Relational Contracts and Good Faith in the Post Office–Subpostmaster Relationship: Commentary on Bates & Ors v Post Office Ltd (No 3) [2019] EWHC 606 (QB)

Relational Contracts and Good Faith in the Post Office–Subpostmaster Relationship: Commentary on Bates & Ors v Post Office Ltd (No 3) [2019] EWHC 606 (QB)

Introduction

This is a detailed commentary on Mr Justice Fraser’s seminal “Common Issues” judgment in the Post Office Group Litigation: Bates & Ors v Post Office Ltd (No 3) [2019] EWHC 606 (QB), handed down on 15 March 2019. The litigation, brought by approximately 550 Subpostmasters/Mistresses (SPMs), concerns the contractual framework governing SPMs’ relationships with Post Office Ltd (POL), and the operation of POL’s Horizon/Horizon Online point-of-sale and accounting system.

The Common Issues trial was designed to resolve legal questions with maximum cross-group utility before technical and individual liability/causation issues (the “Horizon Issues”) and case-specific claims. This judgment therefore:

  • Interprets the SPM contracts (SPMC/Modified SPMC) and the later Network Transformation Contract (NTC) used post-2011;
  • Determines whether those contracts are “relational contracts” carrying an implied duty of good faith;
  • Addresses implied terms, agency and accounting principles, suspension/termination powers, “onerous/unusual” terms and their incorporation;
  • Assesses the reasonableness of key terms under the Unfair Contract Terms Act 1977 (UCTA); and
  • Rules on the legal status of Branch Trading Statements and the effect of “settle centrally” within Horizon.

The Court expressly did not decide the technical accuracy of Horizon, causation, or individual breach/loss at this stage. Those questions were reserved for later trials.

Summary of the Judgment

  • Relational contract and good faith: The POL–SPM agreements are relational contracts. An implied duty of good faith applies to both parties: each must refrain from conduct commercially unacceptable to reasonable and honest people (paras 725–739, 1113–1114, 1122(1)).
  • Implied terms: The Court implied a suite of terms, some as necessary incidents of the relational duty (good faith, fair dealing, transparency, cooperation, non-capricious exercise of powers) and some for business efficacy (adequate training/support; a system reasonably fit for purpose; reasonable care in performance where it affects accounts/liability): see paras 746–758, 772–781; answers at 1122(2)–(3).
  • Liability for losses:
    • SPMC: Clause 12 imposes fault-based liability (negligence, carelessness or error) for SPM and assistants; the Court rejected POL’s effort to treat it as strict or near-strict liability (paras 640–669; answer at 1122(8)).
    • NTC: Part 2, clause 4.1 sought to impose near-strict liability (“however this occurs … or otherwise”), save for some third-party criminality. The Court held this clause fails UCTA reasonableness and is not enforceable; a fault-based term akin to SPMC Clause 12 is implied instead (paras 677–687, 1102–1105; answer at 1122(7)–(9)).
  • Branch Trading Statements are not “settled accounts” in law: Because Horizon forces SPMs to click “Accept Now” to roll over, disputed items and TCs are necessarily included. A Branch Trading Statement compiled in this way is not an agreed/settled agent’s account binding the SPM. SPMs do not bear the burden of proving it incorrect (paras 782–853; answers at 1122(12)–(13)).
  • “Settle centrally” denotes acceptance of debt in POL’s processes: The Court found that settling centrally was treated by POL as acceptance of liability and triggered debt recovery, even where disputes were lodged with the Helpline (paras 549–557, 831–833). This fed a “debt trap” dynamic (paras 562–567).
  • Agency: SPMs were POL’s agents to limited extents (as defined by the contracts and manuals); POL was not the SPMs’ agent for rendering accounts/recording transactions in the manner contended by claimants (paras 782–864; answers at 1122(10)–(12)).
  • Suspension and termination constrained by good faith and “legitimate interests”:
    • Suspension: the power must be exercised for POL’s legitimate business interests and in good faith; remuneration withholding/provisions requiring SPMs to bear the cost of keeping branches open during suspension (and even after reinstatement) were held unreasonable under UCTA (paras 866–887, 1023–1028, 1107; answers at 1122(14)).
    • Termination: “Not less than [3/6] months” notice requires POL to consider the appropriate notice period in good faith; summary termination under both SPMC and NTC is available only for repudiatory material breach (paras 888–909; answers at 1122(15)–(16)).
  • Onerous or unusual terms & incorporation:
    • SPMC: certain onerous/unusual terms (e.g., unilateral variation of core terms via Counter News; suspension remuneration forfeiture; no compensation for loss of office) were not incorporated absent adequate notice (paras 984–1057; answer at 1122(5)–(6)).
    • NTC: signature and the formal “seek legal advice” warning sufficed to incorporate terms, but key clauses nevertheless failed UCTA reasonableness (paras 1052–1062; answer at 1122(7)).
  • UCTA applies to both SPMC and NTC and defeats key POL clauses: Both were POL’s written standard terms of business; UCTA s.3 applied. The Court struck down:
    • NTC Part 2, cl. 4.1 (near-strict loss liability);
    • NTC Part 2, cl. 13.1 (reimbursement “in full on demand” of wide-ranging POL losses/costs);
    • SPMC s.19(5)–(6) and NTC Part 2, cl. 15.2–15.3 (withholding remuneration during suspension, charging SPMs to keep branches open);
    • SPMC s.1(8) and NTC Part 2, cl. 17.11 (no compensation for loss of office) (paras 1063–1110; answer at 1122(7), (19)–(20)).
  • Training and system obligations: POL must provide adequate training/support and a system reasonably fit for purpose (implied for business efficacy). Training materials and the Helpline sit within these implied duties; even if not services under the 1982 Act s.13, equivalent terms are implied (paras 746, 749–752, 769–781; answer at 1122(2)–(4)).
  • NFSP not independent of POL: The Court found the National Federation of Subpostmasters was financially dependent on POL, subject to clawback for reputational “disrepute,” and not negotiating at arm’s length when the NTC was introduced (paras 574–598). This undermined POL’s reliance on NFSP as an independent counterparty.

