machines. It consisted of a short "Contract Agreement", Document No 1, identifying the parties, the start date as 1 April 2008 and the seven year term, extendable at the sole discretion of the Trust for a further three years. Document No 2, "General Information" gave background information on the Trust, outlining the PFI process then underway for centralising hospital services on the one site. Clause 3.4.1 of Document No 2 provided that, at the pre-PFI stage, there would be a catering helpdesk service provided by Medirest, and clause 5 read that Medirest was "expected to provide and operate a helpdesk system to process requests and queries from the Trust regarding the catering service". Subsequently, the PFI consortium was to operate a helpdesk service as part of the facility management services.
6. The body of the contract was contained in the "Conditions of Contract" at Document No 3, the "Specification of Services" at Document No 4 and a separate document entitled "the Payment Mechanism". In the Conditions of the Contract, the key obligations were contained in clauses 2.1 and 2.2. The Trust appointed Medirest as its Contractor to perform the Services in accordance with the Service Level Specification and the Trust agreed to pay the Contract Price.
7. The Payment Mechanism set out in its Part A the annual service payment to Medirest, subject to indexation: £2,137,433 for year 1 (£178,119 a month); £2,187,433 for other years pre PFI, and £1,643,144 for the years post-PFI. (The decrease post-PFI reflected the consolidation of hospital services on one site and what was expected to be a reduction in the number of patient beds). Part B contained the formula to calculate monthly payments to Medirest: these were one twelfth of the annual amount, reduced by deductions for performance failures, but adjusted for so-called volume adjustments (in broad terms, to cover more patients). Deductions were capped in Part C so that they could never exceed the monthly volume adjusted service payment. There was a three month bedding-in period, April-June 2008, when no deductions were to be made.

Terms of the contract

8. In its form the contract was a standard NHS contract coupled with a mechanism for service failure points and deductions. The latter was taken from a standard form for a private finance initiative (PFI) project, although this catering contract was not a PFI project. The cobbled together nature of the contract did not assist its use by either Medirest or Trust staff. The contract terms relevant to the present dispute are relatively few.

(a) Definitions including "location"

9. The Conditions of Contract contained in clause 1 various definitions and rules of interpretation. Apart from the Trust, there were terms identifying other beneficiaries of the contract and clause 1.1.2 defined "Beneficiary" widely to include the Department of Health, GPs and various health bodies. "Contract" was defined in clause 1.1.5 to exclude implied terms in favour of Medirest.

"… for the avoidance of doubt all other terms, conditions or warranties other than any terms, conditions or warranties implied by law in favour of the Trust or the Beneficiaries are excluded from the agreement between the Trust and the Contractor unless expressly accepted in writing by the Trust's Representative".

Headings to clauses were for convenience only and were not to affect the meaning of the terms and conditions: clause 1.3. Terms of the contract were to be given their natural meaning. The parties, continued clause 1.4, had had an equal opportunity to take legal advice and the contra proferentum rule was not to apply.

10. "Location" was defined in clause 1.1.29 of the Conditions of Contract as "the location for the provision of the Services as set out in the contract or otherwise agreed in writing between [the parties]". Subject to satisfactory agreement between the parties on price, the Trust reserved the right by clause 15.1 to increase or reduce the number of locations under the contract. There was nothing further in the Conditions of Contract about location but clause 1.1 of Document No 2, General Information, read as follows:

"The acute hospital services provided by the Trust are currently split across two main hospital sites:

St. John's Hospital, a site of approximately 5 hectares located near the centre of Chelmsford; and

Broomfield Hospital, a site of approximately 23 hectares located some 3 miles north of Chelmsford, in the village of Broomfield.

The current layout of these sites ("the Location") are contained in the drawings at Appendix 1."

Clause 1.1 continued: "The inpatient facilities at the Location are summarised as follows" and there then followed a list of wards, the bed numbers for each ward, and the purpose (cardiac, medical, surgical etc). The total number of beds was given as 675.

(b) Performance: the duty to cooperate in good faith etc

11. Clause 3 of the Conditions of Contract fell under the heading "Performance of the Services". Clause 3.2 underlined the obligation of Medirest to comply with the performance due-by dates, minimum performance levels and methods of performance measurement in the Service Level Specification. Importantly, clause 3.5 imposed a duty to cooperate in good faith:

"3.5 The Trust and the Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions and to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the Contract."

Under clause 3.9 if at any time Medirest became aware of any act or omission by the Trust or any beneficiary which prevented it from providing the services, it had immediately to inform the Trust's representative. Medirest's compliance with the clause "shall not in any way relieve [it] of any of its obligations under the contract."

(c) Performance monitoring, failure and deductions

12. Performance measurement was addressed in clause 5 of the Conditions of Contract. Under clause 5.2 Medirest was to institute and maintain a properly documented system of quality control as set out in the Service Level Specification, to the satisfaction of the Trust's representative, to ensure that the contract standard was met. The Trust was able to carry out its own inspections: clause 5.4. If performance of the contract by Medirest was delayed by reason of any act or default on the part of the Trust or any Beneficiary, or by any other cause that Medirest could not have reasonably foreseen or prevented and for which it was not responsible, Medirest was allowed a reasonable extension of time for completion of the services so affected: clause 5.7. Clause 5.8 provided for the Trust to monitor Medirest's performance and to levy payment deductions and award service failure points.

"5.8 The Trust or any beneficiary shall ascertain whether the Contractor's provision of the Services meets the performance criteria as specified in the Service Level Specification or, if the criteria are not so specified, meets the standards of a professional provider of the Services. Where such performance criteria or standards have not been met by the Contractor in the performance of the Services then the Trust shall be entitled to levy payment deductions against the monthly amount of the Contract Price payable to the Contractor in accordance with the terms of the Payment Mechanism. In addition, the Trust may by notice to the Contractor award Service Failure Points depending on the performance of the Services as measured in accordance with the Service Level Specification. Service Failure Points which are agreed or determined to have been awarded in circumstances where such award was not justified shall be deemed to have been cancelled."

Under clauses 5.9 and 5.11 the Trust could issue warning and remedy notices in the event of certain performance failures.

13. Document No 4, the Service Level Specification, divided into a General Service Specification (not specific to catering) and a Specific Service Specification (for a catering service). Each of these included written terms and a list of performance parameters, identified as "GPs" and "SPs", sometimes referred to as key performance indicators. Clause 6 of the General Service Specification contained performance monitoring requirements. Medirest had to undertake sufficient performance monitoring to demonstrate that each performance parameter was achieved, and where not achieved the extent of any shortfall: clause 6.1. Clause 7 of the General Services Specification set out a number of performance parameters, labelled GP01, GP02 and so on, together with a performance failure category (minor, medium or major) and remedial period.
14. In particular GP11 required a monitoring report to be delivered within five business days of the end of each contract month. The report had to set out the monitoring performed; a summary of incidents reported to Medirest or the Helpdesk; a summary of performance failures, with commencement and cessation times and duration; the volume related data and adjustments; the deductions from the service payment for performance failures; and the number of service failure points to be awarded for performance failures on a daily basis.
15. As well as setting out certain specific requirements (such as ensuring that all food was within its stated expiry date; storing it at the correct temperature; and keeping the food preparation areas clean: SP07, SP09 and SP10 respectively) the Specific Service Specification also incorporated, by reference, various regulations, guides and policies relevant to the storage and preparation of food in a hospital environment.
16. Clause 6.2 of the Conditions of Contract provided that the only sums payable to Medirest for the services were the contract price calculated in accordance with the Payment Mechanism. The Payment Mechanism determined how performance failure was to be accounted for. It provided for service failure points to be awarded to Medirest "in respect of the occurrence of performance failures". "Deduction" was defined as a deduction made from a service payment in accordance with the Payment Mechanism. "Rectification time" was defined as the period during which a fault could be fixed. There were no rectification times specified anywhere in the contract.
17. Part C of the Payment Mechanism permitted Deductions to be made if a performance failure occurred, except in respect of a three month bedding-in period at the start of the contract: paragraphs 1-2. The Deductions were £5 (Minor), £15 (Medium) and £30 (Major): paragraph 3. Paragraph 4 went on to provide for tolerances. If a fault was fixed within a rectification time, no performance failure would occur: paragraph 5. Entitled "Remedial Periods", paragraph 6 of Part C provided that, once a performance failure had occurred, Medirest was required to demonstrate to the reasonable satisfaction of the Trust that it had remedied it within the specified remedial period. If Medirest failed to do so, a further Deduction would fall due at the end of the remedial period and another remedial period would begin.

"6.1 On the occurrence of a Performance Failure, a period shall apply, within which the Contractor shall demonstrate to the reasonable satisfaction of the Trust that it has either remedied the Performance Failure or, where the period is marked with an asterisk in the Service Level Specification, has taken appropriate steps to prevent the recurrence of the Performance Failure. This period is referred to below as the "Remedial Period". The lengths of the Remedial Periods shall be:

6.1.1 as stated in the Service Level Specification in respect of the relevant Performance Failure

…

6.2 If before the expiry of the Remedial Period the Contractor demonstrated to the reasonable satisfaction of the Trust that it has remedied the Performance Failure or, as applicable, has taken appropriate steps to prevent the recurrence of the Performance Failure no further Deduction shall be made in respect of the Performance Failure, otherwise a further deduction shall be made of the appropriate amount (as described in paragraph 3 above) and a further Remedial Period or Periods of equal duration shall apply (and, if appropriate, Deductions shall continue to be made) until such time as:

6.2.1 the Contractor shall demonstrate to the reasonable satisfaction of the Trust that it has remedied the Performance Failure or, as applicable, taken appropriate steps to prevent the recurrence of the Performance Failure …"

18. Part F provided for the award of service failure points. For each performance failure, whether actual or deemed due to the expiry of a remedial period, service failure points would be incurred. There were 2 (minor), 6 (medium) and 20 (major). Appendix D identified the number of service failure points to trigger rights under clause 5.9 (warning notice), clause 5.11 (remedial rights), and clause 28.1.10 (termination).

(d) Equipment and materials

19. The Conditions of Contract contemplated that some of the Trust's existing catering equipment must be transferred into the ownership of Medirest for the purposes of the contract. Under clause 17.15, all equipment transferred to Medirest was to be valued at the commencement of the contract, but transferred without charge. On conclusion of the contract clause 17.16 provided that all equipment, whether provided by Medirest or transferred from the Trust, was to be re-valued and transferred to the ownership of the Trust.

"17.16 On conclusion of the Contract, all equipment, whether provided by the Contractor or transferred into the ownership of the Contractor by the Trust or any Beneficiary will be re-valued and transferred to the ownership of the Trust … as set out in the Specification. Where there is any increase or decrease in the value of the equipment, this shall be added to or deducted from the Contractor's final payment. Transfer of equipment to the Trust … shall be without charge excepting any change in value."

