Are you acting in good faith? It's all relative

A recent case in the High Court has raised issues over whether there may be implied obligations of good faith in long-term contracts which parties may not have intended.

Whilst there has been a large amount of case law and analysis as to whether there is a general duty on parties to act in good faith when discharging contractual obligations, the case of Bates v Post Office Ltd [2019] EWHC 606 has gone further by imposing such duties on parties who have entered into contracts which are deemed to be a 'relational contracts'.

Background

The Bates case is a group litigation in which over 500 sub-postmasters running Post Office branches (SPMs) are claiming damages from the Post Office following problems with the “Horizon” electronic point of sale and accounting system.

The Post Office contracted with the SPMs on two standard forms – the Sub-Postmasters Contract and the Network Transformation Contract. Both contracts provided for the SPMs to be responsible for losses caused; and for the SPMs to pay any shortfall in full.

The SPMs claimed that software defects resulted in accounting discrepancies, some of which were so severe that they led to criminal prosecutions of some of the SPMs.

Whilst the case is lengthy and covers a number of issues, of particular interest was whether the contracts between the Post Office and the SPMs constituted a 'relational contract' and if so whether that meant that specific duties of good faith were implied into the contracts.

Contrary to Chitty, the leading text on contract law, the judge held that there is a body of contracts called relational contracts in which there is implied an obligation of good faith. This meant that the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.

Further, this implied duty of good faith went beyond a duty to act honestly and included the duty to act in good faith, to deal fairly, be transparent and to co-operate with the counterparty.

The judge decided that the contracts on which the Post Office contracted with the SPMs were relational contracts – a concept recognised in the Court of Appeal in both Amey Birmingham Highways v Birmingham City Council (2018), and Globe Motors v TRW Lucas (2016).

It followed from this that there was a general implied duty that the Post Office owed various obligations including, in this case, the duty to keep proper records.

Guidance

The court provided a list of nine non-exhaustive characteristics of a relational contract. These are:

• There are no specific express terms in the contract that prevent the implication of a duty of good faith.
• The contract is mutually intended to be a long-term relationship.
• The parties intend that their roles will be performed with integrity.
• The parties are committed to collaboration in the performance of the contract.
• The spirit and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
• Each party places trust and confidence in the other, but of a different kind to that involved in fiduciary relationships.
• The contract involves a high degree of communication and co-operation based on mutual trust and confidence, and expectations of loyalty.
• There may be significant investment or financial commitment by one party (or both) in the venture.
• The relationship may be exclusive.

Comment

It is easy to see how the Court could have sympathy with the SPMs given that they were under an obligation to use the systems provided by the Post Office, but the Court was clear that there does not need to be an imbalance of negotiating power between the parties for a contract to be classified as a relational contract.

Business to business contracts in any sector, including construction contracts, may be interpreted as relational contracts if they meet the characteristics set out above.

It is possible to use express contractual terms to exclude an implied duty of good faith, although this may not be an avenue that parties feel comfortable in raising during negotiations.

We do not expect to see the Courts adopt the concept of relational contracts widely, and it is likely that the Courts will continue to be reluctant to imply terms in most cases, but there is scope for a party to argue that their relationship goes beyond the words on the page.