Analysis

Precedents and Authorities Shaping the Decision

  • Relational contracts & good faith
    • Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB): recognised relational contracts and implied good faith in long-term cooperative arrangements. Fraser J adopts and refines this lineage (paras 702–711).
    • Subsequent courts acknowledging relational contracts/good faith discussed: Globe Motors v TRW [2016] EWCA Civ 396; MSC v Cottonex [2016] EWCA Civ 789; D&G Cars v Essex Police [2015] EWHC 226; Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm) (paras 705–707).
    • Wood v Capita [2017] AC 1173; Arnold v Britton [2015] AC 1619: interpretation methodology (text first; commercial/common-sense context used with care) (paras 620–629).
  • Interpretation and implied terms
    • Marks & Spencer v BNP Paribas [2015] UKSC 72; Geys v Société Générale [2013] 1 AC 523: business efficacy/obviousness test; strict restraint in implication (paras 694–701).
    • British Telecommunications v Telefónica O2 [2014] UKSC 42: discretions must be exercised in good faith and for proper purpose unless very clear contrary language (paras 759–761, 878).
  • Onerous/unusual terms & incorporation
    • Interfoto Picture Library v Stiletto [1989] 1 QB 433: more onerous/outlandish clauses demand more conspicuous notice (paras 959–975).
    • Goodlife Foods v Hall Fire [2018] EWCA Civ 1371: two-step analysis—incorporation (notice) then UCTA reasonableness; “sliding scale” of notice (paras 975–983).
    • Peekay v ANZ [2006] EWCA Civ 386: signature generally binds (paras 1049–1051).
  • UCTA
    • Yuanda v WW Gear [2010] EWHC 720 (TCC); African Export-Import Bank v Shebah [2017] EWCA Civ 845: “written standard terms of business”, habitually used, little/no variation (paras 1068–1075).
    • AXA Sun Life v Campbell Martin [2011] EWCA Civ 133: s.3(2)(b)(i) can police performance substantially different from what is reasonably expected (paras 1077–1080).
    • Paragon Finance v Nash [2001] EWCA Civ 1466: focus on performance reasonably expected of the party relying on the term (paras 1080–1082).
    • Watford Electronics v Sanderson [2001] EWCA Civ 317; Granville Oil v Davis Turner [2003] 2 Lloyd’s Rep 356: caution in striking terms between commercial parties of equal power—here, critical, the Court found markedly unequal bargaining power (paras 1095–1099).
  • Agency & accounts
    • Bowstead & Reynolds on Agency: settled accounts, agents’ duty to account (paras 790–791). Applied with the practical point that Horizon compelled inclusion of disputed items; thus Branch Trading Statements were not settled accounts.