20. As part of the termination provisions, clause 29.4 provided that upon termination of the contract under clause 28.1, "all equipment and materials provided and/or assembled by…the Contractor…in accordance with the Contract shall be transferred into the ownership of the Trust…" Medirest agreed under clause 28.5 that upon termination for any reason it was not to be entitled to make a claim against the Trust or any Beneficiary in relation to the costs it incurred in providing the services, or the costs incurred in acquiring equipment and/or materials used in their provision.

"28.5 The Contractor agrees that upon termination for any reason (under Clause 28.1 or otherwise) or expiry of the Contract it shall not be entitled to make a claim against the Trust or Beneficiary in relation to costs incurred by the Contractor in providing the Services or costs incurred in acquiring equipment and/or materials used in the provision of the Services…"

(e) Dispute resolution and termination

21. Clause 26 of the Conditions of Contract contained a dispute resolution procedure, including mediation by an independent mediator. It applied to any dispute which could not be resolved at the operational level: clause 26.2.
22. Termination was covered in clause 28. Under clause 28.1 the Trust could terminate by serving written notice should there be a material failure on the part of Medirest to perform any material obligation under various specified clauses of the contract, provided such failure had not been remedied to the Trust's reasonable satisfaction within a period of 30 days following written demand. That clause also entitled the Trust to terminate should Medirest have exceeded the number of service failure points set out in Appendix D of the Payment Mechanism in any six month rolling period. The number was 1400. Clause 28.3 enabled the Trust to terminate the contract by giving six months notice in writing. Clause 28.4 dealt with termination by Medirest.

"28.4 [Medirest] may terminate the Contract in the following circumstances, by giving 1 month's written notice:

28.4.1 if the Trust or any Beneficiary has committed a material breach of the Contract; and

28.4.2 [Medirest] has brought the breach of Contract to the attention of the Trust's representative; and

28.4.3 the Trust or such Beneficiary has not corrected the said breach of Contract within a reasonable period of time."

The duty to cooperate in good faith etc

23. Clause 3.5 of the Conditions of Contract obliged the Trust and Medirest to cooperate with each other in good faith and to take all reasonable action as was necessary for the efficient transmission of information and instructions and to enable the Trust or any beneficiary to derive the full benefit of the contract. Medirest contends that this clause should be read as having imposed (1) a general obligation to cooperate in good faith and (2) a more limited obligation to take all reasonable action as necessary for the two purposes contained in the clause (i.e. for the efficient transmission of information and to enable the Trust or any Beneficiary to derive the contract's full benefit). The Trust agitates a narrower construction, whereby both obligations (i.e. to cooperate in good faith and to take all reasonable action) were qualified by the two purposes which followed. Thus the Trust contends that it was under no duty to cooperate in good faith except for the purposes specifically mentioned. On either interpretation the parties had to take all reasonable action as necessary for the two purposes set out in the clause.
24. In support of its interpretation Medirest points to the second "will" after the first "and", which on its case would be superfluous if the Trust were correct. It submits that the court should generally favour an interpretation which gives effect to all the words used, although it realistically concedes that the syntax itself does not give much guidance as to how the clause should be read. The Trust contends first, that if there had been an intention to impose a general duty to cooperate in good faith there would have been a separate clause to that effect. The Trust also refers to the section in which clause 3.5 falls, "Performance of the Services". It submits that this means that each sub-part of clause 3 was directed at Medirest's performance of the contract. Therefore the Trust's duty was only implicated if its failure to cooperate in good faith hindered the performance, by Medirest, of the catering services. Furthermore, in such event, the remedy for any failure on the part of the Trust was contained in clauses 3.9 and 5.7, described earlier.
25. If it had been necessary to chose between these rival interpretations I would have favoured that advanced by Medirest, i.e. that there was a general obligation to cooperate in good faith. In Rainy Sky v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 the Supreme Court reiterated that if a clause in a commercial contract is open to different interpretations, the court should generally adopt the interpretation which more closely accords with commercial commonsense: [30]. That is the interpretation which the reasonable person, who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to mean: [14], [21]. Here Medirest and the Trust had entered a long term contract for the delivery of food and other services within a hospital, the performance of which required continuous and detailed cooperation between the parties at a number of levels if it was to work smoothly. In those circumstances, it is highly likely that the parties intended that there should be a general obligation that they should cooperate in good faith with each other. The only limitation to that general obligation would be that it would be limited to the performance of the contract.
26. However, if the obligation to cooperate in good faith was limited in the way the Trust suggests, it would not have made any practical difference in the context of the present case. It would not transform the clause into a one way street, or narrow lane, where the Trust's duty to cooperate in good faith was non-existent or limited. That is to misunderstand the Trust's character, which as a public body must be devoted to high standards of behaviour and to the public good. It is also to misunderstand the contract. Clause 3.5 itself expressly stated at the outset the obligation of both parties to cooperate with each other. In particular, on the Trust's own reading, it had to cooperate in good faith with Medirest not only to secure the benefit of the contract for itself but also to secure the benefit of the contract for the Beneficiaries. It was therefore not open to the Trust to interpret the clause in a self-interested manner. However interpreted, this was not a contract solely for the Trust's own benefit, but for the benefit of other persons and institutions. Any disruption through a failure to cooperate in good faith would adversely affect the delivery of those benefits, benefits which ultimately accrued to patients.
27. The real issue in my view concerns the content of the obligations contained in clause 3.5, to cooperate in good faith, and to take all reasonable action as was necessary, for the two purposes identified, i.e. for the efficient transmission of information and instructions and to enable the Trust or any Beneficiary to derive the full benefit of the Contract. It is the second purpose which is crucial. The starting point in clause 3.5 is cooperation, a well understood concept meaning to work together, or to act in conjunction with another person. The precise scope of the duty to cooperate will take its content from the circumstances and the nature of the contract concerned. In a long-term contract such as this the duty to cooperate necessarily required the parties to work together constantly, at all levels of the relationship, otherwise performance of the contract would inevitably be impaired. Importantly, any lack of cooperation in the relationship in this context could have significant ramifications for patient well-being. The duty to cooperate necessarily encompassed the duty to work together to resolve the problems which would almost certainly occur from time to time in a long term contract of this nature: Anglo Group plc v Winther Brown & Co Ltd, (1997) TCC 413, [128], per HHJ Toulmin CMG QC. It also necessarily required the parties not to take unreasonable actions which might damage their working relationship.
28. As to the duty to cooperate in good faith the Trust contends that, within its defined scope, that duty can only be breached by behaviour undertaken in bad faith. The Trust cites Manifest Shipping Co v Uni-Polaris Shipping Co [2001] UKHL 1; [2003] 1 AC 469. That case involved an insurance contract and the well known mutual duty of utmost good faith under section 17 of the Marine Insurance Act 1906. Lord Hobhouse agreed that that was a principle of fair dealing: [48]. Lord Scott suggested that unless the assured had acted in bad faith he could not be in breach of a duty of good faith, utmost or otherwise: [111]. In relation to that obiter remark I am not persuaded of its relevance to the interpretation of this clause obliging cooperation in good faith in this long term facilities contract.
29. By reference to Overlook v Foxtel [2002] NSWSC 17 – an authority first advanced by Medirest – the Trust also submits that even on a broader view a good faith duty is only engaged if one party's pursuit of its own interests would result in, as Barrett J put it in that case, an "unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become) ... 'nugatory, worthless or, perhaps, seriously undermined': [65]. The Trust submits that a good faith duty is not a general wishy-washy duty to be nice in all communications between the parties. The party alleging breach must identify the benefit that is conferred by an express contractual term and then show how the actions of the other party would interfere with that benefit.
30. Even then, quoting again from Overlook v Foxtel, the Trust submits that "the duty is not to prefer the interests of the other contracting party. It is, rather, a duty to recognise and have regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms": [67]. In the present case, the Trust submits, the terms of the contract expressly provided that the service payment was to be reduced by deductions calculated in a manner spelt out in considerable detail in the contract. Medirest could have had no legitimate expectation that these express terms would be overridden, ignored or forgiven. Medirest had a legitimate interest in being paid what was due pursuant to the terms of the contract, no more and no less.
31. Two decisions of this court are especially helpful in interpreting an express contractual duty of good faith. In Berkeley Community Villages v Pullen [2007] EWHC 1330 (Ch) there was an express term in a contract between a developer and landowners that in all matters relating to it the parties would act in utmost good faith towards one another and reasonably and prudently. Morgan J considered Bropho v Human Rights & Equal Opportunity Commission [2004] FCAFC 16, where French J in the Federal Court of Australia canvassed United States authority. Morgan J concluded that the term meant a duty to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose and to act consistently with justified expectations: [97].
32. In CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch) there was an express duty to act in the utmost good faith in a joint venture agreement. Vos J reviewed the authorities, adopted Morgan J's formulation, but added that the meaning of the obligation of utmost good faith before him had to take its colour from the commercial nature of the contract: [243]-[246]. Vos J expressed his agreement with Lord Scott in Manifest Shipping, that without bad faith it was hard to understand how there could be a breach of the duty of good faith: [246].
33. In the contract in the present case the term good faith in clause 3.5 referred to how the parties were to conduct themselves in the course of its performance. Conduct which could be said to be committed in bad faith was clearly caught. Additionally, in its context, the term had an objective character. It qualified how the duty to cooperate was to occur, that duty having the features already described. Moreover, it concerned the performance of a long term, complex contract, involving the provision of an important service to members of the public, the patients and visitors to the hospital. In deriving the full benefit of the contract under clause 3.5 for itself and the beneficiaries identified in the contract, the Trust was in a real sense pursuing a common purpose with Medirest of benefit to the public. To my mind the objective standard of conduct demanded in this case of both parties primarily encompassed faithfulness to this common purpose. Fair dealing and acting consistently with justified expectations were, in a sense, corollaries of that.
34. In addition to the duty to cooperate in good faith, clause 3.5 also contained the duty to take all reasonable action necessary for the two purposes, the efficient transmission of information and to enable the Trust and the beneficiaries to derive the full benefit of the contract. Those two purposes were themselves broad. As I said earlier, in conducting itself the Trust was not entitled to have regard merely to its own interest in securing the benefit of the contract; it was obliged as well to have regard to wider interests. In my view this part of clause 3.5 imposed a broad obligation on the Trust to act reasonably in conducting the contract, in particular not taking unreasonable actions which might damage the relationship with Medirest and thus undermine the purpose of the contract.
35. Given what I have held to be the scope of the duties encompassed by clause 3.5 there is no need to consider any implied duty of cooperation in good faith. Nor is it necessary to consider whether any such implied duty was excluded by the definition of contract in clause 1.1.5, which purported to exclude implied terms other than those in favour of the Trust.

