On 7 May 2020, the Government published ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency’. The guidance begins:
‘Key guidance in this note
1. The guidance in this note is that parties to contracts should act responsibly and fairly, support the response to Covid-19 and protect jobs and the economy’
The guidance then repeats how acting responsibly and fairly:
‘...will result in better long-term outcomes for jobs and our economy’.
Interestingly, it goes on to state expressly that it is guidance only and is not intended to override:
‘ specific guidance or procurement policy notes issued by the Government;
any specific support or relief available:
- in a contract itself;
- law, custom or practice; or
- from the Government in response to Covid-19 including loans, grants, guarantees, financial support for workers or revised tax arrangements.
any other legal duties or obligations with which a party to a contract is bound to comply and any national security interests;
it is not intended to override specific contracts whose primary purpose is to make express and clear provision for, and allocate risk in respect of, the effects of global or national public health emergencies or pandemics, especially contracts of insurance’
In the circumstances, the guidance does not appear to bind or override the law. It is instead a political plea to contracting parties to, where possible, act fairly and responsibly to benefit the UK economy.
Responsible and fair behaviour in contractual arrangements is more fully described in paragraphs 14 and 15 of the guidance. In short, in paragraph 14, it can be summarised as:
i) reasonable and proportionate response to performance issues and enforcing contracts (including dealing with any disputes);
ii) acting in a spirit of cooperation;
iii) aiming to achieve practical, just and equitable contractual outcomes, having regard to the impact on the other party (or parties), the availability of financial resources, the protection of public health and the national interest.
Paragraph 15 then goes on to give broad examples of where responsible and fair behaviour is strongly encouraged, being:
a) requesting, and giving, relief for impaired performance, including in respect of the time for delivery and completion, the nature and scope of goods, works and services, the making of payments and the operation of payment and performance mechanisms;
b) requesting, and allowing, extensions of time, substitute or alternative performance and compensation, including compensation for increased cost or additional performance;
c) making, and responding to, force majeure, frustration, change in law, relief event, delay event, compensation event and excusing cause claims;
d) requesting, and making, payment under the contract;
e) making, and responding to, claims for damages, including under liquidated damages provisions;
f) returning deposits or part payments;
g) exercising remedies in respect of impaired performance, including enforcement of security, forfeiture or repossession of property, calling of bonds or guarantees or the initiation or continuation of insolvency or winding up (or equivalent) proceedings;
h) claiming breach of contract and enforcing events of default and termination provisions (including termination rights arising by reason of the insolvency or potential insolvency of a party);
i) making, and responding to, requests for information and data under the contract;
j) giving notices, keeping records and providing reports under the contract (recognising that the need to keep records of contractual behaviours and decisions, including the behaviours referred to in this guidance, is important);
k) making, and responding to, requests for contract changes and variations;
l) making, and responding to, requests for consents (including funder consents);
m) commencing, and continuing, formal dispute resolution procedures, including proceedings in court;
n) requesting, and responding to requests, for mediation or other alternative or fast-track dispute resolution; and
o) enforcing judgments.
The guidance recommends that the parties seek to negotiate and / or enter into mediation or other alternative or fast-track dispute resolution before matters turn into ‘formal intractable disputes’.
The guidance also refers to the proposed changes to the insolvency rules which the Government announced on 28 March 2020 and which were formerly unveiled and presented to Parliament on 20 May 2020 as the Corporate Insolvency and Governance Bill 2020. The Bill can be found here: https://publications.parliament.uk/pa/bills/cbill/58-01/0128/20128.pdf . The Bill introduces the following key proposals:
1. proposed restrictions on the ability of a creditor to present a winding up petition;
2. a company moratorium with payment holidays on payments, rent, wages and financial repayments;
3. Suppliers must continue supplying the Company which is the subject of the moratorium subject to certain limited exceptions;
4. the ability to seek longer periods to file documents at Companies House; and
5. a new restructuring procedure to make the passing of such a restructuring plans easier.
The Bill next comes before Parliament on 3 June 2020.
Very interestingly, the guidance concludes by stating that the Government will continue to review behaviours in contracting.
Impact
Given the non-binding nature of the guidance, it is unclear precisely what impact, if any, it will have. It is all very well recommending fair and reasonable behaviour, but in many cases this may not be possible. If you are the aggrieved party, is it not unreasonable, unfair and irresponsible to not pursue a remedy? What about the aggrieved party’s own duties to their creditors and, if they are company directors, what about their duties to their company?
Similarly, it is unclear how the guidance will impact on court proceedings or adjudications. Will judges and adjudicators take the guidance into account? Surely, by doing so, they may be ignoring well-trodden paths of established law. What if an adjudicator applies the ‘fair and reasonable’ guidance but the courts overrule it?
It is also unclear what ‘irresponsible’ or ‘unfair’ behaviour would look like under the guidance.
Having said that, as the guidance comes from the Government, one can expect that it will be followed in Government contracts and by those in the public sector. Therefore, if you work in these areas, you may need to comply. Given the Government’s spend in the UK is significant, again, it will be interesting to see how things progress.
The paragraph in the guidance which states that the Government will continue to review matters could be interpreted as a threat to take future action, or a warning that they will in some way intervene, using legislation in the future, if the guidance is not followed. After all, having brought in one of the largest rescue packages historically to cope with the crisis, they are unlikely to want to see their efforts undone in the Courts. This is demonstrated by the proposed introduction of the new Insolvency laws under the Corporate Insolvency and Governance Bill 2020. Will all debt actions or contract disputes caused as a result of the Coronavirus crisis be temporarily banned as it is proposed that winding up petitions will be, for a specific period?
Conclusion
Given the long-established law around contracts, it is going to be interesting to see whether the guidance will have any significant impact and, if it does, it seems that there is bound to be a plethora of litigation around it unless the Government introduce supporting legislation.
The guidance would appear to be a similar statement to the World War II propaganda slogans that we remember, like ‘keep calm and carry on’. Here it is ‘be fair and act responsibly’ in commercial contracts. The difference is that this seems to be accompanied by a threat from the Government that there may be further legislation to force the issue.
The courts have encouraged the parties to act responsibly since the late 1990s when the Civil Procedure Rules (the court rules) were introduced. These rules set out a series of pre-action protocols which govern how the parties are to act before proceedings are issued, to enable the parties to narrow issues with a view to reaching an early resolution. Similarly, alternative dispute resolution has been, and is currently, encourage by the courts. There is clear case law which states that if parties do not try and settle and exhibit behaviours that are contrary to this, such as rejecting the offer of mediation, they run the risk of being penalised on costs.
We will monitor this space and report on further developments.
If you have further questions or wish to discuss matters, please do not hesitate to contact Graham Mead on 01473 298234.