Fraser J’s Legal Reasoning

1) A relational contract, and what it means in practice

The Court articulated concrete indicia for relational contracts (para 725), which were all found to exist in the POL–SPM relationship, including longevity, mutual commitment to cooperative performance, trust/confidence (distinct from fiduciary duty), significant SPM investment, and a high degree of communication and predictable performance. The effect is an implied duty of good faith (paras 738–741), which:

  • Demands honesty plus fair dealing and commercial acceptability;
  • Constrains POL’s discretions—suspension and termination must serve legitimate interests and be exercised rationally and for proper purposes;
  • Supports a suite of further implied incidents (paras 746–758), including non-arbitrary suspension/termination, transparency over shortfalls, and reasonable investigation before recovery.

2) Implied terms and business efficacy

Beyond the “good faith” incidents, the Court implied for business efficacy:

  • Adequate training and support (especially when new systems/services were imposed) (para 750; answer 1122(2)).
  • A system reasonably fit for purpose including adequate error-repellence (paras 749–752, 778–781; answer 1122(2)).
  • Reasonable care in performing functions that could affect accounts/liability (para 752; answer 1122(2)–(3)).

Although the Supply of Goods and Services Act 1982 s.13 did not directly govern Horizon/Helpline/training as “services,” an equivalent standard of reasonable skill and care was implied at common law (paras 769–781; answer 1122(4)).

3) Accounts, agency and the legal status of Branch Trading Statements

Horizon’s architecture dictates that SPMs must click “Accept Now” to roll over a trading period; disputes are handled via the Helpline after acceptance. The resulting Branch Trading Statement therefore necessarily includes disputed entries. The Court held:

  • Such a statement is not an “agreed” or “settled” agent’s account binding the SPM (paras 819–821; answer 1122(12)).
  • SPMs do not bear the burden to prove it wrong; at most they can show they disputed via the Helpline to displace any suggestion of settlement (paras 851–853; answer 1122(13)).
  • “Settle centrally” signified acceptance of debt within POL’s systems (and triggered debt recovery), contrary to the suggestion that it preserved neutrality (paras 549–557, 831–833).

Agency itself was carefully delimited, with SPMs as POL’s agents only to the extent the contracts/manuals prescribed, and POL not acting as SPMs’ agent for rendering accounts or reconciling transactions as alleged (paras 854–864; answers 1122(10)–(12)).

4) Onerous/unusual terms and incorporation

Where SPMC terms were onerous/unusual, they were not incorporated absent adequate, targeted notice (Interfoto principle). In contrast, execution of the NTC coupled with explicit advice to obtain legal advice sufficed to incorporate—even for severe clauses—subject to UCTA reasonableness (paras 984–1062; answers 1122(5)–(7)). Notable findings:

  • Unilateral variation of operational manuals is acceptable; unilateral variation of core terms has the potential to be onerous/unusual depending on content and remains subject to UCTA (paras 985–1001, 1107).
  • Suspension remuneration clauses (withholding pay, compelling the SPM to fund continuity, and allowing POL to withhold even after reinstatement) are onerous/unusual and, crucially, unreasonable under UCTA (paras 1023–1028, 1107).
  • No compensation for loss of office provisions are onerous/unusual and unreasonable under UCTA (paras 1041–1045, 1107).

