Relational contracts – the latest word
Candy v Bosheh (High Court) [2022]
When will a contract be viewed as a ‘relational contract’?
Facts:
Once again, a firm of solicitors was involved. The firm had acted under a conditional fee agreement (CFA), defending a fraud claim against their clients (the underlying claim). The CFA terms provided that "In the event you win or are successful you agree that you will pay double our standard hourly rate costs. If you lose, you will not be liable to pay anything”.
The underlying claim was settled on a "drop hands" basis. It was mutually acknowledged that such an outcome did not amount to a ‘win’ for the purposes of the CFA (although precisely why that was is not entirely clear). The settlement resulted in a nil recovery and no possibility for the firm to recover any of their costs. The firm brought proceedings against the clients for, amongst other things, breach of an implied duty of good faith. It argued that the underlying claim was compromised on terms that were substantially less advantageous to the clients than those previously proposed by the claimant in that action and that the clients did not seek to recover their costs. In agreeing such terms, the clients had acted in repudiatory breach of the retainer.
The judge at first instance held that there was no reasonable prospect of showing that a requirement of good faith was implied into the retainer. The firm appealed.
Decision:
The Court of Appeal dismissed the appeal. The Court of Appeal held that the firm was not entitled to avoid the terms of its own CFA by seeking to rely on an implied duty of good faith on the clients' part, not to settle the claim on terms that meant the firm had no entitlement to their costs. The CFA was not a "relational contract" and no duty of good faith was implied.
Applying the usual test for implied terms, the court found that an implied term of good faith was not so obvious here that it went without saying, and the retainer and the CFA worked perfectly coherently without one. There was no relevant distinction between a CFA and an ordinary retainer to justify the inclusion of a duty of good faith in the former and not the latter. The firm argued that the retainer was a "relational" contract and that there was therefore an implied term of good faith.
As the judge commented “there has been something of an avalanche of claimants in recent years trying to show that the contract into which they seek to imply the term is a relational contract, thereby bringing with it the implied obligation of good faith. Only a relatively few have succeeded”. The judge went on to say, “the elusive concept of good faith should not be used to avoid orthodox and clear principles of English contract law”.
In the instant case, the [implied] term is not so obvious that it goes without saying. It was not necessary for the retainer to work and was, in fact, thought to be counter to some of the express terms of the retainer. Running through the list of factors identified in Bates v the Post Office [2019] (http://www.trglaw.com/news280.html) as being indicative of a relational contract, by way of a “sense check rather than a series of statutory requirements”, there was no guarantee that the CFA would be a long-term contract. The firm's lack of remuneration was a result of the CFA, not of any lack of integrity on the clients' part. There was no commitment to collaboration. There was no high degree of communication and no expectation of loyalty from the clients; this was an ordinary retainer of a solicitor under a CFA. The firm had chosen to tie its prospects of recovering its costs to its assessment of the clients' prospects of success. Nobody had ever suggested before that CFAs were relational contracts or that the client owed the solicitor a duty of good faith under a CFA.
Even if there was an implied obligation of good faith in respect of the settlement of the underlying claim, the firm had no prospect of establishing a breach of duty arising out of that settlement. It was not arguable that the clients were in breach of such a duty of good faith for choosing a settlement which was better for them than for the firm. That stance demonstrated the potential conflict of interest that could arise under a CFA between the client and solicitor.
Points to Note:
- This case illustrates the reluctance of courts to imply terms but also how comparatively rarely the courts will come to the conclusion that a relationship is a relational contract. That particular tidal wave seems to be running out of steam. The case clearly demonstrates how the indicative factors for relational contracts identified in Bates can be applied very flexibly. For example, a retainer in relation to complex litigation could easily have been viewed as being likely to be long term. Also, can it really be said that there was no expectation of a high degree of communication and no commitment to collaboration?