Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC)

[2015] EWHC 1969 (TCC)

Case No HT-2015-000048

IN THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

Venue Royal Courts of Justice, Rolls Building, 7 Rolls Buildings

Date 14 July 2015

London, EC4A 1NL

Before

MR. JUSTICE EDWARDS-STUART

Between

Portsmouth City CouncilClaimant

Ensign Highways LtdDefendant

Peter Fraser Esq, QC and David Johnson Esq

(instructed by Bevan Brittan LLP) for Claimant

Sean Brannigan Esq, QC and Richard Osborne Esq

(instructed by Dentons UKMEA LLP) for Defendant

Hearing Hearing dates: 19 th and 20 th May 2015

Judgment

Mr. Justice Edwards-Stuart:

Introduction

[1]In this action the claimant (“PCC”) seeks declarations in relation to the performance of certain of its obligations under a long term PFI contract (“the Agreement”) made with the defendant (“Ensign”) on 30 July 2004. The dispute is about the manner of awarding Service Points by PCC for breaches by Ensign of its obligations under the Agreement. Ensign is a special purpose vehicle comprising a joint venture between Colas Ltd and Colas SA (its parent). Colas Ltd (“Colas”) was Ensign’s subcontractor for the performance of the work.

[2]The Agreement concerns the long term rehabilitation, maintenance and operation of PCC’s highway network. It was one of the first of its kind in the country. The first five years of the project were known as a Core Investment Period, during which Ensign was required to bring the highway infrastructure up to a defined standard. This it did - at a cost of some £58 million. During the remaining 20 years of the life of the Agreement Ensign was to be responsible for the maintenance and cyclic renewal, where appropriate, of the highway network. Ensign hoped to recoup its initial investment through the payments to which it would be entitled during the term of the contract.

[3]Following the Core Investment Period PCC claimed that its highway network was probably the best in the United Kingdom and during the first few years the project appeared to be a great success. Indeed, between 2006 and 2010 it won several awards.

[4]The Agreement incorporated a regime for awarding Service Points for breaches by Ensign of its obligations under the Agreement. In fact, there are two limbs to the regime: one in respect of Services which comprise Core Service Requirements, the other in respect of other Services. The matters in dispute that are the subject of this judgment concern the latter. Schedule 17 to the Agreement contained a table which set out a large number of Default Events for which Service Points could be awarded and, against each Default Event, a “Maximum Event Value”. The Maximum Event Value for each Default Event originally The Schedule was revised in December 2008 to reduce the maximum figure from 10 to 5 in the circumstances described in paragraph 23 below. consisted of a single figure between 1 and 10. It is common ground that, until about December 2013, PCC treated the figures for the Maximum Event Value as the upper limit of a range. Accordingly, where the Maximum Event Value was greater than 1, the number of Service Points awarded would depend on PCC’s view of the gravity of the breach.

[5]PCC assessed and awarded Service Points on a monthly basis and, initially, the system was operated in a manner that seemed to be regarded as satisfactory by both parties.

[6]But after a few years cuts in central government funding to local authorities began to take their toll and in 2012 PCC began to form the view that if the Agreement continued to be operated in the same manner for the remainder of its term it would become unaffordable. In December 2013 PCC engaged a consultant, a Mr. Jayasundara, to negotiate financial concessions from Ensign and its funders. He apparently took the view that the Agreement was a “pretty awful contract” from PCC’s point of view. Understandably, PCC did not wish to pay the £140 million which it calculated it would have to pay Ensign in order to terminate the contract.

[7]According to Ensign’s skeleton argument, which on this aspect I did not understand to be seriously challenged, at Mr. Jayasundara’s suggestion PCC embarked on a strategy of awarding Ensign large amounts of Service Points in order to force it to accede to PCC’s commercial demands in a renegotiation of the Agreement. This involved, amongst other things, awarding the maximum amount of Service Points for every default, refusing to communicate with Ensign in relation to breaches, finding breaches in areas which Ensign might find hard to remedy and storing up Service Points over several months so that Ensign could be “ambushed” with a large award of Service Points at one fell swoop.

[8]Unsurprisingly, Ensign was very disturbed at these developments and, on 20 June 2014, it notified PCC that it intended to refer the dispute about the award of Service Points to Expert Determination in accordance with the terms of the Agreement. Rosemary Jackson QC was appointed Expert and she received written submissions and heard evidence from four representatives of PCC who were tendered for cross examination. On 6 February 2015 she issued a detailed and careful Determination in which she concluded, in fairly trenchant terms, that PCC had acted in bad faith, without mutual co-operation and unfairly. However, I should note also that Miss Jackson did not conclude that Ensign’s performance was always as it should have been: her conclusion was that in general it was delivering the required service but that the Agreement did not really provide any means of achieving long-term improvements. In addition, it seems that there was a view within PCC that the performance standards required under the Agreement were unnecessarily high, and that it was therefore an unnecessary luxury. Mr. Jayasundara himself had a particular fixation that Ensign had not invested as much as it should have done during the Core Investment Period.

[9]For the purposes of this judgment, it is not necessary to say any more about the Expert Determination at this stage, save to observe that in its submissions at this hearing Ensign relied heavily on some of the evidence that was given to the Expert. Ensign’s justification for this, which was both ingenious and plausible, was that this was evidence of the commercial circumstances that lay behind the Agreement. It submitted that instead of the court, a tribunal which cannot be expected to have any experience of operating a contract such as this, having to rely on its own judgment as to what amounted to commercial common sense, in this case the court had before it a body of evidence which showed, from a practical and commercial point of view, what was required to make the contract work (Day 2/63-64). Ensign submitted also that the court could rely on this evidence with some confidence, because it came, not from Ensign, but from employees of PCC. I will return to this submission later in this judgment.

[10]At the hearing PCC was represented by Mr. Peter Fraser QC and Mr. David Johnson, instructed by Bevan Brittan LLP, and Ensign was represented by Mr. Sean Brannigan QC and Mr. Richard Osborne, instructed by Dentons UKMEA LLP.

The contract in outline

[11]The Agreement is dated 30 July 2004. It is for a 25 year term. It is, as one would expect, a complex document and it contains over 60 sections. The first two Recitals are as follows:

“A PCC’s objective is to provide a highway network which is safe affordable and facilitates the economic development of Portsmouth in a manner consistent with its other wider policies. B PCC desires to achieve best value from the existing highway infrastructure in Portsmouth.”

B PCC desires to achieve best value from the existing highway infrastructure in Portsmouth.”

[12]PCC is under the duty imposed by section 3 of the Local Government Act 1999, known as the Best Value Duty, which requires it to:

“... make arrangements to secure continuous improvement in the way in which its functions are exercised, having regard to a combination of economy, efficiency and effectiveness.”

[13]The definition of Routine Maintenance in the Agreement refers to “… work which is short-term or cyclic in nature and necessary to keep the Project Facilities in good and safe working order”. There follows a long list, as an indicative guide, of the types of work that can be classed as routine maintenance. These include everything from maintaining safety and other fencing to vegetation management and the repair or replacement of tiling and plaques in subways, not to mention the more obvious requirements such as surfacing roads and maintaining kerbs.

[14]The obligation of Ensign under the Agreement is to provide and finance the services required under the Agreement for the duration of the Contract Period, a period which ends on 31 March 2030.

[15]Ensign’s services have to be provided in accordance with the Service Requirements and, amongst other things, in a manner that does not detract from the image and reputation of PCC as a highway and local authority (clause 3.4.5).

[16]Clause 24, the provisions of which are set out in more detail below, provides a regime for the award of Service Points. By clause24.1.1 Ensign was under an obligation to notify PCC of any breach of its obligations under the Agreement as soon as practicable after becoming aware of it. Clause

24.1.2 entitles PCC to serve a notice requiring Ensign to remedy any breach which is capable of remedy within a stated period. If Ensign fails to perform any of its obligations under the Agreement or if a breach has not been remedied within the period required by a notice issued under clause 24.1.2, PCC may award Service Points against Ensign. The Service Points are to be “calculated” by reference to Schedule 17 to the Agreement.

