Good faith and relational contracts explored in Phones 4U v EE Limited and others

Introduction

Unlike in some other jurisdictions, English law does not imply a general duty of good faith into contracts. This is to avoid uncertainty and preserve parties’ freedom to pursue their own commercial interests (within their contractual framework). However, as discussed in a 2023 High Court judgment, a duty of good faith may be implied into “relational” contracts in certain circumstances.  

 

Key takeaways

The uncertainty around the English courts’ willingness to imply a term into a contract requiring a party to act in good faith means that parties should give thought at the point of negotiating a contract as to whether they should include an express duty of good faith in relation to some, or all, of the contractual obligations. If a duty of good faith is expressly included, parties should be clear about its intended scope. Giving careful thought to these issues when negotiating contracts can mitigate the risk of disputes arising as to whether a duty of good faith applies and the scope of such a duty. 

 

Phones 4U v EE Ltd and others

In Phones 4U Ltd (In Administration) (P4U) v EE Ltd and others (EE)¹, the High Court held that the relevant agreement was not a relational contract and EE was not under a general duty to act in good faith.

EE had informed P4U that they would not extend their existing trading agreement (pursuant to which EE paid P4U to sell mobile phone contracts to new customers or upgrade existing customers’ contracts).  P4U claimed that by seeking to terminate the contract a year before it was due to end, EE was trying to force P4U into administration and avoid making further payments. P4U argued that the agreement was relational in nature and as such, EE was under an implied general duty to act in good faith when performing its contractual obligations.

EE denied the claims, including on the basis that the contract did in fact contain an express duty of good faith, but that this was limited to the context of activities designed to reduce P4U’s revenue. Therefore, no broader duty of good faith could be implied.

The judge agreed with EE’s position. First, although he acknowledged that some features of a relational contract existed, for example it was long term and required the parties to collaborate, he decided that the contract was not relational - observing that:

• Whereas exclusivity indicates that a contract is relational, competition between the parties indicates the opposite; and
• Relational contracts do not tend to describe how the parties are to cooperate in detail. This was not the case in the contract at issue, which set out the ways in which the parties were to collaborate.

The judge went on to say that, even if the agreement was relational in nature, it would not affect the outcome.  This was for two reasons:

• First, as the agreement did “address the question of good faith, and expressly defines its scope”, the court was precluded from implying a more general duty of good faith. In this regard, the judge noted that the contract had been negotiated between sophisticated parties and their lawyers, who would have expressly provided for a general duty of good faith if that had been the parties’ intention.
• Second, even if he were to wrong on that point, there was no breach of good faith by EE on the facts of the case. EE had a right to prioritise its own interests and concerns and EE’s decision to notify P4U that their agreement would not be extended could not be regarded as commercially unacceptable by reasonable and honest people.

 

Why it is significant

Parties to an English law contract are not under any general duty to act in good faith in performing that contract.  However, a duty to act in good faith can arise in three situations:

1. Where the parties have agreed an express obligation to act in good faith;
2. Where the so-called Braganza duty operates to imply an obligation on a party to exercise its contractual discretion in good faith; and
3. Where the contract is considered to be “relational” in nature.

This judgment is significant as it provides more detail on the factors to be considered when assessing whether a contract is relational in nature. For example, the judge noted that whether any competition exists between the parties is a relevant factor, as is whether or not the parties have given thought to how they will cooperate (i.e., specifying certain obligations rather than imposing a general duty to collaborate). 

Further, the case shows that a party cannot rely on a specific duty to act in good faith as a basis of demonstrating that a general good faith obligation applies to the contract. Where express good faith duties are included, parties should ensure that those provisions are clearly drafted to ensure that the agreement reflects the parties’ intentions as to the scope of that duty. This should help mitigate the risk of claims being brought on the basis of an alleged implied duty of good faith in relation to contracts where such a duty was never intended to apply.

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¹ [2023] EWHC 2826 (Ch).