Case overview
The dispute arose out of a long-term financing and restructuring agreement between Macdonald Hotels, a prominent hotel group, and the Bank of Scotland. The relationship, spanning more than a decade, had been characterised by complex commercial dealings, shared strategic objectives, and frequent renegotiations. The relationship, initially cooperative, began to deteriorate when the bank enforced repayment rights in a way Macdonald considered abrupt and inconsistent with their previous dealings. When the bank attempted to enforce certain repayment terms strictly, Macdonald brought a claim against the bank.
Macdonald argued that the bank’s conduct breached an implied duty of good faith, on the basis that their relationship was a relational contract – a category of contract where courts may imply such a duty.
The core legal issue: could a duty of good faith be implied into the relationship based on its nature as a “relational contract”?
Duty of good faith: A rundown
Traditionally, English contract law has been wary of embracing a general doctrine of good faith. Unlike civil law systems, the English courts have typically emphasised contractual autonomy, certainty, and express terms.
However, cases like Yam Seng Pte Ltd v ITC Ltd [2013] and Bates v Post Office (No. 3) [2019] EWHC 606 (QB) have opened the door to good faith in the context of “relational contracts” – long-term agreements marked by mutual cooperation and trust.
Later decisions, such as Bates v Post Office Ltd (No. 3) [2019] EWHC 606 (QB), clarified the criteria for such contracts, highlighting features such as duration, exclusivity, communication of objectives, and a high degree of trust.
Findings in Macdonald Hotels
In its 2025 decision, the High Court found that the agreement between Macdonald Hotels and the Bank of Scotland constituted a relational contract. The relationship between the parties was long-term, cooperative, and characterised by repeated renegotiation and mutual reliance.
Crucially, the Court held that a duty of good faith could be implied into such contracts—not as a general default rule, but where the structure and context of the relationship justified it.
The Court concluded that the bank had breached this implied duty by acting opportunistically during a critical refinancing phase, prioritising its own short-term interests over the collaborative intent that underpinned the agreement. It held that the bank’s conduct was commercially unreasonable and undermined the spirit of the contract.
Importantly, the Court reiterated that a duty of good faith does not require a party to prioritise the counterparty’s interests above its own. Rather, it demands honesty, openness, and a commitment to avoid conduct that would frustrate the contract’s purpose.
Judicial reasoning
The Court reiterated that implied terms must either be necessary to give business efficacy to the contract (terms implied in fact) or arise from the nature of the relationship (terms implied in law). Here, the implication was not based on necessity per se but on the type of relationship, consistent with relational contracts.
In doing so, the court emphasised several indicators:
- duration and continuity of the relationship;
- the extent of mutual trust and confidence;
- shared goals and ongoing performance obligations; and
- an absence of termination-at-will clauses.
The judgment also clarified that good faith does not require parties to act against their own interests, but it does preclude conduct that is arbitrary, dishonest, or undermines the agreed purpose of the contract.
Practical implications
This decision builds on earlier precedent, confirming that courts will not imply duties of good faith by default. However, such duties may arise where the relationship between parties involves significant interdependence and continuity.
Notably, the case signals that even sophisticated commercial actors, such as banks, can be held to a standard of good faith in relational contracts. It highlights that the way a contractual right is exercised can be as important as the right itself.
The judgment also reinforces the importance of clear and deliberate drafting. Parties to long-term, collaborative arrangements should consider expressly including (or excluding) good faith obligations to reduce ambiguity and manage expectations during periods of commercial strain.
In negotiations, parties should be cautious about assuming that arm’s-length conduct will always be acceptable. Where relationships exhibit features of cooperation, courts may be prepared to imply obligations that limit aggressive or unilateral behaviour.
Conclusion
Macdonald Hotels v Bank of Scotland marks another important development in the slow but steady evolution of good faith principles in English law. While the doctrine remains limited in application, this case demonstrates that in the right circumstances, the courts will hold commercial parties to standards that reflect the reality (rather than just the letter) of their dealings.
Co-authored by Gabriella Rasiah.
