‘Relational’ contracts and duties of good faith

Bates v Post Office [2019]

English law has traditionally resisted implying an obligation on the parties to act in 'good faith' into commercial contracts. However, over the last few years the English Courts have, in isolated cases, been prepared to imply such a duty into so called 'relational’ contracts. The latest of these cases provides further guidance on the circumstances in which a contract may be classified as a 'relational’ contract


The Bates case is a piece of group litigation in which over 500 sub-postmasters (SPMs) claimed damages from the Post Office following problems with the “Horizon” electronic point of sale and accounting system, which the Post Office rolled out in 1999/2000. Subsequently, the Post Office pursued many SPMs for alleged accounting shortfalls. The SPMs claim that Horizon contained a large number of errors which created the alleged shortfalls and that there were problems with the training that was provided on its use as well as the general failure of the telephone helpline.

The Post Office contracted with SPMs on two standard forms and allowed no negotiation over their terms. The two forms were as follows:

Both contracts required the sub-postmaster to pay any shortfall in full. The Post Office maintained that individual sub-postmasters had to prove that the shortfalls were not their individual responsibility.

The SMPC had no minimum term but the Post Office could terminate by 3 months' notice. The NTC had a one-year minimum term, after which either party could terminate by 6 months' notice.

There were many questions for the court to answer including:-

Was the contractual relationship between the Post Office and SPMs a ‘relational’ contract such that the Post Office was subject to duties of good faith, fair dealing, transparency, co-operation, and trust and confidence?

Were certain terms to be implied?

Were some terms ‘onerous and unusual’ such that they were unenforceable unless the Post Office brought them fairly and reasonably to the SPMs’ attention pre-contract and what steps would suffice?

Were any or all of the ‘onerous and unusual’ terms unenforceable pursuant to the Unfair Contract Terms Act 1977?

In what circumstances was the Post Office entitled to summarily terminate for breach?

In what circumstances was the Post Office entitled to terminate on notice, without cause?


The judge found that the Post Office is not entirely private or wholly commercial, but has some characteristics of a public body. Undoubtedly this influenced his decision on a number of the following points.

‘Relational’ contracts

The judge found the concept of a ‘relational’ contract to be well established in English law referring to 6 recent cases as evidence of this. He identified a list of 9 non-exhaustive characteristics to ascertain whether a contract is ‘relational’. These are:

The judge held that the following factors are not relevant as to whether a contract is ‘relational’:

“It is the circumstances of the relationship, defined by the terms of the agreement, set in its commercial context, that decides whether a contract is relational or not. This must be considered [as] at the time of contracting”.

The effect of being a ‘relational’ contract

The classification of a contract as a relational’ one seemingly has an impact on a whole raft of areas including the willingness of the court to imply terms into the relationship (including an obligation of good faith) and the enforceability of contractual provisions under the Unfair Contract Terms Act.

The judge held that the concept of good faith means more than just honesty. Good faith or "fair dealing" includes an obligation to "refrain from conduct which in the relevant context, would be regarded as commercially unacceptable by reasonable and honest people" and imports an obligation of "transparency, co-operation, and trust and confidence". The implied duty of good faith applies to both contracting parties.

Implied terms

The judge concluded that a multitude of terms ought to be implied into the contracts namely obligations on the Post Office to:-

(c) properly and accurately to effect, record, maintain and keep records of all transactions effected using Horizon

(d) properly and accurately to produce all relevant records and/or to explain all relevant transactions and/or any alleged or apparent shortfalls attributed to SPMs

(e) co-operate in seeking to identify the possible or likely causes of any apparent or alleged shortfalls and/or whether or not there was indeed any shortfall at all

(f) seek to identify such causes itself, in any event

(g) disclose possible causes of apparent or alleged shortfalls (and the cause thereof) to SPMs candidly, fully and frankly

(h) make reasonable enquiry, undertake reasonable analysis and even-handed investigation, and give fair consideration to the facts and information available as to the possible causes of the appearance of alleged or apparent shortfalls (and the cause thereof)

(i) communicate, alternatively, not to conceal known problems, bugs or errors in or generated by Horizon that might have financial (and other resulting) implications for SPMs

