High Court provides guidance on relational contracts and implied duties of good faith

The High Court has held that certain contracts between the Post Office and sub-postmasters, which are the subject of group litigation, are “relational contracts” and therefore subject to an implied obligation on the parties to act in good faith: Bates v Post Office Ltd (No. 3) [2019] EWHC 606 (QB).

The court recognised that an obligation of good faith is not implied in all commercial contracts. However, it held that, consistent with earlier decisions including Yam Seng Pte Ltd v International Trade Corpn [2013] EWHC 111 (considered here), English law recognises that there is a type of contract, a “relational contract”, in which such an obligation is to be implied. Whether a contract is a relational one depends on the “circumstances of the relationship, defined by the terms of the agreement, set in its commercial context”.

The court identified a number of characteristics relevant to an assessment of whether a contract is relational, including, for example, whether the parties’ relationship is long-term, and whether the parties repose trust and confidence in each other in performing the contract. No single one of these characteristics would be determinative, save that there must be no express terms in the contract which would prevent a duty of good faith being implied.

The court rejected the argument that a duty of good faith requires only that the parties act honestly. The duty includes honesty but, in the court’s view, it goes beyond that, requiring that the parties refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.

The decision is of interest in adding to the debate as to whether, or when, duties of good faith will be implied. It suggests that whilst courts will not imply a duty of good faith in all commercial contracts, courts may be prepared to do so in an appropriate case, provided that the implication of such a term is not inconsistent with the express terms.

Rachel Lidgate and Matthew Eglezos, a Partner and Senior Associate (Australia) in our disputes team, outline the decision below. Continue reading

Court finds veto right in share option agreement was discretionary and could not be exercised capriciously, arbitrarily or unreasonably

Where a share option agreement provided that the option could be exercised only with board consent, the High Court has ordered specific performance of the agreement despite the lack of board consent. The court held that the veto was discretionary, rather than an unconditional right, and such discretion could not be exercised capriciously, arbitrarily or unreasonably:  Watson v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm).

The decision illustrates the court’s willingness to find that a contractual discretion is limited by reading into the relevant clause a duty not to exercise the discretion capriciously, arbitrarily or unreasonably. While such a limit will not apply in every case, it did here due to the potential conflict of interest arising from the board’s ability to grant or withhold consent.

Where parties are required to exercise a contractual discretion, they should be alert to the potential scrutiny of their decisions and ensure that any discussions at board meetings or otherwise are meaningful and are properly minuted so as to evidence that a proper decision-making process has been followed.

Contractual discretions are also considered in the fourth edition in our contract disputes practical guides series: How far can you act in your own self-interest?: The role of good faith in commercial contracts.

Gregg Rowan and Anthea Brookes, a partner and associate in our disputes team, consider the decision further below. Continue reading

Court of Appeal considers implied variation and good faith in relation to contractual rights of termination

The Court of Appeal has upheld a decision granting summary judgment to a defendant in relation to an allegation that it had wrongfully terminated a distribution agreement. The court rejected arguments based on contractual construction, implied variation and implied duties of good faith : Ilkerler Otomotiv Sanayai ve Ticaret Anonim v Perkins Engines Co Ltd [2017] EWCA Civ 183.

The decision provides useful guidance on when an express variation of a contract may result in the implied variation of other terms, a point on which there appears to have been no direct authority. The test is whether the express variation is consistent only with the existence of the alleged implied term. When agreeing variations to a contract, parties should be careful to consider whether the proposed changes have any knock-on effects on the rest of the contractual framework, which may need to be addressed by way of additional express amendments. It seems the courts are likely to assist a party in implying a variation only in relatively clear-cut cases.

The decision is also of interest in adding to a growing body of authorities rejecting a role for good faith in relation to contractual termination. 

Gregg Rowan and Andrew Hillam, a partner and an associate in our dispute resolute team, consider the decision further below.

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No implied obligation of good faith in exercising contractual right of termination

The High Court has again considered the circumstances in which a duty of good faith will be implied into a contract, rejecting an argument that a party's contractual right to terminate a consultancy contract had to be exercised in good faith: Monde Petroleum SA v Westernzagros Limited [2016] EWHC 1472 (Comm)

An allegation that a party has breached an implied term of good faith may in some circumstances be a useful tool in a claimant's armoury. In the present case, however, the claimant was unsuccessful in its attempts to deploy this tool.  The deputy judge noted that, outside accepted categories of contract where a duty of good faith is implied by law (eg employment or partnership contracts), such a term will only be implied if the contract would lack commercial or practical coherence without it. That was not the case here. He also suggested that a duty of good faith could not apply to a contractual right to terminate, which can be exercised irrespective of the exercising party's reasons for doing so.