[17]If 150 or more Service Points are awarded in any 12 month period, PCC may issue a warning notice to Ensign. If 200 or more Service Points are awarded in a 12 month period, PCC is entitled to increase its level of monitoring of Ensign at Ensign’s expense. At 250 Service Points or more in a twelve-month period (or the issue of four warning notices within a 5 year period), PCC has the right to terminate the Agreement with immediate effect.

[18]In addition, under a Facility Agreement for the project, which gave Ensign funding up to £70 million from a consortium of banks, the award of 225 Service Points in any 12 month period was an Event of Default which may lead to the loan becoming immediately repayable, or to all of Ensign’s rights and remedies under the Agreement being assigned to the banks. Thus the issue of a large number of Service Points can have grave consequences for Ensign. It has been suggested by Ensign that one of Mr. Jayasundara’s motives was to create a situation which enabled PCC to engage in direct negotiation with Ensign’s funders.

[19]A curious feature of the Service Points regime is that it contains no timetable or time limits for the issue of Service Points. During the course of the contract up to December 2013 it was PCC’s practice to issue Service Points at monthly intervals. However, PCC suspended this practice in December 2013 and then, in mid-April 2014, issued Ensign with 4½ months’ worth of Service Points. In addition, at about the same time PCC adopted the practice of awarding Service Points by reference to the figure shown as the maximum amount in Schedule 17, instead of continuing the previous practice of making the amount of Service Points dependent on the gravity of the breach up to the maximum figure shown in the schedule.

[20]An interesting summary of the Service Points regime is to be found in PCC’s Best Value Review dated 10 July 2012, a document to which I was referred during the course of submissions. It describes the process for awarding Service Points as follows:

“Incidents on the highway are reported by council staff, members of the public or councillors either by phone call, letter or email to the City Helpdesk. The incident is then logged on the Public Enquiry Manager (PEM) database and sent to the contractor on a real time basis to respond to the various incidents in accordance with the contract, within the required timescales. Different incidents will have different requirements and timescales. If the contractor does not respond in accordance with the contract these are then deemed as ‘failures to’ and service points can be awarded. Service points are monitored on a schedule which is sent to the contractor on a monthly basis. They respond giving their comments within two weeks. The monthly schedule is then produced at the council’s monthly contract review meeting where representatives from across the council meet to discuss, review and agree on whether the service points should be awarded or not. Each service point has a maximum event value ranging from one to five which can be adjusted to reflect the severity of the failure. Once the decision has been made the schedule and an official letter is sent to the contractor advising of the award and the reasons. At present there is no formal meeting with the contractor to agree the service points awarded. A graph report is produced monthly at the progress meeting and quarterly at the network board meeting. In addition the graph report is sent to Atkins (lenders technical advisors). Appendix 5 shows the service points awarded from the commencement of the contract. In addition to the process above where the contractor gets service points for highway related incidents, the council can also award them for things like failing to produce information/reports or for failing to respond to a resident or even a PEM.”

Clause 24 and Schedule 17

[21]I now turn to the provisions relating to the award of Service Points in more detail. Clause 24 of the Agreement provides as follows: “24.1.1 [Ensign] shall notify PCC’s Representative of the occurrence of any matters specified in Schedule 17 [Service Points] and any other breach of its obligations under this Agreement as soon as practicable after it becomes aware of such matter but in any case within 7 days of such matter becoming apparent to [Ensign] … 24.1.2 If at any time PCC’s Representative is reasonably of the opinion that [Ensign] has failed to perform any of its obligations under this Agreement ... and such failure is capable of remedy, then PCC’s Representative may serve a notice on [Ensign] requiring [Ensign] (at its own cost and expense) to remedy such failure ... within a reasonable period (the Remedial Period) provided always that no notice may be served in accordance with this Clause in relation to a breach of a Core Service Requirement…24.2.1 If at any time:

(a) any Report indicates or PCC’s Representative is notified or otherwise becomes aware that [Ensign] has failed to perform any of its obligations under this Agreement;

(b) PCC’s Representative serves a notice under Clause 24.1.2 and [Ensign] fails to remedy the failure within the Remedial Period; or

(c) ... then PCC’s Representative may (without prejudice to any other right or remedy available to PCC) by notice to [Ensign] award points (herein called Service Points) calculated by reference to the table set out in Schedule 17 [Service Points] ...

24.2.2 The Parties agree that: (a) Schedule 17 [Service Points] provides a list of examples of matters which may attract Service Points but is only by way of illustration of the matters for which Service Points may be awarded and the severity attributed to such defaults and in no way restricts PCC’s Representative’s right to award Service Points for other failures by [Ensign] to perform its obligations under this Agreement … (b) where the number of Service Points attributable to a failure or default is not identified in Schedule 17 [Service Points] the level of points awarded shall be decided by the Network Board and as a guide, the level of points should correspond to the level set, under Schedule 17 for breaches of equivalent seriousness to the breach under review; (c) where a single event is a breach of more than one obligation under this Agreement then the maximum number of Service Points awarded shall be that relating to the most serious of the breaches only (and no Service Points shall be awarded for the lesser breaches) provided always that this will not in any way limit PCC’s Representative’s ability to award further Service Points if there are failures to comply with obligations related to dealing with the consequence of any such single event;

(d) subject to [Ensign] acting in good faith, for a period of 6 months after the Commencement Date Service Points will be awarded (if at all) at 50% of the value set out in Schedule 17 [Service Points].

24.2.3 [Ensign] may within 28 days of receipt of any notice pursuant to Clause 24.1.2 or 24.2.1 object to the issue of the notice (in the case of Clause 24.1.2), or to the award of Service Points or, where Service Points have been awarded in respect of a matter which is not set out in Schedule 17 [Service Points], to the number of such Service Points. If PCC’s Representative and [Ensign] are unable to reach agreement on any such matter within 14 days of subject objection by [Ensign], either may refer the Dispute for resolution under the Disputes Resolution Procedure. In respect of any Dispute as to the number of Service Points to be awarded pursuant to Clause 24.2.2, the issue for decision shall be how many Service Points should be awarded in comparison with the number of Service Points set out in Schedule 17 [Service Points] for defaults of equivalent severity.” (My emphasis) (a) any Report indicates or PCC’s Representative is notified or otherwise becomes aware that [Ensign] has failed to perform any of its obligations under this Agreement; (b) PCC’s Representative serves a notice under Clause 24.1.2 and [Ensign] fails to remedy the failure within the Remedial Period; or (c) ... then PCC’s Representative may (without prejudice to any other right or remedy available to PCC) by notice to [Ensign] award points (herein called Service Points) calculated by reference to the table set out in Schedule 17 [Service Points] ... (a) Schedule 17 [Service Points] provides a list of examples of matters which may attract Service Points but is only by way of illustration of the matters for which Service Points may be awarded and the severity attributed to such defaults and in no way restricts PCC’s Representative’s right to award Service Points for other failures by [Ensign] to perform its obligations under this Agreement … (b) where the number of Service Points attributable to a failure or default is not identified in Schedule 17 [Service Points] the level of points awarded shall be decided by the Network Board and as a guide, the level of points should correspond to the level set, under Schedule 17 for breaches of equivalent seriousness to the breach under review; (c) where a single event is a breach of more than one obligation under this Agreement then the maximum number of Service Points awarded shall be that relating to the most serious of the breaches only (and no Service Points shall be awarded for the lesser breaches) provided always that this will not in any way limit PCC’s Representative’s ability to award further Service Points if there are failures to comply with obligations related to dealing with the consequence of any such single event; (d) subject to [Ensign] acting in good faith, for a period of 6 months after the Commencement Date Service Points will be awarded (if at all) at 50% of the value set out in Schedule 17 [Service Points].

