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Driving collaboration through 'relational' construction contracts

Out-Law Analysis | 02 Oct 2019 | 4:24 pm | 3 min. read

A new type of construction contract, dubbed a 'relational' contract, may help to bridge the gap between English law's focus on contractual certainty and a growing desire amongst contractors to incorporate general obligations to collaborate into their contracts.

Alliancing contracts and collaborative contracts aim to create a different way of behaviour, and indeed will often include 'no claims' clauses which seek to limit the parties' rights of action. Ultimately, however, this highlights the fact that while the industry is willing to accept these contracts, English law has typically focused on certainty of terms and has resisted arguments that are based on good faith obligations being implied or, where they are express, having a wide application.

The growing acceptance of what have been described as 'relational' contracts provides one potential way of addressing this mis-match. The concept first came into prominence in a 2013 High Court decision, Yam Seng Pte Ltd v International Trade Corporation Ltd. Mr Justice Leggatt described these contracts as requiring a high degree of communication, cooperation and predictable performance based on mutual trust and confidence. These contracts, he said, involve expectations of loyalty which are not legislated for in the express terms of the contract but are implicit in the parties' understanding and are necessary to give business efficacy to the arrangements.

It is easy to see why construction contracts, and collaborative contracts in particular, would fall into this category. Construction contracts will often take place over several years and require close cooperation between all parties without which problems are likely to arise.

Jackson Shy_November 2019

Shy Jackson

Partner

 If a contract to distribute Manchester United-branded toiletries in the Far East was considered a relational contract, it is difficult to see why a [collaborative] construction contract will not be seen as a relational contract.

Despite the Yam Seng decision, the courts have maintained their traditional reluctance to recognise the existence of implied good faith obligations or wider obligations beyond what is specifically and precisely provided for in the contract. A more recent decision, however, Bates v Post Office, has looked at the concept of relational contracts and has described it in some detail, finding that, as the law stands, these contracts do in fact give rise to an implied duty of good faith.

One of the issues which the court was asked to determine was whether the contractual relationship between the parties was a relational contract, under which the parties were subject to duties of good faith, fair dealing, transparency, co-operation and trust and confidence.

The judge began by identifying a number of recent decisions which, in his view, demonstrated that the courts recognised the concept of relational contracts. He found that there was a type of contract, referred to as a relational contract, where there was an implied obligation of good faith and that this meant that the parties must refrain from conduct which, in the relevant context, would be regarded as commercially unacceptable by reasonable and honest people.

The judge then identified a non-exhaustive list of factors which identify a relational contract:

  • no specific express terms preventing a duty of good faith being implied into the contract;
  • a long-term contract, with the mutual intention of the parties being that there will be a long-term relationship;
  • the parties must intend that their respective roles will be performed with integrity, and with fidelity to their bargain;
  • the parties are committed to collaborating with one another in the performance of the contract;
  • the spirits and objectives of the venture may not be capable of being fully captured in a written contract;
  • the parties have "trust and confidence" in each other, of a different kind to that present in fiduciary relationships;
  • the contract involves a high degree of communication, cooperation and predictable performance based on mutual trust and confidence, and expectations of loyalty;
  • one or both parties may have invested significantly in the venture, in a way which may in some cases be more accurately described as a substantial financial commitment; and
  • the relationship may be an exclusive one.

Looking at the criteria identified by the judge, it is clear that many of them will apply to construction contracts. Indeed, the increasing use of collaborative models is driven by the recognition that construction projects, by their nature, require close cooperation over a lengthy time period in order to deal with the inevitable risks that arise on such projects. If a contract to distribute Manchester United-branded toiletries in the Far East was considered a relational contract, as in the Yam Seng decision, it is difficult to see why a construction contract - especially one in which the parties chose to use a collaborative form of contract - will not be seen as a relational contract.

It remains to be seen if the concept of relational contracts is adopted more widely by the courts and applied to construction contracts, but it is a positive sign that the courts recognise that parties are expected to behave in a certain way where they choose to enter into certain types of contracts. That is not to say that a party cannot have regard to its own commercial interests or that the express agreed terms are less important, but the emphasis on refraining from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people is useful guidance on how the law regards collaborative contracts.

Shy Jackson is a contentious construction expert at Pinsent Masons, the law firm behind Out-Law.