'Relational contracts' and the implied duty of good faith
‘Relational contracts’ and the implied duty of good faith
In the recent case of Bates v Post Office  EWHC 606 (QB) (Bates) the English High Court found that an implied duty to act in good faith exists in 'relational contracts'.
Traditionally, English and Irish contract law has not recognised an implied duty of good faith (with the exception of specific contractual relationships such as insurance or partnership agreements). This contrasts with the position in the United States and many civil law jurisdictions (such as France and Germany), where a duty of good faith has long been a recognised component of commercial contracts. However, over recent years, a number of decisions of the English courts have made some inroads into the traditional position.
This first started with the decision of Mr Justice Leggatt in the case of Yam Seng Pte Ltd v International Trade Corporation Ltd  EWHC 111 (QB) (Yam Seng). In that case, the judge recognised the concept of an implied duty in what he called 'relational contracts'. Broadly, he characterised such relational contracts as contracts which are underpinned by a strong personal and collaborative element, such as joint venture agreements. While the approach in Yam Seng has found favour in some courts, generally English judges have been reluctant to imply an obligation of good faith in the absence of express wording and many have taken a cautious approach to the concept of relational contracts.
The issue came before the Irish High Court in Flynn v Breccia  IECA 74 (Flynn), where the approach in Yam Seng found favour with Mr Justice Haughton. However, the Court of Appeal overturned this ruling. Ms Justice Finlay Geoghegan, giving judgment, noted that Irish contract law does not recognise a general principle of good faith and fair dealing, although there are certain limited categories of contractual relationships where such a duty may be implied. This is currently the established position in Ireland and we have yet to see a ruling from the Irish Supreme Court on this matter. (Ms Justice Finlay Geoghegan is now a judge of the Supreme Court.)
In Bates, Mr. Justice Fraser goes much further than Yam Seng by stating that once there is a 'relational contract', then there is an implied term of good faith as a matter of law. "This means that the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people."
In order to determine if a contract is 'relational', Mr. Justice Fraser set out a non-exhaustive list of characteristics denoting a relational contract; including:
No express terms in the contract preventing the implication of good faith
Contract is a long-term one and it is the mutual intention of the parties that there will be a long-term relationship
Parties committed to collaborating with one another in performance of the contract
Contract will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty
It is arguable that most commercial contracts would meet some, if not all of the above characteristics of a relational contract. Mr. Justice Fraser's approach represents quite a significant broadening of the law in this area and, if the decision is appealed to a higher court, we may see a different outcome.