Calculating service failure points and deductions

36. Under clause 5.8 of the Conditions of Contract, in the event of performance failure the Trust had the power to calculate deductions and award service failure points. There were no rectification periods in the contract in which Medirest would have the opportunity to rectify a performance failure without service failure points and deductions being triggered. The standard form which had been used in drafting it contemplated that there would be. Instead performance failures were immediate and service failure points and deductions accrued in accordance with the provisions of the Payment Mechanism, Part C, clause 6.1 until Medirest demonstrated to the reasonable satisfaction of the Trust that it had either remedied the performance failure or, where the period was marked with an asterisk in the Service Level Specification, it had taken appropriate steps to prevent its recurrence.
37. In interpreting the mechanism, the Trust submits that service failure points are awarded by the contract, not in any way levied by the Trust. The Trust performed calculations of the service failure points and notified Medirest of these; Medirest did the same. It was the terms of the contract, not the calculations of the parties, which determined the true level of service failure points. The Trust might have notified Medirest of what it believed the level of service failure points to be but, by definition, a service failure point was only such if "determined by the provisions set out in Part F of this Payment Mechanism and Appendix A." Deductions were made only when the Trust deducted a sum from a monthly service payment. If the deduction was justified by the terms of the contract, it was a "Deduction" in terms of the mechanism. If it was not justified by the terms of the contract, it was a deduction resulting in an underpayment to Medirest and the Trust had no power to levy it.
38. In the Trust's submission clause 5.8 recognised that there might be a dispute as to the correct level of service failure points and provided that service failure points which were "agreed or determined to have been awarded in circumstances where such award was not justified shall be deemed to have been cancelled". They were deemed cancelled, rather than actually cancelled because, if not contractual, they were not true service failure points. The contract anticipated possible disagreement and resort could be had to the dispute resolution procedures, the usual contractual remedies and the right, in certain circumstances, to terminate the contract.
39. As to the calculation of service failure points and deductions, the Trust contends that they were precisely that, calculations. Unless the Trust exercised a remedy, such as termination, dependent on the service failure points having reached a particular level, or made a deduction from a service payment, the calculations had no effect on Medirest or the contract. If the Trust had terminated in circumstances where the true level of service failure points did not justify it, Medirest would have had an action for wrongful termination. If the Trust made non-contractual deductions from a service payment, Medirest would have had an action for the unpaid part of the price. Providing Medirest with a spreadsheet calculation of service failure points and deductions was not purporting to exercise a contractual right: Batis Maritime Corp v Petroleos Mediterraneo SA (The Batis) [1990] 1 Lloyd's Rep 345, 350.
40. Thus the Trust resists any implication of terms to affect the tolling of service failure points and the making of "Deductions" under the contract. It submits that the implication of any term imposing obligations on the Trust would be directly contrary to the express terms of the contract, where the definition of "contract" in clause 1 of the Conditions of Contract excluded implied terms other than those to the benefit of the Trust and the Beneficiaries. Further, the Trust submits that no term was to be implied because no term was necessary: Mediterranean Salvage & Towage v Seamar Trading & Commerce Inc (The Reborn) [2009] EWCA Civ 531; [2009] 2 Lloyd's Rep 639, [15], per Sir Anthony Clarke MR. That was because the parties agreed in clause 3.9 of the Conditions of Contract that if the Trust hindered Medirest from providing the services Medirest should inform the Trust's representative. Clause 5.7 then set out Medirest's remedy, which was an extension of time for performance of the contract.
41. In particular the Trust submits that the principle that a contracting party should not act capriciously, arbitrarily or unreasonably is confined in the authorities to situations where one contracting party has a discretion, the parties have conflicting interests, and the provisions of the contract effectively place the resolution of the conflict in the hands of the party exercising the discretion: Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287; [2005] ICR 402, [30]. Here there was no contractual discretion in any meaningful sense in the accrual of service failure points and the consequences which followed.
42. In my view a fundamental flaw in the Trust's submissions is that they overlook the obligations in clause 3.5 of the Conditions of Contract, to cooperate in good faith and to take all reasonable action to maximise the benefit of the contract for itself and the Beneficiaries. Especially with this as background, there is an aura of commercial unreality in the submission that, whatever be the Trust's calculation of service failure points and deductions, these would have made no impact on Medirest unless a deduction was actually made from a monthly service payment. It seems to me unlikely that reasonable commercial parties would have contracted on the basis that the Trust could make absurd calculations, with the serious consequences which then could threaten, and still be regarded as acting in a manner compliant with clause 3.5 or rationally. Coupled with that was the equally unattractive submission that if Medirest had any objections to the Trust's behaviour under the contract its course was to invoke its contractual remedies.
43. As to the Trust's specific submissions, I am not persuaded that the calculation of service failure points and deductions was the mechanical process which the Trust portrays. Clause 5.8 of the Conditions of Contract provided that in the event of a performance failure the Trust "should be entitled to levy payment deductions" and "may … award service failure points … by notice". So the award of service failure points is a contractual step. That language is also discretionary. The contract did not impose any obligation on the Trust to levy the deductions or to award the service failure points. No doubt the Trust would normally have chosen that course under clause 5.8 in the event of performance failures. However, the contractual language conferred a discretion, and no doubt for the good reason that this was a long-term and complex contract. The mechanical application of its provisions could potentially lead to absurd results. Moreover, the purpose of the Trust's powers under clause 5.8 was to curb performance failure not, for example, to generate discounts on service payments to Medirest. Reasonable persons with this background knowledge would thus interpret the clause as conferring on the Trust a power to act consistently with that purpose of the mechanism.
44. The test for the implication of a term in the contract is whether, without it, the "consequences would contradict what a reasonable party would understand the contract to mean", the touchstone being the "reasonable expectations of the parties": Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988, [22]-[23]. Clause 1, in defining "Contract" to exclude implied terms in Medirest's favour, cannot have the effect the Trust suggests, since the Privy Council in that case held that the implication of a term is not an addition to the instrument but only spells out what it means: at [18], [21]. Conceptually, therefore, it seems impossible to agree to preclude the implication of the types of terms which are necessary to give business efficacy to the contract and which give effect to what the parties must be taken to have meant or which are intrinsic to the agreement: Axa Sun Life Services plc v Campbell Martin Ltd & Otrs [2011] EWCA Civ 133, [2011] 1 CLC 312, [41]. Clause 1, in defining "Contract" must be confined in its application to exclude the implication of other types of clauses. In any event, clauses such as this, excluding the implication of terms in favour of one side only, must be interpreted strictly.
45. Crucially the law reports are now replete with authorities where a term has been implied in a commercial contract as a restriction on the exercise of a contractual discretion: the discretion must be exercised in good faith, and not in an arbitrary, capricious or irrational manner. In a well known passage in Abu Dhabi National Tanker Co v Product Star Shipping Ltd [1993] 1 Lloyd's LR 397, Leggatt LJ said this:

"Where A and B contract with each other to confer a discretion on A, that does not render B subject to A's uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably."

Mann and Balcombe LJJ agreed. That passage has been applied by the Court of Appeal in a variety of different situations. In Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1 Lloyd's LR 538, Rix LJ carefully reviewed many of these authorities, including Cantor Fitzgerald International v Horkulak, cited by the Trust, and concluded that he did not think that the principle was in dispute. The purpose of the implied term was to prevent the abuse of power; the test was one of rationality i.e. whether no reasonable contracting party would take the decision to exercise the discretion in the way it was exercised: [60] – [69]. Lloyd and Laws LJJ agreed. More recently, in JML Direct Ltd v Freestat UK Ltd [2010] EWCA Civ 34, Moore-Bick LJ held that the implied obligation not to act in an arbitrary, irrational or capricious manner was "likely to be implicit in any commercial contract under which one party is given the right to make a decision on a matter which affects both parties whose interests are not the same …" [14]. Lord Neuberger MR and Toulson LJ agreed. It seems to me that the authority in favour of the principle enunciated by Leggatt LJ is overwhelming.

46. There is a point regarding the application of paragraph 6 of Part C of the Payment Mechanism, under which Medirest had to demonstrate to the reasonable satisfaction of the Trust that a performance failure had been remedied. The Trust insisted that it could only be reasonably satisfied under paragraph 6 if it received an email or the like from Medirest that the fault was remedied. Otherwise service failure points continued to accrue. In my view paragraph 6 imported an obligation on the Trust to act reasonably in deciding whether it was reasonably satisfied in any particular instance that a particular fault had been remedied. In several cases, although a fault was remedied in the presence of senior Trust staff, the Trust asserted that it could not be reasonably satisfied that a fault had been remedied and continued to calculate service failure points because no email was received. That, in my view, was not reasonable behaviour on the part of the Trust. But this is to anticipate what happened in practice during the course of the contract, to which I now turn.

III PERFORMANCE

The factual background

(a) 1 April – July 2008

47. Prior to the contract at issue in this case Medirest had contracted to supply bulk chilled food to the Trust over a number of years. Under these arrangements the Trust itself regenerated and served the food at ward level. That contract operated without significant problems. As that contract was drawing to an end the Trust invited offers for a full catering service, including a "ward hostess" service. Following a competitive tender process, the contract was awarded to Medirest. Medirest was not only responsible for supplying the food – the so-called Steamplicity product – but also for serving it in the wards. Medirest took over the existing catering staff by virtue of a TUPE transfer.
48. The form of the contract, combining a standard NHS supply contract and a PFI mechanism for service performance failures and deductions, was Mr Aitchison's design. The contract was only a week old when Mr Aitchison asked Mr Wright to obtain a copy of the contract since the relationship "could get contractual". There was a bedding-in period of three months. About halfway through that period Mr Aitchison instructed Mr Wright to "read the riot act" to Medirest, in particular the Payment Mechanism provisions. No doubt this was consistent with the "challenging" approach which Mr Aitchison conceived the Trust had with Medirest and his expectation that there would be service failure points and deductions.
49. To a large extent a challenging approach on the part of the Trust proved justified in the early period of the contract. Despite the TUPE transfers there was a shortage of Medirest staff, especially team leaders. There were the additional demands caused by the transition to two hot meals per day, a different form of regeneration (Steamplicity rather than bulk chilled) and the need to deliver the food to patients in the wards. Medirest was now responsible for the maintenance and cleanliness of ward kitchens. All this proved a strain for Medirest. Mrs Ali, a matron on a gastroenterology ward, observed a decline in the state of the ward kitchens and the presence of out of date food after Medirest assumed its new role.
50. Monitoring was also deficient. Medirest was obliged to self-monitor its performance of the contract from the outset. Daily monitoring was carried out at ward level, the results recorded manually, and the forms kept in files for each ward in a supervisors' office, where they were available for inspection. But the contract demanded that Medirest also record performance failures and prepare monthly monitoring reports. Medirest misunderstood the effect of the bedding-in period and thought that the first monitoring report was not required until July. Thus none were produced in the first three months of the contract. The Trust had drawn Medirest's attention to the omission on 18 June. Medirest's Mr Cage then requested a meeting to discuss the content of the monthly report. At a meeting in early July Mr Wright of the Trust suggested a format for Medirest's monitoring reports. He also asked for a formal response from Medirest explaining the omission. None came until Medirest produced its first monitoring report on 7 August.

