Oh no, not another case on good faith and rationality

Jason Rix

In Cathay Pacific v Lufthansa, the High Court found that an option in an engine maintenance agreement: (1) was not subject to an implied duty to be exercised rationality, (2) even if it were, there was no breach, (3) nor was the agreement a “relational contract” subject to an implied duty to act in good faith, (4) and even it it were, there was no breach.

This is a lengthy and detailed judgment on a subject that continues to occupy the courts. It’s not feasible to summarise in less than 300 words (the mission of this blog), but here’s as punchy as I could manage:

No implied duty to act rationally

  1. The option—to remove engines from a flight hours service programme (with significant financial consequences)—was far removed from the sorts of discretionary powers where rationality is implied.
  2. It was closely analogous to a partial-termination clause.
  3. There was no assessment required.
  4. A power to terminate or, as here, to withdraw an object ought to take effect in accordance with its terms.
  5. There was no justification to interfere with the bargain struck.

No breach

  1. The decision to withdraw the engines was rational.
  2. It was shared in advance.
  3. Other engines had been withdrawn previously.
  4. The internal discussions showed the option was seen as a legitimate way to save money.
  5. This was revealed to and understood by both parties.
  6. The fact that one party may have been in financial difficulty was irrelevant.

The approach for “relational contracts”

There has been a difference of approach in recent High Court decisions as to whether the test is to ask:

  1. whether a contract is relational and if so to imply, as a matter of law, a duty to act in good faith; or,
  2. whether it is so obvious as to go without saying or that it is necessary to give business efficacy to the contract that a duty to act in good faith is implied (ie as a matter of fact).

The court said both apply, though it preferred the latter.

The agreement was not relational, the only criteria it satisfied was being long term.

There was no reason to imply a duty on the facts since:

  1. The agreement was very detailed and showed a considered allocation of risk.
  2. There was very little for a good faith obligation to bite on.
  3. The parties had expressly stated that they did not want to create a joint venture or partnership relationship.
  4. The contract worked perfectly well without the obligation.
  5. The agreement was an impersonal one.
  6. An engine maintenance contract does not obviously lend itself to being a relational contract.
  7. If the obligation were to be implied, it would have to be implied into all such contracts.
  8. The parties had expressly dealt with areas where good faith applied (eg in relation to agreeing procedures).

Even if there were a duty, it had not been breached for essentially the same reasons as for rationality.

Post script: the Equitas case was due to go to the Supreme Court on 8/9 July and would have looked at the rationality issue. However the parties settled.