Bristows’ SnippITs - DHSC v Medpro: estoppel arguments ‘dressed down’ by the court

This post is the latest in the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.

The recent decision of Secretary of State for Health and Social Care v PPE Medpro Ltd provides a useful reminder of the challenges of successfully arguing estoppel as a defence to non-conformity with contractual obligations, particularly where the party seeking to rely on estoppel is a specialist supplier relying on sign-off from its customer.

Although this case involved the supply of surgical materials, the ruling is relevant to specialist suppliers in other sectors, including IT and technology.

Key takeaways:

1. Suppliers should remain cautious of relying on client approvals or sign-off processes as definitive evidence that their solution meets the contractual standard. Even absent customer-friendly provisions that “acceptance certificates” do not confirm compliance with all contractual requirements, contract terms will often “trump” customer assurances.
2. In particular, specialist suppliers and those holding themselves out as experts in their field will struggle to prove reliance on any general statements as to conformity given by a non-specialist customer.
3. Where there has been an agreed deviation from specified standards, suppliers should insist on written approvals that make explicit reference to this or operate the contractual change process to ensure such agreement has been formalised.

Background:

The case involved a £120 million contract between the Department of Health and Social Care (DHSC) and Medro for the supply of 25 million sterile surgical gowns during the Covid pandemic. Following delivery, the gowns were found to be missing a notified body number accompanying their “CE marking” (a marking indicating conformity with certain standards). DHSC was therefore not satisfied that the gowns were contractually compliant, including in relation to sterility. DHSC served a notice rejecting the gowns and seeking its money back. Subsequent testing confirmed that a significant proportion of the gowns were not sterile.

In its claim, DHSC sought repayment of the contract price and the costs of storing the gowns. Medpro’s defence included: (i) that the contract did not require Medpro to meet the sterility requirements claimed by DHSC, including applying a valid CE mark to the gowns; and (failing this) (ii) that DHSC was estopped from relying on the relevant clauses which imposed those obligations.

The court found that Medpro’s gowns did not meet the requirements of the contract, including having a valid CE mark. It was therefore necessary for the court to consider Medpro’s case on estoppel.

The Court’s findings on estoppel:

Medpro sought to rely on four different kinds of estoppel: contractual estoppel, estoppel by representation, estoppel by convention, and estoppel by acquiescence, although its argument on contractual estoppel fell away over the course of the trial.

Medpro’s estoppel case relied on pre-contractual discussions between the parties concerning compliance of the gowns, including:

• a request from DHSC for Medpro to provide certain certifications (which Medpro did not provide);
• further exchanges between the parties, in which Medpro stated “We are certain that we are 100% compliant” and “Hopefully this is all your technical department requires”; and
• a subsequent message from DHSC confirming “Gowns have been approved by Technical”, after which the parties proceeded with the contract.

Medpro argued that this sign-off in the absence of the previously requested certification amounted to DSHC approving an “equivalent technical solution” and that by giving the go-head to progress to the next stage DHSC had confirmed it was satisfied with everything and that there was no need to demonstrate anything else (including in relation to the CE mark).

The court rejected these arguments and found against Mepro in relation to each of its estoppel arguments:

1. Medpro failed to establish a clear and unambiguous representation required for estoppel by representation. The “Gowns approved by Technical” statement fell short of the clarity required. At best, the statement could be construed as an implicit representation that DHSC believed that the gowns were capable of meeting the technical requirements, but this was too vague to support an estoppel by representation.
2. Medpro failed to establish an unambiguous assumption that an equivalent technical solution had been approved in place of the strict contractual standards and/or that a valid CE mark was not required (whether a shared assumption for estoppel by convention or a one-sided assumption for estoppel by acquiescence). There was no mention of an equivalent technical solution in any of the communications and Medpro failed to specify what equivalent solution it relied upon. The “Gowns approved by Technical” statement did not explicitly refer to a CE marking - there was simply not enough explicitness for a clear assumption to be the result.
3. Medpro also failed to establish reliance, which was fundamental to all its cases on estoppel. Medpro had elected not to call any factual witnesses on this point and instead sought to argue that reliance could be inferred from material representations which led to a “presumption of inducement.” The court did not accept that this was an appropriate way to prove reliance in estoppel cases but also found that such a presumption could not be made out where reliance would not be reasonable. In this case, Medpro (as a supplier of specialist goods) was essentially saying that its failure to comprehend the requirements for the multi-million pound contract should not lie at its door, because it relied on statements made by its customer (which conflicted with the contractual terms). In these circumstances it was not reasonable for Medpro to rely on DHSC’s statements as “trumping” the contractual terms.

The court further found that, even if Medpro’s case had been capable of getting off the ground on its merits, it would have faced “insuperable difficulties” due to the non-reliance and entire agreement clauses in the contract.

The Court’s ruling:

The Court further rejected Medpro’s counterclaim based on common mistake and negligent misstatement. It therefore found that DHSC was entitled to recover the full value of the gowns as damages. However, DHSC’s claim for storage costs failed as the loss had not been proved.