The importance of being relational and Bates v The Post Office
Rarely will a legal dispute reach the level of recognition that the Bates v Post Office case has reached in the last weeks, thanks to a dramatic TV mini-series.
In 1999, the Post Office in the United Kingdom introduced a new online accounting system. It then abruptly ended contractual relationships with its sub-postmasters due to accounting discrepancies, blaming the sub-postmasters for the problems. In many situations, the issues raised were due to flaws in the accounting system itself and not the fault of Post Office operators. Many contractors were left without access to their domicile or work, affecting their relationships and mental health. In 2017, Mr Bates, alongside 550 other claimants, mostly sub postmasters, brought proceedings against the Post Office.
In 2019, the High Court of Justice in the United Kingdom rendered five judgments addressing different legal issues. The third judgment by Lord Justice Fraser focused on the breach of contract by the Post Office. This legal dispute has essential social and legal implications, including a legal definition of a relational contract in English contract law. In his seminal judgment, Justice Fraser emphasised the relational characteristic of the relationship and provided a non-exhaustive list to determine whether a contract is indeed relational.
In December 2023, the Northern Ireland Legal Quarterly published an article in which I analyse that decision. Using it as a case study, I argue the following three points: the notion of the contract is evolving in common law jurisdictions; the common law of contracts deals with recognising the particularity of long-term transactions; and, finally, relational contracts are used to import implied terms, including a duty for parties to act in good faith in their contractual dealings.
In common law jurisdictions, a contract is built upon the pillars of freedom to contract and party autonomy. This is what is referred to as the classical theory of contract. The parties to a contractual relationship are free to draft the terms of their agreement, albeit under certain limits. This liberal, laissez-faire approach has prevailed for centuries, with courts limiting their involvement in contractual disputes to the bare minimum, letting the parties' objective intentions prevail. Over time, tests have been developed to incorporate terms into a contract, either due to the nature of the contract and the relationship between the parties or due to the context of an agreement. What legal terms can be implied and what notions sit outside of the law have remained a point of contention to this day. The article provides some insights into the tension between morals and law and the challenge that notions, such as relational contract and good faith, create in the English and Australian common law of contract.
Drawing on the history of the tension between morals and law, I argue that this is not a novel challenge of the legal sphere. Collaboration, cooperation, and loyalty to the bargain are not new doctrines, some dating back to Roman law. The main issue has been the extent to which the parties’ conduct is analysed through the text of the agreement and to what extent the context of the relationship matters.
Interestingly, when Ian MacNeil presented the concept of relational contract, he never intended it to become a new theory but offered it as a possible social explanation of contracting. He argued that:
First, every transaction is embedded in complex relations.
Second, understanding any transaction requires understanding all essential elements of its enveloping relations.
Third, effective analysis of any transaction requires recognition and consideration of all essential elements of its enveloping relations that might affect the transaction significantly.
Fourth, combined contextual analysis of relations and transactions is more efficient and produces a more complete and sure final analytical product than does commencing with non-contextual analysis of transactions.
The notion of relational contracting was first broached in in 2013 in the case of Yam Seng PTE v International Trade Corp Ltd. Justice Leggatt brought to the fore legal implications of a relational contract in English common law of contract.
While it seems unlikely that any duty to disclose information in performance of the contract would be implied where the contract involves a simple exchange, many contracts do not fit this model and involve a longer-term relationship between the parties to which they make a substantial commitment. Such ‘relational’ contracts, as they are sometimes called, may require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements.
In 2019, Justice Fraser used this case to introduce criteria to qualify a contract as relational.
- There must be no specific express terms in the contract that prevent a duty of good faith being implied into the contract.
- The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
- The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
- The parties will be committed to collaborating with one another in the performance of the contract.
- The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
- They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
- 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.
- 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.
- Exclusivity of the relationship may also be present.
While the issues raised in the group litigation led by Mr Bates were ultimately settled out of court, the judgment rendered by Justice Fraser remains a valuable addition to the discussion of relational contracting and its place in English contract law. Since then, courts have been trying to come to terms with the significance of a contract being qualified as relational. In cases that followed Bates, the courts have been clear that qualifying a contract as relational can have implications on the construction of the contract, but it will not be used to rewrite the terms of the agreement.
In Australia, relational contracting has not had the same momentum in case law. While good faith has been articulated in lower courts, there is no recognition of a duty to act in good faith in the general law of contract. However, the implicit dimensions of the contract, namely, context and the relationship between contractual parties, are articulated in some recent statutory regulations of some industry-specific contracts in Australia.
My article in the Northern Ireland Legal Quarterly argues that it is becoming increasingly difficult to rely exclusively on the terms of the agreement and that the contractual context and relationship of the parties do matter. The next challenge is to find the balance as notions of good faith and relational contract remain a point of contention. This article argues that there is value in the exercise and merit in bringing such arguments forward to be considered by the courts.
 Ian Macneil, ‘Relational contract theory, challenges and queries’ (2000) 94 Northwestern University Law Review 877, 881.
 Yam Seng PTE v International Trade Corp Ltd  EWHC 111 (QB) .
 Bates v Post Office Ltd (No 3)  EWHC 606 (QB) .