‘Relational’ Contracts And Good Faith

Consultancy agreements are a valuable way in which to introduce expertise to a business, but there can be misconceptions as to the legal implications of entering into these and other business-related agreements. When, for example, is there an implied duty of good faith? The award-winning commercial lawyers at ParrisWhittaker are experienced in advising businesses on how best to operate their business and protect their business interests.

An interesting ruling¹ from the UK’s High Court followed a dispute centred on a consultancy services agreement between a holding company (the defendant) and a logistics expert in the oil and gas industry. The ruling has important persuasive authority on the courts in The Bahamas and should be noted.

What’s the background?

The holding company’s CEO agreed key terms for a consultancy services agreement during a meeting with the claimant. The claimant conducts his logistics business through various companies. A dispute arose and the defendant (D) argued that certain conditions had earlier been verbally agreed, but were breached by the claimant at the meeting – entitling it to terminate the contract. The claimant brought proceedings seeking US $2,700,000 in damages for breach of contract. 

A key issue for the court was the nature of the consultancy agreement. D argued (among other things) that the agreement was a ‘relational contract’ and that the claimant had breached an implied term of good faith and had harmed D’s interests (D accused the claimant of funding a competitor, which he denied). This was a crucial issue because there is no general implied duty of good faith in agreements which are not ‘relational’. 

A contract may be treated as ‘relational’ if it’s long-term and, for instance, requires a high level of communication and collaboration between the parties. Importantly, commercial contracts can amount to relational contracts, meaning that there is an implied duty of good faith. However, the parties can expressly state in the contract terms that there is no such term implied.

Here, the High Court ruled that the contract was not a relational contract, it was simply a contract for the performance of services on request. There was, for example, no requirement of collaboration and loyalty. It therefore refused to imply a good faith term into the agreement. D was trying, unsuccessfully, to use the implied obligation of good faith to import what it claimed were the oral conditions agreed between them.

What does this mean?

The claimant’s substantive claim has yet to be determined, but the ruling on the good faith issue is important. While there is no definitive legal definition of what amounts to a ‘relational contract’, the judge relied on a 2019 ruling setting out the characteristics of a contract that could indicate it is relational. This is not an exhaustive list and none (except the first) is determinative  in and of itself: 

1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.

2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.

3. The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.

4. The parties will be committed to collaborating with one another in the performance of the contract.

5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.

6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.

7. 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.

8. 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.

9. Exclusivity of the relationship may also be present.

If any business has concerns about the nature of their contractual obligations, or those of the other party, it is important to discuss the issues with experienced commercial lawyers before taking any further steps.

Get in touch as early as you can with the commercial team at ParrisWhittaker for specialist advice at +1.242.352.6112

¹Gian Angelo Perrucci v Orlean Invest Holding Limited [2022] EWHC 2038