Implying a duty of good faith into commercial agreements – it's all relational

Alan Bates and Others v Post Office Limited, [2019] EWHC 606 (QB)

The Bates case is a piece of group litigation in which over 500 sub-postmasters (SPMs) are claiming damages from the Post Office following well-publicised problems with the “Horizon” EPOS and accounting system, which the Post Office rolled out in 1999/2000. Subsequently, the Post Office pursued many SPMs for accounting shortfalls. In some cases, criminal proceedings were brought. The SPMs claim that Horizon contained a large number of software coding errors and that there were problems with the training that was provided on its use as well as the general failure of the telephone helpline.

This is a long and complex piece of litigation, and the present judgment concerns just some of the issues.

One particular issue that is of wider interest concerns the question of whether the standard contract between the Post Office and the SPMs is a “relational contract” such that the Post Office was subject to duties of good faith, fair dealing, transparency, co-operation, trust and confidence. The concept of the “relational contract” first came to general prominence in the judgment of Leggatt J (as he then was) in Yam Seng Pte Ltd v International Trade Corporation Ltd, 2013. However, since then, courts have been reluctant to imply a general obligation of good faith in the absence of express wording. This is in contrast to the related but narrower Braganza duty, which has taken a firmer hold in case law and requires that where a party has a contractual discretion it must not exercise that discretion in a way that is arbitrary, capricious or irrational.

Despite the apparent lack of support for the concept of the relational contract, and the consequent implication of a good faith obligation in recent case law, the High Court in Bates nevertheless considers the concept to be established in English law. Fraser J refers to 6 cases as evidence of this, all of which were decided since Yam Seng. Half of those cases were appeal decisions (including the case of MSC Mediterranean Shipping Co v Cottonex Anstalt, 2016), and one is a first instance decision decided by Leggatt J himself.

Having decided that the relational contract exists, Fraser J went on to decide that (in disagreement with Chitty on Contract) English case law does support the idea that a doctrine of good faith should apply to those contracts which can be classified as relational.

But how can a court work out whether or not a commercial contract is relational? Fraser J provides a list of nine non-exhaustive characteristics. These are:

  • There are no express terms that prevent the implication of a duty of good faith.
  • The contract is mutually intended to be long term.
  • The parties intend that their roles will be performed with integrity and fidelity to their bargain.
  • The parties are committed to collaboration.
  • The spirits and objectives of the parties' venture may not be capable of being expressed exhaustively in a written contract.
  • Each party places trust in the other, but of a different kind to that found in fiduciary relationships.
  • The contract relies on a high degree of communication, cooperation and mutual trust and loyalty.
  • There is a significant financial commitment or investment by at least one of the parties.
  • The relationship may be exclusive.

In this particular case, it is hard not to have some sympathy for the SPMs themselves. However, what do Fraser J's findings mean for larger businesses who regularly enter into long term contracts (for example, the suppliers and customers of outsourced services)? Should businesses be concerned that they will be held to a higher standard than that set out in the contract?

The usual criticism of those who disagree with the implication of a good faith obligation is that the boundaries are simply too unclear. If large, well-advised businesses have taken the time to document their business relationship in a lengthy and detailed contract, is it appropriate for the law to step in and imply an additional set of obligations? In short, there is too great a risk that the plain words of the agreement reached by the parties will be severely undermined. This approach, the doubters would assert, is also in line with the restrictive approach to implication of terms endorsed by the Supreme Court in M&S v BNP Paribas, and to contract interpretation in Arnold v Britton (both from 2015).

In this case Fraser J has attempted to set some boundaries, particularly as regards the nine factors that may indicate that a contract is relational. The problem is that most long term, arm's length, commercial agreements are likely to satisfy all nine of those tests, meaning that we are no closer to understanding whether or not a long-term contract should be considered "relational". On the other hand, Fraser J is at pains to emphasise that a commercial agreement should not be considered relational simply because it is long term in nature. On balance, therefore, it is likely that the ability of the courts to imply such a wide a general duty will be reserved for the most deserving circumstances.

Following the first of Fraser J's nine tests, it would theoretically be open for commercial parties to agree expressly that no duty of good faith should be implied, though that might be a tough proposition to bring to the negotiating table, and, unfortunately in our opinion, this is clearly an issue that is not going away, at least until a case reaches the Supreme Court.