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Implied duty of good faith endorsed for relational contracts

In the recent case of Bates v Post Office Ltd (No.3) [2019], the High Court decided that certain provisions contained in contracts between the Post Office and sub-postmasters were subject to an implied duty of good faith.  

Despite the traditional reluctance of the English courts to recognise a general duty of good faith, the case of Yam Seng in 2013 decided that a duty of good faith can be implied in certain types of long-term "relational" contracts.  Yam Seng has attracted criticism however, and subsequent decisions appear to be contradictory (for example, see our previous update: Good faith dealt another blow).   

Endorsing Yam Seng, the High Court in Bates provides a detailed analysis of the case law and unequivocally concludes that an obligation of good faith can be implied into relational contracts. Fraser J also provides guidance on the characteristics relevant to an assessment of whether a contract is relational.

Group action by sub-postmasters: the facts

The claimants (around 550 in number), most of whom were sub-postmasters, brought various claims against the Post Office alleging defects in its electronic accounting system ("Horizon") adopted across Post Office branches. The Post Office denied that Horizon was at fault and pursued the claimants individually for any shortfalls, resulting in some cases in criminal convictions.  The claimants sought damages for (amongst other things) financial loss, personal injury, deceit, unconscionable dealing and unjust enrichment. 

In a lengthy judgment, Fraser J reached binding conclusions on several common contractual issues (while breach, causation and loss are to be considered at subsequent trials). This article focuses on the judge's comments on relational contracts and the terms that may be implied as a consequence. 

Relational contracts

Fraser J analysed a number of cases which he considered made it clear that the concept of relational contracts is in fact an established one in English law and not a "passing fad". Even the cases which the Post Office submitted did not follow the approach of Yam Seng are considered by the judge to support, rather than undermine, the proposition that some contracts are relational ones.

The judge also disagreed with the editors of Chitty on Contract in their summary of the law in this area, in particular the statement that a term requiring good faith only means a duty to act honestly.  Fraser J states that the duty includes honesty, but goes beyond it.  Parties must refrain from conduct which in the relevant context would be regarded as "commercially unacceptable by reasonable and honest people". Transparency, co-operation, and trust and confidence, are implicit within the implied obligation of good faith.

Whether a contract is relational will heavily depend on the context, as well as its terms.  Fraser J lists nine characteristics that he considers are relevant in determining if a contract is a relational one or not:

  • There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract;
  • The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship;
  • The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain;
  • The parties will be committed to collaborating with one another in the performance of the contract;
  • The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract;
  • They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships;
  • 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;
  • There may be a degree of significant investment or substantial financial commitment by one party (or both) in the venture; and
  • Exclusivity of the relationship may also be present.

This list is not exhaustive.  Factors that will not be relevant include an "imbalance of power", the behaviour of the parties and whether or not the contract is a business-to business contract.

Implied terms

As a consequence of the decision that the two different forms of contract with the claimants were relational, Fraser J decided that 17 out of the 21 different implied terms identified should be implied into the contracts.  Those terms included specific obligations on the Post Office to keep accurate records of all transactions effected using Horizon and to properly, fully and fairly investigate any shortfalls before seeking recovery from the claimants.

The judge decided that 3 out of the remaining 21 identified terms should be implied, not as a consequence of the contracts being relational, but instead because they were necessary for business efficacy. Those terms included obligations on the Post Office: (i) to provide adequate training and support; (ii) to provide a system which was reasonably fit for purpose (including adequate error repellency); and (iii) to take reasonable care in performing and exercising functions within the relationship, particularly those which could affect the accounts, business, health and reputation of the claimants.

Comment

Although this judgment attempts to clarify the boundaries of relational contracts, there is a danger that a large number of long term commercial agreements are likely to share these nine characteristics.

Businesses will obviously be concerned that this could lead to an additional set of obligations being implied into their long term contracts (which may already contain lengthy and detailed obligations). It would of course be possible to expressly exclude a duty of good faith, in view of the first characteristic listed; however, this may be difficult for customers to accept without extensive negotiation on the issue. 

Going forward, it is possible that the courts may choose to distinguish this case on its facts (particularly in view of the quasi-employment nature of the relationship) and continue to imply a duty of good faith only in exceptional circumstances. Without clarity from the Supreme Court, it looks like the debate on when a duty of good faith should be implied will continue.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions

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