[22]Schedule 17 consisted of a table, of which the first four types of default event, together with the headings, are shown below in their original form. SCHEDULE 17 SERVICE POINTS Where PCC intends to award Service points for a Default Event other than those listed below such intention shall be first made known to the Network Board. Default Event Maximum Event Value Traffic Management Failure to provide a schedule of annual lane closures in accordance with Clause 12.3.1 3 Failure to remove or modify any lane closures in accordance with Clause 12.3.3 2 Failure to remove any traffic cones in accordance with Clause 12.3.8 1 Failure to provide information for the purposes of any public information service in accordance with Clause 12.4 1 Signing and Communications Direct any sign on the Network without compliance with Clause13.1 3 Failure to install any notification sign in accordance with Clause

13.2 2 Failure to place or remove any traffic sign as directed by the PCC in accordance with Clause

13.3 1 Fossils and Antiquities Failure to provide access for the Archaeologist in accordance with Clause 15.1.1 10 Failure to prevent the removal or damage of any Fossils and Antiquities in accordance with Clause 15.3 10 Failure to inform the PCC of the discovery of any Fossils and Antiquities in accordance with Clause 15.3 10 Insurance Failure to submit details of any Insurance or changed insurance in accordance with Clause 17.1.5 5 Failure to furnish any insurance policy (or a copy thereof certified in a manner acceptable to the PCC) in accordance with Clause 17.1.5 1 Failure to provide evidence of compliance with Clause 17.1.5 requested by the project 1 Failure to obtain and forward to the PCC renewal certificates in accordance with Clause 17.1.7 1 Failure to allow inspection of the register of claims and incidents 3 SCHEDULE 17

SERVICE POINTS

[23]The Schedule was amended by a deed of variation to the contract dated 22 December 2008. To the text immediately below the title was added the words:

“This list is not exhaustive”

. The headings “Default Event” and “Maximum Event Value” remained unchanged, but an additional column was inserted to the left of the table in order to give each event a number. Various Default Events were added, headings were changed and the figures for the points in the column headed Maximum Event Value were reduced, so that the highest number of points for any Default Event became 5 instead of 10.

[24]The issue between the parties that arises out of Schedule 17 is whether each figure given in the column headed Maximum Event Value is a maximum figure in a range, or is a fixed “tariff” which must be taken for a particular Default Event irrespective of its gravity. If there is a range, there was some debate as to whether the bottom figure in the range is 0 or 1.

Clause 44 and the duty of good faith

[25]Clause 44 of the Agreement is concerned with Best Value. Clause 41.1.1 provides:

“[Ensign] acknowledges that: (a) PCC is subject to the Best Value Duty; and (b) the provisions of this Clause 44 [Best Value] are intended to assist PCC in discharging its Best Value Duty in relation to the Service (c) The provisions of this Clause 44.1 [PCC’s Best Value Duty] shall apply in respect of the obligations of [Ensign] and PCC concerning the Best Value Duty and the 1999 Act generally”

And, by clause 44.1.2:

“[Ensign] shall, throughout the Contract Period, but only to the extent of its obligations in this Contract, make arrangements to secure continuous improvement in the way in which the Service is provided, having regard to a combination of economy, efficiency and effectiveness.”

[26]Clause 44.2.1 provides:

“If, in PCC’s reasonable opinion, the provision, performance or delivery of the Service (or any part of the Service) may be more effective, efficient and economic having regard to the Annual Service Report, and the Best Value Duty, then PCC may serve a written notice upon [Ensign] (a Best Value Service Change Notice) stating the nature and timing of the changes to the provision, performance or delivery of the Service (or the relevant part of the Service) which PCC desires.”

[27]Clause 44.3 provides for Best Value Reviews. These are to be held once every five years. Under the heading “Liaison and Partnering”, clause 44.4 provides as follows:

“44.4.1 PCC and [Ensign] shall deal fairly, in good faith and in mutual co-operation with one another and with Interested Parties. 44.4.2 PCC and [Ensign] shall each take the respective steps necessary to establish and maintain the Network Board. Such steps shall include the following: (a) PCC shall appoint and keep appointed two representatives of PCC to the Network Board, such representatives to be PCC’s City Engineer (or such other person of similar stature as is nominated by PCC) and PCC’s Representative (or a nominee of PCC’s Representative having equivalent authority to PCC’s Representative); (b) PCC shall appoint and use reasonable endeavours to keep appointed to the Network Board a Partnering Facilitator who shall have been nominated by the Network Board from a list of partnering facilitators provided by PCC, provided that in the absence of consensus on the part of the members of the Network Board with regard to such nomination PCC shall nominate the Partnering Facilitator; and (c) [Ensign] shall appoint and keep appointed two representatives to the Network Board, such representatives to be [Ensign’s] Representative (or a nominee of [Ensign’s] Representative having equivalent authority to [Ensign’s] Representative) and a director of [Ensign] nominated for such purpose by [Ensign] (or a nominee of such director having equivalent authority).” (a) PCC shall appoint and keep appointed two representatives of PCC to the Network Board, such representatives to be PCC’s City Engineer (or such other person of similar stature as is nominated by PCC) and PCC’s Representative (or a nominee of PCC’s Representative having equivalent authority to PCC’s Representative); (b) PCC shall appoint and use reasonable endeavours to keep appointed to the Network Board a Partnering Facilitator who shall have been nominated by the Network Board from a list of partnering facilitators provided by PCC, provided that in the absence of consensus on the part of the members of the Network Board with regard to such nomination PCC shall nominate the Partnering Facilitator; and (c) [Ensign] shall appoint and keep appointed two representatives to the Network Board, such representatives to be [Ensign’s] Representative (or a nominee of [Ensign’s] Representative having equivalent authority to [Ensign’s] Representative) and a director of [Ensign] nominated for such purpose by [Ensign] (or a nominee of such director having equivalent authority).”

[28]As a matter of general interpretation, clause 1.2.1 provides that headings and sub-headings are not to be taken into consideration in the interpretation or construction of the Agreement. Accordingly I must approach the Agreement ignoring the headings to which, for convenience, I have referred above. Nevertheless, I consider that the heading to clause 44, “Best value”, aptly describes the contents of most of that clause, although clause 44.4.2, which is concerned with the Network Board, is rather wider in application because it is also concerned with the day to day running of the project as well as the achievement of Best Value.

[29]As I have mentioned, clause 44.1.1(b) provides specifically that the provisions of clause 44 - as a whole - are intended to assist PCC in discharging its Best Value Duty. Whilst I accept that this does not necessarily mean that the provisions of clause 44 are to have no application to any other parts of the Agreement, it does suggest that the provisions of clause 44 were intended to be concerned principally with the discharge of PCC’s Best Value Duty.

[30]The Best Value Review of July 2012, to which I have already referred, contained the following passages. At page 4:

“During the drafting process of this BVR, the council faces the need to reduce the overall costs of the contract, primarily as a result of the reduction in the council’s cash settlement. During 2012, the council and contractor will begin in-depth discussions with a joint aim to maximise efficiencies and savings within the contract. For this reason, some of the recommendations (e.g. insurance, additional works and third-party revenue limit) have now been taken out of the scope of the BVR and will now be considered as part of the wider in-depth discussions.”

And, at pages 16 and 17:

“The original Schedule 17 service point events and default values tend to be focussed on the process rather than outcome for the end user. As part of the BVR these have been examined and Appendix 4 contains an initial council recommendation both in terms of the number and value of default events which should be negotiated with the contractor. ... The contractor has proposed an alternative set of values which has the effect of reducing the risk assessment back to the existing value. The council and contractor will need to negotiate an agreed set of default events and values which more accurately reflect the end user perception of performance.”