(j) communicate, alternatively, not to conceal the extent to which other SPMs were experiencing relating to Horizon and the generation of discrepancies and alleged shortfalls

(k) not conceal from SPMs the Post Office’s ability to alter remotely data or transactions upon which the calculation of the branch accounts (and any discrepancy, or alleged shortfalls) depended

(l) properly, fully and fairly to investigate any alleged or apparent shortfalls

(m) not seek recovery from SPMs unless and until: (i) the Post Office had complied with its duties above (or some of them); (ii) the Post Office has established that the alleged shortfall represented a genuine loss to it; and (iii) the Post Office had carried out a reasonable and fair investigation as to the cause and reason for the alleged shortfall and whether it was properly attributed to the SPM under the terms of the SPM contract (construed as stated above)

(n) not to suspend SPMs: (i) arbitrarily, irrationally or capriciously; (ii) without reasonable and proper cause; and/or (iii) in circumstances where the Post Office was itself in material breach of duty in respect of the matters which the Post Office considered gave it the right to suspend

(o) not to terminate SPMs' contracts: (i) arbitrarily, irrationally or capriciously; (ii) without reasonable and proper cause; and/or (iii) in circumstances where the Post Office was itself in material breach of duty in respect of the matters which the Post Office considered gave it the right to terminate

(p) not to take steps which would undermine the relationship of trust and confidence between the parties

(q) to exercise any contractual, or other power, honestly and in good faith for the purpose for which it was conferred

(r) not to exercise any discretion arbitrarily, capriciously or unreasonably

(s) exercise any discretion in accordance with the obligations of good faith, fair dealing, transparency, co-operation, and trust and confidence

All of the above were to be implied as a consequence of finding that these were ‘relational’ contracts. In addition the following obligations on the Post Office were implied on the grounds of ‘business efficacy’:-

(a) to provide adequate training and support (particularly if and when the Post Office imposed new working practices or systems or required the provision of new services)

(b) to provide a system which was reasonably fit for purpose, including any or adequate error repellency. In this respect it is interesting to note that the ‘helpline’ was regarded by the judge as being an integral part of the Horizon system.

t) to take reasonable care in performing its functions and/or exercising its functions within the relationship, particularly those which could affect the accounts (and therefore liability for alleged shortfalls).

The express right for the Post Office to suspend SPMs where the suspension is ‘desirable’ or ‘necessary’ ‘in the interests of the Post Office’ were, in both cases, qualified with reference to the “legitimate interests” of the Post Office.

The right to terminate for cause was, read literally, capable of allowing immediate termination for minor breaches. But the judge interpreted it as allowing termination only for a repudiatory or serious breach. He also held that, in a relational contract, the right could only be invoked in good faith.

The right to terminate on notice without cause was also to be used only in good faith. The judge drew this conclusion not only from the general duty of good faith, but also from the fact that the specified notice period was a minimum being "not less than three [or six] months’ notice". This, he said, created a discretion and a duty to decide what actual notice to give, which must not be decided arbitrarily or taking into account irrelevant factors. Relevant factors, he said, would include the reason for wanting to close the branch, whether the sub-postmaster lived in the business premises, how long they had been in post and how much they had invested in the business.

Unusual and onerous terms – incorporated or not?

The judge analysed the principle that an onerous and unusual clause is not incorporated unless fairly and reasonably brought to the other party's attention. He concluded that:

The judge found that the following terms of the contracts were (or might be) both unusual and onerous:

Reasonableness and enforceability

Since the contracts were made on the Post Office's written standard terms of business, the judge went on to apply the UCTA reasonableness test. Although an unusual and onerous term is not necessarily unreasonable, he found that, in this case, the unusual and onerous terms largely failed the UCTA reasonableness test, making them unenforceable. The particular UCTA provision in question is contained in section 3. It provides:-

(2) As against [a party who deals on the other’s written standard terms of business], the other cannot by reference to any contract term

… (b) claim to be entitled

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as the contract term satisfies the requirement of reasonableness.”

Those provisions which were found to be covered by the scope of section 3 (2) included:-

Points to Note:

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