5) UCTA: POL’s standard terms; the s.3 test; and why key clauses failed

The Court held both SPMC and NTC were POL’s written standard terms of business (paras 1068–1075), so s.3 UCTA applied. It then asked whether POL sought, by those terms, to render a substantially different performance, or none at all, and whether the terms were reasonable having regard to circumstances at formation (paras 1063–1110). The Court emphasised:

  • Markedly unequal bargaining power: SPMs had no negotiation leverage; NTC followed a decade of Horizon use; NFSP was not independent (paras 1095–1101, 574–598, 1098–1099).
  • Near-strict loss liability (NTC 4.1) had severe, unlimited financial exposure “however this occurs”, incompatible with reasonableness. It was struck down; a fault-based loss term akin to SPMC Clause 12 is implied (paras 1102–1105).
  • Reimbursement on demand (NTC 13.1) for POL’s wide-ranging losses/costs was unreasonable (para 1105).
  • Suspension remuneration provisions in both regimes and no compensation terms failed reasonableness (paras 1107, 1110; answers 1122(7), (19)–(20)).

6) Suspension and termination re-framed by good faith

  • Suspension: Permissible to protect legitimate interests (arrest/charge/misconduct/insolvency suspicion etc.) but subject to good faith and rationality; POL must avoid blanket exclusion from records; and avoid running suspension regimes that strip remuneration and offload costs while leaving the branch open (paras 866–887, 886, 1107; answer 1122(14)).
  • Termination on notice: “Not less than” requires a real decision on the appropriate period in good faith, considering relevant factors (investment, tenure, premises, reasons) and excluding irrelevant ones (e.g., litigation) (paras 888–909; answers 1122(16)).
  • Summary termination: confined to repudiatory breach under both SPMC and NTC (paras 888–909; answer 1122(15)).

7) NFSP’s lack of independence

The Court found the NFSP financially dependent on POL under a Grant Framework Agreement with stringent confidentiality and clawback triggering on reputational harm; an email indicated NFSP sought its own funding deal as a condition for agreeing SPM compensation within Network Transformation. POL could not rely on NFSP as an arm’s-length counterparty in supporting the NTC suite (paras 574–598).

Impact and Implications

  • Good faith mainstreamed in English contract law: This judgment consolidates a practical test for relational contracts and the content of the implied duty of good faith. It will reverberate across franchising, distribution, network/agency alliances, and long-term outsourcing where one party enjoys structural advantages.
  • Standard form business contracts are vulnerable under UCTA: Even in B2B contexts, where one party dictates terms habitually, UCTA s.3 applies. Clauses imposing near-strict liability for losses, “on demand” reimbursement, suspension pay-stripping, and blanket “no compensation” are at real risk of being held unreasonable absent compelling justification and balanced safeguards.
  • Evidence and accounting burdens in tech-mediated systems: Treating forced electronic acceptances as “agreed accounts” is incompatible with fairness. Where a system architecture compels acceptance to trade (e.g., roll over), disputes must be properly resolved outside “accept now” workflows and before recovery.
  • Governance within public-influenced networks: When a public body or a public-service provider contracts with small operators, the law will police good faith and reasonable exercise of powers. The decision stresses “legitimate interests,” rationality, and proportionate investigation before sanctions.
  • Drafting lessons: “Not less than X months” notice means a genuine discretion to decide on period; exercise of powers should be expressly tied to proper purposes; suspension regimes must avoid punitive effects contrary to reasonableness; unilateral variation of core terms invites challenge and should be constrained with transparent process, consultation, and reasonableness checks.