The decision provides another illustration of the difficulties that a claimant will face when seeking to imply a good faith term into a contract, particularly in relation to a contractual right of termination. Other recent cases where the courts have rejected an implied duty of good faith are considered here and here, or see our guide: How far can you act in your own self-interest? The role of good faith in commercial contracts, which forms part of our series of contract disputes practical guides.   

Gregg Rowan and James Robson, a partner and associate in our dispute resolution team, consider the decision further below.

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Court of Appeal finds innocent party could not affirm contract following repudiatory breach where defaulting party unable (not just unwilling) to perform

The Court of Appeal has upheld a decision that a party was not entitled to keep a contract alive for the purpose of claiming ongoing liquidated damages for delayed performance following its counterparty’s repudiatory breach: MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789.

The Court of Appeal did not however base its decision on whether the innocent party had a "legitimate interest" in affirming the contract, as the High Court had done (see our blog post on the first instance decision). Instead, the Court of Appeal found that it was not open to the innocent party to affirm the contract because the defaulting party was unable to perform its obligations, as the commercial purpose of the venture had become frustrated, rather than simply refusing to do so. The decision suggests that an innocent party's ability to affirm a contract following a counterparty's repudiatory breach will be fettered if performance is no longer possible.

The Court of Appeal also disagreed with the High Court's suggestion that "good faith" principles are relevant in considering whether an innocent party has a legitimate interest in affirming a contract. Its comments on this aspect suggest a reluctance on the part of the senior judiciary to broaden the application of "good faith" principles in matters of interpretation and contractual construction.

Gregg Rowan and Rob Javin-Fisher, a partner and senior associate in our dispute resolution team who commented on the High Court decision, consider the outcome of the appeal further below.

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Court of Appeal considers “all reasonable endeavours” obligation

The Court of Appeal has held that a party was not in breach of an obligation to use "all reasonable endeavours" to procure the grant of planning permission where that obligation was subject to a qualification regarding the circumstances in which it had to pursue an appeal, ie only where planning counsel advised the prospects of success were 60% or greater: Bristol Rovers (1883) Ltd v Sainsbury's Supermarkets Ltd [2016] EWCA Civ 160.

The decision illustrates that general obligations to endeavour to achieve some object, whether that is to use "best" or "reasonable" or (as here) "all reasonable" endeavours, will give way to more specific provisions setting out steps that must be taken, or steps that need not be taken, to comply with the obligation. In this case there was some ambiguity in the drafting of the relevant clause, which complicated matters, but nonetheless the decision illustrates the value of including such provisions in order to set boundaries on a potentially open-ended endeavours obligation. 

James Farrell and Maura McIntosh outline the decision below. For more information on endeavours obligations, see our recently published guide: Endeavours obligations: How hard do you have to try? which forms part of our series of contract disputes practical guides.

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How far can you act in your own self-interest? The role of good faith in commercial contracts

The traditional starting point in English contract law is that parties are free to do what they like so long as they do not breach the agreed terms.

But it is becoming increasingly common for parties to agree terms requiring them to act in “good faith”, or similar. Even where no such term is expressed in the contract, courts and tribunals are increasingly being asked to imply good faith obligations.

As a result, commercial parties may be uncertain what is required of them.

In this fourth of our series of contract disputes practical guides, Chris ParkerGregg Rowan and Nick Pantlin consider the circumstances in which parties may owe one another duties of good faith, what those duties may involve, and some practical steps that can be taken to minimise the risks. You can click here to download the PDF guide.

Clients and contacts of the firm can also register to access the archived version of our webinar exploring these issues by contacting Jane Webber. The webinar lasts an hour and qualifies for one CPD point. Or if you would prefer a shorter version focusing on key practical tips, Gregg has also presented this 12 minute podcast.

There are three previous editions in the series, listed below, which can be accessed from the home page for our contract disputes series (which is also linked under "our guides" in the top menu):

  • When do you have a binding contract? It may be more (or less) often than you think
  • What does your contract mean? How the courts interpret contracts
  • Pre-contractual statements: When can they come back to bite you?

High Court refuses to imply duty of good faith in relation to exercise of contractual right

In a decision earlier this year, the High Court refused to imply a duty of good faith in relation to a contractual right to amend a loan note instrument: Myers and another v Kestrel Acquisitions Ltd (Kestrel) and others [2015] EWCH 916 (Ch).