(b) August – December 2008

51. Medirest's first monitoring report, produced in early August, was inadequate. It only covered July 2008. No report or other monitoring information was provided for April, May or June. Moreover, July was the first month that Medirest recorded performance failures. It calculated 46 service failure points and £75 for Deductions. Medirest subsequently suggested that the reason that no monthly reports were provided from April to June was due to the contract being unclear as to what should be in the report or how it should be presented. In fact, the content of the report was set out in detail in GP11 in the Service Level Specification. Neither that performance parameter, nor the contract, required that the report be in any particular form.
52. At a meeting on 13 August 2008 the Trust provided Medirest with its calculation for July of 3264 service failure points and consequent deductions of £3570. The Trust requested a formal response. The calculations caused surprise at Medirest and the matter was referred to the Medirest lawyers. On 4 September Medirest wrote questioning some of the calculations, asserting that the Trust's monitoring was demoralising and suggesting a meeting between Medirest's Mr Taylor and the Trust's Mr Aitchison so that the parties could work together and move forward in a more positive manner. Unhelpfully at this point the Trust's Mr Wright told Medirest's Mr Cage something along the lines that the Trust's stance was: how much did Medirest want to pay to retain the contract? I have no doubt that Mr Wright's comment was inspired by Mr Aitchison although I also accept Mr Wright's evidence that frustration levels were rising on both sides. Eventually, on 25 September, the Trust replied that it needed to take further advice and review matters before a meeting could be held.
53. Meanwhile, from about late June 2008, the Trust had begun its own monitoring. Members of the Trust board conducted executive walk-arounds, a practice which pre-dated the contract. Then pursuant to the Department of Health national cleanliness standards the Trust carried out regular monitoring, at least monthly, of wards, including the kitchens, through use of a 49-point ward-level check sheet. It also pursued catering-specific monitoring and by July 2008 had developed a detailed monitoring sheet to facilitate this. The Trust was entitled to do all this under the contract. There was no evidence before me that the conduct of the Trust's monitoring was in any way unreasonable or improper. On the basis of this monitoring the Trust began to calculate service failure points and deductions attributable to performance failures on Medirest's part.
54. It was in the course of such monitoring in August and September that the Trust uncovered certain performance failures by Medirest which featured ad nauseam in the course of the trial. Relatively minor in themselves they ultimately led the Trust to commit, as I explain below, gross errors. The date these failures were discovered, their nature and what subsequently happened, are as follows:

4 August. Box of ketchup sachets, out of date on 4 May, found in cupboard. This was not a brand used by Medirest and the box was removed immediately.

4 August. Failure to sign off a cleaning schedule and cleaning issues, ward B3. On being informed Medirest replied the same day with an explanation of what supervisors had done by way of remedy.

5 August. No temperature on refrigeration display, ward B4. I find that the refrigerator was being defrosted.

5 August. Individual butter sachets in refrigerator with no use by date. They were with their box in the refrigerator.

7 August. Bagels out of date on 3 August. I find that the bagels were patient or staff food and were removed immediately.

11, 20 August. Two occasions of spoons wedging open fire doors. At least one was immediately removed in the presence of the Trust's staff. I find that the other spoon was removed shortly after as well.

20 August. Mousse out of date on 19 August. Removed immediately in the presence of Trust staff.

9 September. Cleaning issues ward B16.

24 September. Royal College of Nursing ("RCN") notice board dirty. On 26 September Medirest cleaned the outside but it took some time for Medirest to locate the RCN key holder who was on holiday and clean the inside.

55. Medirest did not report service failures and associated service failure points and deductions in its August, September and October 2008 monthly reports. The justification given is that the large discrepancy between its and the Trust's approach to service failure points and deductions meant that Medirest wanted to meet the Trust to resolve these matters. Those divergent approaches and the absence of a meeting between the parties to discuss matters were, in my view, no excuse for Medirest's failures. As admitted by Medirest in their November report, and in evidence at trial, it had not been recording performance service failures in the August to October period. Mr Cage's reasoning was that there would be larger problems if the recording had been done incorrectly and thus Medirest chose not to record them at all. Moreover, Mr Cage could not explain why Medirest performed calculations for November and December 2008, when a methodology had still not been agreed, but was unable to do so during the previous three months. Mr Cage accepted that Medirest was in breach of contract, as certainly it was, in not recording performance failures during this period.
56. The long anticipated meeting between Medirest and the Trust finally took place on 27 November 2008. Both sides now blame each other for the delay. It seems to me that that the delay was attributable partly to people being on leave and the need to take advice; partly due to an obstructive attitude on the Trust's side; and partly due to inadequate drive on Medirest's part. Both parties also dispute what precisely was said at this meeting. Certainly the meeting was not as productive as either side had hoped largely, it seems, because each approached the meeting with different purposes. It may not have helped that on the additional wards issue (see part V below) Mr Aitchison made a blanket denial that Medirest was entitled to any additional payment, although an agreement had previously been reached for that in respect of at least ward J6.
57. The following day, 28 November 2008, Mr Aitchison wrote to Medirest. In the letter he drew a distinction between the Steamplicity system, about which no complaint was made, and other aspects of Medirest's service. The 31 July service failure points amounted, he wrote, to 7000. Mr Aitchison identified, as matters of particular concern, Medirest's failure to set up a help desk, to monitor, to provide monitoring reports, and, where reports were provided, to comply with the requirements of the contract. The letter concluded by asking Medirest for its proposals for rectifying these matters and warned of possible termination. The Trust now accept that the helpdesk did not have to take any particular form.
58. On 10 December 2008, Medirest wrote in what in evidence Mr Aitchison conceded was a conciliatory fashion. Mr Taylor's letter accepted that Medirest did not have all the monitoring requirements in place in accordance with the contract. The letter stated that following the 27 November meeting Medirest had immediately implemented the helpdesk facility. The letter accepted that Medirest was in breach of the threshold of 1,400 service failure points but that it would work extremely hard to reduce the six month average over the coming months. There were attached action points. On 12 December, however, Mr Aitchison responded that there was no record of the helpdesk having been implemented and that Medirest would need to ensure compliance with all of its contractual obligations, not just those discussed at the 27 November meeting. On the same day, the Trust sent a warning notice, triggering the clause 5.10 procedure for the production of an agreed action plan and its implementation.
59. During the whole of this period, despite Medirest's monitoring failures, the catering service proceeded without complaint, as Mr Aitchison largely conceded in the 28 November letter. A meeting on 27 August 2008 of the Trust's Joint Consultation Negotiation Committee was informed that satisfaction with the catering provision had increased considerably. The Unison staff side secretary reported to that meeting that positive feedback had been received regarding improved delivery. A Patient Feeding Report for the period October to December 2008 indicated a very high level of patient satisfaction with both the food and the service by the Medirest staff. The report was based upon 70 responses. (The report was finally tabled at a Patient Catering User Group meeting on 14 April 2009 and its findings, in general, endorsed.)

(c) January – July 2009

60. The warning notice of 12 December triggered an obligation on Medirest to provide an action plan and for the parties to meet within 10 business days. The Trust's failure to respond positively to Medirest's conciliatory letter of 10 December was now compounded. Internally, Mr Wright told his team at the Trust that they would have two days to review Medirest's action plan and to "pull it to bits". In evidence Mr Wright rightly expressed regret for that attitude. When Mr Cage of Medirest understandably asked for some guidance as to the issues about which the Trust were concerned, given that the warning notice was generic, the Trust's response was unhelpful. It simply repeated that the action plan needed to address Medirest's failure to meet contractual requirements, directing Medirest to all the contractual performance parameters, and asking it to review its entire tender documentation prior to the award of the contract to ensure it was delivering on all aspects of the services it had committed to provide.
61. The meeting took place on 5 January 2009. Both sides must share part of the blame that it was not convened until then. At the trial there was an issue as to whether a further warning notice from the Trust was handed to Medirest at the meeting. Nothing turns on the point but I find as a fact that, although a further notice was prepared for the meeting, it was not given to the Medirest representatives. After various iterations, a final action plan was issued on 12 January 2009, updated on 15 January. At a meeting on 15 January it was agreed that there should be a certain amount of joint monitoring of the wards in order to validate findings.
62. At this point – the second part of January 2009 – the Trust does not dispute that the contract was operating in a more satisfactory manner, with better monitoring by Medirest and the introduction of an electronic helpdesk. In evidence Mr Aitchison and Mr Wright accepted that by this stage the contract was essentially being performed properly and there were no significant problems with service delivery. A helpdesk satisfactory to the Trust had been instituted. The monthly report for December 2008 had been accepted as compliant. As mentioned, patient satisfaction was high.
63. Moreover, patient safety was not at risk. A local authority environmental health inspection confirmed in mid January 2009 that all legal requirements were met and that "food safety, general standards of food hygiene and cleanliness were found to be good in all areas visited". Medirest had also arranged an inspection by a health and safety expert, Mr Wyn-Jones, who regularly undertook work for the Compass Group. As with the environmental health inspection the intention was to provide the Trust with some element of confidence that Medirest were delivering how it should have been. On 19 January Mr Wyn-Jones' report identified a number of aspects where improvement was required. In the report Mr Wyn-Jones observed that over the next two months, if his recommendations were implemented, the service would be ready to be audited for ISO accreditation (which was, in fact, achieved). Only part of the report was sent to the Trust. Omitted were two pages of the six page report. These two pages set out a list of food safety requirements and HAACP controls, some of which had to be completed with immediate effect. Medirest's lack of openness with the Trust in this regard was unfortunate, to say the least, but no legal consequence follows.
64. As for monitoring Medirest had begun recording performance failures since November. The Trust accepts that this aspect of its obligations had started to improve towards the end of 2008 and continued to improve from January 2009, in particular with the implementation of more robust self-monitoring and the electronic helpdesk. More robust self-monitoring meant that a greater proportion of performance failures were discovered and recorded, but the system was such that most were remedied quickly and the remedy also recorded. The result was that, with some exceptions, although the number of recorded performance failures increased, the number of service failure points and deductions declined compared with those calculated for August to October 2008. It was these historical failures, or at least how they were to be treated, which as we shall see poisoned the relationship.
65. When the Trust formally accepted the action plan on 27 January, it included in its letter to Medirest an appendix which purported to detail the number of service failure points and resulting deductions calculations. The total of deductions owed for period July 2008 – December 2008 was said to be £587,207.67. The Trust asked for proposals for Medirest to pay over, say, 6 months. The appendix provided only totals by month, without back-up detail, although the supporting spreadsheets were available and could have been sent to Medirest. The figure of £587,207.67 was over half of the whole service fee payable by the Trust for the six months to which it related.
66. Quite how the calculations underlying those figures in the January document were prepared is still unclear. In one sense it does not matter. The fact is that this is what the Trust, in effect, was claiming it was owed. The previous calculation which had been given to Medirest in August, claimed about £3500, so there was a huge escalation. In evidence Mr Wright denied having reviewed the calculations in detail but accepted that when they were given to Medirest they had a severe impact on the working relationship. Mr Aitchison knew that they would cause very serious concern but said that his primary aim was to encourage a debate and then perhaps a proper engagement on Medirest's part. Neither were able to say that they checked whether the figures were accurate. Mr Aitchison said in evidence that he expected Medirest to ask for the supporting information.
67. Medirest's formal response to the Trust's calculation came from its legal counsel on 6 February 2009. He stated that Medirest would need to verify the figures and asked for a breakdown in the same manner as for the July 2008 deduction claim. Although the information was available, however, the Trust did not forward it immediately. At a meeting on 16 February, Mr Wright stated that he would be responding to the letter to provide a detailed breakdown. He also indicated that the Trust intended to make unilateral deductions of £50,000 per month.
68. The Trust's detailed breakdown was contained in a document presented on 5 March (the "March spreadsheet"). That identified each performance failure relied on by the Trust, and in respect of each performance failure, identified the "SP" or "GP" that had been breached; the ward where the failing was identified; and the details to enable a calculation of the service failure points and deductions. The totals calculated by the Trust were 52,908 service failure points and £590,117.67 of deductions. The deductions attributable to the August and September performance failures, mentioned earlier, were as follows: ketchup, £46,320; cleaning, ward B3, £71,055; refrigerator temperature display, £ 94,830; butter sachets, £94,830; bagels, £96,060; spoons, £43,612; mousse, £84,450; cleaning, ward B16, £35,400; and RCN notice board, £7,477. On 11 March 2009, Medirest proposed that the Trust make four monthly on account deductions of £20,000 each, pending determination of the correct figure. On 26 March the Trust agreed to this course.
69. Medirest responded to the March Spreadsheet on 23 April 2009 (the "April 2009 spreadsheet"). On its calculation, as at the end of January, the total figures were 18,822 service failure points and £37,365 in deductions. In the covering letter Medirest asserted that a performance failure did not exist before the Trust reported it to Medirest and that service failure points and deductions stopped running at the time when the Trust was aware that the failure has been remedied, or after Medirest had reported the steps it would take to prevent its continuance. In evidence it became clear that some of Medirest's own calculations in the 23 April spreadsheet were not consistent with this approach.
70. Meanwhile, Medirest concluded that the relationship with Mr Aitchison had broken down. Mr Cage and then Mr Cenci sought to speak with the Trust's chief executive, Ms May. There was a short telephone conversation between Mr Cenci and Ms May in early February although, unbeknown to Mr Cenci, Mr Aitchison was with Ms May at the time. Ms May replied in a letter dated 12 February 2009, written for her by Mr Aitchison. The letter contained the passage:

