More than friends: implied duties in relational contracts

Bates and others v Post Office [2019] EWHC 606 (QB)

Facts

The Post Office contracted with certain sub-postmasters and postmasters on two standard form agreements: a Sub Postmasters Contract and a Network Transformation Contract, each of which was intended to govern the services provided by the sub-postmasters - namely the management of post office branches. No negotiation was permitted on these terms, with the former making the sub-postmasters liable for all losses caused through his, her, or his or her assistant’s negligence, and the latter asserting that the sub-postmasters would be fully liable for any loss however incurred. Both obligated the sub-postmasters to make good any shortfalls.

Accounting errors and unaccounted-for financial shortfalls were discovered, and the Post Office held the sub-postmasters personally responsible for these errors in accordance with the above contracts. As a result, some sub-postmasters paid back the difference, some were fired, and some were subject to criminal convictions for fraud, theft and false accounting, despite the claimants’ argument that the errors and shortfalls were attributable to software introduced by the Post Office in 2000 and not to their actions.

Mr Bates and his fellow sub-postmasters together sued the Post Office (there were around 550 claimants in total), claiming damages for financial loss, personal injury, deceit, duress, unconscionable dealing, harassment and unjust enrichment on the basis that the Post Office has breached an implied duty of good faith. The Post Office contended that this was one aspect of a ‘kitchen sink’ approach to the contractual issues, and that the claimants were seeking to rewrite completely the agreement initially made with the Post Office when they contracted as sub-postmasters.

Decision

1. Implied duty of good faith. Somewhat controversially, the court concluded that there exists a broad duty of good faith, which can be implied into “relational” contracts in situations where this is in line with the “presumed intention of the parties”. It is a long-standing principle of English law that there is ordinarily no general duty of good faith in relation to contractual arrangements, but this is the latest development in a line of recent case law that seems to contradict this. In applying an implied duty of good faith, the court considered that the parties would be required to abstain from any commercially unacceptable actions – as judged by a reasonable and honest observer. Specifically in this case, this was interpreted as a duty to keep proper records and a duty not to claim payment of losses without first establishing the fact of the loss and investigating its cause.
2. “Relational” contracts. Clearly the decision requires some extrapolation of what constitutes a “relational” contract. While primarily it will depend on the facts and terms of each bargain and relationship, the court did give some granular guidance on when a contract might be considered a relational one. Among 17 items in total, the length of the contract term, the collaborative nature of the contracts, and the non-commercial or quasi-public service aspect of the contracts with the sub-postmasters were noted particularly as crucial factors contributing to the court reading a “relational” nature into the contracts.

Comment

By considering that there was a relational aspect to the sub-postmaster contracts, and stating that this entailed an implied duty of good faith, the court made a departure from the leading non-judicial authority on contracts, Chitty. Chitty considers that an implied duty is required only where the context of that arrangement necessitates; Bates v Post Office suggests that where it is established that there is a “relational” contract, there arises automatically an implied duty of good faith.

This raises issues for those drafting such agreements – not least in terms of each of the 17 things noted by court as being characteristics of a relational contract. The judge did however make the welcome observation that an express exclusion of a “relational” nature would be enough for the court to preclude consideration of the same. This, together with each of the 17 items, will be important for contract drafters to consider.