The judge cited the fact that the contractual documentation was "extensive and detailed" and the parties were professionally advised and at arm's length with one another. If they had intended that there should be a duty of good faith, they would have said so expressly but, instead, they agreed other provisions that protected the claimants' interests. This suggested that no such duty was intended.

The judge also drew a distinction between (a) a discretion that involves an assessment being made or a choice from a range of options and (b) a binary choice as to whether or not to exercise an absolute contractual right. The decision suggests that a duty of good faith is unlikely to arise in the latter situation.

This is one of a number of recent cases in which the courts have been invited to imply a duty of good faith into a contract.  On some occasions, the courts have been willing to do so – see for example our posts on the decisions in Yam Seng Pte Ltd v International Trade Corporation, Bristol Groundschool Limited v Intelligent Data Capture Limited and MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt.

This latest decision goes in the opposite direction and fuels the debate as to the circumstances in which a duty of good faith will be implied.  While this debate continues, litigants can be expected to test the parameters of the duty and, in light of this decision, possibly also the distinction between decisions that are binary and those involving a range of options, which in practice may not always be easy to draw.

In view of the continuing uncertainty as to the scope of implied duties of good faith, it is advisable for contracting parties wishing to include such a duty to define the nature and extent of the duty in express terms.  Conversely, if contracting parties do not wish to be subject to a duty of good faith, it may be advisable to exclude it expressly.

Gregg Rowan, a partner in our disputes team, and Corina Demeter, a trainee solicitor, consider the decision further below. Continue reading

Good faith principles applied to question of whether innocent party could keep contract alive following repudiatory breach

The High Court has held that a party was not entitled to keep a contract alive indefinitely for the purpose of claiming ongoing liquidated damages for delayed performance following its counterparty’s repudiatory breach: MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2015] EWHC 283 (Comm).

The court held that an innocent party’s decision whether to terminate or affirm a contract following a counterparty’s repudiatory breach must be exercised in good faith. This is essentially the same test as where a party exercises a contractual discretion.

Previous cases had established that an innocent party could not affirm a contract unless it had a “legitimate interest” in performing and claiming the contract price rather than claiming damages, but that was generally interpreted as setting a fairly low threshold. The present decision arguably goes further in applying good faith principles. If this approach is followed in other cases, it may mean that an innocent party’s options following an opponent’s repudiatory breach are subject to greater constraints than previously thought.

It is worth noting that the judge, Mr Justice Leggatt, also decided Yam Seng Pte Limited v International Trade Corporation Limited [2013] EWHC 111 (QB) (see post) which is generally seen as setting the high water mark for implied duties of good faith in commercial contracts. The decision is subject to an outstanding application for permission to appeal.

The decision is also of interest for the court’s comments regarding penalty clauses. If the court had concluded that the innocent party had an unfettered right to keep the contract alive and claim liquidated damages, it would have held that the liquidated damages clause was unenforceable as a penalty. Gregg Rowan and Rob Javin-Fisher, a partner and senior associate in our dispute resolution team, consider the decision further below. Continue reading

High Court implies duty of honesty and integrity into vehicle recovery contract

In a recent decision, the High Court has implied a duty of "honesty and integrity" into a vehicle recovery contract: D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB).

Whilst it remains clear that there is no general doctrine of good faith in English contract law, this case is a further instance of the implication of ethical standards into a commercial contract, following the decision of Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB) (see post).

Yam Seng suggested that duties of good faith were more likely to be implied into so-called "relational" contracts – contracts which involve a longer-term relationship between the parties and which may require a high degree of communication, co-operation and predictable performance based on mutual trust and confidence. The examples given were joint venture agreements, franchise agreements and long term distributorship agreements.

In the subsequent decision of Bristol Groundschool Limited v Whittingham [2014] EWHC 2145 (see post), it was found that a contract relating to the development of computer-based training materials (described by counsel for the defendant as a "hybrid" between two of these categories) was a "relational" contract containing an implied duty of good faith. The contract in the present case did not fall within any of the categories, but the court described it as a "relational contract par excellence" through the application of the general principles summarised in Yam Seng. These decisions may therefore be seen to indicate an incremental broadening of the circumstances in which a duty of good faith, or the equivalent, might be implied.

Given the ease with which many contracts could potentially be described as "relational", commercial parties should exercise caution, not only when negotiating the terms of any agreement, when it may be advisable to consider addressing the matter expressly, but also when performing their obligations. Joanne Keillor, a senior associate in our dispute resolution team, considers the D&G decision further below. Continue reading