"… I will expect your site manager to agree to a deduction on account pending agreement of the final figure."

There was further correspondence but attempts to arrange a meeting between Mr Cenci and Ms May failed. In evidence Mr Aitchison accepted that at a meeting held on 5 June he remarked that Medirest was part of a large company, which could afford the deductions the Trust had calculated.

71. During this whole period the services being provided by Medirest continued. The Trust accepts that there were no problems with the service, and that Medirest's own monitoring and reporting of performance failures were compliant with the contract. In evidence Mr Cage stated that the parties agreed to split the two issues and that the catering service was not affected by the dispute.
72. On 17 June 2009 the Trust produced a revised spreadsheet ("the June spreadsheet"). On the evidence this analysis was the product of a line-by-line consideration by both Mr Wright and Mrs Brown. Mr Aitchison said he did not look at any of the disputed items. Because the Trust did not accept the points of construction advanced by Medirest, there was relatively little difference to the overall calculations from the March spreadsheet. Now that the Trust had a closure date from Medirest's April spreadsheet, namely 23 April for some of the items which it believed previously remained open, the service failure points and deductions for some items actually increased. Thus deductions for the spoons increased to £91,740, for cleaning on ward B16, to £80,580, and for the RCN notice board, to £18,975. However, the deduction for the butter sachets reduced to £540.

(d) July – September 2008

73. On 16 July 2009, Mr Wright requested that Medirest continue the £20,000 per month payment deductions on account. Medirest refused and explained that it was no progress at all towards a resolution of the dispute. It proposed that the dispute resolution procedure be activated to bring in a third party, such as a mediator, who could move matters forward. The Trust contended in a letter that there was no formal dispute; that on account deductions must continue; and that it might be forced to seek additional remedies. Medirest replied on 23 July 2009, indicating that unless a proposed meeting between Mr Taylor and Mr Aitchison on 5 August bore fruit Medirest would activate the dispute resolution procedure, leading to a meeting between chief executive officers and then mediation. The Trust withheld £137,834 from the 23 July invoice.
74. In response to Medirest's letter of 23 July 2009, Mr Aitchison suggested on 27 July that if Medirest did not want to avail themselves of the on account offer, the Trust would be more than pleased to receive payment for the full outstanding amount. Mr Taylor responded that matters were not progressing and that unless the parties used the formal dispute resolution route the unproductive correspondence would continue. On the same day, during a telephone call, Mr Taylor told Mr Aitchison that the only way to progress matters was through the formal dispute resolution procedure. Mr Aitchison did not reveal that he planned to serve a notice of termination under clause 28 of the contract. Almost immediately after the telephone call, Mr Aitchison issued a notice of termination of the contract.
75. The Trust no longer relies on that termination notice in these proceedings. That it was issued, and the background to its issue, are nonetheless important parts of the factual matrix. In evidence Mr Aitchison said that in fact he did not intend to terminate the contract by issue of the notice. The notice was instead part of the process to resolve the dispute. It was issued because Medirest would not agree to any more payments for the deductions the Trust believed were due. There is no internal Trust documentation about how this notice was issued. Mr Aitchison cannot recall whether he discussed it with the chief executive. The Trust's board do not appear to have been consulted. The notice referred to a calculation of additional service failure points with a consequent deduction of £82,470 for the previous six months.
76. On 5 August 2009, a meeting took place between Mr Cenci and Mr Aitchison and others from both Medirest and the Trust. Mr Aitchison asserted that the way to resolve the dispute was to pay the deductions. Mr Cenci made an offer of £150,000 by way of settlement of the deductions the Trust had calculated. Mr Aitchison recommended to the Trust's chief executive that this be rejected. On 10 August 2009 Mr Aitchison stated that the deductions which were outstanding now amounted to £716,197 and that unilateral deductions would be made from Medirest's invoices in the sum of £106,032 for each of the next five months. At an internal meeting of the Trust on 11 August Mr Aitchison was optimistic that the dispute would be resolved. In his view, Medirest would try to avoid adverse publicity, which could result in it not winning further public sector catering contracts. £106,032 was withheld from an invoice the Trust paid on 20 August 2009.
77. The August spreadsheet supporting the £716,197 figure re-imposed several substantial deductions which had been withdrawn in the light of Medirest's April spreadsheet, e.g. £94,830 for the undated butter sachets. Otherwise the figures in the August spreadsheet for the matters identified earlier reverted to those in the first, the March, spreadsheet. The August spreadsheet also imposed a number of new penalties, for instance, for April 2009, deductions of over £25,000 were proposed because the temperature readings of refrigerators were not taken on ward B18 in the afternoons. Mr Gernon had explained in April 2009 that ward B18 was a clinic which was not in use in the evenings so there would be no food there for patients.
78. On 28 August 2009 Medirest through its solicitors gave the Trust notice of material breach of contract under clause 28.4.2 of the Conditions of Contract. The Trust repaid the £243,875.53 deducted from the 23 July and 30 August invoices. Nonetheless on 10 September Medirest issued a notice of termination of the contract. The Trust purported to extend its July notice termination date to 27 February 2010. On 8 October 2009 the Trust withdrew the July notice of termination and issued a new notice with effect from 23 October 2009. Medirest extended its termination date, with the Trust's agreement, to 27 October 2009. The parties then agreed that termination would take effect on 23 October 2009 without prejudice to whose termination of the contract was effective. This and subsequent events are dealt with later in the judgment when addressing termination. At this point the only post-28 August event which it is appropriate to note here is that on 21 September 2009 the Trust sent revised monitoring data ("the September spreadsheet"). It appears that it was produced after legal advice. There was a very significant reduction in the calculation of deductions, from over £700,000 to under £200,000. As for the matters mentioned earlier the amounts in the September spreadsheet were as follows: ketchup, £30; cleaning, ward B3, £105; refrigeration temperature display, £180; butter sachets, £990; bagels, £12,990; spoons, £690; mousse, £30; cleaning, ward B16, £60; and RCN notice board, £18,990. Additional penalties were imposed in relation to the spoons and the mousse because of what was said to constitute a failure to report.

