Blog

Implied terms in
relational contracts

Implied terms in relational contracts

Published: 26th March 2019
Area: Corporate & Commercial
Author: Andrew Hartshorn

The existence of implied duties of good faith has received a recent review and a great degree of updating.  The High Court in Bates v Post Office Ltd (No. 3) * has considered what makes a relational contract and the specific terms of good faith that would be implied into a relational contract.

The background is messy.  It concerns the “Horizon” electronic point of sale computer system that the Post Office installed in 2000 and which it required sub-postmasters to use.  The sub-postmasters are claiming that the Horizon system was faulty and led them to make overpayments to the Post Office (or worse, be convicted of fraud or false accounting).

An initial judgment has been given to resolve some common issues including whether the contract between the Post Office and the sub-postmasters was a “relational contract” and, if so, what the implied terms would be.

The court looked at the existing cases (and also the leading textbook).  It found nine characteristics of a relational contract (including a long term relationship; intentions of integrity; collaboration between the parties; trust and confidence; high degrees of communication and co-operation).  Critically, it also requires that there are no express terms preventing a duty of good faith arising.

Once you establish a relational contract the court will imply a duty of good faith.  Here the court found 17 specific terms that were automatically implied into the Post Office’s contract including an obligation to keep records of all transactions using Horizon, to provide these records; to be open about the bugs in the Horizon system; and to act in good faith in exercising its rights and powers under the contract.

So, if you are entering into a long term contract where there is a high degree of reliance and co-operation required, be prepared for terms of good faith to be implied unless you expressly agree to exclude these.

* [2019] EWHC 606 (QB)

Back to Thoughts & Insights