Corporate Litigation update - May 2018

 

You’ve got to have faith!

Health and Case Management Limited v Physiotherapy Network Limited [2018] EWHC 869 (QB)Good faith clauses are increasingly common in commercial contracts and there is much debate as to their practicability and enforceability. A recent decision of the High Court pours further fuel onto the flames of that debate.

In this case, the Claimant (HCML) sought a declaration that it has not acted in breach of contract or in breach of confidence. The Defendant (TPN) counter claimed and alleged that the Claimant was in breach of contract and, amongst other things, in breach of confidence and in breach of its obligation to act in good faith. HCML provided services to insurance companies by managing referrals of patients to physiotherapy clinics. TPN was engaged with a nationwide network of clinics and would receive introduction fees by making referrals to clinics in its network. The parties entered into an agreement whereby HCML would refer patients to TPN in return for fees (the “Referral Agreement”). Of particular relevance to the dispute were clauses 3.1 and 14.1 of the Referral Agreement, which stated respectively that HCML would act in good faith to TPN and that both parties would keep all information confidential of the other parties obtained under or in connection with the agreement.

In 2011, unbeknown to TPN, HCML commenced a project to build its own network of physiotherapy clinics. In February 2012, HCML sought information from TPN in respect of TPN’s database of clinics. HCML informed TPN, misleadingly, that it required the information in order to develop a geographic pricing model. TPN provided the information to HCML. From late 2012 until 2014, the number of referrals made by HCML to TPN reduced and then ceased completely. The court considered that HCML was not in breach of clause 14.1 of the Referral Agreement and was not in breach of confidence. The Referral Agreement restricted disclosure of the confidential information, but did not purport to restrict use. On the basis that TPN’s pleaded case was that HCML had used confidential information, rather than a case that HCML had disclosed information to third parties, there was no breach in this regard and it was not necessary to consider whether the information was in fact confidential.

However, the court considered that HCML was in breach of its obligation of good faith, by giving a dishonest reason for its request for data. The court considered that HCML had recognised that, until its own network was fully established, HCML would continue to need TPN to service referrals it made and had therefore misled TPN in order to protect its own position.

 

In breach of its obligation of good faith, the Court considered that HCML had failed to:

• adhere to the spirt of the Referral Agreement;
• observe reasonable commercial standards of fair dealing;
• be faithful to the agreed common purpose; and
• act consistently with the parties’ justified expectations.

 

Court also commented that HCML had acted in an underhand and exploitative manner by setting up a rival network whilst continuing to benefit from a commercial relationship, which, had the other party to the relationship been fully aware of the circumstances, would have been terminated. The Court considered that a provision in the contract that stated HCML “anticipated” referring “circa” 700 patients to TPN in accordance with the Referral Agreement was not binding on HCML (because of language such as “anticipate” and “circa”). However, what that provision did do was heighten the importance of the good faith provisions in the contract.

 

Practice point

The case is useful as an example of the Courts enforcing obligations of good faith, and, in addition, adding colour to what the Courts consider to be acting in good faith (i.e. adhering to the spirit of the relevant agreement; observing reasonable commercial standards of fair dealing; being faithful to a common purpose; and acting consistently with the parties’ justified expectations).

Lauren Davies, Solicitor, 0345 634 1743

 

 

Be careful what you admit to…

ADVA Optical Networking Ltd and another v Optron Holding Ltd and others [2018] EWHC 852 (TCC)The Defendant in a supply chain dispute made an application for permission to withdraw an admission. The application was refused on the basis that (a) the Defendant failed to provide a good reason for having made the application so late in proceedings and (b) if permission were granted it would cause significant prejudice to the Claimant. The claim arose from the supply of allegedly faulty electrical cables. The cables had passed through a supply chain of four parties, before the Claimant finally supplied the cables to their customer, BT.

A BT engineer suffered an electric shock whilst installing the cables. Following subsequent investigations, the batch of cables were found to be faulty and potentially dangerous. As a result, the Claimant paid BT a sum to settle its liability. The Claimant subsequently sought to recoup this sum from its supplier, with each party in the supply chain seeking to pass its potential liability down the chain. In its Defence the Defendant admitted that it had supplied the allegedly faulty cables to the Claimant, on the basis that the “source supplier” had admitted, in pre-action correspondence, that it had initially supplied the faulty cables. However, the source supplier subsequently changed its pre-action position and denied supplying the faulty cables. The Defendant (belatedly) sought the Court’s permission to withdraw its admission and amend its Defence to plead no admissions in relation to the supply of the cables.

CPR 14.1(5) states that “The permission of the court is required to withdraw an admission”. Accompanying guidance, set out in CPR 14 PD 7.2, states that the Court should have regard to factors including: the grounds of the application; the stage in the proceedings at which the application is made; and the prejudice which may be caused to the other parties if the admission is withdrawn. Accordingly, the Court rejected the Defendant’s application. Applying the guidelines and relevant case law, the Judge considered that the Defendant had failed to establish a good reason for the delay in bringing its application. The trial was less than six weeks away and the parties were entitled to treat their respective cases as crystallised. The granting of the order sought, following such delay, would cause the Claimant significant prejudice by requiring it to revisit key stages of the litigation process, including the reconsideration of disclosure and its witness statements. As a result, and in addition, the scope for pre-trial settlement would be severely curtailed.

 

Key takeaway

If an admission has been made and it becomes necessary to seek the Court’s permission to withdraw it, consider carefully the Court’s guidance on when such permission will be given, contained in CPR 14 PD 7.2.

Josh Middleton, Managing Associate, 0345 128 7955