Trust's breach of contract

79. As we have seen one aspect of the Trust's answer to Medirest's case on breach of contract is that it did not impose any service failure points or deductions but simply calculated what it said arose through Medirest's performance failures. The Trust says that the only deductions in fact made were agreed on account payments. The unilateral deductions of £243,875.53 for the July and August 2009 invoices were later repaid. Otherwise the Trust paid Medirest the service payment due for every month the contract was in existence. It was also common ground that Medirest was in breach of the 1,400 service failure point termination threshold. Moreover, the Trust continues, there was no secret accumulation of service failure points and deductions since it was for Medirest to identify a performance failure, remedy it and provide documentary evidence of that. It was thus Medirest's own failure to comply with its contractual obligations that resulted in it not appreciating the level of service failure points it had incurred.
80. With respect to the calculations it made, the Trust accepts that, with the benefit of all the information now available, it is more difficult to justify some of the service failure points and deductions in the Trust's March and August 2009 spreadsheets. However, the Trust submits that the errors would only have meant a breach of contract if the Trust had sought to terminate on that basis or had wrongly made and not repaid deductions from the contract price. It points out that Medirest does not challenge most of the service failure points and deductions contained in the Trust's spreadsheets. Medirest focused its criticism instead on the failures arising in August and September 2008, previously highlighted in the judgment. With the March and August spreadsheets, the Trust submits, it is entirely unrealistic to have expected the Trust staff to achieve complete accuracy in their line-by-line calculation of the many performance failures, identified over the lifetime of the contract. In their preparation of the spreadsheets in 2009, Trust staff cannot be criticized for failing to recall that performance failures had been remedied back in August or September 2008. It is unsurprising that the odd issue slipped through the net, particularly given that Medirest itself on occasion failed to point out to the Trust that it had provided documentary evidence that a performance failure had been remedied. The Trust makes the further point that it was under no obligation to produce the spreadsheets.
81. Moreover, the Trust submits that the calculations were not made in bad faith. The Trust's staff cannot be criticised for applying the contract according to its terms just because the result was unpalatable for Medirest. There is no rule of English law that says that, in such circumstances, the contractor must be forgiven the contractually agreed consequences of its performance failures. If Medirest had a proper system in place for performance failures and evidencing the remedial steps taken, the level of service failure points and deductions would have been much lower. The fault lies in Medirest's failure to perform its obligations properly, not in the Trust's failure to do it for them. The Trust submits that Medirest's expectation should not have been that the Trust, being a public body, would be more likely to forgive its failings. There is no reason why the public purse should not be protected with the same enthusiasm as would be the case if the Trust were a private body. Further, the Trust submits, it made its concerns known from late 2008. It also explained its calculations, notably in its June 2009 spreadsheet, and in many respects Medirest has accepted the explanation.
82. In considering these submissions, one must begin with the significant problems with Medirest's performance of the contract in 2008, especially in August and September 2008. Although Medirest was self-monitoring, the results were in raw data in supervisors' offices. Medirest did not institute an adequate regime of recording performance failures until late 2008. (In passing I note that the absence of an electronic helpdesk did not help the process. However, pre-PFI Medirest was under no obligation to provide an electronic helpdesk). Then there was Medirest's omission to provide the monthly monitoring reports, as required under the contract. Medirest thought, wrongly, that it had no obligation to provide monthly monitoring reports prior to July. Between August and October it could not provide adequate reports because it had not recorded any performance failures. Medirest's explanation that this was due to uncertainty about the form and content of the monitoring reports does not hold water. The Trust identified performance failures in August and September 2008. Medirest accepts that its performance of the contract was such throughout this period that it was in excess of the number of service failure points necessary to terminate it. Thus in my view the Trust's warning notice in late 2008 was justified. Throughout 2009 the Trust continued to have the right to terminate the contract because Medirest's service failure points exceeded the requisite 1400.
83. However, the effect of the Trust's conduct from the first part of 2009 was to damage, and ultimately to destroy, the working relationship with Medirest. In my view the Trust's actions during this period were in breach of its duties under clause 3.5 of the Conditions of Contract to cooperate in good faith and to take all reasonable action so that the Trust and the Beneficiaries could derive the full benefit of the contract. They also constituted a wrongful abuse of the Trust's powers under the contract. In particular, the Trust was in breach as of 28 August 2009, when Medirest gave notice of material breach, and 10 September 2009, when it gave notice of termination. In broad terms the Trust's breaches revolved around first, its absurd calculations of service failure points which it now concedes were in many respects indefensible. Those calculations led to demands for payment. That was coupled with, secondly, a failure to respond positively when Medirest protested the calculations and sought to resolve the dispute. The breaches of contract on Medirest's part in 2008 were no justification for the Trust's breaches the following year.
84. The crucial background to the Trust's breach of its obligations is that, by late 2008, and during 2009, the catering service worked well and to the Trust's satisfaction. Yet from late 2008 the relationship between the parties went downhill. The position crystallised on 27 January 2009, when the Trust claimed to be owed some £587,000 and required Medirest's proposals to pay it. The Trust failed to attach any details of how this sum was calculated, beyond monthly headings. Nor did it do so, despite being asked, until the 5 March 2009 spreadsheet, although the data was available in January. Mrs May's letter of 12 February 2009 specified that payments on account were expected. The March spreadsheet seems to have been produced in the most cavalier fashion, despite the import of the calculations contained in it.
85. Important calculations in the Trust's March spreadsheets were patently absurd. There is nothing wrong with a challenging approach in managing a contract, even with a contract containing a clause such as 3.5 in the Conditions of Contract, so long as a party deploys fact and common sense. These qualities were absent in important calculations in those spreadsheets. Nothing much changed in the Trust's June and August spreadsheets, despite the challenges and explanations given by Medirest. There is no need to canvass the full details but a few examples of absurdity suffice:

The box of out of date ketchup sachets found in a cupboard attracted 30,860 service failure points and a deduction of £46,320 on the basis that the sachets had been out of date since May. As mentioned it was not a brand used by Medirest, the box was removed immediately and the Trust was told. In evidence Mr Wright accepted that these calculations were not sensible. Indeed they were not, even though Medirest was responsible for all food in ward kitchens. The plain fact was that there was no evidence when the sachets had been brought into the kitchen of the ward.

One of the cleaning issues in ward B3 on 4 August was that a supervisor had not signed off a cleaning schedule. It led to 4737 service failure points and a £11,842.50 deduction. A failure to sign off a cleaning fault is obviously a once and for all fault, which cannot be remedied. Nevertheless, on the Trust's interpretation of the contract repeat deductions were accrued until December 2008 because it said that it received no information of a remedy. In evidence Mrs Brown accepted that it made no sense. It certainly did not.

The other cleaning issues on 4 August in ward B3 attracted 4737 failure points and a £71,055 deduction. The Trust treated the issues as continuing, unrectified, until mid-December, incurring repeat failures to rectify within the remedial period. That was despite Mr Gernon having replied on the same day with a perfectly adequate explanation from Medirest's supervisors, as to what had been done; despite daily cleaning of the ward kitchens and no evidence that these would not have remedied the 4 August defects; and despite no mention of cleaning on ward B3 in the outstanding issues log (which Ms Mitchell confirmed included all issues picked up during daily walkabouts by Trust staff).

Similarly absurd was the £84,540 for a one day old chocolate mousse, which was immediately removed, and the £96,060 for some 3 day old bagels belonging to staff or patients, and also immediately removed. On no reading of the Payment Mechanism were these and some of the other calculations even remotely possible.

86. The absurdity of such calculations was a breach of clause 3.5. It also constituted an exercise of the Trust's contractual power under clause 5.8 and the Payment Mechanism in an arbitrary, capricious and irrational manner. The Trust's submissions that all that was involved were calculations does not accord with the reality. There was the clear threat to Medirest that its monthly service payment would be discounted by deductions, making the contract quite unprofitable. Mrs May's letter of 12 February 2009 specified that payments on account of the service failure points and deductions were expected. In late March Medirest in fact agreed to on account deductions of £20,000 from their monthly service payments. In early July the Trust wanted the payments to continue. When Medirest refused, Mr Aitchison suggested that the whole amount be paid. Then there were the unilateral deductions of £243,875.53 in July and August. So the calculations had practical ramifications in the making of absurd demands for payment even if Mr Aitchison conceived of them simply as a tactic.
87. These ramifications were not only financial. There was a poisoning of the relationship as the Trust failed to respond to Medirest's overtures. Attempts on Medirest's side to reach an accommodation began with Mr Cenci's attempt to resolve matters in early February and continued until August. Perhaps the high point was Mr Cenci's offer of settlement of £150,000 in early August, after Mr Aitchison issued the notice of termination in late July without, it seems, informing the Trust's chief executive or the board. That offer was misguidedly rejected, with the Trust claiming shortly after to be entitled to the ridiculously high amount of £716,197.80, the threat to deduct this from Medirest's service payments, and the partial implementation of the threat by the July and August deductions. It is a tragedy that when the Trust revised its calculations in the September spreadsheet, the deductions fell from over £700,000 to £191,620.87. In evidence Mr Wright for the Trust in effect accepted that the September spreadsheet was in important respects inaccurate so that the deductions stated there were too high. Mr Cenci's offer was in fact realistic but Mr Aitchison rejected it out of hand. All this constituted a failure to cooperate in good faith to attempt to resolve problems arising in the course of the contractual relationship.

IV TERMINATION

The termination letters and notices

88. In a letter from its solicitors of 28 August 2009 Medirest gave the Trust notice under the termination provisions of the Conditions of Contract, clause 28.4.2. In ordinary parlance this was its letter of cure, with the Trust needing to act by 4 September. Following an introduction, and a section headed "factual background", the solicitors identified as the relevant contract provisions clause 6.2 of Part C of the Payment Mechanism and various parts of the Service Level Specification. DLA did not refer to Clause 3.5 of the Conditions and did not allege breach of any implied term. In the next section of the letter the solicitors canvassed details of some of the claims of performance failures mentioned earlier in the judgment, stating that it considered them "erroneous and inflated". The solicitor's letter asserted that the Trust had "failed to comply with its obligations set out in the Contract (notably the Payment Mechanism)". The letter then said:

"[W]e have advised Medirest that the maintenance of those penalties constitutes a material breach of the Trust's obligations to Medirest. In addition, the Trust's unilateral application of monthly deductions commencing on 20 August 2009 in respect of amounts that are properly due to Medirest is a further material breach of the Trust's obligations".

There was a reference to clause 28.4 and a demand that the Trust withdraw the existing monitoring information, produce an amended version, pay the amounts deducted unilaterally from the invoices and confirm that no further deductions would be made pending agreement on the monitoring information, failing which "the matter should be addressed pursuant to clause 26 of the Conditions".

89. There then followed correspondence between the respective solicitors. On 4 September the Trust's solicitors made proposals in relation to the meetings which needed to take place, including those pursuant to the dispute resolution procedure, and stated that the Trust would pay the sums unilaterally deducted pending the outcome of those meetings. Medirest's solicitors agreed on 7 September to extend time until 10 September and reiterated its list of demands. On 9 September 2009 the Trust's solicitors wrote that the Trust had taken steps to repay the sums unilaterally deducted, although that was without prejudice to its rights to make future deductions in accordance with the contract. The Trust was reviewing its existing monitoring information which it might amend or confirm. The letter reiterated that it would not make any further deductions pending the outcome of the meetings but asserted the Trust's right to make unilateral deductions. The Trust made further suggestions in relation to the proposed meetings.
90. On 10 September 2009 Medirest's solicitors sent a one month notice of termination. The accompanying letter confirmed that Medirest had received the return of £243,875.53 from the Trust. The letter continued that the Trust had failed to comply with Medirest's request that the Trust withdraw the existing monitoring information and produce amended information to reflect the amount the Trust genuinely believed to be due.

"[I]t is apparent that the information currently relied on by the Trust includes amounts that are plainly not due to the Trust in any circumstances. The Trust's failure to withdraw that information and produce an amended schedule represents a material and ongoing breach of the contract."

91. On 21 September 2009 the Trust issued what is earlier described as the September schedule, with its substantial reduction in deductions. There were then without prejudice negotiations. On 23 September Mr Aitchison said that there would be no negotiations unless Medirest's termination notice was withdrawn. The following day he rejected a proposal for a "workshop" because the termination notice had not been withdrawn. However, on 30 September a meeting was held between Mr Cenci for Medirest and Professor Ramsay, the incoming chief executive officer of the Trust. It was agreed to seek to resolve issues regarding service failure points, deductions and volume adjustments, and to delay termination for that purpose. Mr Cenci agreed to extend the time of the Medirest termination notice by two weeks.
92. Consequent on the 30 September meeting a number of further meetings took place. A proposal was drawn up to increase service failure point thresholds ten fold. On 1 October Medirest met with the Trust's deputy director of finance and the Trust indicated agreement to amend the payment mechanism to allow for Medirest to recover stepped fixed costs. However, negotiations then broke down.
93. The Trust issued its notice of termination under clause 28.1 on 8 October 2009. Mr Aitchison's letter of termination on behalf of the Trust recorded that the Trust had been concerned with Medirest's performance for some time. It attributed Medirest's failure to move matters forward to its desire to avoid a contract which it had underpriced. The letter said this:

"As you will aware the provisions of clause 28.1 permit immediate termination of the Contract by the Trust. However, to ensure orderly handover of the services the Trust gives notice that it will require a short period to make suitable arrangements for the continuity of the catering service and therefore the Contract will terminate at 2359 hrs on Friday 23 October 2009."

