HomeInsightsHigh Court finds contracts between Post Office Ltd and its subpostmasters were relational and therefore implied an obligation on both parties to act in good faith

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In this group litigation there were approximately 550 claimants, who were mostly part sub-postmasters, responsible for running branch Post Offices.  In about 1999/2000 the defendant, Post Office Ltd, introduced a new computerised system for the accounting function both in the branches, and between the branches and itself, called Horizon. All claimants were required to use the Horizon system by the Post Office.  There was no “opt in” or “opt out” alternative.

The claimants’ case was that the Horizon system contained, or must have contained, a large number of software coding errors, bugs and defects, and as a result of this threw up apparent shortfalls and discrepancies in the accounting of different branches.  They alleged that the shortfalls in their financial accounting with Post Office were caused by these problems, by the training that was provided to use it, and by a general failure of the Horizon helpline.

Post Office argued that the claimants themselves were responsible for the shortfalls, which represented actual amounts of money missing from the claimants’ accounting.  Post Office maintained that it was for individual sub-postmasters to prove that the shortfalls were not their individual responsibility, and if they failed to do so, the shortfalls were their individual responsibility.

Some claimants paid the shortfalls to Post Office and some were made bankrupt as a result.  Others were prosecuted and convicted for false accounting, fraud or theft.  The claims were for damages for financial loss, personal injury, deceit, duress, unconscionable dealing, harassment and unjust enrichment.

Until 2011 the claimants were contracted with Post Office under the Sub-postmaster Contract (SPMC), which was then modified in 2006 and became known as the Modified SPMC.  In 2011, Post Office introduced a new model of contract called the Network Transformation Contract, or NTC.

The SPMC stated that the subpostmaster was responsible for all losses caused through his own negligence, carelessness or error, and also for losses of all kinds caused by his assistants.  Deficiencies due to such losses had to be made good without delay.

The NTC stated that the subpostmaster was fully liable for any loss of, or damage to, any Post Office cash and stock (whether it occurred as a result of any negligence by the subpostmaster, its personnel or otherwise, or as a result of any breach of the agreement by the subpostmaster) except for losses arising from the criminal act of a third party (other than personnel).  Any shortfall in the money payable to Post Office had to be made good without delay.

A set of “Common Issues” were agreed by the parties, including whether the contractual relationship between the Post Office and subpostmasters was a relational contract such that Post Office was subject to duties of good faith, fair dealing, transparency, co-operation, and trust and confidence.

Mr Justice Fraser found that the contracts were indeed relational contracts, meaning that there was an implied duty of good faith in the agreement.  Post Office was not therefore entitled to act in a way that would be considered commercially unacceptable by reasonable and honest people.  That implied duty of good faith acted upon the subpostmasters as well.

According to case law, the concept of relational contracts is an established one, Fraser J said.  Further, he said, the concept of good faith meant more than just honesty.  Quoting from various authorities, Fraser referred to Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50, in which it was said that an obligation of good faith involves an obligation to act honestly and with fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.

In Fraser J’s view there is an implied an obligation of good faith (which is also termed “fair dealing” in some of the cases) in relational contracts.  This means that the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.  An implied duty of good faith does not mean solely that the parties must be honest.

Fraser J said that the authorities all demonstrated that there is no general duty of good faith in commercial contracts, but that such a duty can be implied into some contracts where it is in accordance with the presumed intention of the parties.  Whether any contract is relational is heavily dependent upon context, as well as the terms, he said.  The circumstances of the relationship, defined by the terms of the agreement, set in its commercial context, is what decides whether a contract is relational or not.

Fraser J considered the following (non-exhaustive) list of characteristics relevant as to whether a contract is a relational one or not:

  1. there must be no specific express terms in the contract that prevent a duty of good faith being implied into the contract;
  2. the contract will be a long-term one, and 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; and
  9. exclusivity of the relationship may also be present.

No single one of the above list was determinative, Fraser J said, with the exception of the first one.  This is because if the express terms prevent the implication of a duty of good faith, then that will be the end of the matter.  However, many of these characteristics will be found to be present where a contract is a relational one.  In other cases on entirely different facts, it may be that there are other features not identified above that are relevant to those cases.

In this case, Fraser J considered that all of the above features were present, both under the SPMC and the NTC.  He emphasised that accepting the concept of the existence of relational contracts, and finding that these contracts with Post Office were relational, did not mean there would be automatic and widespread application of an implied duty of good faith to all commercial relationships.  Very specific characteristics are necessary in order that a commercial contract is a relational one, he said. (Alan Bates v Post Office Ltd (No 3: Common Issues) [2019] EWHC 606 (QB) (15 March 2019) — to read the judgment in full, click here).