[31]The statements in these passages suggest that the Best Value Review process involves the consideration and possible variation of the terms of the Agreement so as more accurately to reflect and achieve what is described in the last sentence quoted as “… the end user perception of performance”.

The authorities

[32]In their skeleton argument Mr. Fraser and Mr. Johnson summarised the law on the interpretation of contracts in the following terms, at paragraphs 5.11 and 5.12:

“5.11. Lord Hoffmann made clear in ICS that the process of interpretation is such that the meaning of a phrase, clause or provision may not be the same thing as the meaning of its words. The Court should be open to the possibility that the drafted words may not reflect the objectively ascertained intention of the parties and that the parties may therefore have used the wrong words or syntax. The Court should be alive to the fact that parties do not normally make linguistic mistakes, particularly in formal documents such as a contract, but that it is nevertheless possible for something to have gone wrong with the language. At the same time, the Court should not attribute to the parties intentions that they plainly did not have. 5.12. Circumstances may arise where a particular term is credibly open to more than one interpretation. The Supreme Court confirmed in Rainy Sky v Kookmin Bank [2011] 1 WLR 2900 (SCE) at [21] that the correct approach is to start (and finish) by looking for and adopting the interpretation that most accords with commercial common sense. The exercise of identifying the parties’ commercial intention should be carried out from the outset, and is not simply a tool to be deployed once it has first been concluded that the natural meaning of the words produces a result that appears to have been unintended (see [20]). The Court must therefore conclude what interpretation accords with ‘business common sense’.”

[33]Mr. Brannigan expressly accepted that these two paragraphs contained a correct summary of the law. In my view he was right to do so, and I shall do the same. I would add, as Lord Hoffmann has stated more than once See, for example, AG for Belize v Belize Telecom

[2009] 1 WLR 1988

(PC), at [16] and [21]. , that the process of interpretation involves discerning the meaning which the instrument in question would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument was addressed.

[34]PCC relied strongly on a decision of the Court of Appeal in Mid Essex Hospital Services NHS Trust v Compass Group

[2013] BLR 265

, which involved a contract by which the defendant contractor (“Medirest”) was engaged to provide catering and cleaning services over a period of seven years at a hospital in Essex.

[35]Clause 3 of the conditions of contract contained a provision, clause 3.5, which provided as follows:

“The Trust and the contractor will cooperate 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. At all times in the performance of the Services, the contractor will cooperate fully with any other contractors appointed by the Trust or any Beneficiary in connection with other services at the Location.”

[36]Medirest was required to undertake sufficient performance monitoring to demonstrate that each Performance Parameter was achieved. In a table forming part of sub-part B of the specification 60 performance parameters were set out. In respect of each parameter a performance failure was to be classified as “major”, “medium” or “minor”. A further column in the table set out the remedial period which was allowed for each performance failure. Further performance parameters were set out in a similar table in sub-part C of the specification, in which the failures were again classified as “major”, “medium” or “minor”.

[37]Clause 5.8 of the contract included the following provisions:

“... 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.”

[38]At first instance, the judge held that the obligation to “co-operate ... in good faith” applied to the regime relating to performance parameters. In addition, he held that there was an implied term of clause 5.8 that, in exercising this power, the Trust would not act in an arbitrary, capricious or irrational manner.

[39]The Court of Appeal disagreed with both conclusions. In relation to the implied term, the court considered the following authorities: Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The Product Star”) (No 2)

[1993] 1 Lloyd’s Rep 397

; Cantor Fitzgerald International v Horkulak [2004] EWCA Save 1287; Socimer International Bank Limited v Standard Bank London Ltd

[2008] 1 Lloyd’s Rep 558

; JML Direct Ltd v Freestat UK Ltd

[2010] EWCA Civ 34

[40]Jackson LJ cited the following passage from the judgment of Leggatt LJ in The Product Star (No 2), with which the other two members of the court agreed, at page 404, where he said:

“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. That entails a proper consideration of the matter after making any necessary enquiries. To these principles, little is added by the concept of fairness: it does no more than describe the result achieved by their application.”

[41]In JML Direct the defendant operated a satellite television service and the claimant was a provider of television shopping channels. It was agreed that the claimant should have two of its shopping channels on the defendant’s platform and that the defendant would have discretion in the allocation of logical channel numbers. Both the trial judge and the Court of Appeal held that, in exercising its discretion, the defendant was under an implied obligation not to act in an arbitrary, irrational or capricious manner. Moore-Bick LJ, with whom the Master of the Rolls and Toulson LJ agreed, added at paragraph 14:

“… such an obligation is likely to be implicit in any commercial contract under which one party is given the right to make a decision on a matter which effects both parties whose interests are not the same.”

[42]Of these authorities Jackson LJ made the following observations:

“82. In each of the above cases the implied term was intrinsic. The contract would not make sense without it. It would have been absurd in any of those cases to read the contract as permitting the party in question to exercise its discretion in an arbitrary, irrational or capricious manner. By reference to Baroness Hale’s classification in Société Générale, London Branch v Geys [2012] UKSC 63 at paragraph 55, [2013] ICR 117, that implied term falls into the first category. 83. An important feature of the above line of authorities is that in each case the discretion did not involve a simple decision whether or not to exercise an absolute contractual right. The discretion involved making an assessment or choosing from a range of options, taking into account the interests of both parties. In any contract under which one party is permitted to exercise such a discretion, there is an implied term. The precise formulation of that term has been variously expressed in the authorities. In essence, however, it is that the relevant party will not exercise its discretion in an arbitrary, capricious or irrational manner. Such a term is extremely difficult to exclude, although I would not say it is utterly impossible to do so.”

[43]The court held that the specification in conjunction with the Payment Mechanism contained precise rules for determining how many service failure points Medirest had incurred and what deductions were due. It said that this exercise was a matter of calculation to be carried out at the end of each month. It did not involve discretion and there was only one right answer. So, the court held, once the correct figures for service failure points and deductions had been established, the Trust had a discretion. The Trust may “award” the service failure points to Medirest or it may choose not to do so. Likewise the Trust may levy deductions against its monthly payment to Medirest or it may choose not to do so (see clause 5.8 of the conditions).

[44]The court then said this:

“90. Against this background, the question arises whether there is an implied term that the Trust would not act in an arbitrary, capricious or irrational manner in relation to awarding service failure points or making deductions. 91. The discretion which is entrusted to the Trust in relation to service failure points and deductions in the present case is very different from the discretion which existed in the authorities discussed above. The Trust is a public authority delivering a vital service to vulnerable members of the public. It rightly demands high standards from all those with whom it contracts. There may, of course, be circumstances in which the Trust decides to award less than the full amount of service failure points or to deduct less than it is entitled to deduct from a monthly payment. Nevertheless the Trust could not be criticised if it awards the full number of service failure points or if it makes the full amount of any deduction which it is entitled to make. The discretion conferred by clause 5.8 simply permits the Trust to decide whether or not to exercise an absolute contractual right. 92. There is no justification for implying into clause 5.8 a term that the Trust will not act in an arbitrary, irrational or capricious manner. If the Trust awards more than the correct number of service failure points or deducts more than the correct amount from any monthly payment, then that is a breach of the express provisions of clause 5.8. There is no need for any implied term to regulate the operation of clause 5.8.”

[45]In relation to clause 3.5 of the conditions, which Jackson LJ described as containing “… a jumble of different statements, set out in an incoherent order”, the Court of Appeal held that it was to be read as if it were punctuated as follows:

“The Trust and the contractor will cooperate with each other in good faith and will take all reasonable action as is necessary: (1) for the efficient transmission of information and instructions; and (2) to enable the Trust or, as the case may be, any Beneficiary to derive the full benefit of the contract.”

