Energy and Utilities

Relational contracts come under increased focus in the energy sector

Published on 9th Apr 2021

What do 'good faith' obligations implied into long-term energy contracts offer and what do they mean in practice?

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The design, construction and operation of major renewable energy assets is often structured contractually under the guise of EPC (Engineer, Procure and Construct), EPCOM (Engineer, Procure Construct, Operate and Maintain), BOOT (Build, Own, Operate and Transfer), O&M (Operation & Maintenance), JVs (joint ventures) and others too numerous to list.

The relevant stakeholders to these contracts invest significant time and money to realise the successful delivery of a project. The prospect of guaranteed income, often backed by government funds, is highly attractive. Equally, however, the stakes are high to ensure performance is maximised throughout the design, construction and operation phases.

The long-term nature and the close levels of cooperation between the various stakeholders to these contracts means they may be deemed "relational", which often impose an implied term of good faith between the parties.

The implication of good faith obligations may be entirely welcome. However, given that there remains no general requirement of good faith in English contract law, the prospect of potentially being bound by an implied term of good faith warrants careful consideration.

What is good faith?

One of the better known definitions of good faith under English law comes from the case of CPC Group v Qatari Diar Real Estate [2010] EWHC 1535 (see para 246) where the "obligation of utmost good faith" was described as: "to adhere to the spirit of the contract… and to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations [of one another]”.

These concepts are clearly subjective and what precisely is required under an obligation of good faith will depend on the contract itself.

What is a relational contract?

The concept of relational contracts has come under increasing focus in recent years as parties to a relational contract may be bound by an implied duty of good faith to each other. In other words, if a contract is deemed to be "relational", it is arguable at law that an additional duty beyond that set out in the contract will bind the parties to act in good faith.

What constitutes a relational contract was recently considered in 2019 in the case of Bates v Post Office [2019] EWHC 606 (QB) in which nine indicative characteristics were set out. This test was discussed in 2020 in the context of 25-year private finance initiative (PFI) waste-to-energy project, and it was concluded in that case the "25-year PFI contract is a paradigm example of a relational contract in which the law implies a duty of good faith", citing factors such as the parties' long-term, close and collaborative relationship, the high degree of trust, confidence, communication and co-operation, the exclusivity between the parties and the significant investment by both parties (see Essex CC v UBB Waste (Essex) Limited [2020] EWHC 1581 (TCC)).

By contrast, a contract for maintenance, repair and overhaul services over a period of 10 years in respect of 27 new aircraft engines was found not to be relational on the basis that the contract was expressly agreed not to be a joint venture or partnership and allowed the subletting of both the engines and the provision of services (see Cathay Pacific Airways Limited v Lufthansa Technik AG [2020] EWHC 1789 (Ch)).

When might it apply to energy contracts?

In the context of energy contracts, if, for example, the development of a solar plant is undertaken pursuant to a JV, with significant investment by the JV partners, alongside cooperation in the design, development, construction and operation of the plant over a 25-year period, this would stand a good chance of being a relational contract.

A similar set of circumstances could arise in the context of power purchase or operation and maintenance contracts, with the energy sector having multiple complex contractual arrangements that may be deemed as relational.

Where the contract is relational and an implied term of good faith exists, this may manifest itself in many ways but most commonly we see good faith being raised in response to termination, variations, the exercise of options and other matters that fall between the clearly articulated contractual rights and remedies.

The scope of terms requiring fair dealing, cooperation or similar are by their nature potentially wide ranging and nebulous. This undermines what parties have come to expect in terms of contractual certainty under English law.

OC comment

In terms of practical tips, it remains critical to identify the scope of the obligations that will form a contract between parties. If a contract is to include duties of good faith, or honesty, fairness etc. it is best to state these plainly. Alternatively, if you want to avoid grappling with good faith, the simplest solution is to expressly exclude these.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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