Case law: Court rules that implied duty to act in good faith does not apply automatically to ‘relational’ contract

Parties negotiating a proposed agreement need to be aware that previous legal rulings that a duty to act in good faith will automatically be implied into their agreement if it is ‘relational’ have been watered down in recent court decisions.

Traditionally, the courts have only implied a term into an agreement if the term satisfies the strict test that it is either:

• necessary to give business efficacy to the agreement (so, if it works without that term in it, the term will not be implied); or
• so obvious that it goes without saying.

The rules also say that a term should only be implied into an agreement if it is reasonable and equitable, and if it is capable of clear expression. One key additional criterion is that the implied term must not be inconsistent with an express term of the contract.

However, in several recent legal cases, the courts have also ruled that a term saying the parties must act in good faith will automatically be implied into a contract that is ‘relational’. Generally, a contract is relational if the parties’ relationship is more than purely commercial – if there is a strong personal and collaborative element to it.

The rationale is that such a term is essential to give effect to the reasonable expectations of the parties to such a contract, and it therefore satisfies the business necessity/efficacy test. If there is an implied duty to act in good faith, 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’ and each party can ‘trust that the other party will act with integrity and in a spirit of cooperation’.

In one recent ruling, the High Court set out a list of specific (though non-exhaustive) characteristics to be applied when determining whether a contract was relational. However, in a later legal decision the court took a different approach. It said that, rather than identifying and weighing specific factors indicative of a relational contract, the better approach was to consider ‘whether a reasonable reader of the contract would consider that an obligation of good faith was obviously meant or whether the obligation is necessary to the proper working of the contract’.

The overall character of the contract in issue will be highly material in answering that question. So may particular terms in it, as recognised by the principle that no term may be implied into a contract if it would be inconsistent with an express term.

In a new twist, two new decisions have watered down the previous assumption that the duty will be implied automatically if a contract is relational. One decided that a joint operating contract could be relational (because it was long-term and required significant co-operation and collaboration between the signatories), but went on to say that this did not mean that a duty to act in good faith had to be automatically implied into the contract. It was simply a factor to take into account when assessing whether such a term was necessary to give business efficacy to the agreement or was so obvious that it went without saying. The other involved a joint venture agreement – which are very often treated as relational contracts. Again, the court decided not to automatically imply a duty of good faith into the agreement.

Operative date

• Now

Recommendation

• Parties negotiating a proposed contract need to be aware that a different test will apply when deciding whether it is a ‘relational contract’, and also that this is only one factor in deciding whether a duty to act in good faith is to be implied.

Case ref: TAQA Bratani Limited & Ors v RockRose UKCS8 LLC [2020] EWHC 58
Russell v Cartwright [2020] EWHC 41