Bates v Post Office Ltd (No 3)
Post Office in Corsham
Court	High Court of Justice
Full case name	Bates & Others v Post Office Ltd (Judgment (No.3) "Common Issues")
Decided	15 March 2019
Citation(s)	[2019] EWHC QB 606
Court membership
Judge(s) sitting	The Honourable Mr Justice Fraser
Keywords
Good faith

Bates v Post Office Ltd (No 3) is a part judgment^[1] (the third of six), made in the group litigation order case of Bates & Others v Post Office Ltd, an English contract law case, concerning the term of good faith and the British Post Office scandal.

Case

Five hundred and fifty subpostmasters (SPMs) and others were claimants against the Post Office Limited in group litigation. The claimants argued that the Post Office's Horizon software system for sales and accounting was defective and produced false accounting shortfalls for which the Post Office then wrongly held the claimants accountable. They argued this was a breach of contract, and good faith. The Post Office argued that the claimants were responsible for the shortfalls, claiming that this represented actual money missing, and brought many prosecutions, culminating in the British Post Office scandal.

Judgment

In the High Court, Lord Justice Fraser held there was a relational contract with a duty of good faith, fair dealing and transparency in the terms on liability, payment, termination and suspension in the contract. Some provisions were too unusual and onerous to be incorporated without being drawn specially to the other party's attention. Twenty-nine bugs, errors and defects were identified and analysed in the Horizon software.

Referring to the legal textbook Chitty on Contracts, Fraser J said the following:

710. ... I must disagree with the learned editors of Chitty in the passage I quote at [708] on the subject of relational contracts, and a duty of good faith. There are two distinct respects in which I disagree. Firstly, a term requiring good faith does not mean honesty. That emphasised sentence in the passage in Chitty is, in my judgment, simply wrong, and ignores statements in the cases explaining what a term requiring good faith means. There is more to a duty of good faith than a requirement to act honestly. It includes honesty, but there is more to it than that. Secondly, by stating that English law generally rejects a legal requirement of good faith, the passage at 1-058 uses its opposition to the doctrine as a justification for why that doctrine is said not to be of application. It is a wholly circular argument, and ignores a number of cases, not only Yam Seng itself but the subsequent cases. I do not consider that, on the authorities I have identified, English law rejects a legal requirement of good faith. What the cases make clear is that such a duty will not be routinely applied to all commercial contracts.

711. I therefore consider that in this respect, the learned editors of Chitty do not correctly summarise the jurisprudence in this area of the law. I consider that there is a specie of contracts, which are most usefully termed "relational contracts", in which there is implied an obligation of good faith (which is also termed "fair dealing" in some of the cases). 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 continued his judgment:

721. These cases, both appellate and first instance, all demonstrate in my judgment that there is no general duty of good faith in all commercial contracts, but that such a duty could be implied into some contracts, where it was in accordance with the presumed intention of the parties. Whether any contract is relational is heavily dependent upon context, as well as the terms. 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.

722. It follows that I therefore do not consider that what the Claimants refer to as "the imbalance of power" has any effect upon whether the contracts are relational ones. This appears to me to be equivalent to saying "the contract terms are unfair; please re-balance them by finding they are relational contracts". That is the wrong approach. The Claimants, in different ways and in respect of different Common Issues, drew regular attention to what was identified as a dramatic imbalance of power between the parties. These features are that the Post Office decides the terms upon which SPMs contract, having had those terms drafted for themselves by their legal advisers (subject only to the nominal involvement of the NFSP). They impose their draconian effect upon SPMs, and behave with impunity and oppressively, as demonstrated (it is said) by their behaviour towards the Lead Claimants.

...

725. What then, are the specific characteristics that are expected to be present in order to determine whether a contract between commercial parties ought to be considered a relational contract? I consider the following characteristics are relevant as to whether a contract is a relational one or not:

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.

726. I hesitate to describe this as an exhaustive list. No single one of the above list is determinative, 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 which I have not identified above which are relevant to those cases.

727. I consider that all of the above features are all present in this case, between the SPMs and the Post Office, both under the SPMC and the NTC. I would also emphasise that accepting the concept of the existence of relational contracts, and finding that these contracts with the Post Office are relational, does not mean there will 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 categorised as a relational one.

