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Are you under a duty to act in good faith?

Many will be aware of the well-publicised dispute between the Post Office and a number of its subcontractors responsible for running branch Post Offices.  The dispute stems from an issue with an electronic accounting and POS system which the Post Office required its subcontractors to use.  The system allegedly contained faults which resulted in accounting errors and financial shortfalls.  The Post Office pursued its subcontractors and claimed that they were personally responsible for the errors under the terms of the contract which was in place.

Some of the subcontractors paid the differences, some Post Office contracts were terminated, some subcontractors were suspended and some were convicted of criminal offences and imprisoned.  A Criminal Cases Review Commission review is underway in relation to the convictions of a number of the subcontractors.

In response, a group of subcontractors are pursuing the Post Office for (amongst other things), damages for financial loss, on the basis that the Post Office breached an implied duty of good faith.  This is a significant piece of “bitterly contested” litigation which will take some time to reach a final conclusion however, on 15 March 2019, the Court handed down its first judgment.

The recent judgment, which deals with ‘the Common Issues’, covers a number of ‘contractual issues’ including implied terms, onerous or unusual terms, etc.

One of the questions before the Court was whether the contractual relationship between the Post Office and its subcontractors was a relational contract such that the Post Office was subject to duties of good faith, fair dealing, transparency, co-operation and trust and confidence.

In English law, there is generally no duty of good faith in contractual arrangements.  In a number of recent cases however, the Court has found that in some “relational contracts” there will be an implied obligation of good faith.  Although a duty of good faith will not be “routinely applied to all commercial contracts” it nevertheless may exist. A duty of good faith means that parties are required to refrain from conduct which is “commercially unacceptable by reasonable and honest people”.

The question then becomes, what is a “relational contract”.   In its judgment, the Court gave some guidance on when a contract might be considered to be a “relational contract”.  Some of the characteristics of a “relational contract” are:

  • There must be no specific express term in the contract which prevents a duty of good faith being implied.
  • The contract will be a long term one.
  • The parties must intend that their respective role are performed with integrity.
  • The parties will be committed to collaborating with one another in performance of the contract.
  • The spirit and objectives of the parties’ venture may not be capable of being express exhaustively in a written contract.
  • They will each repose trust and confidence in one another.
  • The contract will involve a high degree of communication, co-operation and predictable performance.
  • There may be a degree of significant investment by one party (or both).
  • Exclusivity of the relationship may be present.

In this instance, the Court found that a relational contract did exist between the Post Office and its subcontractors and this implied a duty of good faith.

The Post Office is likely to appeal this decision but the implications could be profound.  Parties will need to carefully consider whether their contract amounts to a ‘relational contract’ and, if so, they could be under a duty to act in good faith.  Drafting is, as always, key. Critically, the Court noted that if a contract expressly excludes a duty to act in good faith then this duty will not be implied.

 

If you would like to speak to someone about contractual disputes or any other commercial or corporate matter, please call 01524 545 494 or 01228 552 600.

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