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)  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  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