Fraser J’s judgment in Bates and others v Post Office Ltd (No 3) [2019] EWHC 606 (QB) is the third judgment in the group litigation between the Post Office and a group of sub-postmasters over alleged shortfalls in the accounts at the branches run by the sub-postmasters.
The sub-postmasters claim the shortfalls are the fault of the Horizon accounting system they are required to use. The Post Office claims that, unless the sub-postmasters can prove otherwise, the shortfalls are their responsibility and they must refund the missing money. Fraser J summarised the case as “bitterly contested litigation”.
The judgment is huge, stretching to 1,122 paragraphs. We are only interested in 39 of them, which deal with the question of whether the individual contracts between the sub-postmasters and the Post Office are relational ones, into which the law would imply an obligation that could be described as good faith, fair dealing or a duty to cooperate on the parties.
Key point
- Despite a recent case in favour, there remains no judicial or academic agreement as to whether relational contracts implying good faith obligations should exist in English law
Having reviewed numerous authorities, including Leggatt J’s introduction of the phrase “relational contract” in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), Fraser J concluded that the contracts are relational, and that various terms were implied into the contracts, including that the Post Office’s right to terminate the contracts could only arise if the sub-postmasters were in repudiatory breach.
Relational contracts
The starting point of any discussion is to acknowledge that there is no general duty of good faith in English contract law.
In Costain Ltd v Tarmac Holdings Ltd [2017] EWHC 319 (TCC), a decision on the meaning of the partnering clause (a requirement on the parties “to act in the spirit of mutual trust and cooperation”) in the NEC suite of construction contracts (see “Not so perfect partnering clauses”), Coulson J (who acknowledged that the clause had some limited effect) was reluctant to impose a more general obligation on the parties to act fairly or in good faith, since “that is a difficult obligation to police because it is subjective”.
Relevant characteristics
Interestingly, Coulson J mainly concentrated on Australian authorities on good faith clauses when deciding Costain. Fraser J, on the other hand, was able to refer to English authorities, which “make it clear… that the concept of relational contracts is an established one in English law.”
In addition to Yam Seng, Fraser J drew comfort from, among others, Jackson LJ’s judgment in Amey Birmingham Highways Ltd v Birmingham City Council [2018] EWCA Civ 264 and Beatson LJ’s judgment in Globe Motors, Inc v TRW Lucas Varity Electric Steering [2016] EWCA Civ 396.
The judge decided that there were a number of characteristics which are relevant to the question of whether a contract is relational:
- There must be no express term which prevents a duty of good faith being implied;
- The contract will be a long- term one, with a mutual intention for there to be a long-term relationship;
- The parties must intend that their roles are performed with integrity and true to their bargain;
- The parties will be committed to collaborating with one another;
- The spirits and objectives of the parties’ venture may not be capable of being exhaustively expressed in a written contract;
- Each party places trust and confidence in the other (although this is different to a fiduciary relationship);
- The contract involves a high degree of communication, co-operation and predictable performance based on mutual trust and cooperation and expectations of loyalty;
- One or both parties may have made a significant investment in the venture which might take the form of a substantial financial commitment;
- The relationship between the parties may be exclusive.
Fraser J made it clear that the list was not exhaustive and, apart from the first point, none was intended to be decisive of the issue. However, “if the express terms prevent the implication of a duty of good faith, then that will be the end of the matter”.
Precise definition
The judge faced a number of challenges. Some of the cases on which he relied – most notably MSC Mediterranean Shipping Co v Cottonex Anstalt [2016] EWCA Civ 789 – are not that supportive.
In that judgment, Moore-Bick LJ said: “The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far- reaching consequences, and I do not think it necessary or desirable to resort to it in order to decide the outcome of the present case.”
However, Fraser J was able to take comfort from the fact that Moore-Bick LJ did not say that there was no concept; rather, it was not necessary or desirable to resort to it.
The judge showed similarly nimble judicial footwork to distinguish authorities which the Post Office relied on to argue against the existence of relational contracts, and the strong academic criticism in Chitty on Contracts.
Chitty struggles to define precisely what good faith means – although it thinks that honesty is key – and feels implying good faith “would undermine to an unjustified extent English law’s general position rejecting a general requirement of good faith”.
The judge was unperturbed. Good faith “includes honesty, but there is more to it than that”, and the assertion that English law rejected good faith ignored the cases which he referred to, in which the duty was accepted.
This is unsatisfactory. Despite the force of Fraser J’s arguments, there is no judicial or academic agreement as to whether relational contracts can, or even should, exist. We need a binding appellate decision to resolve the issue.
Stuart Pemble is a partner at Mills & Reeve