my name is Vivian Halstead from TravelSmith LLP and this is a short talk on relational contracts what are they and why does it matter and perhaps most importantly of all what is the connection between this topic and mr. whippy ice cream to answer those questions I'm here with Jonathan Rush who like me is knowledge counsel in the commercial IP and technology department at Travis Smith Jonathan can you explain briefly what a relational contractors there isn't a definitive test as yet but the courts have indicated the relational contracts usually involve three things a longer term relationship a substantial degree of commitment from both parties and a high degree of communication and cooperation in practice what sorts of contracts with that apply to its most likely to apply to joint ventures complex outsourcing where the customer and supplier need to cooperate quite closely to make it work and in some cases franchising or distribution arrangements that's by no means an exhaustive list but nor does it mean that all agreements of that type will be regarded as relational it's very much question of looking at the substance of what's been agreed not what the parties have called it what about a contract for the sale and purchase of a business after all that's usually a pretty complex contract often with a fair amount of money at stake I think that's nuts unlikely to be relational because the parties are usually looking for a clean break once the seller has sold the business it doesn't expect to have much to do with the buyer anymore so there's no longer term relationship now maybe some transitional services arrangements but they won't normally last much longer than six months to a year and then after that parties will go their separate ways so it's essentially transactional in nature contrast that with a joint venture with an expected duration of perhaps five to ten years where both parents are contributing resources and expertise and to make it work they need to cooperate closely with one another on a day-to-day level over a significant period of time now that's much more likely to be a relational contract and what about a 20-year lease of commercial premises is that likely to be relational well that would obviously tick the box when it comes to the need for a longer term relationship but you also need to look at the nature of that relationship in particular how much regular interaction is there between the parties with many leases there are likely to be long periods where there's very little interaction between the tenant and the landlord beyond payment of rent and given that I think the course will be quite reluctant to characterize the majority of leases as relational contracts in the same way as say certain types of joint venture okay now before we get on to why it matters whether a contract is relational or not I think it's time we stopped keeping people in suspense and explained the significance of mr. whippy ice cream to all of this well this all to do with a case called Amy and Birmingham City Council from 2080 where the Court of Appeal ruled that the agreement in dispute was a relational contract it involved a massive PFI deal worth 2.7 billion over 25 years and five thousand one hundred and ninety pages long under which amy was responsible for managing and maintaining the council's entire road network this D rise to numerous complaints about Amy's failure to repair roads adequately it's also given rise to some intense competition between local journalists in Birmingham to find the best way of demonstrating just how bad the roads were so one reporter filmed himself being driven over a series of potholes trying to hold a very full glass of water but I think but I think the award for best Amy related pothole video has to go to the reporter who was filmed while attempting to eat a mr. whippy ice cream most of which ended up all over his face just in case anyone is tempted to try this themselves I think we should make it clear that the reporters were in the passenger seat while they did this they weren't actually driving them some themselves meanwhile I gathered that the contractual dispute has generated a fair amount of press coverage in its own right especially when the council imposed penalties in on Amy have almost 50 million pounds for failing to replace a mere two sets of damaged bollards so what actually went wrong with the Amy deal well the contract appeared to be working well until 2014 when according to the court of appeal Amy thought up an ingenious new interpretation of the contract which would have the effect of reducing their workload or increasing their profit if they issued change notices that interpretation essentially involved a very strict reading of certain provisions of the contract if upheld it would have meant that Amy was only under an obligation to maintain roads listed in a data set which was known to be out of date and it didn't include they're parts of the council's road network a me argued that it was not the cost function to rescue parties from bad bad or even disastrous bargains which they make and at first instance the the trial judge agreed but I gather the Court of Appeal took a different view why was that the Court of Appeal described the outcome at first instance as most bizarre given that the whole purpose of the contract was to maintain the entirety of the council's road network it took the view that this was a relational contract which would only work if both parties were prepared to cooperate with one another and as they put it adopt a reasonable approach in accordance with what is obviously the long-term purpose of the contract because of the long term nature of the contract tract it was inevitable that the contractual obligations of Amy would change over time this supported the existence of a general obligation on Amy to update the road network data the Court of Appeal also said that with a contract of this length there were bound to be inconsistencies and instances of bad drafting it wasn't helpful to most exclusively on a small number of provisions in isolation from the purpose of the contract as a whole which was after all to maintain the whole of Birmingham's road network not just some of it but I thought that more recently the trend in contractual interpretation had been towards a more literal approach especially in disputes between well-resourced sophisticated parties in this case it