The subject of good faith in commercial contracts under English law has been considered by the courts in a number of judgments in recent years (see our previous articles Good faith and the exercise of discretion in contracts and Good faith in commercial contracts revisited). Further judicial consideration of this subject has now been given in the 2019 judgment in Bates v Post Office – a major class action[1]. The case involved a claim by sub post masters against the Post Office arising out a defective computer system. One allegation was that the Post Office were under an obligation to act in good faith.
No universally applicable duty of good faith in commercial contracts
The judgment confirmed that under English law there is no general duty of good faith in all commercial contracts. However such a duty would be implied into contracts that were considered “relational”.
Relational contracts
A “relational” contract has been described as contract that involves a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and expectations of loyalty “which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements”.
Whether any contract is relational is heavily dependent upon context, as well as the terms. The 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.
The court considered[2] that the following characteristics are relevant as to whether a contract is a relational one giving rise to an implied duty of good faith or not:
- There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
- The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
- The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
- The parties will be committed to collaborating with one another in the performance of the contract.
- The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
- They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
- The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
- There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.
- Exclusivity of the relationship may also be present.
This was not considered as an exhaustive list. No single one of the above list was determinative, with the exception of the first one (express terms). If the express terms prevent the implication of a duty of good faith, then that will be the end of the matter.
The court noted that an imbalance of power between the parties was not a factor that had any effect of whether a contract was a relational one.
What is a duty of good faith?
The judge stated that where duty of good faith is implied in a contract,
“This means that both the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people. Transparency, co-operation, and trust and confidence are, in my judgment, implicit within the implied obligation of good faith.”
A duty of good faith is more than a duty to act honestly or, alternatively, not to act dishonestly[3].
Also it is more than an implied term merely not to do anything to frustrate the purpose of the contract.
Duty of good faith to be distinguished from a fiduciary duty
The judgment confirmed that obligation to act in good faith is not the same a fiduciary duty quoting the following from an earlier judgment[4].
“… ‘relational’ contracts involve trust and confidence but of a different kind from that involved in fiduciary relationships. The trust is not in the loyal subordination by one party of its own interests to those of another. It is trust that the other party will act with integrity and in a spirit of cooperation.”
Implied terms
The court upheld the view that there are two types of implied terms[5].
First, there are those terms which are implied into a contract where it is necessary to give business efficacy to the particular contract in question. Second, there are those terms which are implied into a class of contractual relationship e.g. relational contract, unless the parties have expressly excluded it.
If a contract was “relational” then a good faith obligation would be implied and this could give rise to a number of implied obligations. In the particular judgment concerned the court implied seventeen separate provisions that arose out on the good faith obligation In parallel the court implied other terms were considered necessary on the grounds of business efficacy.
Express terms imposing a duty of good faith
An obligation of good faith will only be implied in the absence of express terms on the subject. Express provisions dealing will good faith may restrict or prevent any implied obligations of good faith.
Comment
The duty of good faith may appear deceptively simple. However if a contract is a relational one then the existence of a duty of good faith may be portal through which many obligations may be implied As mentioned previously in the Bates case no less than seventeen provisions were implied as a consequence of the good faith obligation. The nature of the good faith obligation in the context of any particular relational contract may be a source of dispute in the future.
[1] Bates v Post Office Ltd (no 3) [2019] EWHC 606 (QB)
[2] At para 725
[3] para 711
[4] Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm)
[5] Geys v Société Générale [2013] 1 AC 523
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