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 of Appeal finds clause imposing liquidated damages for delay did not apply where work was never completed

In a recent decision, the Court of Appeal held that a clause providing for liquidated damages for delay did not apply where the contractor failed to complete the contracted work (the installation of a new software system). The employer under the contract was therefore entitled to recover damages for breach assessed on ordinary principles, rather than liquidated damages: Triple Point Technology Inc v PTT Public Company Ltd [2019] EWCA Civ 230.

The Court of Appeal said that the question of whether such a clause applied in these circumstances would depend on the wording of the clause itself. In relation to the specific clause before the court, the clause was focused specifically on delay between the contractual completion date and when the work was actually completed by the contractor and accepted by the employer. If that never occurred, the liquidated damages clause did not apply. The case is a useful reminder that, when drafting a liquidated damages clause, it is important to ensure there is no room for doubt as to when the clause will apply.

The Court of Appeal also rejected the appellant’s argument that the liquidated damages clause should be struck out as a penalty clause, under the test established by the Supreme Court in the leading case of Cavendish v Makdessi (considered here). The court noted that the total sums as calculated under the clause were modest when compared to the financial consequences of delay in installing the software, and concluded that it was a genuine pre-estimate of loss.

Anthea Brookes, an associate in our disputes team, outlines the decision below. Continue reading

Supreme Court overturns decision finding contract incomplete and declining to imply term

The Supreme Court has unanimously held that a binding agreement was reached between a property seller and an estate agent, despite the parties not having specified the circumstances in which the agreed rate of commission would fall due: Wells v Devani [2019] UKSC 4.

In doing so it overturned the majority decision of the Court of Appeal (considered here) finding that the agreement was incomplete because of the failure to agree this essential term, and that the court could not imply a term in order to transform an incomplete bargain into a legally binding contract.

The Supreme Court found that the only sensible interpretation of the parties’ words and conduct was that the commission would be payable on completion of a purchase by a buyer introduced by the agent, so it was not necessary to imply a term. If it had been necessary, however, the court would have had no hesitation in doing so. It did not agree with the Court of Appeal that there is any general rule preventing the court implying a term where that will render the agreement sufficiently certain or complete to constitute a binding contract, and the conditions for implying a term are satisfied.

The decision emphasises the court’s reluctance to find that an agreement is too vague or uncertain to be enforced where the parties intended to be bound and have acted on their agreement. Of course, as a practical matter, to avoid the risk that the courts will find their bargain unenforceable – or, conversely, imply a term that is not in fact what they intended – parties should ensure that all essential terms are expressly agreed.

Chris Bushell and Maura McIntosh consider the decision further below. Continue reading

Court of Appeal decision underlines high threshold for implying terms into a contract

The Court of Appeal has overturned a High Court decision to imply a contractual term into a loan agreement entered into between a brokerage firm and an intended partner in that firm, to the effect that the loan must be repaid if the individual did not serve an initial four-year term of employment: Robert Bou-Simon v BGC Brokers LP [2018] EWCA Civ 1525.

This case is a reminder of the strict approach which English courts adopt when asked to imply a term into a contract. It is necessary to construe the express terms of the contract before considering whether a term should be implied. The court may not apply hindsight, but must consider the position at the time the contract was formed. The court cannot imply a term simply because it seems fair or because the court considers that the parties would have agreed to it had it been suggested to them.

The Court of Appeal also made some interesting obiter comments about the admissibility of words which were included in a previous draft of the agreement but omitted from the final version. In particular, Lord Justice Singh observed that in the context of considering implied terms (as distinct from construing express contractual terms) he would not necessarily accept that there is an ambiguity threshold which must be satisfied in order for deleted words to be admissible.

Zoe Wood in our London dispute resolution team considers the decision further below. Continue reading

High Court finds option agreement void for uncertainty where it left delivery dates to be agreed

The High Court has found that an option agreement for the purchase of oil tankers was void for uncertainty where it provided that the delivery date for the vessels would be "mutually agreed upon" when the relevant options were exercised: Teekay Tankers Ltd v STX [2017] EWHC 253 (Comm).

Although the parties had intended the agreement to be binding, the court found that it was impossible to imply a term by which the delivery dates were to be determined if the parties were not able to reach agreement. The delivery dates were an essential term of the contract, and so this was merely a non-binding "agreement to agree".  

The Teekay decision shows clearly the difficulties parties may have in enforcing contracts where essential terms are left to be agreed at a later date. Where possible, it is best to agree all important terms in advance. If that is not possible, the agreement should ideally set down some objective standard against which agreement is to be reached, or some other fall back provision to determine the content of the term if there is a deadlock. If the parties wish to retain the freedom to agree, or not, as they see fit, this may result in the agreement being rendered void as a result.

Chris Bushell and Tom Brown, a partner and associate in our disputes team, consider the decision further below. For more on contract formation, and the potential pitfalls, see When do you have a binding contract? It may be more (or less) often than you think, which is part of our series of contract disputes practical guides.

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Court of Appeal refuses to imply term where contract incomplete

The Court of Appeal has held, by a majority, that no binding agreement was reached between the seller of several flats and an estate agent, as the parties had failed to agree the circumstances in which the agreed rate of commission would fall due. This was a critical term which, the court said, could not be decided by reference to the standard of reasonableness. That meant the agent was not entitled to commission when the flats were sold to a purchaser he had introduced: Wells v Devani [2016] EWCA Civ 1106.

The Court of Appeal in this case expressed the view that the courts cannot imply terms into an agreement where to do so would transform an incomplete bargain into a legally binding contract. There are however many cases in which the courts have held that a failure to agree essential terms was not fatal to the formation of a binding contract, where it was clear that the parties intended to form a binding contract and the court could fill in the missing term for example by reference to a reasonable price or reasonable time of performance (see for example this blog post).

There may be room for some debate as to precisely how these authorities should be reconciled. As a practical matter, however, what is clear is that parties should expressly agree all essential terms if they want to be certain they will be able to enforce the contract against the counterparty.

Chris Bushell and Tom Brown, a partner and associate in our disputes team, consider the decision further below. For more on when the courts will find that there is a binding contract, and the problems that can arise, see our contract disputes practical guide: When do you have a binding contract?

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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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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?

Supreme Court clarifies test for implying terms into a contract

In a judgment handed down yesterday morning, the Supreme Court has clarified the law on when the court can imply a term that the parties have not expressly included in their contract, endorsing the traditional approach that the term either must be so obvious as to go without saying or must be necessary to give business efficacy to the contract: Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72.

The decision considers the Privy Council decision in Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988, which had generally been accepted as the leading modern case on the implication of terms. In that case, Lord Hoffmann suggested that the process of implying terms was part of the exercise of contractual construction, so that the only question was whether a reasonable reader of the contract, with the relevant background knowledge, would understand it to be implied. That decision led to a great deal of academic debate as to whether it had changed the law, so that reasonableness could now be seen as a sufficient ground for implying a term.

In the present decision, the Supreme Court is unanimous in emphasising that Belize Telecom should not be taken as having watered down the traditional, highly restrictive approach to the implication of terms. The upshot of the decision is that reasonableness in itself is not sufficient; the tests of obviousness or business efficacy must be met. There is however some disagreement between the Supreme Court Justices as to how Belize Telecom should be treated going forward. Natasha Johnson, a partner in our dispute resolution team, considers the decision below.

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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