It pays to have good faith in commercial contracts

The High Court has recently provided guidance on a good faith clause in a contract with respect to a claim involving the use of a contracting party’s data in the context of establishing a competing business.

The Case

Health & Care Management Ltd (HCM) v The Physiotherapy Network Ltd (TPN) [2018] EWHC 869 (QB) involved a company that (initially) administered referrals from insurance companies to physiotherapy clinics, HCM, and a company that administered a (typically non-exclusive) nationwide network of physiotherapy clinics, TPN.

The Agreement

The agreement, entered into by way of a services contract in 2011, was set up to formalise a pre-existing 3-month ‘pilot agreement’ whereby HCM were to supply TPN with an approximate number of referrals every month in return for fees paid by TPN. The parties agreed that “circa. 200” referrals a month should be made during the pilot agreement and “circa. 700” referrals a month during the services agreement.

The Dispute

A dispute arose between HCM and TPN because in 2011, HCM began to establish its own network of physiotherapy clinics. In 2012, HCM requested information from TPN about its database of nationwide clinics, ostensibly in order to develop a geographic pricing model. After it had become evident that HCM was setting up its own network of clinics, TPN claimed that the request for its database was a ruse and that HCM had used its database of clinics to develop its own network.

HCM, as the claimant, sought a declaration of the court that it had not acted in breach of contract or breach of confidence. TPN counterclaimed and alleged that HCM had breached the terms of the contract, breached its obligation of good faith, infringed TPN’s database rights, committed passing off and acted in breach of confidence.

From 2012, the number of referrals sent from HCM to TPN decreased steadily until they stopped completely in 2014.

The Court’s Interpretation

Breach of Contract

The court found that HCM could not have breached the terms of the contract to supply “circa. 700” referrals to TPN as a binding commitment could not be found where there were uncertain values – the contract was even explicit in that it said “there are no guaranteed minimum values”.

Infringement of Database Right

The court found that HCM had infringed TPN’s database rights in its network of clinics. The court found that the reason given by HCM for the request for the database of clinics was false and that, had TPN been made aware of the true reason for the request, it would not have consented to its use in that way.

Breach of Confidence and Passing Off

The court did not find that HCM had acted in breach of confidence as the information it held was not disclosed to third parties (which would have been required under the confidentiality definition in the contract). Further, the essential elements of passing off were not made out and so HCM were not found to be passing off.

Breach of Good Faith

Interestingly, the court did find that HCM had breached its obligation to act in good faith, which was contained in the services agreement. The court found that HCM had given a dishonest reason in its request for information from TPN and that this was a pre-meditated scheme to extract the network database from TPN. In doing so, HCM had failed to adhere to the spirit of the agreement, had acted so as to fall below expected commercial standards of fair dealing, had not been faithful to the parties’ agreed common purpose and had not acted in accordance with the parties’ justified expectations when entering into the contract.

Comment

The good faith clause in the services contract ‘rescued’ TPN from loose drafting in the contract (i.e. on the commitment to provide referrals), so the lesson is to ensure that contracts truly reflect both parties’ intentions and gives the appropriate rights to either party if certain standards are not being met. On the basis that TPN’s breach of confidence claim failed, it is also a reminder that confidentiality provisions in contracts should be tightly drawn to ensure they cover misuse of confidential information (not just unauthorised disclosure as in the present case).