sounds as if the court of appeal placed more emphasis on the interpreting of the words in the light of the overall purpose of the contract you're right that recent Supreme Court rulings have suggested a shift towards focusing on the natural meaning of the words used even if that sometimes produces some rather uncommital out commercial outcomes and if the contract had not been relational then it's entirely possible that Amy's strict interpretation would have prevailed for example if it had been a sale and purchase agreement but what the Court of Appeal seems to be saying in this case is that a more purpose of approach can be justified where you have a relational contract especially a very long complex one like this in particular point may be reached focusing on the natural meaning of the words used starts to have diminishing returns because the contract is so long that each side can easily find individual provisions which support their view the only way to decide which interpretation is to be preferred is to take a step back and look at the overall purpose of the contract if they're likely to be an appeal to the Supreme Court that's unlikely because the council announced in July that they had reached a settlement with AMI now that's probably good news for long-suffering drivers in Birmingham as it enables the council to move on but it does mean that as lawyers we still don't know what the Supreme Court thinks about relational contracts okay so that's one example of how finding a cut that a contract is relational can make a difference to the outcome our next example is the case from March 2019 called Bates versus post office can you explain what this one was about this litigation arose out of a very long runnings and saga involving the post office and some of its sub post masters who run post office branches based on discrepancies in their accounts these sub post masters were accused of theft fraud or false accounting and their contracts were terminated some of them have even been convicted and sent to prison the sub post masters argue that these discrepancies arose because of errors in the post offices own computer system known as horizon the courts haven't yet reached a view on whether that's correct but there's a fair amount of evidence in the public domain that the horizon system was far from perfect and was indeed prone to errors I gathered the litigation has been very hard-fought and the post office has been accused of some fairly heavy-handed tactics in its dealings with the sub post masters yes when interviewing sub post masters who were under investigation the post office told them that if they disclosed anything that was said at the interview they will be in breach of the Official Secrets Act the judge was less than impressed describing this tactic as unusual and oppressive the post office has since accused him of bias but that allegation has been rejected by the Court of Appeal so what does this case tell us about relational contracts well among other things the judge found that the post offices agreements with sub postmasters were relational contracts this meant that arranging duty of good faith was implied or as the judge put it the post office is not entitled to act in a way that will be considered unacceptable by reasonable and honest people why is that so problematic for the post office it affects them in a number of ways but to take just one example the post office has been first has been exercising its discretion to suspend or terminate sub postmasters contracts unless they could prove that the discrepancy wasn't their fault so in effect it's been presuming guilt unless shown otherwise this is against a background where as I mentioned earlier there is evidence that the horizon computer system may have been a fault although we haven't had a judgment yet on breach it's by no means impossible that the post offices conduct will be found to have breached this duty to act in good faith does this ruling mean that good faith will be implied into all relational contracts not necessarily for example there's no suggestion in the ami case the cell is present and the judge in Bates made it clear that where a contract dealt with good faith expressly for example by requiring it to be observed in relation to some provisions but not others then it would not normally be appropriate for the course to imply a general duty to act in good faith in relation to the whole contract that's because the parties at least clearly applied their minds to the matter and decided against that approach the rationale for applying employing it here was that the judge took the view that the contract necessitated a high degree of cooperation and Trust to make it work so what's the next stage in the post office litigation a judgement is expected later this year on whether the post office actually breached the terms of its contracts with sub post masters so that will be worth keeping an eye out for okay so if I could just try to sum up there seem to be two main points here the first is that a finding that a contract is relational can have a significant impact on how strictly it's interpreted as we in the ami case and the second is that it may also results in a wide-ranging duty of good faith he implied as we saw in the post office case is there anything you would add to that just to expand on both those points it can affect how you exercise your rights under the contract so you may need to ensure that you're acting consistently with the purpose of the contract and in a commercially acceptable way and you may also need to avoid exploiting defects in the drafting or an imbalance in bargaining power but it's important to keep these cases in perspective the post office case in particular is quite unusual and the vast majority of contracts and not relational but transactional so we're really only talking about a small subset of commercial contracts generally it's also important to bear in mind that the concept has yes yet to be tested in the Supreme Court although in my view the concept has been sufficiently recognized a Court of Appeal level that it will be unwise to dismiss it as just a passing fad thanks for answering those questions Jonathan and thank you for listening please note that this talk is not a substitute for detailed legal advice if you'd like more information or you have any feedback on this talk you can contact us at commercial at TravelSmith calm