Contractual duties of good faith in "relational contracts"

• Published date: 06 September 2019
• Author: Rebecca Campbell,James Hart,Richard Coopey,Steven Baker
• Law Firm: White & Case LLP

In a long running group litigation between a number of Sub-Post Masters and Post Office Limited, Mr Justice Fraser, sitting in the English High Court, has given detailed consideration of the issue of relational contracts in English law. The decision is of significance to long-term commercial contracts across the board, and is likely to be of particular interest to companies operating in joint venture or other long-term collaborative contracts in sectors, such as mining & metals, oil & gas and technology.¹

Summary

It was recognised by the English courts in a decision in 2013 that, in certain categories of long-term contract the Court may be more willing to imply a duty to co-operate, or a "duty of good faith", in the performance of a contract.²Yam Seng, and some subsequent cases, suggested that the duty of good faith would be implied where the contract could be described as "relational" in nature, although there has been some judicial and academic debate since as to whether such a "duty" can be implied into commercial contracts. Irrespective of that more general debate, the circumstances in which a contract would be classified as relational and, if it were, the precise scope of the consequent duty of good faith has been unclear. Fraser J explored both issues in a recent judgment in the ongoing Bates v Post Office case. He provided a list of nine (non-exhaustive) characteristics which are relevant when determining if a contract is relational. He also clarified that, in circumstances where a duty of good faith can be implied, this will extend beyond a requirement to act honestly.

Background

Bates v Post Office is a group litigation in which approximately 550 sub-postmasters (and certain others) are bringing claims relating to the Post Office's introduction and operation of an IT system, known as Horizon. The sub-postmasters claim that the Horizon system included flaws that resulted in accounting discrepancies, ultimately causing substantial losses.

The claims principally arise under two types of contract: the "sub-postmaster contract" and the "network transformation contract" (the "Contracts"). Both of the Contracts govern the relationship between the Post Office and the sub-postmasters, setting out the terms upon which the sub-postmasters operate branches of the Post Office. The claims are grounded, in part, upon an alleged implied duty of good faith, and 21 other terms said also to be implied into each of the Contracts as a result of that duty. The sub-postmasters argue that the Post Office breached its duty of good faith, and the implied terms, when operating the Horizon system.

The questions for Fraser J were: (a) whether a duty of good faith should be implied into the Contracts; and (b) if so, what was the scope of that duty.

When will a duty of good faith be implied?

Since the judgment in Yam Seng, it has been clear that English law may recognise an implied duty of good faith in the performance of a contract where that contract is relational. There has, however, been considerable academic debate over whether relational contracts exist as a separate species of contract and, if they do, when a contract will be considered relational.

Fraser J, citing Yam Seng and a series of subsequent cases with approval, held that relational contracts were a specific specie of contract.³ Determining whether a contract is relational was, according to the judge, an inherently fact-specific exercise: "[t]he circumstances of the relationship, defined by the terms of the agreement, set in its commercial context, is what decides whether a contract is relational or not."⁴

Nevertheless, Fraser J identified a non-exhaustive list of nine "specific characteristics" that were relevant when determining whether any given contract was relational.⁵ Those characteristics were:

1. no...