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03 Mar 2020

Implied terms, relational contracts and good faith: Taqa Bratani & Ors v Rockrose

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When and why will the courts imply a term into a contract? This vexed question was recently considered by the courts in Taqa Bratani & Ors v Rockrose UKCS8 LLC [2020] EWHC 58 (Comm). The judgment is particularly of interest because it applies the general principles of the implication of terms in the context of the developing law on relational contracts, good faith, and the “Braganza” duty. In this case, although the court concluded the contract was possibly a relational one, it did not imply any terms.

Background

The claimants (“Taqa Bratani”) sought declarations that they had validly terminated the appointment of the defendant (“Rockrose”) as operator of various oil and gas fields in the North Sea. Rockrose had been appointed under a series of joint operating agreements (“JOAs”). Although the JOAs permitted termination on 90 days’ notice, Rockrose argued this was subject to either:

  1. An implied term qualifying the exercise of the right to terminate by the concepts of good faith and genuineness and the absence of arbitrariness (relying on Braganza v BP Shipping Limited [2015] UKSC 17, the “Braganza” duty); and/or
  2. By similar obligations of good faith arising from the characterisation of the JOAs as “relational contracts” (relying on Yam Seng Pte v International Trade Corp [2013] 1 All E.R. (Comm) 132).

A question of construction

Before considering the implication of terms, the court analysed the express words of the contract (a contract must be construed before any additional terms can be considered). In summary, bearing in mind this was a sophisticated contract where textual analysis was paramount, the court concluded that the language was unambiguous and conferred an absolute right to terminate on 90 days’ notice. It judged that other clauses in the JOAs (where, for example, the parties had expressly agreed that they were entitled to vote in favour of their own interests) were consistent with this analysis. Further, the court largely disregarded the documentary and expert evidence relied upon by Rockrose because it post-dated the date the JOAs were entered into. The court also ruled there was nothing within the factual or commercial matrix which suggested the natural meaning of the words was wrong, still less apparently illogical or incoherent.

When will a term be implied?

The court re-stated the general test for implying terms as follows:

  1. Is the term necessary to give business efficacy and / or is it so obvious that it goes without saying?
  2. Is the term fair and / or is it one the court considers the parties would have agreed to had it been suggested?
  3. A term will only be implied if it does not contradict the express terms of the contract.

In addition to these points, the court emphasized that the necessity test should not be watered down: fairness, equity or the improvement of the contract were not sufficient.

Could a term be implied under the Braganza duty?

The first basis upon which Rockrose argued a term should be implied was pursuant to the Braganza duty. This means that a contractual discretion must be exercised in a manner which is not arbitrary, capricious or irrational. HHJ Pelling QC was clear that in his view it was important to undertake the detailed textual and contractual analysis before considering whether a Braganza duty existed. The starting point for him was that it was hard to consider the implication of any term where the wording of the contract was unambiguous and it was neither necessary for business efficacy, nor so obvious that it went without saying, that such a term should be implied.

Secondly, while recognising that this is an “incrementally developing area of the law”, he concluded that the Braganza doctrine simply does not apply to unqualified termination provisions in professionally drawn contracts between well-resourced parties. Were that not so, there would be “almost no contractual provision that would not attract them”. Braganza was distinguishable from the present case, he judged, because the clause in question here permitted the exercise of an “absolute contractual right”. In Braganza, the discretion involved making an assessment or choosing from a range of options in which the interests of both parties had to be taken into account. In reaching that decision, the court affirmed the finding in Equitas Insurance Limited v Municipal Insurance Limited [2019] EWCA Civ 718 that in establishing that an “absolute contractual right” existed, it was necessary to consider the terms of the contract as a whole and its context as well as the characteristics of the parties themselves.

In conclusion, the court ruled that to extend the application of the Braganza duty to professionally drawn or standard form contracts featuring (but not limited to) absolute contractual rights to terminate would be “an unwarranted interference in the freedom of parties to contract on the terms they choose”.

Could a term be implied because this was a relational contract?

In this case, the court ruled that just because a contract is defined as a “relational” one, this does not mean that the parties will automatically owe each other an implied duty to act in good faith. Case law has defined relational contracts as those governing long-term relationships to which the parties make a substantial commitment. Here, the court was content to proceed on the basis that the JOAs, at least arguably, fell into that category.

However, on the question of good faith the court concluded that no such duty was implied. Returning to the earlier analysis, the right to terminate was an absolute and unqualified contractual right and it would be impermissible to imply a term that qualified what the parties had agreed between them. Adopting Leggatt J’s language from Yam Seng, the parties had already “legislated” for this issue in the express terms of the contract. HHJ Pelling QC also highlighted that Leggatt J had expressly commented that the implication of a duty of good faith is: “not a reflection of a special rule of interpretation for this category of contract.”

Conclusion

In this case, significant weight was attached to the fact that where the contract is professionally drawn and negotiated and the parties well-resourced, particular care is needed he implication of terms. In fact, the court concluded that: “where an issue has been left unresolved, it is much more likely to be the result of choice rather than error.” Whether or not commercial contract lawyers at the end of a long negotiation agree with this is, of course, open to debate.

It is perhaps this focus on the equality of arms between the parties which allowed the court to sidestep the conclusion in Bates & Ors v Post Office Limited [2019] EWHC 606 (QB) (a case where there was a significant inequality of arms) that: “there is a specie of contracts, which are most usefully termed ‘relational contracts’ in which there is implied an obligation of good faith…This means that the parties must refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people.”

As it happens (at the parties’ request) the court went on to consider whether, if it was wrong in deciding that no terms should be implied, Taqa Bratani would have been in breach in any event. Its conclusion was that it would not. It seems likely, therefore, that even if the court had concluded that all relational contracts contained an implied duty of good faith, the outcome would not have changed.

What is clear from the judgment is that this is a developing area of law. When drafting long-term contracts or those which confer discretionary rights upon the parties, care should be taken to ensure the contract accurately reflects the parties’ agreed positions. When exercising rights under existing contracts, consider whether any obligations are or might be implied into the contract in addition to the express contractual wording.

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