Many of our readers would have found themselves in a position where they had a need to review their contractual obligations due to the impact of Covid-19 on their ability to pay or carry on with the contract.In our experience, we have found that some businesses have been very supportive and understanding of our clients’ position. However, we also came across some who acted unreasonably.The Government has published some guidance on responsible contractual behaviour in the performance and enforcement of contractual obligations impacted by the COVID-19 emergency. Responsible and fair behaviour in contracts now will result in better long-term outcomes for jobs and our economy.
What does this mean for businesses?
Businesses are strongly encouraged responsible and fair performance and enforcement of contracts during this public health emergency.
Who and how does it apply?
- It applies to individuals, businesses and public authorities;
- It applies to all existing contracts which are materially impacted by COVID-19. It is not clear in the guidance what materially impacted means in practice. We therefore encourage parties to adopt a reasonable approach;
- It is not clear whether it is intended to apply to all English law governed contracts irrespective of the parties’ nationalities.
What is reasonable?
Contracting parties are encouraged to act responsibly and fairly in their performance and enforcement of contracts during the UK’s response to the pandemic. Businesses should aim at resolving their contractual disagreements outside of formal dispute resolution proceedings, i.e. Courts.It is not expressly defined what constitutes responsible and fair behaviour. The guidance says the following:“Being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of co-operation and 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”.
Examples
Some examples of situations in which fair and reasonable behaviour is strongly encouraged is provided in the guidance, including:
- 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;
- Requesting, and allowing, extensions of time, substitute or alternative performance and compensation, including compensation for increased cost or additional performance;
- Returning deposits or part payments;
- Making, and responding to, requests for contract changes and variations;
- 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;
- Requesting, and making, payment under the contract;
- Claiming breaches of contract and exercising termination provisions; and
- Making and responding to force majeure, frustration, and change in law claims.
Is it helpful?
Unfortunately, the guidance is not legally binding on the parties. The purpose of the guidance is to simply encourage responsible and fair contractual behaviour in light of COVID-19. The guidance does not affect the legal rights of parties under the contract law. For this reason, the guidance does not restrict those who choose to enforce their rights through Courts.Contracting parties are encouraged take up mediation and to negotiate out of Court settlements by inviting parties “to seek to resolve any emerging contractual issues responsibly – through negotiation, mediation or other alternative– before these escalate into formal intractable disputes.”It seems that, the guidance does not take precedence over any relief that is already available to the parties under the contract in question. For example, force majeure provisions or the Government’s response to COVID-19 by way of loans and grants.The guidance signals behaviours which are expected by the UK Government of businesses, by using the language of the Government strongly encouraging parties to comply for their collective benefit and for the long-term benefit of the UK economy.The Government will continue to review behaviours in contracting, including public sector procurement, performance, prompt payment and contract management arrangements, as we emerge from this public health emergency to ensure that contractual arrangements can function effectively and maximise their contribution to jobs and the economy. The will be reviewed on or before 30 June 2020.It remains to be seen how this broad request to act fairly and responsibly will impact on the Judicial reasoning if and when parties do decide to resort to Court proceedings in resolving their contractual disputes.
Read our future publications
We intend to cover another relevant issue of how Covid-19 will impact on the assessment of damages in Court proceedings in our next article. We are open for business as usual. For more guidance please get in touch with our team on info@barnes-law.co.uk.
