Does the court have faith in relational contracts & the implied duty of good faith?

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Following a recent High Court ruling, it would certainly seem that the courts have faith in the so-called concept of “relational contracts” and the consequent implication of a good faith obligation.

This might seem surprising, given that in recent years the courts have made it more difficult to imply terms into a contract (Marks & Spencer Plc v BNP Paribas) and depart from the express words of a contract (Arnold v Britton). However, as indicated below, it is not impossible to persuade a judge to imply a duty of good faith into certain types of contracts, characterised as “relational contracts”.

We consider one particular issue that arose in the Bates v Post Office case – the dispute goes beyond this taking in other issues, such as unfair contract terms. The point of greatest interest is whether the agreements between sub-postmasters (SPMs) and the Post Office was a “relational contract”. If it was, this had various consequences, and meant that the Post Office would be subject to an implied duty to act in good faith.

Background

Bates is a piece of group litigation, involving over 500 claimant SPMs. In about 2000, the Post Office introduced a new computerised system for SPMs to use to carry out accounting functions. From then onwards unexplained discrepancies and losses began to be reported by SPMs. The Post Office chased many of the SPMs for these accounting deficits, involving criminal proceedings in some cases. The SPMs sought damages from the Post Office, claiming that there were problems with the software as well as issues with the training provided.

Relational contracts

The SPMs argued that the Post Office owed a duty of good faith because a relational contract existed. While some in the legal profession have doubted the very existence of relational contracts and suggested that labelling it as a separate type of contract is a “passing fad”, it does seem that it is here to stay. In Bates, Mr Justice Fraser, relying on Yam Seng Ptd Ltd v International Trade Corporation Ltd and six other key cases, concludes that “that the concept of relational contracts is an established one in English law”.

In Bates, Mr Justice Fraser found that a relational contract did exist between the parties. You might wonder how a court will decide whether a commercial contract is relational one or not. The judge provided the following non-exhaustive guidance:

  1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
  2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
  3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
  4. The parties will be committed to collaborating with one another in the performance of the contract.
  5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
  6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
  7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
  8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.
  9. Exclusivity of the relationship may also be present.

Good faith

Despite the fact that there is no overarching duty of good faith under English law that would apply generally to contractual relationships, this judgment clarifies that the duty of good faith can be implied into particular types of contracts.

So, what does the duty to act in good faith mean in commercial contracts? The Post Office argued that good faith means that the parties have to act honestly. However, the judge rejected this interpretation, instead saying that good faith means “the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people”.

What does this mean for you?

Maybe nothing. Bates may have a very limited impact in practice for the following reasons:

  1. It is open to the parties to expressly exclude the duty to act in good faith from the contract (although see our comment on this below).
  2. Mr Justice Fraser suggests it will not open the floodgates for the implied duty of good faith to be applied to all commercial contracts:

“[this judgment] does not mean there will be automatic and widespread application of an implied duty of good faith to all commercial relationships. Very specific characteristics are necessary in order that a commercial contract is categorised as a relational one”.

That said, Mr Justice Fraser’s “very specific characteristics” could apply to all long-term and co-operative contractual relationships (including joint venture agreements, franchise agreements and distribution agreements). It may also be that there is only a theoretical possibility of excluding good faith provisions – you can imagine what the reaction of the other party would be if you continuously insisted that duties of good faith should be expressly excluded from the contract.

Another consideration to weigh up here will be whether the Bates judgment could be beneficial. It could be something you would wish to benefit from if you are entering into a close and evolving relationship.

Finally, as a parting thought, Bates is only a High Court decision, and it is certainly conceivable that there will be an appeal leading to a different view. We will have to wait and see how judgments given by the higher courts treat Mr Justice Fraser’s analysis.

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