This article has been written by Samridhi Prakash from Symbiosis Law School, Noida.
RELATIONAL CONTRACT THEORY
This theory was originally conceived in the United States of America, guided by the intellect of learned legal savants Stewart Macaulay and Ian Roderick Macneil. It is characterised by the view that contracts are not only discrete but relational as well, i.e., contracts in which the expectations of both parties are not inked down in thorough detail but it develops subsequently as the relation progresses. This relationship between the parties is based on trust and has its roots in bona fide intentions towards one another. This theory stipulates that the beginning and end of some contracts are progressive and develop further based on user interaction and the unseen future.
Relational contract is a special category of contract, entered into by the parties for their mutual benefit. It involves a high degree of cooperation, communication, loyalty and is deeply rooted in transparency, trust and good faith. These contracts contain an implied obligation on both parties to not engage in any action which may lead to its frustration. This type of contract is very useful for securing long term mutual goals in order to keep the parties’ interests and desiderata aligned. Relational contracts are executed in cases where the relationship between the parties is to last 10-15 years or more and all conditions of service cannot be presumed at the onset.
EVOLUTION OF RELATIONAL CONTRACTS
Technically, the concept of relational contracts was birthed in 1889 in the English Court by Lord Bowen under the test of ‘business efficacy’. It was in 2013 that the concept of ‘duty of good faith’ was recognised as a mechanism of cooperation between contracting parties by the English Courts in the much-discussed case of Yam Seng. This implied duty conveys a shift from the traditional view and brings forth a general doctrine of duty of good faith. The Court framed nine characteristic features which will help categorise contracts under the relational contract species. The Queen’s Bench in this precedential decision of Bates v. Post Office Ltd. directed that a duty of good faith encompasses not just honest actions but also, a restrain on certain conducts which are commercially substandard and may prove fatal to the achievement of the purpose of contract.
LEGAL RECOGNITION IN INDIA
Relational contracts find no mention or provision under any Indian acts of the legislature, nor any jurisprudential reference. Stepping into the sphere of relational contract terms, the Hon’ble Supreme Court in 1976 observed that parties should adopt a common-sense approach to execution of contracts rather than a bland legalistic reading of the terms which may lead to widening the prospects of unconscionability. Using the theory of ‘business efficacy’ supra the Indian courts in the matter of Nabha Power Limited v. Punjab State Corporation recognised the principle of good faith implied in relational contracts through Penta Principles. These five guidelines include being reasonable and equitable, providing business efficacy to contracts, the Officious Bystander Test, clear expression through terms and that there should exist no express contradiction or violation of explicit conditions central to the execution of the contract. The court also observed that the intention and bona fide attitude of both the parties should be assessed before application of these principles, reinforcing the jurisprudential practice of not employing implied terms into a contract unless absolutely necessary.
In another recent judgement by the Hon’ble Supreme Court in 2019, the court relied upon the Penat principles of Nabha Power Limited v. Punjab State Corporation supra, to interpret the contract harmoniously. It was held that the implied principle of business efficacy can be applied only if the literal terms of the contract cannot be interpreted in a manner leading to fulfillment of intention of both the parties. If the original contracted terms made commercial sense without the application of business efficacy clause, then the courts are bound to go by the literal interpretation. Moreover, the unexpressed term should be implied by the courts only if it forms a part of the intention of the parties at the time of drawing of the contract or if it goes without saying or if it is necessary to provide business efficacy to the contract.
The theory of relational contract, unlike in England (Yam Seng, 2013 supra), has yet to undergo direct judicial interpretation and pronouncement. Though, through the principles of good faith and trust laid out in the above-mentioned cases, the Indian courts are moving ahead on the evolution of this contractual structure. These contracts, after the judicial intervention, may be termed as relational contracts. The slow progress of the legal institutions in this sphere is primarily due to the existing dichotomy between express and implied terms and the interpretation of the same by the courts.
I believe that the time has come to embrace the developing new structures in the law of contracts. Nowadays, with acute technical dynamics playing a major role in almost every commercial contract, it is impossible to envisage all distinct future possibilities or contentions arising between the parties. It is necessary to validate and introduce relational contracts to regulate and promote duty of good faith, transparency, trust and business efficacy. Formal relational contracts will never truly replace or modify traditional contracts but are necessary to govern the highly complex relations, demanding flexibility and cooperation.
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Lexis Nexis, Infrastructure Arbitration: A Perspective, Manoj K Singh, 1st Edition 2020
The Murdock,  14 PD 64
Yam Seng Ptd Ltd v International Trade Corporation Limited, 2013, EWHC 111 (QB)
Alan Bates and Others v Post Office Limited, 2019, EWHC 606 (QB)
Union of India vs. M/s. D.N. Revri & Co. and Ors, AIR 1976, SC 2257
Nabha Power Limited vs Punjab State Power Corporation, 2018, 11 SCC 508
Shirlaw v Southern Foundries Ltd, 1939, 2 KB 206
Adani Power (Mundra) Ltd. vs. Gujarat Electricity Regulatory Commission and Ors., MANU/SC/0869/2019
Harvard Business Review, A New Approach to Contracts, David Frydlinger, Oliver Hart and Kate Vitasek, Sept-Oct Issue, 2019
Curated by Shivanshika Samaddar of National Law University, Delhi.