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Express duty of good faith: rescuing drafting deficiencies

The High Court has recently held that an obligation to act in good faith was breached when a company managing referrals to physiotherapy clinics used the other party's information to set up a rival business.

The case is interesting because the express good faith clause rescued other drafting deficiencies, in particular the wording of a confidentiality clause and the lack of obligation to make a certain number of referrals.

Health & Case Management Ltd v The Physiotherapy Network: The facts

Health and Case Management Limited (HCML), a company managing referrals to physiotherapy clinics, entered into a services agreement with The Physiotherapy Network Limited (TPN), under which HCML referred patients to TPN in return for a fee. HCML received referrals from various insurance companies, including Aviva Health UK Limited (Aviva Health). This arrangement was recorded in the services agreement between HCML and TPN.

In 2011, HCML started to build its own network of physiotherapy clinics (called Innotrex) and asked TPN for information from its database of clinics stating that it wanted that information to develop a geographic pricing model. Unaware that HCML was building its own clinic network, TPN provided that information. From February 2012, HCML started to divert referrals away from TPN to other clinics or networks. Between 2012 and 2014, the number of referrals made by HCML to TPN reduced and then ceased completely.

HCML sought a declaration that it had not acted in breach of contract or confidence. TPN alleged that HCML had used its database to recruit clinics to its own network.

Issues before the High Court

The High Court was asked to determine, among other things, the following issues:

  • The construction of clause 2.3 of the services agreement and whether HCML was in breach of that clause by failing to make to TPN the number of referrals specified in it.
  • Whether HCML was in breach of the obligation to act in good faith incorporated in clause 3.1 of the services agreement.
  • Whether the use of confidential information belonging to TPN was a breach of the confidentiality provision included in the services agreement and/or an infringement of the database rights of TPN.

Construction of clause 2.3

Clause 2.3 stated: "HCML anticipates making circa. 700 referrals per month to TPN, and volume discounts from time to time for this level of referrals".

The High Court decided that, given that the words "anticipates" and "circa" had been retained in the final agreement (despite other deletions), the clause was not ambiguous and did not oblige HCML to make a particular number (or indeed, any) referrals per month to TPN.   

Breach of obligation to act in good faith

Clause 3.1 stated that "HCML shall act in good faith towards TPN at all times".  The High Court accepted TPN's contention that HCML acted in bad faith and was therefore in breach of this clause by misusing data belonging to TPN in order to establish a rival network of clinics.

In reaching its decision, the High Court examined the evidence submitted by the parties and referred to previous judgments in which an express duty of good faith was explained. These included the case of Berkeley Community Villages Ltd v Pullen and the case of CPC Group Ltd v-Qatari Diar Real Estate Investment Co.

The High Court was satisfied that HCML was diverting referrals away from TPN using information obtained from TPN under false pretences. The High Court was also satisfied that HCML attempted to benefit from its commercial relationship with TPN (which TPN would probably have terminated if it had known HCML's true intentions) until its own network was fully set up (this was indicated in a business plan for Innotrex).

In addition, although there was no contractual obligation on the part of HCML to make any particular number of referrals (or indeed any referrals), there was an expectation by both parties that HCML would do so as this was the commercial objective that the parties shared. The absence of a contractual obligation to make any referrals reinforced the importance of the good faith clause in assisting the parties to achieve their commercial objective.

It was therefore clear to the High Court that HCML failed to adhere to the spirit of the services agreement, to observe reasonable commercial standards of fair dealing, to be faithful to the agreed common purpose and to act in accordance with the parties' justified expectations.

Breach of confidentiality and database rights

A confidentiality clause contained in the services agreement restricted the disclosure of confidential information but did not restrict the use of that information. As the information held by HCML was not disclosed to third parties, it was decided that there was no breach of the confidentiality clause. However, while TPN's confidentiality argument failed, the court decided that TPN's database rights under the Database Directive had been infringed by the extraction of a substantial part of its database on several occasions.

Comment

It has become increasingly common to include an express duty of good faith in commercial contracts, despite the fact there is no universally accepted meaning of such a duty. Trying to determine the effect of such a duty in any particular context can create uncertainty and may lead to unintended consequences.  

This case is interesting because it demonstrates the advantages of including an express duty of good faith. As well as the deficiency in the confidentiality clause and lack of obligation to make referrals, TPN had not sought to protect its position by including an exclusivity or non-competition clause. The court decided that, rather than diminish the importance of clause 3.1, these deficiencies enhanced it. HCML's intentions were opportunistic, underhand and exploitative and a clear breach of the express duty.

So does this case help to clarify what good faith is? The judge provides a helpful summary of the law to be applied, confirming that good faith has been held to mean (among other definitions) "playing fair", "coming clean" or "putting one's cards on the table": He also agreed with the submission that unless a party has acted in bad faith, he cannot be in breach of the duty of good faith – as long as it is understood that "bad faith" in this context is not the same as dishonesty. It is possible to act in bad faith without being dishonest.

Construction of the relevant contractual term of good faith will always be context-sensitive however. For this reason, it will always be preferable to ensure that express obligations are clearly set out in a contract, rather than relying on a duty of good faith to fill any gaps.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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