The Trust's termination

94. As indicated earlier, the Trust served a termination notice on 8 October 2009. In the letter Mr Aitchison alleged that the Trust had been concerned at the performance of Medirest for some time. There is no evidence to support that since Mr Aitchison himself conceded the service was proceeding well from early 2009. However, Medirest acknowledges that the termination threshold of 1,400 SFPs had been exceeded. Medirest contends that nonetheless notice was invalid because the Trust was not entitled to terminate the contract from a future date. First, it submits that there was nothing in clause 28.1 which allowed the Trust to keep the contract alive for any period it wished. That construction would produce unfairness since the right to terminate might not have existed by the time of termination. Moreover, where termination was to be on notice the contract said so, as it did in clauses 28.3 and 28.4, which required six and one month's written notice respectively. There was nothing unworkable about requiring the Trust to give immediate notice since it could always have delayed giving notice if it wished to arrange a replacement service before termination. Secondly, Medirest refers to what it submits is the rule at common law, that termination of a contract cannot be from a future date: Norwest Holst Group Administration Ltd v Harrison [1985] ICR 668, 683; Walkinshaw v Diniz [2001] 1 Lloyd's Rep 632, 643 on appeal at [2002] EWCA Civ 180; [2002] 2 Lloyd's Rep 165.
95. In my view there is nothing in these arguments. The contract allowed the Trust to terminate by serving written notice. The contract was not prescriptive about the amount of notice that had to be given, by contrast with other clauses, such as clauses 28.3 and 28.4. There were no words on the face of clause 28.1 requiring that the notice have immediate effect. Other clauses in the Conditions of Contract anticipated steps being taken prior to termination, in particular the clauses governing the transfer of employees under TUPE. If termination under clause 28.1 could only occur immediately upon service of a notice it would be impossible for the parties to comply with the requirements of these clauses prior to termination. The suggestion that the Trust should have given advanced notice that it would subsequently give notice of termination was commercially unreal.
96. To my mind the very nature of the contract was supportive of the right of the Trust to give notice to terminate at a future date so those arrangements could be put in place in the meanwhile. This was a contract for the provision of services, these services including serving meals to patients on wards. Immediate termination would halt the service, leave the Trust no time to make alternative arrangements and put the patients at risk. Since in my view this follows on from a straightforward construction of the contract there is no need to consider what Medirest contends is the rule at common law. In any event, whatever the position in relation to termination at common law for repudiatory breach, it cannot be transposed to termination pursuant to this express term of the contract. With repudiatory breach the innocent party brings the contract to an end by accepting the breach. With an express term the innocent party is exercising a contractual right. The contract does not come to an end when the notice is served but when the notice period expires.

Medirest's termination

97. As we have seen under clause 28.4 of the Conditions of Contract Medirest was entitled to terminate the contract, by giving one month's written notice if the Trust was in material breach of the contract. Medirest had brought the breach to the attention of the Trust's representative and the Trust had failed to correct the breach within a reasonable period of time. The Trust submits that Medirest's purported termination was ineffective because of non-compliance with these requirements.
98. The first part of the Trust's case in this regard is that under clause 28.4 Medirest in its 28 August 2009 letter had to identify the contract terms and the breaches alleged and could only subsequently terminate on the basis of these breaches, if not cured. In the letter Medirest did not mention clause 3.5 on which it has subsequently relied. Although clause 6.2 was highlighted in the letter that clause had not been breached because the Trust had not made deductions in accordance with the spreadsheets. There was no allegation that the calculation of the service failure points constituted a material breach. The spreadsheets themselves could not be a breach of contract. Medirest did not allege that the demands made in the correspondence constituted a material breach. Even if they had constituted demands for payment, this would not have been a breach since it was not a breach of contract to assert a particular level of service failure points and deductions. A breach would only occur if the Trust made deductions which were not permitted by the contract or terminated in circumstances where it was not able to do so.
99. The Trust further submits that by repaying the sums unilaterally deducted, it corrected the only matter alleged by Medirest that was capable of amounting to a material breach. From this it ought to have been obvious to Medirest, as was spelt out in the Trust's 9 September letter, that it would not be entitled to terminate under Clause 28.4. Finally, the Trust submits that if there had been a breach of contract it was not material. The Trust's calculations of service failure points and deductions had no discernible impact on the benefit that Medirest was to receive from the contract.
100. In my view Medirest satisfied the prerequisites of clause 28.4 of the contract and was entitled to terminate. As to the formal requirements, it seemed to me at one point in the argument that the Trust was submitting that Medirest in the 28 August letter should have met the standards required in pleading a case. In Forrest v Glasser [2006] EWCA Civ 1086; [2006] 2 Lloyd's LR 392, the Court of Appeal approved what Gloster J said in RWE Nukem Ltd v AEA Technology plc [2005] EWHC 78, that what any notification clause requires turns on its own individual wording. Here clause 28.4.2 simply required Medirest to "[bring] the breach of contract to the attention of the Trust's Representative". It did not require Medirest to give full particulars of the material breach, nor require it to specify the particular clauses which were breached. By contrast the warning notice provision under clause 5.9 required the Trust specifically to "set out matter or matters giving rise to the Notice". In my view a simple statement of the nature of the breach of conduct said to constitute the breach would have been sufficient for Medirest to comply with clause 28.4. There was no requirement to spell out the clauses which the Trust was alleged to have breached.
101. In fact the 28 August letter set out the nature of Medirest's complaints in considerable detail, stating what the Trust had to do to remedy them. It complied with the requirement that the breaches of contract of which Medirest complained should be brought to the attention of the Trust. The Trust would have been left in no doubt as to the nature of Medirest's complaints or what actions were required to remedy them, i.e. to withdraw and revise its calculations. The period given for cure was sufficient given the months which the Trust had had to review Medirest's challenges and the discussions which had already taken place between the parties. The Trust well understood the issues but did not remedy the breaches. Certainly it repaid the moneys which had been deducted from the service payments in July and August but it failed to withdraw its calculations, even when Medirest extended time. In the letter of 9 September 2009 the Trust offered only to review and amend the information; it also asserted that it was entitled to make unilateral deductions. It is in no way surprising that Medirest decided to issue a one month notice of termination on 10 September 2009.
102. As explained earlier in the judgment I am in no doubt that the Trust was in breach of contract in calculating the deductions, in making demands for payment on the back of them, in maintaining the calculations and demands well after they should have realised that there was no justification for them and in failing to respond to Medirest's overtures. To my mind those breaches of contract were material, within the terms of clause 28.4 of the contract. Materiality is to be judged objectively by reference to all the facts: Fitzroy House Ltd v Financial Times Ltd [2006] EWCA Civ 329; [2006] 1 WLR 3207, [24]. In the course of his judgment in that case Sir Andrew Morritt C said: "The words "substantial" and "material", depending on the context, are interchangeable": [36]. In Phoenix Media Ltd v Cobweb Information, unreported, 16 May 2000; 2004 WL 147 6680 Neuberger J said:

"Materiality involves considering the following: the actual breaches, the consequence of the breaches to [the innocent party]; [the guilty party's] explanation for the breaches; the breaches in the context of TEL Agreement; the consequences of holding TEL Agreement determined and the consequences of holding TEL Agreement continues."

Unsurprisingly that passage has been approved in subsequent decisions: Gallagher International Ltd v Tias Enterprises Ltd [2008] EWHC 804 (Comm), [764]; Crosstown Music Company LLC v Rive Droite Music Ltd [2009] EWHC 600 (Ch) at [99]; on appeal [2012] Ch 68.

103. Here the breaches in their context were substantial. I accept Medirest's submissions that it is difficult to imagine, in practice, behaviour more likely to result in a breakdown in the relationship with Medirest than that which the Trust adopted. The Trust acted in a manner calculated, at least objectively, to impose the largest possible service failure points irrespective of the lack of justification. I also accept Medirest's submissions that the commercial effects of the breach were substantial. The value attributable to the service failure points in August at £711,037, amounted to a very significant part of the contract turnover and made it commercially unworkable from Medirest's perspective. There was no sign that the Trust did not intend to continue with excessive and unjustifiable calculations. The Trust's refusal to back down on those claims when Medirest reasonably disputed them went to the heart of the commercial viability of the contract and gravely damaged the necessary working relationship between the parties. It was impossible for Medirest to continue to work with a contracting party which continued to make calculations of this nature. The existence of the calculations created substantial ongoing uncertainty as to whether Medirest would be paid for its services. As explained earlier in the judgment the making and sustaining of these claims by the Trust constituted a failure to comply with its obligations under clause 3.5 and a misuse of its contractual powers. That behaviour persisted, in the face of Medirest's 28 August letter. The Trust remained in material breach of contract which was not remedied.

Repudiatory breach

104. Medirest contends that not only was the Trust in material breach of contract under clause 28.4 but its conduct amounted to a repudiatory breach of contract. Although Medirest did not terminate for repudiatory breach, repudiation is still relevant. If Medirest was entitled to terminate the contract for repudiatory breach the Trust would be entitled to only nominal damages for post-termination losses.
105. There were, as I have held, material breaches of contract by the Trust. However, a material breach is not necessarily repudiatory: Dalkia Utilities Services plc v Celtech International Ltd [2006] EWHC 63 (Comm); [2006] 1 Lloyd's Rep 599; Gallagher International Ltd v Tias Enterprises Ltd [2008] EWHC 804 (Comm). It is trite law that a party is not in repudiatory breach of contract unless it breaches an intermediate term of the contract in a sufficiently serious manner, one which goes to the root of the contract: Chitty on Contracts, 30^th ed, para 24-040. In a well known passage in Hong Kong Fir Shipping Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 Diplock L.J (at p.66) stated the test in the following terms:

"[D]oes the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?"

