In Post Office v Bates (2019), the court said that in relational contracts there are implied obligations of good faith:

“This means that the parties must refrain from conduct which in the relevant context would be regarded as commercial unacceptable by reasonable and honest people. An implied duty of good faith does not solely mean that the parties must be honest.”

The parties had agreed that the contract included these implied terms:

  • each party would refrain from taking steps that would inhibit or prevent the other party from complying with its contractual obligations
  • each party would provide the other with such reasonable cooperation as was necessary to the performance of the other party’s obligations.

What is good faith?

The court said acting in good faith requires not merely the implied terms set out above but also:

  • transparency
  • cooperation
  • trust, and
  • confidence.

It also said that for this relational contract, the duty of good faith extended to these duties:

  • to disclose information candidly, fully and frankly
  • to communicate (or, at least, not conceal) known problems which might have financial implications for the other party, or data upon which the other party depended
  • not to suspend or terminate the contract arbitrarily, irrationally or capriciously and without reasonable and proper cause
  • not to take steps which would undermine the relationship of trust and confidence between the parties
  • to exercise any contractual power honestly, in good faith and for the purposes it was conferred
  • not to exercise any discretion arbitrarily, capriciously or unreasonably; but in accordance with obligations of good faith, fair dealing, transparency, cooperation, and trust and confidence.

What should you do?

In a relational contract, your duties of good faith may take priority over your own business aims.

It is far better to agree the basis on which both parties will act, behave and conduct themselves before your venture starts, than try to work it out with the benefit of hindsight. By then, it might be too late for you to comply!

Case: Bates & Ors v Post Office Ltd (No 3) [2019] EWHC 606 (QB) at [698, 700]

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