Dr Ryan Cushley-Spendiff, Lecturer at NLS https://www.ntu.ac.uk/staff-profiles/law/ryan-cushley-spendiff
Since the ITV dramatization of Mr Bates v Post Office, quite a lot of attention has come onto the Bates v Post Office case. What is less known, however, is how complex the case was legally. The case required 6 separate judgments to be handed down, and the amount of common law that seemed to have spawned from the litany of cases has, by and large, flown under the radar of public attention. One of the largest changes that seems to be virtually ignored by the docu-drama, the public, and even legal professionals, is the creation of an entirely new class of contracts by the back door.
As tempting as it would be to lay the responsibility of general ignorance to ITV and its portrayal of the scandal, they can hardly be blamed for this. The intricacies of contract law are hardly the most palatable drama for a lay audience, however the effects will have unforeseen consequences for contractual parties who were hoping to rely on the common law of contract. This back-door revolution is the de-facto establishment of a new class of contract that will have good faith implied in law. This new class of contract is Relational Contract.
Relational Contract is hardly a new concept, however its interpretation has been dogged by misinterpretation and misunderstanding since its theoretical inception in the 1970s. To simplify what is, aptly, considered a horrifically complicated paradigm, Relational Contract theory is based fundamentally on centring contracts on societial and human relations. In doing so, it examines the norms present in exchange relations in order to accurately describe the relationship between the parties. This theory stood opposed to the liberal theory of contract, whose individualistic focus dominated the English law of contract from the mid nineteenth century. Relational Theory swept the field of academia, generally being considered both more in touch with reality than the ideologically biased liberal theory as well as academically superior. With the theory sweeping the field of commercial academia, it wasn’t long before calls emerged for the law of contract to change to reflect the theory.
The first attempt at this was Baird Textile Holdings Ltd v Marks and Spencer plc. Baird, a clothing supplier, had a close relationship with M&S which lasted a period of 30 years without need of a legally enforceable relationship. Despite this, the parties had created multiple interconnected links with one another including: regular logistics consultations, appointment of mutually approved managers, and the implementation of a unique umbrella agreement. This agreement took a rather sharp decline when M&S cut off all its ties with Baird due to decrease in sales (around 50%) and management overhaul. Importantly, there had never been an overarching legal document between the parties, rather a series of seemingly independent contractual exchanges. Baird’s Counsel explicitly referred to Relational Contract theory in their submission, causing Lord Mance to refer to the Theory in his judgment. However, this was not of application, but of rejection, as the Court of Appeal took the view that there is nothing in the theory that requires practical rules of law to be developed from it, especially with a view of inventing a legal contract between the parties.
Yet, that which is said cannot be unheard. The word relation was now bounding around our courts, in particular in cases where there was a long term, often informal, relationship between the parties. Yam Seng Pte Ltd v International Trade Corp Ltd gained notoriety here as Lord Steyn continuously referred to this elusive “relational contract” when he decided to imply a duty of good faith within the contractual relationship. This seemed to balk at the traditional stance of English contract law, in which good faith was considered an alien prospect. The divide on whether we should have a general duty of good faith within contract law has been a historically bitter one, not least because such a duty already exists in the USA and, after 70 years of judgments and scholarship, American contract law still doesn’t have a definition of what ‘good faith’ means.
It should be highlighted here that the Yam Seng implication was one of fact, that is to say the implication of a good faith duty would only be case by case and only when necessary for business efficiency. There was never any intention to create a general duty of good faith within contracts, and initially it had seemed like there would be no automatic duty within long term relationships to have a duty of good faith. The linkage with Relational Contract was only really affirmed by Lord Seng again in Al Nehayan v Kent where he reflected that all cases in which good faith successfully was implicated were in long term ‘relational contracts’, and those where the implication failed were more short term, paper-document based contracts. Yet even in this reflection, the test for implication was that of business efficacy, not a general standard within law.
Then comes Bates. Fraser J decided to sweep away the stance that good faith could now be considered an ad hoc implication dependant on the facts, and rather claimed that all relational contracts had a duty of good faith, creating what is, de facto, an implied term in law. However, in what might be the most head scratching moment of commercial law, this justification was based on the idea that relational contracts were an established part of the law of contract, despite the fact that such a class of contract had never fleshed out by the courts. To try to square the circle, Fraser J fabricated 9 characteristics of a ‘relational contract’:
1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
4. The parties will be committed to collaborating with one another in the performance of the contract.
5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
8. There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.
9. Exclusivity of the relationship may also be present.
These categories are a fascinating combination of unhelpfully vague, and vaguely unhelpful. Five years after the case and category 3 still seems like a particularly poetic way to say “thou shall not commit fraud”, which is a general rule of all contracts, making it questionable why it is specially tied to relational contracts. Categories 4 and 7 are tautologies of one another in practice of long terms contracts, with category 4 applying equally to even the most discrete transaction as the basic collaboration of your contractual partner will be needed to have any form of contract. Categories 5 and 6 prove to be an evidentiary nightmare, and category 9 is incredibly wishy-washy (notice how it merely says that exclusivity may be present, not that it needs to be).
Courts have had ample opportunity to depart from the Bates class of contract, yet they seem to have accepted this deviation. Essex County Council v UBB Waste (Essex) Limited accepted that good faith is now implied at law in all relational contracts, but rather frustratingly referred to Fraser J’s categories as mere guidance rather than any sort of clear list to actually determine what a relational contract is. In Candey Ltd v Bosheh, Coulson LJ remarked that ‘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’. While Coulson did attempt to retreat from the position of implied in law by relying on the implied in fact test, the damage is already done.
It is likely that this avalanche from Bates will continue until either the new class of contracts is elucidated more intelligibly, or we scrap this new class and revert back to the ad hoc position of Yam Seng. Unless ITV wants to create a spin off legal drama about the annoyance this has stirred in the world of contract (in which case, I propose that this long-suffering academic be portrayed by Rupert Grint) it is more likely this will escape public attention, and just be a constant annoyance to commercial lawyers for the foreseeable future.
Further Reading