Express and implied good faith obligations and relational contracts

Phones 4U Limited (In Administration) v EE Limited and Ors [2023] EWHC 2826 (Ch)

The question

Did an express or implied general duty of good faith arise under a relational contract between parties who were also competitors?

The key takeaway

Where parties are not exclusive, but are in fact direct competitors, they are less likely to be considered to be in a relational contract. If an agreement expressly specifies a requirement to act in good faith in relation to a specific activity or on one party only, then a general duty of good faith is less likely to be implied. 

The background

In September 2014 Phones 4U Ltd (P4U), suppliers of consumer connections to mobile networks in the UK, went into administration. The administrators of P4u brought proceedings against mobile network operators EE, Vodafone UK and O2 (the MNOs) and their parent companies. P4u claimed that the defendants engaged in anti-competitive collusion which caused it to enter into administration and also that its collapse was caused by a breach of contract on the part of EE (only the breach of contract claim is covered in this analysis). 

The alleged collusion stemmed from suspicions that the operators did not renew their individual agreements with P4U following discussions with each other in order to strategically advance their own commercial aspirations and boost profits, and in breach of competition law. The administrators also claimed EE was in breach of an express and an implied obligation of good faith after EE announced to P4U in September 2014 that it would not be renewing its agreement after its expiry in September 2015. 

The clause relied on stated:

“13.2 EE hereby undertakes and agrees that it will in good faith observe and perform the terms and conditions of this Agreement and in particular EE shall, and shall procure that its employees, agents and subcontractors will….

13.11 EE hereby undertakes and agrees with P4U that it will act in good faith and not carry out any activity designed to reduce or avoid the making of any Revenue Share Payment(s) to P4U as contemplated by this Agreement”.

Relying on the case of Yam Seng Pte Ltd v International Trade Corp Ltd where the one year commercial distribution agreement in question was deemed to be a “relational contract”, P4U contended that the clause 13 provisions should be construed in the light of the nature of the EE Agreement as a “relational contract”, and therefore giving rise to a general duty of good faith.

The telecom companies denied the allegations claiming that the decisions were made independently and based on thorough commercial analysis. 

The decision

The High Court dismissed the breach of contract claim against EE holding that the agreement between P4U and EE did not entail a general duty of good faith.

The court found that this was a professionally drafted and very full contract between sophisticated parties and that had the parties intended to impose a general obligation of good faith, they would have expressly done so. The court also found that if there was to be such an express, general good faith obligation on EE, the contract would also have imposed the same obligation on P4U. But while there was a corresponding obligation to clause 13.2 on P4U in clause 13.1, there was no equivalent to clause 13.11. Further, clause 13.11 followed clauses 13.8 to 13.10 which all related to matters affecting the occasioning of Revenue Share Payments. Accordingly, clause 13.11 was to be interpreted as applying the requirement of good faith to “activity designed to reduce or avoid” the liability under the agreement to make Revenue Share Payments, and not more generally.

On the question of whether the EE agreement was a relational contract and whether, if so, that impacted the construction of either of the clause 13 provisions, the court reasoned that the nature of the parties’ relationship in the case relied on by P4U – Yam Seng (which involved an exclusive distribution agreement) was significantly different to the relationship between P4U and EE. Relational contracts required “a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties’ understanding and necessary to give business efficacy to the arrangements”. Examples included joint venture agreements, franchise agreements and long term distributorship agreements. 

While the EE agreement had some features of a relational contract in that it was moderately long term and involved collaboration, it also had some major differences. EE was not only enabling P4U to supply connections to its network but was also in competition with the retailer to supply the connections to customers directly. This meant that it was only natural for EE to seek to reduce its reliance on indirect retailers and instead expand its direct retailing business. In Yam Seng, exclusivity was “a supporting indication, not a necessary condition, for a relational contract” but here the fact that the parties were in direct competition pointed away from the existence of a relational contract. The court found that this was not a relational contract but that even if it was, no duty of good faith would be implied. If the court was wrong on that then it considered that there was no duty of good faith by EE on the facts. 

Why is this important?

The case shows the courts’ reluctance to imply a general duty of good faith in commercial transactions between sophisticated parties, where the agreement has been professionally drafted and where the general duty is not reciprocated between the parties. 

Any practical tips?

While courts may in some circumstances imply a general obligation to act in good faith, if that is what the parties intend, an express clause to act in good faith should be included in the contract. 

A good faith clause should be drafted with the context of the agreement in mind and scoped accordingly (all of the agreement or only certain aspects?), for example to promote cooperation or prevent a party from acting in a way that is detrimental to the other. The parties may also consider including a (non-exclusive) list of examples of good faith behaviour. 

If there are particular actions that are intended to be covered, it is preferable to have specific obligations dealing with them – although bear in mind that a general good faith obligation will not usually override these specific provisions.

Winter 2023