[46]The court therefore considered that the content of the duty to co-operate in good faith was limited by the two stated purposes. Having considered the authorities, and noting in particular that there was no general doctrine of good faith in English contract law, although a duty of good faith is implied by law as an incident of certain categories of contract, the court concluded that in the context of clause 3.5 the obligation on the parties was to “… work together honestly endeavouring to achieve the two stated purposes” (paragraph 112).

[47]In relation to the question of the application of the duty of good faith to the Trust’s conduct in awarding service failure points, the court held that there was no breach of clause 3.5 of the conditions. This was for two reasons: i) There was no finding by the judge that the Trust was acting dishonestly, as opposed to mistakenly applying the provisions of a complicated contract. ii) The deductions were irrelevant to the two stated purposes. In particular, an award of service failure points under clause 5.8 of the conditions was not “… the transmission of information and instructions” within clause 3.5.

[48]However, the court did find, on the facts as found by the judge, that the Trust’s persistence in awarding excessive service failure points throughout the period August 2008 to September 2009 was a breach of the express provisions of clause 5.8.

[49]Lewison LJ, who agreed with the judgment of Jackson LJ, observed, at paragraph 138, that the judge did not find that in deciding to award service failure points the Trust had made an arbitrary or capricious decision. Rather, he said, the judge decided that the absurdity of the Trust’s position was in the number of service failure points that it awarded. At paragraph 146 of his judgment, Lewison J went on to say this:

“It seems to me to be clear that whatever the scope of the duty it can be no more than a duty to co-operate in good faith. My difficulty is to see in what sense the unilateral decision by the Trust to award [service failure points] or to assert a right to levy Deductions (or even the actual levying of Deductions) is something that requires co-operation at all.”

[50]In a short concurring judgment Beatson LJ added a few observations about clause 3.5. He said this:

“152. ... In my judgment, [the judge’s] approach meant that, in determining the scope of the obligations under clause 3.5, he gave insufficient weight to the other provisions of the contract and, to this extent did not take sufficient account of the context of clause 3.5. 153. As awarding excessive service failure points and making excessive deductions from the payments put the Trust in breach of clauses 5.8, 6.3 and 6.5 of the contract, it was not necessary to give clause 3.5 a wide meaning which meant that these matters also constituted a breach of that provision. Absent a wide meaning to clause 3.5 and a broad interpretation of the two stated purposes, awarding excessive service failure points and making excessive deductions from payments were not relevant to the two stated purposes for the reasons given by Jackson LJ at paragraphs 114 and 116 of his judgment. 154. The contract in the present case is a detailed one which makes specific provision for a number of particular eventualities. The specific provisions include clauses 5.8, 6.3 and 6.5. In a situation where a contract makes such specific provision, in my judgment care must be taken not to construe a general and potentially open-ended obligation such as an obligation to ‘co-operate’ or ‘to act in good faith’ as covering the same ground as other, more specific, provisions, lest it cut across those more specific provisions and any limitations in them.”

[51]The judgments in the Mid Essex case do not set out the tables which list the relevant parameters and performance failures and so it is a little difficult to compare them with Schedule 17 to the present Agreement. This difficulty only arises if Ensign is correct in its contention that the points set out in Schedule 17 represent the top of a range rather than a fixed tariff. But considering the documents in this case I would be reluctant to conclude that whether a particular breach warranted an award of, say, 3, rather than 4, Service Points was a question to which there was only one right answer. It seems to me that, in some cases at least, there must be an element of judgement. To that extent, therefore, I consider that the facts of this case differ from those in the Mid Essex case.

The submissions of the parties on the Service Points issue

[52]Mr. Brannigan submits that the words in clause 24.2.1, namely: “PCC’s Representative may (without prejudice to any other right or remedy available to PCC) by notice to [Ensign] award points (herein called Service Points) calculated by reference to the table set out in Schedule 17”, together with the heading “Maximum Event Value” in the schedule itself, shows very clearly that the figures given in Schedule 17 represent the top of the range of points that may be given, at the discretion of PCC’s Representative, for any particular Default Event. He submits that the word “maximum” is a word with a clear meaning: it means the upper limit of a possible or permissible range.

[53]Further, Mr. Brannigan asks rhetorically: if what the PCC’s Representative was required to do was simply to take the figure in Schedule 17 as the number of points attributable to any Default Event, why does clause 24.2.1 use the verb “calculated”? It would have been far more appropriate to say that PCC’s Representative may “… award the points ... shown in the table set out in Schedule 17”.

[54]Mr. Brannigan also makes the obvious point that calculation is different from transcription: it involves some form of mental process, such as taking the number shown in the schedule and doing something with it.

[55]In response to this Mr. Fraser made five points. First, he submitted that Schedule 17 itself sets out the differing severity attributed to each type of default in that the “Maximum Event Value” differed from Default Event to Default Event and thereby constituted a contractually negotiated and agreed assessment of the severity of each default.

[56]Second, he submitted that, since a number of Default Events carried the figure of 1, there was no range and so this pointed to a fixed tariff rather than a maximum figure within a range.

[57]Third, he relied on clause 24.2.2(b), which provided that, where Schedule 17 did not identify the number of points attributable to a particular default, those points were to be set by the Network Board and should “… correspond to the level set, under Schedule 17, for breaches of equivalent seriousness ...” . This, he submitted, supported the proposition that the Default Events had already been assigned a degree of severity, connoted by the number of Service Points shown in the schedule.

[58]Fourth, he relied on clause 24.2.2(d), which I have set out above, which he submits makes it clear that the values shown in Schedule 17 are fixed and not on a sliding scale, since a sliding scale would undermine the purpose of the 50% “discount” by allowing it to be circumvented through awarding a greater number of Service Points up to the maximum.

[59]Fifth, he submitted that clause 24.2.3 contained a further clear support for PCC’s interpretation. This allows Ensign to object to the issue of a notice under clause 24.1.2 or “… to the award of Service Points” (following receipt of a notice issued under clause 24.2.1), or to the “… number of such Service Points” if they have been awarded in respect of a matter which is not set out in Schedule 17. The point made by Mr. Fraser is that there is no reference to making an objection to the number of the Service Points awarded if done by PCC’s Representative, only where the number of Service Points awarded has been decided by the Network Board. This, he says, supports his submission that PCC’s Representative must either award the number of points shown in Schedule 17 or make no award of points at all. By contrast, where the breach is not a Default Event within Schedule 17 there is no value for the points to be awarded and so the Network Board must exercise a judgement in order to arrive at a figure using the values set out in Schedule 17 as a guide.

[60]At first sight, this looks like a powerful point. However, there is a difficulty with the argument which was raised during the course of submissions. In a case where the breach is not a Default Event listed in the schedule, it is PCC’s Representative who makes the determination that there has been a breach, not the Network Board. As Mr. Brannigan pointed out, if clause 24.2.3 is read in the manner for which Mr. Fraser contends, in such a case Ensign can object only to the number of points awarded but not to the determination that there has been a relevant failure or default in the first place. Mr. Fraser’s answer to this, as I understood it, was to say that Ensign could object to the number of Service Points awarded by contending that it should have been nil.

[61]However, it seemed to me that this answer did not sit easily with the last two sentences of clause 24.2.3, which deal with the dispute resolution procedure where Ensign objects to the award of Service Points. The last sentence of the clause provides that in respect of any such dispute as to the number of Service Points awarded pursuant to clause 24.2.2 - that is by the Network Board - the “… issue for decision shall be how many Service Points should be awarded in comparison with the number of Service Points set out in Schedule 17”. This does not suggest that nil is an available answer.

[62]Finally, in relation to the presence of the word “Maximum” in Schedule 17, Mr. Fraser submitted that this was explained by clause 24.2.2(c). He said that this provided a clear indication as to the purpose of the word “Maximum” in Schedule 17. That clause provided that where a single event is a breach of more than one obligation under the contract, the maximum number of Service Points shall be those attributable to the most serious of the breaches as set out in Schedule 17. I agree with Mr. Brannigan that there is nothing whatever in this point. It seems to me that clause 24.2.2(c) makes perfect sense on its own irrespective of whether or not the word “maximum” appears in the schedule.

