Case law: Court gives guidance on when a duty to act in good faith should be implied into commercial contracts
Parties negotiating a proposed agreement should consider whether it could be a ‘relational contract’, so a duty to act in good faith is automatically implied; and if so, whether they wish to expressly exclude an implied duty of good faith.
This update was published in Legal Alert - May 2019
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Several hundred sub-postmasters were penalised by the Post Office for apparent accounting breaches. Criminal proceedings were even brought in some cases. The sub-postmasters argued these breaches either did not take place or were not their fault. They only started occurring after the Post Office introduced an online sales and accounting system that the sub-postmasters were required to use. The sub-postmasters alleged that the breaches were down to bugs in the system, the training they were given and the quality of service received from the system helpline.
In the course of the dispute (which has been ongoing for several years), the High Court has ruled that a duty for the parties to act in good faith should be implied into the contracts between the sub-postmasters and the Post Office.
Traditionally, the courts have said that there is no legal rule in the UK requiring a duty to act in good faith to be implied into agreements. If such a duty applies, it means ‘that the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people’.
However, there have been exceptions to this rule, and in this case the High Court ruled that a duty to act in good faith should be implied into an agreement if it is a ‘relational’ agreement. There is a relational agreement between two parties where the contractual relationship is more than purely commercial, and there is a strong personal and collaborative element to it.
The High Court decided that the contracts in this case are relational contracts. Usefully, it has highlighted a non-exhaustive set of characteristics that could indicate the presence of a relational contract, such as:
- An absence of express terms indicating that the duty should not be implied.
- The contractual term is long, and the parties both intend it to be.
- The parties are committed to collaborating to ensure the contract’s performance.
- The performance of the contract requires a high degree of communication, co-operation and predictable performance, based on mutual trust and confidence, and expectations of loyalty.
- Parties negotiating a proposed agreement should consider whether it could amount to a relational contract, so that a duty to act in good faith is automatically implied; and if it is, whether they wish to expressly state that any implied duty of good faith shall not apply.
Case ref: Bates v Post Office  EWHC 606
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.
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