Relational Contracts

A Relational Contract is my favourite type of contract, if actually having a favourite contract is a thing.

In any event, most mediators like me tend to see them a lot because they are uniquely suited to the process of mediation – many having a life of up to 10 or 15 years, maybe even longer. They might be joint ventures or other contracts that require a degree of collaboration, say in the tech space or mining sector – and they are certainly not confined to individuals and can be relational even if between companies.

The defining feature is not necessarily term but more that these types of contracts are underpinned by a relationship requiring more than simply what is written in the contact – and often it is that trust and confidence is vital for the business of the contract to work compared to an ordinary long term commercial lease or standard supply contract.

And it’s because of this special relationship that the courts have often been prepared to read in duties of good faith where none exist on a black-letter reading.

So, a common conversation I have with counsel in mediation is… “what difference, if any, does that relational underpinning make in law, will a judge be tempted to see some extra obligations where none exist within the four corners of the document?”

For instance in a dispute over the rights and wrongs of termination – if it is indeed a relational contract, an implied duty of good faith might have a real impact on the merit of that termination.

That conversation has been made easier by the recent English High Court case Bates v Post Office (a group litigation in which 550 sub-postmasters had claims relating to the introduction and operation of an IT system, known as Horizon ) identifying nine “specific characteristics” that are relevant when determining if a contract is relational – summarised well by White & Case here;

  1. no “specific express terms” in the contract preventing a duty of good faith being implied;
  2. a long-term contract, “with the mutual intention of the parties being that there will be a long-term relationship”
  3. an intention on the part of the parties “that their respective roles be performed with integrity, and with fidelity to their bargain”
  4. a commitment on the part of the parties “to collaborating with one another in the performance of the contract”
  5. the “spirits and objectives” of the parties’ venture being such that they are incapable “of being expressed exhaustively in a written contract”
  6. the parties “repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships”
  7. a contract which involves “a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty”
  8. a “degree of significant investment” or a “substantial financial commitment” by one party (or both) in the venture; and
  9. the exclusivity of the parties’ relationship.
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