Landmark High Court Ruling regarding ‘Relational’ Contracts

A recently concluded case, Bates v Post Office Ltd, has brought into question the efficacy of the contracts between sub-postmasters and the Post Office, in terms of their implied duty of good faith in ‘relational’ contracts.

In a landmark case which concluded in recent days, the High Court has ruled that sub-postmasters' contracts with the Post Office were "relational contracts", in which there was an implied obligation of good faith.

The relevance of this ruling is that neither party could exercise its express contractual rights in a way that reasonable and honest people would consider commercially unacceptable.

The ruling stated that whether or not a contract was deemed ‘relational’, depended upon the fundamental foundations of the relationship. These were determined by the terms of the agreement in its commercial context. In this case, there were two types of contract brought forward for review. First the SPMC the Sub-Postmasters Contract, used for all sub-postmaster relationships prior to 2011. Secondly, the NTC, the Network Transformation Contract, introduced in 2011. Both contracts stated that the post master was responsible for all losses caused through their negligence, carelessness or error, and for losses caused by their employed teams. The NTC included added a clause that stated that the postmaster was liable for any loss, in whatever situation that occurred, whether as a result of any negligence by the sub-postmaster, its personnel or otherwise.

The contracts were made on the Post Office's written standard terms of business. The judge held that some of the provisions invoked by the Post Office were too unusual and onerous to be incorporated into the written contracts, unless they were in the signed document or where the Post Office had brought attention to the provisions in a reasonable manner, to the sub-postmasters.

This is the first reported case since 1987 where a term was not incorporated in a commercial contract for this reason. There were roughly 550 claimants, mostly sub-postmasters responsible for running branches. In around 2000, the Post Office rolled out a new Point of Sale system to all branches, called Horizon, which all branches were expressly required to employ. The claimants state that software defects in the Horizon system resulted in unexplained financial losses through the tills in terms of shortfalls in the cash/ card sales drawer verses the expected end of day totals and accounting discrepancies.

Following these discrepancies, and following the terms of their contracts, some claimants were forced to pay back shortfalls, despite disputing these being actual losses, some had their contracts terminated and others faced criminal convictions. The sub-postmasters brought forward claims for damages for financial loss, personal injury, deceit, unconscionable dealing, harassment and unjust enrichment. In response, the Post Office denied the issues associated with Horizon, and raised contractual defences.

Contrary to the views of some lawyers, the judge concluded that the general duty of good faith is implied in ‘relational’ contracts, ‘where it was in accordance with the presumed intentions of the parties’, without questioning whether the duty was obvious or not. The implied duty of good faith goes further than a duty to act honestly, requiring both parties of the contract to avoid activity that reasonable and honest people would consider commercially unacceptable.

A relational contract, depends upon the circumstances of the relationship, defined by the terms in a commercial context. Relevant points in this case include:

• These were long term contracts, entered into with significant financial burden for the sub-postmaster- often ‘the most significant investment they would make’
• The parties intended their roles to be performed with integrity and fidelity
• The parties were committed to collaborating to perform the contract
• The parties were required to put trust and confidence in one another
• Although contracts were created for personal services as opposed to employment, the role was more akin to an employee’s in terms of a number of aspects, including the ‘holiday substitution allowance’
• Although the relationship was based on a commercial undertaking, there are non-commercial aspects of the Post Office’s statutory provision of a postal service- including in locations that would not be considered commercially viable. Therefore, the body of the Post Office was not considered to be wholly private or commercial but displayed some characteristics of a public body.
• Mutual trust and confidence was required for the contract to be a success
• The contract required a high degree of communication, co-operation and predictable performance

The content of contracts, especially where provisions may be considered unusual or onerous, are complex and complicated whether in a traditional, formal, employer-employee relationship. They are even more so in more unique situations such as those associated with the contractual obligations of the Post Office and its sub-postmasters.

If you are looking for help or support in terms of contracts of employment as an employer or an employee, or require corporate dispute resolution support or advice, please call 0116 212 1000 to arrange an appointment. Depending on the nature of your enquiry we will ensure your appointment is with the suitable department; Commercial or Dispute Resolution.  

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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