106. The Trust contends that its conduct of the contract was not repudiatory. None of the matters about which Medirest complains had the effect of depriving it of substantially the whole benefit for which it had contracted. In an important sense the benefit of the contract to Medirest was payment of the service charge. If the agreed deductions and unilateral deductions are put to one side the Trust paid Medirest the amounts to which it was contractually entitled. Even if the Trust had deducted some £500,000, or even £700,000, and refused to repay it, this would not have deprived Medirest of "substantially the whole benefit" of the contract. In fact the unilateral deductions were repaid before Medirest issued its termination letter of 10 September 2009, and the Trust issued its radically revised September schedule a fortnight later, before Medirest's termination period expired.
107. In my view the Trust's material breaches of contract, including the obligation to cooperate in good faith, constituted a serious and continuing breach of its critical obligations, which went to the very heart of what was meant to be a long term contract requiring cooperation. As Medirest put it in argument, the sword of Damocles remained suspended over it. At any time the Trust might start to enforce its claimed deductions, or levy yet further irrational deductions. After many months of complaints it had refused to accept that its approach was fundamentally flawed. So there was a repudiatory breach.
108. In my view, however, repudiatory breach was abated by the September schedule. While it included a number of excessive and absurd items, it greatly reduced the amounts claimed. No doubt as a result of legal advice the Trust also entered into a more sensible dialogue with Medirest, although negotiations ultimately broke down. This revised approach meant that Medirest was no longer being deprived of substantially the whole benefit the contract intended to confer. By then, however, it was too late. Medirest had terminated the contract for material breach as it was entitled to do, and all that needed to occur was the effluxion of the requisite period for the contract to end.

V ANCILLARY CLAIMS

109. There are a number of ancillary claims. Some of them are small and should be capable of agreement between the parties. None involve issues of principle. In the absence of agreement which I would hope occurs, they can be determined by a Master. The ancillary claims involving matters of principle are as follows.

Equipment

110. Medirest has claimed an amount in respect of equipment transferred to the Trust's ownership upon termination of the contract. Some of that equipment was transferred from the Trust to Medirest at the outset of the contact, but some was purchased by Medirest for the purposes of catering (e.g. refrigerators, microwaves). The Trust contends that that equipment owned by Medirest was forfeited to it on termination without any need for payment.
111. Clause 17 of the Conditions of Contract required Medirest to provide equipment in connection with the contract but also that, at the outset, existing equipment was to be valued and transferred to Medirest's ownership free of charge. (In fact Medirest paid the Trust £50,000 for the equipment, but this does not affect the principle). On conclusion of the contract all equipment, whether transferred or purchased by Medirest, was to be re-valued and transferred to the Trust. The equipment was to be transferred free of charge, save that there was to be an adjustment from Medirest's final payment in respect of any increase or decrease in the value of equipment: clause 17.16. So in the ordinary course of events the Trust would pay the increase in the value of the equipment.
112. However, the Trust points to clause 28.5, under which Medirest agreed that "upon termination for any reason (under clause 28.1 or otherwise) or expiry of the contract" it was not entitled to make a claim against the Trust in relation to "costs incurred in acquiring the equipment". The Trust submits that clause 17.16 did not apply in this case due to the operation of clause 28.5 and that clause 28.5 was clear: it barred any claim by Medirest for the costs incurred in acquiring equipment where the contract had been prematurely terminated for any reason. Its argument is that clause 28.5, read together with clause 17.16, drew an important distinction between termination of the contract under clause 28.1 and termination, otherwise. The parties drew that distinction by the very deliberate use of the word "conclusion" in clause 17.16 to denote expressly the determination of the contract at the end of its natural term. The Trust also refer to clause 29.4, which dealt with the position of the equipment on a termination and contained no mention of the Trust having to pay Medirest in respect of the equipment on termination.
113. In my view the difficulty with the Trust's argument is that clause 28.5 applied "upon termination … or expiry". This on its face covered any form of termination – expiry, termination for the Trust's breach and termination for Medirest's breach. If the Trust's construction were right, clause 17.16 would have been rendered redundant. As for clause 28.5, my interpretation is that it was a general provision providing that, on the contract ending under any circumstances, Medirest could not claim additional payment on the basis that it had not fully recouped the costs incurred in performing the contract, whether providing services or acquiring equipment. That construction sits with clause 17.16, which required the Trust to pay the actual value of equipment being transferred into its ownership. It also avoids clause 28.5 being construed as a forfeiture clause, which quite apart from anything else would not make sense if the contract had been terminated by Medirest for the Trust's breach. There is no mileage for the Trust in clause 29.4, which simply covered the transfer of ownership and did not purport to exclude the obligation to pay on termination under clause 17.16. Thus my conclusion is that the Trust is liable to pay the value of the equipment transferred, to be assessed.

The additional wards

114. Clause 2.3 of the Specific Service Specification stated that the catering service applied "to all areas of the Location". As we have seen "Location" was defined at clause 1 of the Conditions of Contract as the location for the provision of the services as set out in the contract or as otherwise agreed in writing between the Trust or any Beneficiary and Medirest. Clause 1.1 of Document No 2, the General Information, described how the hospital services provided by the Trust were then split across the two main hospital sites, and that the "current layout of these sites ("the Location") are contained in the drawings at Appendix 1". Those drawings covered all wards. There then followed a list of wards – "inpatient facilities at the Location" – which did not include wards B11, B17, B18, B19, J5, J6 and the renal unit ("the additional wards"). Clause 15.1 permitted the Trust to increase or reduce the number of Locations under the contract, subject to a suitable agreement between the Parties on price.
115. Medirest contends that on a proper interpretation of the contract it is entitled to be reimbursed for its costs of catering in the additional wards. The relevant wards are B11, B17, B18, J5 and the renal unit, since the Trust has admitted liability to pay an additional fee for wards J6 and B19 (on the basis that they were operated by the Mental Health Trust and the Primary Care Trust respectively). However, the Trust submits that Medirest's only remedy when asked to cater a new ward was the volume adjustment mechanism. The significance of that is that the prices contained in that adjustment mechanism allowed only for food, not for other stepped fixed costs such as labour. Thus, whilst supplying an extra meal to a patient on an existing ward only incurred the additional costs of the meal, £3.14 for an inpatient, supplying meals for an additional ward required Medirest to maintain additional equipment and to staff the ward. For those wards Medirest claims a suitable price on a restitutionary basis.
116. There was never any agreement to vary the contract in relation to the additional wards nor did the Trust accept that it had to pay additional sums for those wards, apart from the volume adjustment. So whether Medirest is entitled to be paid for additional wards, apart from wards J6 and B19, turns on a short point on the construction of the contract. In my view the matter is clear. In Document No 2 the Location consisted of the two identified sites, the plans appended to the General Information showing all wards. There was a reference to the current layout of the Location and clause 1.1 summarised the impatient facilities "at the Location", listing details of the wards that were then in use. But the latter cannot narrow the definition of the Location. As is clear from the preceding sentence, the list was a list of current wards and the Trust cannot be thought to be warranting that the same wards, with the same bed numbers, would be used for the same purpose throughout the 7 or 10 year term of the contract. The list of wards was a list of the inpatient facilities "at the Location" and did not cover the non-patient aspects of the catering (e.g. the restaurant). Clause 1.1 did not say that the list of wards was the Location. The context of clause 1.1 was the PFI, described elsewhere in Document No 2. It anticipated a substantial change in the layout of the hospital post-PFI. Thus clause 2.4.6 of Document No 2, summarised the planned future configuration of inpatient beds in the new facilities and the retained estate.
117. In my view this is the commercially sensible result. Over the course of a long term contract there were bound to be changes to the wards. That was the bargain Medirest struck, however unsatisfactory it may look with hindsight. It was obliged to provide the catering service to any wards at the Location and any change in volume caused by the opening, closing or changing of wards was to be compensated through the volume adjustment payments made in accordance with Part E of the Payment Mechanism. Thus in my judgment in respect of the additional wards Medirest is only entitled to payment for wards J6 and B19.

Deductions: outstanding matters

118. The Trust's outstanding claims in relation to deductions should be resolved in accordance with the following principles. The parties have liberty to apply should matters not be covered by these principles:

(a) There are no rectification periods in this contract.

(b) Under clause 5.8 the Trust could award service failure points leading to deductions, but service failure points "which are agreed or determined to have been awarded in circumstances where such award was not justified should be deemed to have been cancelled". Thus if in its June or September spreadsheets or otherwise (e.g. at trial) the Trust accepted lower service failure points that is the end of the matter.

(c) If the Trust issued an Outstanding Issues Log, once that no longer referred to a matter the Trust could not award any further service failure point in relation to it. The only additional service failure in that situation would be a single failure to report a remedy.

(d) All cleaning issues on any ward on an inspection constituted a single performance failure. This follows because SP10 required "areas" to be cleaned. The Trust contends that each dirty cooker, toaster or so on in a ward was an "area". That is an artificial reading of the term. A failure to clean an area, typically a ward kitchen, constituted a single breach.

(e) GP05 and GP011 contained the obligation to submit separate monthly service managing and monitoring reports; these were separate from the reporting of performance failures and their remedy. Although Medirest combined both reports in the one document, a failure to produce the document in any month constituted a breach of both provisions.

(f) SP09 obliged Medirest to ensure that all food issued to a patient had been kept at the requisite temperature at all times, including storage prior to preparation, during cooking, during transfer and at the point of service. Clause 5.3 of the Specific Service Specification incorporated the "Industry Guide to Good Hygiene Practice: Catering Guide", which required that chilled food "must be kept at 8^oC or cooler" and that "it is good practice to set fridges at a target food temperature of 5^oC to allow a margin of error." The Trust's "Food Hygiene Policy" referred to an acceptable temperature for chilled food of 5^oc. Compliance with policies was generally required by clause 2.1.4 of the Conditions of Contract. In my view the contractual requirement was thus for refrigerators to be kept below a maximum temperature of 5^oc, and Medirest was obliged to keep the refrigerators at or below that temperature. If the temperature of a refrigerator was not recorded when it should have been that failure, without more, was a failure to carry out proper procedures.

VI CONCLUSION

119. Because of the breaches of contract by the Trust, in particular its failure to cooperate in good faith with Medirest and the abuse of its contractual powers, Medirest is correct in its claim that it was entitled to terminate the contract on 10 September when it sent its one month notice of termination. There had been material breaches which fell squarely within the termination clause. Until the September schedule, and the more emollient approach the Trust adopted around that time, Medirest would also have been entitled to terminate the contract for repudiatory breach, although it did not seek to do so. The Trust was also entitled to terminate the contract when it did so on 8 October 2009 because Medirest had accumulated the requisite number of service failure points within the relevant period. The Trust's notice expired on 23 October 2009. Medirest's notice of termination had been extended to provide for termination on 27 October. Both parties sensibly agreed to the common termination date of 23 October, without prejudice to their dispute. Since the Trust's notice was the first to expire, it was that notice which was effective in bringing the contract to an end.
120. Because both parties were entitled to terminate the contract neither can succeed in their substantial claims for post termination losses. Medirest is entitled to other sums, some of which the Trust accepts in principle and some of which flow from the judgment. The Trust can claim for its losses for the short period between 23 and 27 October since its termination brought the contract to an end slightly earlier than Medirest's termination. Given the amounts already expended on this case I very much hope that these matters can be quickly resolved by negotiation between the parties, without further resort to the court.