You’ve got mail: the High Court puts a stamp on good faith and relational contracts

In Bates v Post Office the court has implied a duty to act in good faith into a contract on the basis of it being relational.

This dispute is between 550 claimants, most sub-postmasters, and the Post Office. It concerns Horizon, an electronic point of sale and accounting system. The claimants say defects in Horizon threw up accounting shortfalls for which the Post Office then held them accountable. The Post Office says the claimants were responsible for the shortfalls which represented actual money missing.

This 336-page judgment deals with some preliminary issues. The most interesting is: "Was the contractual relationship between the Post Office and Subpostmasters a relational contract such that the Post Office was subject to duties of good faith, fair dealing, transparency, co-operation, and trust and confidence...?"

In answering, "Yes", the High Court may have set a cat among the pigeons.

The court said there is a type of contract—a relational contact—where good faith (also called fair dealing) is implied. According to the court this means parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people. The court stressed that it is not enough just to be honest.

In doing so, the court expressly disagreed with the position set out in the leading text book, Chitty. The relevant bit in Chitty says that judicial commentary on Yam Seng—the case which has given rise to the relational contract/good faith debate—saw it not as setting out a general principle but rather as "recognising a particular example of a contract where a term as to good faith (meaning honesty) should be implied". In other words, a term to act in good faith can be implied in fact if the context requires. Whereas the court in the Post Office case is saying that once you have a "relational contract" then, as a matter of law, you have the implied term. At the same time the court is arguably raising the standard required if the term is implied.

The court gave a list of the sorts of characteristics that may determine whether a contract is relational, for example: it will be long term during which the parties will be collaborating with each other; there may be exclusivity; there may be a degree of significant investment by one party (or both) in the venture; and, there is likely to be a high degree of collaboration. Crucially, "There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract".

The court acknowledges the importance of the Post Office being a publicly funded body which, along with other factors, may distinguish the decision. However the court clearly states that you can have a relational contract which is a commercial contract between businesses.

Off the back of it being a relational contract, an astonishing 17 terms (or more accurately “incidents” of the finding that there is an implied obligation of good faith) were implied into the contract. These included: providing adequate support and training; properly, fully and fairly investigating any alleged or apparent shortfalls; and, co-operating in seeking to identify the possible or likely causes of any apparent or alleged shortfalls.

If you don't want good faith being implied into your contract, and there's a risk it may be a relational contract, you may want to say so expressly.

Update 20 May: Bates v Post Office can be contrasted with cases where there is an express duty to act in good faith.  This was the case in Teesside Gas v CATS North Sea. One clause said  Teeside Gas had "the right to dispute, in good faith, any amount specified in an invoice". The court held that "The contract thereby defined, in my judgment exhaustively, the extent of any good faith obligations arising under it. It would be inconsistent with those terms to imply any wider duty of good faith."

Update 22 November: The Post Office has been refused permission to appeal. The claimants have posted a copy of the reasons for the refusal here. Coulson LJ says "No judge will ever know more about this case generally, and the Common Issues specifically, than Fraser J."  Interestingly, in this detailed explanation, Coulson LJ goes on to state "In my view, on any fair reading of the judgment, the judge ... considered the circumstances of this case and found, for a variety of reasons, that the good faith duty should be implied into these contracts. ... At no point did he find that, because the contract could be described as ‘relational’, the good faith term somehow “automatically” had to be implied."

Update 11 December: the dispute has been has settled.