Complex Concepts Simplified

  • Relational contract: A long-term, cooperative agreement where the parties’ roles depend on mutual trust, ongoing communication, and predictable performance. In such contracts, the law implies a duty of good faith: honesty, fairness, transparency, and no arbitrary/capricious exercise of powers.
  • Implied term (business efficacy): A term the law reads into a contract because, without it, the deal would lack practical or commercial coherence (e.g., adequate training; a system reasonably fit for purpose).
  • Onerous/unusual term & incorporation: If a clause is unusually harsh or severe in effect, the party seeking to rely on it must show it was fairly brought to the other party’s attention before the contract was made.
  • UCTA reasonableness (s.3): When using standard terms, a party cannot exclude/alter core performance unless the term is reasonable given circumstances at formation. Unequal bargaining power, absence of negotiation, and extreme financial exposure weigh against reasonableness.
  • “Settle centrally” in Horizon: A workflow choice whereby a shortfall is parked to an account and thereafter pursued as debt, despite dispute notifications—this did not preserve neutrality.
  • Settled agent’s account: Normally, an agent’s agreed account binds unless shown mistaken. Here, forced inclusion of disputed items meant Branch Trading Statements were not “settled accounts.”

Practical Takeaways

  • In long-term networked arrangements, build explicit good faith and “proper purpose” constraints into powers (suspension, termination, unilateral changes).
  • Provide structured, audited workflows for dispute resolution—never tie the right to trade to acceptance of disputed items.
  • Limit loss allocation to fault or narrowly tailored risk allocations with clear investigative standards; avoid “however this occurs” language.
  • Draft suspension regimes with pay safeguards, time limits, and proportionality (and share costs only where justified).
  • Treat “not less than X months” as a duty to decide the appropriate notice; record reasoning.
  • Ensure trade associations negotiating contract terms are genuinely independent of the principal.

Conclusion

Bates (No 3) is a watershed judgment in English contract law’s everyday operation. Fraser J both recognises and operationalises the concept of the relational contract and its implied duty of good faith in a context of marked bargaining asymmetry. He rejects attempts to disguise forced electronic “acceptances” as settled accounts and insists that standard form business terms are subject to UCTA’s reasonableness discipline.

The Court’s answers to the Common Issues recalibrate the POL–SPM contractual matrix: fault-based loss allocation is restored, suspension/termination are constrained by legitimate interests and good faith, and onerous clauses are either unincorporated (SPMC) or unreasonable (NTC). The judgment promotes a fair, rational, and transparent framework for long-term, technology-mediated public service delivery, and provides a robust template for courts and drafters confronting similar network relationships in future.

Appendix: Answers to the Common Issues (Concise)

  • 1: Yes—relational contracts; implied duty of good faith applies bilaterally.
  • 2–3: Implied terms as per paras 746–758; training/system/skill-and-care implied for efficacy; powers/discretions governed by good faith.
  • 4: No s.13 SGSA route needed—equivalent terms implied for training/system/Helpline.
  • 5–6: Certain SPMC terms onerous/unusual and unincorporated for lack of notice; NTC terms incorporated by signature but still subject to UCTA.
  • 7: UCTA defeats NTC cl. 4.1 and 13.1; suspension remuneration terms; “no compensation for loss of office.”
  • 8–9: SPMC loss clause is fault-based; NTC clause invalid—fault-based term implied.
  • 10–12: POL not SPMs’ agent as alleged; SPMs’ duty to account governed by contracts/manuals; Branch Trading Statements are not settled accounts.
  • 13: SPMs do not bear burden to prove Branch Trading Statements incorrect.
  • 14–16: Suspension and termination constrained by good faith; suspension requires legitimate interests; summary termination for repudiatory breach; “not less than X months” requires real consideration.
  • 17–18: No separate “true agreement” findings required beyond the above constructions.
  • 19–20: Compensation for loss of office available (exclusion clauses fail); loss heads not limited as POL contended.
  • 21: Discretion on successor appointments remains with POL but must be exercised for proper purpose/in good faith.
  • 22: Assistants not third-party beneficiaries under the 1999 Act.
  • 23: SPMs must train assistants, but not to a standard higher than their own training.

Case Details

Year: 2019
Court: England and Wales High Court (Queen's Bench Division)

Comments