[63]In addition to his submissions in relation to the true meaning of the words used in the contract and the schedule, Mr. Brannigan relied on two further points in support of Ensign’s interpretation. First, he submitted that it accorded with commercial sense. He submitted that it was understandable that the parties would have wished to retain a degree of flexibility regarding the number of Service Points which were to be imposed in the face of a particular breach. For example, he said that it was easy to see the utility in PCC having the flexibility to punish deliberate failures to notify in respect of major breaches more severely than an inadvertent failure to report a minor breach. He said that it was difficult to see why the parties would have thought such flexibility would not be valuable and/or why they cannot sensibly have meant the word “maximum” to have its normal and commonly understood meaning in order to allow such flexibility.

[64]By way of example he referred to Default Event 13, which is the failure to inform the PCC of the discovery of any Fossils or Antiquities. He said that a contractor may discover some fossils, suspend work and secure the relevant area but, through oversight, fail to inform the PCC Representative of the position “immediately” as opposed to a short time afterwards. If the PCC Representative was properly informed a short time later, nothing on the site having changed in the interim, this could properly be considered a minor breach. If, by contrast, there was a deliberate decision not to inform the PCC Representative of a discovery, this might legitimately be thought to be very serious and warranting a much more substantial award of Service Points.

[65]Mr. Brannigan also referred me to some evidence that was given before the Expert, Rosemary Jackson QC. The purpose of this, he said, was to provide the court with some examples of what commercial common sense meant in practice.

[66]In giving evidence before Miss Jackson, PCC’s Highways PFI Contract Manager, Ms. Tume, said this:

“… so I have worked since day one on the contract, and worked with service points since day one of the contract, so I have seen every single service point that has come through and I think it is quite hard because you cannot put a matrix or a - something in place that will say how you award the number that you do for each event. It is not possible. Because every event is completely different.”

A little later she said this:

“... any health and safety issues I would tend to award a higher number of points. Unfortunately we didn’t have an item under Schedule 17 for health and safety which caused a few problems for that. But I think I would always judge on things like whether - if, for example, it was a pothole that was in a high pedestrianised area that Colas hadn’t fixed, that they had gone outside the timescale, the location, various factors would determine how many I would issue.”

[67]In receiving evidence of this sort there is, of course, the risk that the court may find itself using the mode of performance of the contract as an aid to its construction, which is not permissible. But taking careful heed of that risk, I consider that there is some force in Mr. Brannigan’s submission that this evidence can assist in informing the court about the commercial considerations that may be in play. But, in reality, I am not sure that this evidence adds anything that is not reasonably self-evident from the circumstances already known to the court as set out in the agreed statement of facts. If one considers any infrastructure project of this sort, it is clear that breaches of the service contractor’s duties can vary enormously in severity: a pothole at the end of a little used cul-de-sac is one thing, a pothole in the middle of a major junction is quite another.

[68]Mr. Brannigan had a further point based on the amendments to Schedule 17. When considering those amendments in 2008 the parties certainly considered what should or should not be Default Events to be included in the schedule, and they certainly considered the number of points. However, what they did not do was change the heading of the column in which they were changing the points. One obvious reason for this is that the heading “Maximum Event Value” accurately represented what the parties understood the numbers were: namely, a figure that represented the maximum number of points that could be awarded for the type of breach in question. If this was not the case, submitted Mr. Brannigan, one would have expected them to have deleted the word “Maximum”, but they did not.

[69]When I put this argument to Mr. Fraser during his submissions in reply, I understood him to accept - without agreeing with its conclusion - that this was in principle a legitimate exercise (albeit only in relation to the range point, not in relation to the extent of any implied term). I regard that concession as properly made.

My conclusions on the Service Points issue

[70]As I have already mentioned, it is plain that failures of highway maintenance can take many forms. The examples of the discovery of fossils given by Mr. Brannigan and that of the pothole illustrate the point very well. It does not in my view make commercial sense to have a system which requires the authority to impose the same number of points irrespective of the gravity or duration of the breach. In the absence of any specific indications to the contrary, one would expect the parties to have agreed a system that provided or permitted some flexibility in relation to the number of points to be awarded for any particular breach. As the Supreme Court confirmed in Rainy Sky v Kookmin Bank

[2011] 1 WLR 2900

at [21], the correct approach is to start (and finish) by looking for and adopting the interpretation that most accords with commercial common sense.

[71]I agree that the word “maximum” is a word with a clear meaning - namely, the upper limit of a range. It is therefore an inappropriate word to include in the heading of a column containing numbers if those numbers were intended to be single values, rather than the upper limit of a range. On PCC’s approach, the word simply has to be ignored.

[72]In my view, the use of the word “Maximum” in the heading to the column showing the number of points was not the result of a drafting error but was there for a purpose. That purpose was to permit the PCC Representative, within the range provided for in the schedule, to award an appropriate number of points having regard to the gravity of the breach.

[73]I consider that Mr. Brannigan is right to submit that it is relevant that when considering the amendments to Schedule 17 the parties never deleted the word “Maximum” from the heading to the Service Points column in circumstances where they had - as is not disputed - operated the system for several years on the flexible basis for which Ensign contends. In my view the fact that the heading to the Service Points column remained unchanged in the course of extensive and careful amendments to Schedule 17 as a whole shows very clearly that the parties intended it to be there at a time when they shared a common view as to what it meant.

[74]All these considerations seem to me to be far more compelling than Mr. Fraser’s argument based on clause 24.2.3 to which I have already referred.

[75]However, after further reflection since the hearing of the argument I have come to the conclusion that clause 24.2.3 can be construed in a manner which accords with commercial common sense. In my view the clause is drafted as it is because an important element is the requirement for any objection to the issue of a notice, under either clause 24.1.2 or clause 24.2.1, to be made within 28 days of receipt of the relevant notice. However, where the number of Service Points has to be decided by the Network Board that may well not happen within 28 days of receipt of notice of the decision to award Service Points under clause 24.2.1. Accordingly, where the Network Board decides on the number of Service Points I consider that the clause allows a further 28 days within which to object to that number - it being quite likely that the time for objecting to the issue of the notice of the decision to award Service Points will have already passed. On any view the clause is not happily drafted, but I consider that it can be construed in this way without doing any violence to its language and thereby be given a meaning that accords with commercial common sense and what I consider to have been the true intention of the parties.

[76]I therefore conclude that the Service Point values set out in Schedule 17 are maximum values that can be awarded for a particular breach and are not fixed “tariffs” that are to be applied irrespective of the gravity of the breach in question.

The submissions of the parties on the extent of the duty of good faith

[77]Before addressing the submissions of the parties on this issue, I should mention that there is a related issue which is the question of what, if any, terms are to be implied into clause 24 were I to hold that the duty set out in clause 44.4.1 does not extend to the provisions of clause 24.

[78]Mr. Fraser, understandably, started from the proposition that there exists no general duty of good faith in English law. Further he submitted that the fact that the relationship is described as a partnering agreement or is some similar long-term relationship does not mean that there exists a duty of good faith between the parties. In support of this submission he referred to the decision of Carr J in this court in Fujitsu Services Ltd v IBM United Kingdom Limited [2014] 1 CLC 353 (TCC).

[79]He then points out that there is no provision anywhere in the Agreement to the effect that clause 24.2 is subject to the duty in clause 44.4.1.

[80]Mr. Fraser relies on the decision in the Mid Essex case, the facts of which he says bear a remarkable similarity to those of the present case, and, in particular, to the passage from the judgment of Beatson LJ that I have quoted above. He submits that when the purpose and nature of the Best Value Duty is considered correctly, it can be seen that such a duty requires the incorporation of a good faith and mutual co-operation obligation if it is to operate properly.