728. I find that there are also the other following features of the Post Office/SPM relationship that influence these particular contracts being categorised as relational contracts. These are:

1. In a great many cases, the investment of the SPMs in buying or leasing premises for the branch represented a major and significant financial personal commitment to running that branch, which operates for the joint benefit of the SPM and the Post Office. This is more than merely "a significant degree of investment". For many (if not all) SPMs, this investment would represent the most significant investment they would make.
2. The Post Office knew not only of the size of this investment, but the source of an incoming SPM's funds, as these were included in the business plans submitted by the SPMs. If the source of funds was not identified, this information would be sought by the Post Office.
3. The role of a SPM providing personal service entitled that SPM to benefits that had similar characteristics to that of an employment contract, such as entitlement to holiday substitution allowance.
4. The Post Office was careful, when considering potential SPMs for appointment, to assess the financial viability of the applicant for appointment. An element of approval, or "vetting", was therefore involved in the Post Office deciding that an SPM's business plan was viable. This is so regardless of the disclaimer (or variety of disclaimer) used by the Post Office, such as that identified at [444]. This disclaimer does not mean, on its words, that the Post Office was not approving for its own purposes the contents of the business plan.
5. As the Post Office put it in its Opening, the Post Office is required by the Government to maintain a broad network of branches across the country, even in locations that would not normally be commercially viable. There was therefore an aspect to this relationship that was other than purely commercial.
6. Trust is integral to almost all of the Post Office's activities carried out in a branch between the SPM and members of the public wishing to use that branch Post Office.
7. The Post Office itself submits that it is essential that it can repose trust in its SPMs. I find that it is similarly essential that SPMs can repose trust in the Post Office, and I find as a fact that all six of the Lead Claimants did so.

729. There are other secondary features that are relevant, for example in a great many instances, that the branch premises included residential accommodation in which the SPM themselves (and potentially other family members) would live. However, this is not essential and I consider that even SPMs who were not going to live in (or above, or connected to) the business premises would still be in a relational contract with the Post Office.

730. I would also add that Post Office Ltd, the corporate Defendant in these proceedings, is ultimately owned by the Government, admittedly through a corporate chain and a Government Department. It therefore either is, or shares a large number of features with, a public body. That is not to say that its decisions are subject (for example) to judicial review (and that point was not argued at all, so I am not expressing any view) but it cannot be seen as entirely private and wholly commercial. One of the characteristics of the contract in D&G Cars v Essex Police Authority which the judge found to be a particular feature which warranted the inclusion of the implied term of good faith, was that the claimant was performing certain acts (in that case, recovery of vehicles) on behalf of a law enforcement agency. I consider it to be a particular feature in this case that SPMs are engaged by the Post Office, ultimately a publicly funded body, and perform transactions in the branch on its behalf, and also that the public require access to Post Office services. This might however be expressing the same point at [728](5) above, but in different terms.

...

758. I am surprised that the Post Office denies their existence as implied terms, but given that these are in issue, findings are required.

759. As Lord Sumption JSC stated in British Telecommunications plc v Telefónica O2 UK Ltd [2014] UKSC 42 at [37]:

"... it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously: Abu Dhabi National Tanker Co v Product Star Shipping Ltd, The Product Star (No 2) [1993] 1 Lloyd's Rep 397 (per Leggatt LJ at 404); Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] EWCA Civ 1047, [2001] 2 All ER (Comm) 299 (at [67]) per Mance LJ; Paragon Finance plc v Staunton, Paragon Finance plc v Nass [2001] EWCA Civ 1466, [2001] 2 All ER (Comm) 1025, [2002] 1 WLR 685 (at [39]–[41] per Dyson LJ). This will normally mean that it must be exercised consistently with its contractual purpose: see Ludgate Insurance Co Ltd v Citibank NA [1998] Lloyd's Rep IR 221 (per Brooke LJ at 239–240); Equitable Life Assurance Society v Hyman [2000] 3 All ER 961, 972 (per Lord Steyn and Lord Cooke of Thorndon)" [Emphasis as added to quotation by Fraser J.]

760. This exact passage is reproduced in the judgment of Mr Richard Salter QC sitting as a Deputy High Court judge at [234] of Monde Petroleum, a case which was fully argued before me.

761. I find that there is no clear language to the contrary in either the SPMC, the Modified SPMC, or the NTC. Indeed, the extreme nature of the Post Office's denial of these implied terms (and in my judgment, a stance that is wholly incorrect in law) can be tested in a way consistent with common sense as follows. The Post Office's submission amounts to one that it is contractually entitled to suspend and/or terminate SPMs arbitrarily, capriciously, irrationally and without reasonable or proper cause, and to exercise contractual powers other than honestly. The necessity for these terms to be implied to give business efficacy is clearly established, in my judgment, even if I am wrong about these contracts being relational and the consequences of that finding.

See also

• English contract law
• UK enterprise law
• Alan Bates (subpostmaster) – British campaigner and former subpostmaster

References