The cost of wrongly alleging breach of good faith: Part 36 offers and indemnity costs

A High Court judge's decisions in a multi-million pound dispute between a council and a waste company are helpful in understanding the Court’s approach to duties of good faith – and the consequences of making allegations of bad faith without sufficient evidence, write Judith Hopper and Rory Budworth.

The third judgment between Essex County Council and UBB Waste (Essex) Ltd (UBB) (Essex County Council v UBB Waste (Essex) Ltd (No 3)) [2020] EWHC 2387 (TCC) (Costs Judgment)), tops off a miserable run of decisions against UBB in respect of its management of the Council’s waste under a 25 year PFI contract (Contract). 

Under the Contract, UBB was required to design and build a Mechanical Biological Treatment (MBT) plant. When the MBT plant failed to pass Acceptance Tests by the contractual longstop date, the Council exercised its right to terminate and claimed £9 million in damages. UBB, in turn, claimed damages for the payments it had not received under the Contract, amounting to nearly £100 million.

UBB claimed that the Council had acted unreasonably, capriciously and in breach of its obligations of good faith in failing to agree that Acceptance Tests had been met and that its refusal to do so was, in essence, a smokescreen to allow the Authority to terminate the Contract.

In the main judgment (Essex County Council v. UBB Waste (Essex) Ltd (No. 2) [2020] EWHC 1581 (TCC), the Principal Judgment), the Court therefore had to consider the question of whether a contractual duty of good faith had arisen. The Court reviewed the characteristics of a relational contract (which gives rise to a duty of good faith) identified by Fraser J in Bates v Post Office (No. 3) [2019]: these include longer term contracts which require substantial commitments from the parties, and which may require high degrees of communication, co-operation and performance based on mutual trust and confidence. Unsurprisingly, given the decision of Jackson LJ in the Court of Appeal case of Amey Birmingham Highways Ltd v Birmingham City Council [2018], the Court here concluded that “this 25 year PFI contract is a paradigm example of a relational contract in which the law implies a duty of good faith”.

Pepperall J went on to say that:

1. The test for determining whether a party has not acted in good faith is an objective one;
2. Whilst dishonest conduct will be a breach of the duty of good faith, dishonesty is not a necessary ingredient of an allegation of breach; the material question is whether the conduct would be regarded as commercially unacceptable by reasonable and honest people;
3. The contractual and factual context will determine what is and is not good faith.

It is fair to say that Pepperall J was not impressed with UBB for making such allegations against the Council. UBB’s witnesses included the chief design engineer, whom the judge described as “having a somewhat cavalier attitude to key design parameters and the setting of critical performance guarantees”. The witness had been required to explain, under cross-examination, what was meant by the various references in his emails to “bullshit”: Pepperall J concluded that to be a reference to “unreliable flannel that could be used to dress up UBB’s proposals”. He went on to say:

“There is some irony in UBB’s promotion of the implied term of good faith since it is certainly arguable that it did not itself act in good faith in its original concealment of the density problem, its attempts to replace the BMc test and its piecemeal presentation of the QRSF Line when it understood full well that it needed to divert significant waste away from the biohalls if it was to meet the guaranteed Throughput. It does not, however, itself face any claim for alleged breaches of the implied term . . . “

UBB had also called an expert whose company it had not only instructed in connection with the design of the plant, but against whom it had threatened a potential claim for negligence, which could only be brought if the Authority’s claim succeeded. The Court concluded that the expert had “failed to properly distinguish between advocacy for a client and the rigour required when acting as an independent expert”.

Based on the evidence, the Court concluded that UBB had designed a facility incapable of passing the Acceptance Tests and that the allegations that the Authority had failed to act reasonably in trying to find a commercial solution and in seeking to terminate were without foundation.

In the Costs Judgment, the Court considered the Part 36 offer made by the Council, dismissed UBB’s argument that the Part 36 offer was not compliant with the rules, and found the Principal Judgment was at least as advantageous as the Part 36 offer. Accordingly, Pepperall J found that the Council’s Part 36 offer was valid and was content to award interest at 10% over base rate on the Council’s judgment sum – the maximum amount permitted - because “UBB acted unreasonably by failing to engage with the Part 36 offer and in pursuing a defence and a very considerable counterclaim upon wholly unwarranted allegations of lack of good faith [and] demonstrably false allegations”. He also awarded interest at 10% over base rate in respect of the Council’s costs for similar reasons.

In respect of the Council’s costs, Pepperall J felt the proper and fair order for costs was to award the Council its costs that it incurred throughout on an indemnity basis. Coming to this decision, he found that UBB made widespread allegations of a lack of good faith by the Council. Pepperall J noted in respect of the allegations made against the Council’s employees:

“As professional men and women employed at a senior level by a public authority, I readily accept that these officers have a deep understanding of the importance of integrity in their dealings on behalf of their employer. I have little doubt that they will have been distressed by allegations that their professional conduct might be regarded as commercially unacceptable by reasonable and honest people. Indeed, such a finding might have put their employment, or at least their prospects of advancement in the public sector, at risk . . . “

Pepperall J also felt that UBB’s counterclaim could be properly described as speculative, weak, opportunistic, and thin, and their conduct and allegations were “designed to bring commercial and political pressure to bear on the Authority not to press its own claims to trial.”

The Costs Judgment is a reminder that poor conduct and unsubstantiated claims can result in maximum cost consequences for parties. The reaffirmation in the Primary Judgment that PFI/PPP contracts can, in certain circumstances, include implied duties of good faith does not mean that the Courts will entertain weak claims that a party has failed to discharge that duty. 

Judith Hopper is a partner and Rory Budworth is a solicitor at Bevan Brittan.