Concept of Good Faith in Contracts

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Bates v Post Office Limited [2019] EWHC 606 QB, All ER (D) 100

Facts

Mr Bates was one of 550 claimants who were, generally, sub-postmasters running sub-post offices for The Post Office.  In each case it was their responsibility to run a branch office.  In about 2000, the Post Office introduced a new computerised system which sub-postmasters were obliged to use to record all their accounts and receipts at the point of sale.

All these people were investigated by the Post Office and accused of accounting deficiencies which in each case the individuals blamed upon the defects in the Post Office’s computer software, and the total lack of proper training and support in how to use it.

However the Post Office refused to admit that the software was defective and instead relied upon the standard form contract conditions which it had imposed upon sub-postmasters.  These allocated 100% responsibility for all shortfalls howsoever caused to the sub-postmasters.  The PO was very aggressive, took proceedings against all these individuals to recover alleged losses.  In a number of cases this had led to people being dismissed or losing their livelihoods, and even to criminal prosecutions for alleged crimes of dishonesty.  Some sub-postmasters had in fact been convicted and sent to prison.

In this action, 550 sub-postmasters as a group sued the Post Office for malicious prosecution together with damages for financial loss, personal injury, deceit, duress and unjust enrichment.  There were a number of hearings; in a recent hearing the Court had to decide whether the Post Office could rely upon a clause in its Conditions imposing responsibility for financial shortfalls on the sub-postmasters.

Held

  1. The nature of the relationship between the Post Office and each sub-postmaster was such that the contract was “relational”, with an implied duty of good faith requiring the Post Office to deal fairly transparently and co-operatively with its sub-postmasters.
  2. The Court therefore concluded that the Post Office was in breach of this implied duty of good faith and further had acted in a way which reasonable and honest people would regard as commercially unacceptable. It was accordingly liable for a breach of good faith.

Comment

  1. This case shows the Post Office behaving outrageously; by 2011 there were many incidents which the Post Office was aware of, clearly proving faults in its software. Its solution was not to fix the defects, but instead it produced and imposed new Conditions which sub-postmasters were made to accept, putting all the risk of losses onto them!
  2. Many internal documents came out showing that the Post Office was aware of these problems. The evidence also showed the Post Office persistently sought to avoid making payments to sub-postmasters, even refusing compensatory payments to those who could prove they had been wrongfully dismissed.
  3. The Court found that on the particular facts that it was necessary, to make the sub-postmaster contract work (or give it “business efficacy”) that a duty of good faith and co-operation should be incorporated into the contract. This is quite a bold ruling, but it does fit within the conventional framework of an implied term for business efficacy.
  4. Alternatively, however, Fraser J analysed the existing law of good faith in English contracts. While there is no general duty of good faith, there are several specific types of contract, such as insurance, and partnership, where good faith is a necessary feature.  These might be said to be part of a broad class of contracts which he called “relational contracts” where a duty of good faith is necessary.  He explained 9 characteristics which served to identify a “relational contract” to which a duty of good faith may necessarily apply.  Those characteristics are:
    • no specific express term in the contract to prevent a duty of good faith being applied;
    • the contract is a long-term contract, with the mutual intention of a long-term relationship;
    • there is an intention to perform the parties’ respective roles with integrity and fidelity to their bargain;
    • there is a commitment to collaboration in the performance of the contract;
    • the “spirit and objective” of the parties’ venture is not capable of being exhaustively expressed in a written contract;
    • the parties necessarily need to repose trust and confidence in each other;
    • a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and expectation of loyalty;
    • a degree of significant investment by one or possibly both parties; and
    • exclusivity of contractual relationship.
  5. The Judge did not describe this list as exhaustive, and he did emphasise that no single factor would be determinative, apart from item (a). Fraser J observed that a requirement to act in good faith in a relational contract goes beyond simply acting honestly. He said that “parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.  Transparency, co-operation and trust and confidence are…implicit within the implied obligation of good faith.
  6. This is a very interesting judgment and in many ways creatively adopts and applies the existing law in the best common law tradition. (The Post Office subsequently sought permission to appeal to the Supreme Court which was refused by the Court of Appeal in May 2019).