Recent High Court decision in Bates v Post Office
With the exception of certain specific types of contracts (such as employment and insurance contracts), English judges have historically refused to recognise an overriding principle of good faith between contractual parties, due to it being unworkable in practice and inconsistent with the position of the negotiating parties (Lord Ackner in Walford v Miles).
Despite this traditional approach, Fraser J recently concluded in Bates v Post Office that such an obligation of good faith will be implied in “relational” contracts.
The High Court clarified that a contract is likely to fall within the definition of “relational” if (amongst others):
the implication of a duty of good faith is not prevented by any express contractual terms;
the contract is mutually intended to be long term;
- the parties intend their roles to be performed with integrity and fidelity to their bargain;
- the parties are committed to collaborating with one another in performing the contract;
- each party places trust and confidence in one another (distinct from any fiduciary relationship which might exist between them); and
- the contract involves a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and expectations of loyalty.
The High Court’s decision further highlighted that the concept of good faith goes beyond mere honesty between the contractual parties. It includes an obligation to “refrain from conduct which […] would be regarded as commercially unacceptable by reasonable and honest people”.
As the principle of good faith is now likely to cover a wide variety of contracts, it would be advisable that contractual parties expressly state whether they wish to be bound by the duty of good faith in order to avoid its uncertain application and potential ambiguous consequences.
If you wish to find out more information on this topic, please contact Natalie Ingram, or give us a call in 0345 070 6000.
This article was prepared by Andra Dinu.