[81]On this last point, I agree with Mr. Fraser. It is clear to me that, in the context of this Agreement, PCC could not discharge its Best Value Duty unless it was in a position to negotiate improvements to the Service that might operate to Ensign’s financial detriment in circumstances where Ensign was obliged to discuss such changes in good faith - in other words, by giving proper and careful consideration to PCC’s needs and statutory obligations and balancing those against its own commercial interests. That, it seems to me, is the reason why, at least for the purposes of clause 44, Ensign is required by clause 44.4.1 to deal fairly, in good faith and in mutual co-operation with PCC. Since a duty of good faith is not usually implied into commercial contracts under English law, save in certain particular types of contract, it is necessary to provide for an express duty in appropriate terms. That is what clause 44.4.1 does.

[82]Mr. Fraser points out that there are further express duties of good faith at numerous points throughout the Agreement. The following clauses contain an express duty of good faith in relation to some particular activity: clauses 12.3.12 and 12.4.4 (which impose a duty of good faith so as to ensure that reports of agreed road closure periods give a true and fair view of the position); clause 26.1.4 (which imposes an obligation on PCC to give a “good faith estimate” in relation to the timing of its response to a request for the exercise of a statutory power); clause 32.6.1 (which gives either party the right to dispute, in good faith, any amount specified in an invoice or debit note); and clause 34.3.6 (which requires the parties to negotiate in good faith to agree the basis and method of calculation of any Refinancing Gain).

[83]In addition to this, I observe that there are several clauses that require one or other of the parties to use reasonable endeavours to assist the other or to provide information that the other might reasonably request (see, for example, clauses 17.2.3, 18.1.1, 21.3 and 22.3). Arguably such provisions would not be required if there was an overarching duty to deal with each other fairly, in good faith and in mutual co-operation.

[84]Mr. Fraser submits that Ensign appears to be under a misunderstanding when it submits, as Mr. Fraser says it appears to be doing, that an absence of a good faith obligation entitles a party to act in bad faith. Since I did not understand Mr. Brannigan to pursue any such argument, I need not consider it further.

[85]Mr. Brannigan began by pointing out that this was a long-term project in which the parties were obliged to work closely together over a 25 year period. This would entail Ensign dealing with PCC and its residents (both generally and individually) extensively. In the circumstances he submitted that it was obvious why each of the parties would wish to obtain an assurance from the other that they would deal with each other on the basis of the clause 44.4.1 duties. In this context he relied on the following observations of Leggatt J in Yam Seng Pte Ltd v International Trade Corporation [2013] 1 All ER (Comm) 1321, at [142]:

“English law has traditionally drawn a sharp distinction between certain relationships - such as partnership, trusteeship and other fiduciary relationships - on the one hand, in which the parties owe onerous obligations of disclosure to each other, and other contractual relationships in which no duty of disclosure is supposed to operate. Arguably at least, that dichotomy is too simplistic. While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer term relationship between the parties which they may make a substantial commitment. Such ‘relational’ contracts, as they are sometimes called, may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements. Examples of such relational contracts might include some joint venture agreements, franchise agreements and long term distributorship agreements.”

[86]Mr. Brannigan also relied on the fact that witnesses called by PCC in the adjudication, in particular a Mr. Lavers, the PCC Representative, repeatedly referred to the approach to the project as one of “partnering”. As is apparent from the provisions of clause 44 that I have already quoted above, the Network Board, to which each party provided two representatives, was to operate by consensus.

[87]Mr. Brannigan submitted that there were gaps in clause 24 which the clause 44.4.1 duties would be required to fill. He said, first, that clause 24 provided numerous options and choices for the PCC Representative; second, it allowed a range of Service Points rather than fixed awards; and, third, there are gaps as to how it is to work in practice - for example, the absence of any provision as to when or how often PCC is to award Service Points. It is common ground now that to store up Service Points, as at one point PCC did, and then to issue them all in one fell swoop by way of ambush, was not a legitimate exercise of PCC’s obligations under clause 24.

[88]Mr. Brannigan also relied heavily on the fact that PCC witnesses, when giving evidence to the Expert, agreed that it was essential to adopt a fair and sensible approach to the Service Point regime if it was to fulfil its commercial purpose.

[89]Mr. Brannigan submitted that the Service Points regime was an example of PCC implementing its Best Value Duty. In this context he adopted the conclusion of the Expert, at paragraph 209 of her Determination, where she said:

“I can think of no provision of the Contract more likely to improve efficiency and effectiveness than the Service Point Regime. Unless and until sufficient Service Points are accumulated to a 12 month cumulative total that will trigger a warning notice or an act of default, the Service Points appear to have no contractual consequence. They do not lead to deductions. The main purpose of the Service Points is self-evidently, to provide a formal way of notifying Ensign of failures so that Ensign’s performance can be improved.”

[90]If taken by themselves, I do not disagree with these views. But if Miss Jackson is to be understood as saying that the implementation of the Service Points regime was itself an exercise in discharging the Best Value Duty, then I would not go that far. In my view it is the creation of the Service Points regime and the inclusion of clause 24 and Schedule 17 in the Agreement that constitutes the discharge of PCC’s Best Value Duty. That, of course, is based on the assumption that the Service Points regime will be properly implemented. But I do not consider that PCC is entitled to increase the Service Points awarded for a particular breach, irrespective of the gravity of that breach, simply on the ground that this will encourage Ensign to do better and therefore assist in achieving Best Value. In my view, once the Agreement has been entered into, so far as the Service Points regime is concerned, PCC can only achieve Best Value by seeking to renegotiate the terms of clause 24, or perhaps more realistically Schedule 17, in the manner indicated in the 2012 Best Value Review.

My conclusions on the clause 44.4.1 issue

[91]I consider that this issue needs to be approached in two stages. First, as a matter of interpretation of the contract, does the clause 44.4.1 duty apply to the rest of the Agreement? Second, if not, does it apply to clause 24 alone (or, possibly, to clause 24 and some other unidentified clauses)?

[92]I consider that there are four reasons why the clause 44.4.1 duty does not apply to the rest of the Agreement. First, there is nothing in the language of clause 44 itself, or indeed in any other part of the Agreement, that indicates, either expressly or by implication, that the clause 44.4.1 duty is to apply more widely than to clause 44 alone.

[93]Second, the presence of various clauses which contain a specific and narrow obligation of good faith suggests that the parties considered the situations in which a duty of good faith was necessary and provided accordingly. To a lesser extent, the same point can be made in relation to the clauses which require reasonable assistance in some particular request: if there was an overarching duty of mutual co-operation, it is at least arguable that such provisions would not be necessary.

[94]Third, I cannot find any clause in the Agreement which requires the implication of a duty of good faith in order to make it work, and none has been drawn to my attention (apart, of course, from clause 44 itself). So far as clause 24 itself is concerned, I discuss the position in more detail below.

[95]Fourth, I accept Mr. Fraser’s submission that there is no room for imposing a duty of good faith in relation to Ensign’s right to terminate the Agreement for non-payment under clause 40.1.5. If PCC fails to pay a sum due to Ensign (being a sum not in dispute) and that failure continues for 60 days after PCC has received a written notice in appropriate form from Ensign identifying the non payment, there is a termination event. If the situation is not remedied within a further 60 days, Ensign may serve a further notice terminating the Agreement with immediate effect. There is no room here for the imposition of any duty of good faith.

[96]In reaching this conclusion, I am fortified by the observation of Beatson LJ in the Mid Essex case to which I have already referred. As he said: “… care must be taken not to construe a general and potentially open-ended obligation such as an obligation to ‘co-operate’ or ‘to act in good faith’ as covering the same ground as other, more specific provisions, lest it cut across those more specific provisions and any limitations in them”.

