Notes on Relational Contracts

Jul 25, 2024

Notes on Relational Contracts

Introduction

  • Speaker: Vivian Halstead from TravelSmith LLP
  • Co-speaker: Jonathan Rush, Knowledge Counsel in Commercial IP and Technology Department
  • Topic: Relational Contracts - What they are and their importance

Defining Relational Contracts

  • No definitive test yet, but courts suggest three main characteristics:
    • Long-term relationship
    • Substantial commitment from both parties
    • High degree of communication and cooperation

Applications of Relational Contracts

  • Common areas where relational contracts apply:
    • Joint Ventures
    • Complex Outsourcing
    • Franchising or Distribution Arrangements
  • Not every agreement in these areas will be relational; substance over form is key.

Examples of Contracts

Sale and Purchase of a Business

  • Unlikely to be relational; parties typically seek a clean break post-sale.
    • Transitional services may occur but are short-term.

Commercial Lease (20-year lease)

  • Long-term relationship is present; however, interaction level is critical.
  • Many leases have minimal interaction beyond rent payment – might be considered transactional.

Importance of Relational Contracts

Mr. Whippy Ice Cream Case

  • Case Reference: Amy vs. Birmingham City Council (2008)
  • Involves a £2.7 billion PFI deal (25 years, 5190 pages) for managing the road network.
  • Problems arose due to Amy's interpretation to reduce workload, leading to poor road maintenance.
  • Court of Appeal ruled it was a relational contract, highlighting that cooperation and a reasonable approach are key in long-term contracts.

Key Findings in the Amy Case

  • Long-term obligations can change; the sole focus on specific provisions disregards the contract’s purpose.
  • The court favored a holistic interpretation based on the contract's overall goals.

Bates vs. Post Office Case (March 2019)

  • Sub-postmasters were accused of discrepancies attributed to a flawed system, Horizon.
  • Judge found agreements to be relational, suggesting an implied duty of good faith.
  • Post Office's conduct presuming guilt could breach this duty.

Implications of Relational Contracts

  1. Interpretation: A relational finding can lead to broader interpretations, as seen in the Amy case.
  2. Good Faith: Implication of good faith obligations in relational contracts; however, it may not apply universally.
    • If a contract specifies where good faith applies, courts likely won't imply it in other areas.

Final Thoughts

  • Acting consistently with the contractual purpose and avoiding exploitation of imbalances is critical.
  • Most contracts are transactional, not relational; only a small subset falls into this category.
  • The concept of relational contracts is recognized but awaits further clarification from the Supreme Court.

Contact Information

  • For more information or feedback, contact: [email protected]
  • Note: This talk is not a substitute for detailed legal advice.