UK: Government guidance urges contractual parties to act responsibly and fairly
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On 7 May 2020 the UK government published a note setting out guidance and recommendations urging parties who have active contractual arrangements which are materially affected by COVID-19 to act responsibly and fairly in performing and enforcing their contracts. For many businesses the question of what is the post-COVID ‘new normal’ and how they get there will depend, to some extent, on how existing contractual arrangements play out. The guidance could prove valuable in finding a commercial, rather than legal path, out of the current crisis and into the future.
The purpose of the guidance is to encourage contractual parties to support the response to COVID-19 and thereby protect jobs and the economy. The involvement of the government, as opposed to the courts and the legislature, in providing guidance in this area is highly unprecedented although, we are of course, living in unprecedented times.
The guidance makes it clear that it does not purport to override any specific guidance or policy, law, custom or practice and is not intended to override any relief given expressly in provisions in contracts themselves. This has led many commentators to question the relevance of the document. But, as we already know from many of our client’s experiences, in reality many businesses are already dealing with contractual issues in this way and the guidance can be seen as reflecting current commercial practices on the ground and will act as an aid to help businesses struggling with the uncertainties created by the pandemic.
The guidance asks parties to act in the spirit of cooperation and aim to achieve practical, just and equitable contractual outcomes that are considerate of the other party, financial resources of both and for the protection of public health and the national interest. The guidance encourages parties to resolve any emerging contractual issues responsibly through alternative dispute resolution such as negotiation or mediation or by use of fast track dispute resolution options.
Whilst the guidance lacks legal effect, businesses could start to see suppliers, licensees and their other contractual partners referencing the guidance when addressing contractual issues and particularly larger or higher profile businesses may need to consider the potential public profile implications of not complying with the guidance.
The crux of the guidance is contained within paragraph 15. It sets out a list of activities which form the basis of the majority of all contractual relationships and requests that parties are strongly encouraged to act responsibly and fairly in their behaviour in relation to these. As such, the guidance is relevant to all businesses, in all sectors, and to all kinds of disputes including supply chain and continuity of service issues.
Paragraph 15 states that responsible and fair behaviour is strongly encouraged in relation to the following:
(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 applies with immediate effect and will be reviewed on or before the 30th June 2020. We are yet to see any real impact on our clients and their contractual relationships but the legal issues coming out of the pandemic and the lockdown are only really starting to come to the fore.
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