[97]I now turn to the question of whether there is any ground for interpreting the contract so as to make the provisions of clause 24 subject to the clause 44.4.1 duty. Since I have concluded that this duty did not apply to the Agreement as a whole, it seems to me that one must start by looking for some particular provision - whether in clause 24 itself or elsewhere - that suggests that the duty is intended to apply to clause 24.

[98]In my view there is no such provision anywhere in the Agreement and none has been drawn to my attention.

[99]It is therefore necessary to look at clause 24 itself and to ask whether, reading both the clause itself and the Agreement as a whole, the parties must have been taken to intend that the clause 44.4.1 duty was to apply to it. However, it is common ground that there must be some restrictions on the exercise by PCC of its rights under clause 24: indeed, the concession by Mr. Fraser, which I consider to have been correctly made, that PCC is not entitled to store up points for several months and then serve them in one fell swoop shows that there must be some limitations on what PCC can do. That, I accept, provides at least a springboard for an argument that the clause 44.4.1 duty applies to clause 24. However, since the same springboard can be used to justify the implication of an appropriate, but different, term, that in itself does not get Ensign very far.

[100]I did not understand Mr. Brannigan to argue As Mr. Brannigan put it: “Here we start with the clause itself” (Day 2/107). , and in any event I do not regard it as arguable, that the clause 44.4.1 duty can be cherry-picked so as to take, for example, the duty of good faith alone and then say that it applies to other clauses in the Agreement. It seems to me that it must be all or nothing because that is how the clause is written.

[101]Like Lewison LJ in the Mid Essex case, I have great difficulty in seeing how clause 24 requires cooperation either from Ensign or PCC in order to work. Ensign has certain obligations, such as the obligation to report a breach as soon as practicable after it becomes aware of it, but in my view it is not required to do anything beyond compliance with those obligations in order to make the Service Points regime work. Once PCC’s Representative becomes aware of a failure by Ensign to perform any of its obligations under the Agreement, it has various options open to it. For example, to issue a notice under clause 24.1.2 or to award Service Points under clause 24.2.1. Neither of these requires PCC to cooperate with Ensign: each requires a unilateral decision by PCC.

[102]For these reasons, therefore, I reject Ensign’s case that the clause 44.4.1 duty applies to clause 24. So I turn finally to the implication of a term.

The submissions of the parties on the nature of the implied term

[103]I have formulated the issue in this way because, by the conclusion of the hearing, both parties were agreed that, if I decided the clause 44 issue against Ensign, there had to be a term of some sort implied into clause 24 in relation to the manner in which Service Points could be awarded.

[104]PCC’s formulation of the term was as follows:

“The exercise of the discretion by PCC under clause 24.2.1(c) in whether to award Service Points must be taken on proper grounds and for proper purposes, and without dishonesty or deceit.”

[105]Ensign’s formulation of the term, taken from Mr. Brannigan’s oral submissions (at Day 2/145), is as follows:

“PCC is to ensure that, when issuing Service Points, its Representative will hold the balance fairly as between PCC and Ensign and will act in a manner which is independent, impartial, fair and honest.”

[106]This formulation was derived from a decision of Jackson J (as he then was), which was one in a line of cases about the duties of employees of the employer under a building contract who had to exercise a decision making function (such as ascertaining loss and expense, issuing certificates, making adjustments to the contract sum, granting extensions of time and the like) as opposed to an agency function (such as issuing variation instructions). The case was Scheldebouw BV v St James Homes (Grosvenor Dock) Ltd

[2006] BLR 113

[107]In that case Jackson J considered authorities such as Frederick Leyland and Co Ltd v Compania Panamena Europea Navigacion Limitada [1943] 76 Ll L Rep 113; Perini Corporation v Commonwealth of Australia

[1969] 12 BLR 82

; and London Borough of Hounslow v Twickenham Garden Developments Limited

[1971] 1 Ch 233

. At paragraph 34(3) he said this:

“When performing his decision-making function, the decision-maker is required to act in a manner which has variously been described as independent, impartial, fair and honest. These concepts are overlapping but not synonymous. They connote that the decision-maker must use his professional skills and his best endeavours to reach the right decision, as opposed to a decision which favours the interests of the employer.”

[108]Mr. Fraser’s formulation was not derived from any authority but took into account the fact that when deciding whether or not to issue a notice under clause 24.1.2 or to award Service Points, PCC’s Representative was not acting in a certifying function. Mr. Fraser submitted, in my view correctly, that when taking a decision whether or not to award Service Points PCC’s Representative was entitled to take into account, and, if he wished, only to take into account, PCC’s commercial interests. However, once a decision had been taken to award Service Points, then the Representative had to do it in accordance with his formulation of the implied term.

[109]In so far as there is any difference between the parties about this, and I am not sure that there is, I consider that Mr. Fraser’s approach of confining the application of the implied term to the awarding of Service Points under clause 24.2.1(c) must be correct.

[110]It is clear that both parties agree that PCC’s Representative must act honestly. However, because of the close interaction between the decision to award any Service Points at all and, if there is to be an award, the amount of the Service Points, I have some difficulty with any term that requires fairness or impartiality. That does not necessarily mean that PCC can act in a manner that is unfair, because - depending on the circumstances - acting in such a way might be regarded as arbitrary or capricious.

[111]It may be helpful if I give an example to illustrate the point. Suppose that Ensign has accumulated 197 Service Points within a 12 month period and PCC is aware of an Event of Default which carries a maximum of 5 Service Points. Assume that, viewed objectively, the breach is a fairly serious one - probably justifying 3 or 4 Service Points. In my view, when deciding the number of Service Points to award, PCC would be under no obligation to consider the wider implications for Ensign of an award of 3 or 4 Service Points for the breach, rather than an award of, say, just 2 Service Points - which would prevent the 200 point threshold being crossed. It may well be that PCC might, when deciding whether or not to issue a notice under clause 24.2.1, take into account the fact that the breach is likely to justify an award of 3 or 4 Service Points and the consequences for Ensign which that would entail. But as the decision in the Mid Essex case makes clear, that is a decision whether or not to exercise a contractual right, not a decision that involves a balancing exercise. The introduction of a duty to act fairly when awarding Service Points might be taken as introducing wider considerations going beyond the circumstances of the breach. Whilst I do not suggest that such an interpretation would be correct, it seems to me preferable to avoid using language that might create uncertainty or, at least, provide scope for dispute.

[112]In my view the best course is to follow the authorities that were cited and considered in the Mid Essex case. I therefore declare that the term to be implied into clause 24 is as follows:

“When assessing the number of Service Points to be awarded under clause 24.2.1(c) of the Agreement, PCC’s Representative is to act honestly and on proper grounds and not in a manner that is arbitrary, irrational or capricious.”

[113]It may well be that, in terms of practical application, there will be little difference between this formulation and that proposed by Mr. Fraser, but I prefer to follow rather more closely the formulation that has been adopted in the relevant authorities. Indeed, it may be also that the differences between my formulation and that proposed by Mr. Brannigan will in practice prove to be more apparent than real.

Conclusions

[114]For the reasons that I have now given, I consider that Ensign is correct in its submission that the Maximum Event Values shown in Schedule 17 are just that: in each case the figure represents the maximum number of Service Points that PCC may award for any particular event. Having decided to award Service Points for a particular breach, PCC must make a decision as to how many points to award up to the maximum figure shown in Schedule 17 (unless the value is 1 - in which case only one Service Point can be awarded). That decision is to be based on a consideration of all the circumstances of the breach including, amongst other things, its gravity.

[115]I reject Ensign’s submission that the clause 44.4.1 duty applies to the Agreement as a whole or to clause 24 in particular.

[116]In my judgment when awarding Service Points under clause 24 PCC is subject to the implied term that I have set out above.

[117]I will hear counsel on any matters in relation to the form of relief or as to costs.