Relational contracts and good faith
Phones 4U v EE (High Court) [2023]
The latest word on relational contracts and the implication of general obligations of good faith
Facts:
EE and P4U had a trading Agreement under which EE would pay P4U for selling mobile phone contracts to new customers or upgrading existing customers’ contracts. EE informed P4U in September 2014 that it would not be renewing its Agreement after its expiry in September 2015. P4U claimed that EE sought to force P4U into administration by such action, thereby enabling it to terminate the Agreement early and avoid making further payments. P4U argued that the Agreement was relational in nature and that, as a consequence, EE was under an implied general duty to act in good faith in relation to the performance of its obligations under the contract.
The Agreement contained the following clauses:
“13.2 EE hereby undertakes and agrees that it will in good faith observe and perform the terms and conditions of this Agreement.
13.11 EE hereby undertakes and agrees that it will act in good faith and not carry out any activity designed to reduce or avoid the making of any Revenue Share Payment(s) to P4U as contemplated by this Agreement”.
Decision:
The High Court held that the Agreement was not a relational contract and that EE was not under a general duty to act in good faith.
The judge held that the agreement in question addressed “the question of good faith expressly [and] defined its scope in the language of clauses 13.2 and 13.11”. That operated to preclude the implication of a more general duty of good faith.
Although the judge acknowledged that some features of a relational contract existed, for example it was long term and required the parties to collaborate, he decided that the contract was not relational. In doing so, he made the following observations:
Whereas exclusivity indicates that a contract is relational, competition between the parties is a strong indicator of the opposite. “It is a striking feature of the present case that EE was not only enabling P4U to supply connections to its network but was in competition with P4U in seeking to supply such connections to customers directly… exclusivity is a supporting indication, not a necessary condition, for a relational contract.”
Relational contracts do not tend to describe how the parties are to cooperate in detail and that “here, the details of the parties’ collaboration are spelt out in considerable detail in the written agreement.
The contract had been negotiated between sophisticated parties and their lawyers.
The judge went on to say that, even if the Agreement was relational in nature, it would not affect the outcome. There was no breach of good faith by EE on the facts of the case. EE had a right to prioritise its own interests and concerns. EE’s decision to notify P4U that their Agreement would not be extended could not be regarded as commercially unacceptable by reasonable and honest people.
Points to Note:
- The case shows the courts’ current reluctance to imply a general duty of good faith in commercial transactions between sophisticated parties, where the agreement has been professionally drafted and, where good faith is explicitly addressed in individual clauses. This is very much a return to the original genesis of relational contracts in cases such as Yam Seng v International Trade Corporation http://www.trglaw.com/news141.html and perhaps suggest that cases such as Amey v Birmingham City Council http://www.trglaw.com/news257.html were something of an outlier that will not be followed in future.
- The discussion before the court seemed to centre on implied general duties of good faith rather than the express wording of the clauses which referred to good faith obligations. Based on the wording of those clauses it might have been possible to find a more general duty of good faith. However even if the court had been prepared to come to such a conclusion, it would have been unlikely to affect the overall result. The courts have tended to suggest that decisions whether or not to exercise a contractual right to terminate (or in this case, not to renew) are absolute rights which are unaffected by good faith considerations see Cathay Pacific v Lufthansa http://www.trglaw.com/news314.html