- On May 7, 2020, the government published a guidance note on responsible contractual behaviours which applies to all contracts impacted by COVID-19 with immediate effect.
- The guidance encourages parties to act responsibly and fairly by being reasonable and proportionate when responding to performance issues and enforcing contracts (including dealing with any disputes).
- It expressly states that it does not usurp the express provisions of a contract or the law and the intent therefore seems to be to discourage sharp practice or opportunistic behaviour, rather than to ask parties to forgo contractual or legal entitlements.
- The guidance is non-statutory and therefore has no direct legal or mandatory effect. However, the guidance leaves open the possibility of the government taking more radical action to intervene in commercial contracts if its concludes that the advice is being ignored.
- Whilst the guidance is not express, it is unlikely to extend to cover contracts where the only nexus to the United Kingdom is that it is governed by English law.
- Read the full guidance here.
In this article, we look at the measures that parties are being asked to take (or refrain from taking) by the government in its recent guidance note on responsible contractual behaviour produced jointly by the Cabinet Office and the Infrastructure and Projects Authority. We consider what this might mean in practice and assess the legal status of the guidance.
Purpose and status
The guidance recognises that the impacts of COVID-19, including illness of the workforce, closure of businesses, and restrictions on the movement of people and goods are in some cases making contractual performance difficult or impossible. The stated purpose of the guidance is to:
- Encourage maintenance of contractual performance where possible to support the immediate response to COVID-19, protect public health, jobs and the economy.
- Ensure cash flow is maintained.
- Ensure those contracts where performance is not possible or not essential (and wider supply chains and markets) are preserved avoiding destructive disputes and insolvencies.
- Generally ensure contractual and economic activity is preserved and can continue in a sustainable way once the emergency is over.
The guidance applies to all contracts where performance is materially impacted by the COVID-19 emergency, although presumably it would not apply to contracts where the only nexus to the United Kingdom is that it is governed by English law. It is non-statutory, which means it does not have the force of law, but the government strongly encourages parties to follow it for “their collective benefit and the long-term benefit of the UK economy” and indicates that it may consider more pro-active intervention in commercial contracts, including through enacting legislation, if it feels that the guidance is not being followed.
Further, whilst not legally binding, the guidance may nonetheless influence the approach of those who are expected to be asked to resolve many COVID-19-related disputes, including mediators, arbitrators and adjudicators. Even in court, there are case law examples of judges giving weight to non-statutory guidance issued by the executive, albeit this is typically where the guidance is seen as an authoritative and expert statement on the particular subject matter, rather than what appears to be a largely political document.
The guidance applies with immediate effect from May 7, 2020 and will be reviewed by June 30, 2020.
What is responsible and fair behaviour?
The guidance encourages parties to act responsibly and fairly by being reasonable and proportionate when responding to performance issues and enforcing contracts (including dealing with any disputes), acting in the spirit of cooperation and aiming to achieve practical, just and equitable outcomes, having regard to the impact on other parties, the availability of financial resources, the protection of public health and the national interest.
Notably, the guidance states that it is not intended to override any relief contained in a contract or available at law and certainly its status as guidance, rather than binding statute, means it does not go as far as to amend the terms of private law contracts. However, it does set out a comprehensive list of contract rights and remedies, in respect of which it strongly encourages “responsible and fair behaviour”. It covers almost every route of recourse a party might have for COVID-19 affected performance, including:
- Requesting and giving relief for impaired performance, including for time for delivery and completion, nature and scope of goods, work and services, the making of payments and operation of payment and performance mechanisms.
- Requesting and allowing extensions of time and substitute or alternative performance and compensation, including compensation for increased cost or additional performance.
- Making and responding to force majeure, frustration, change in law, relief event, delay event and compensation event claims.
- Making and responding to damages claims, including liquidated damages.
- Exercising remedies for impaired performance, including enforcement of security, forfeiture, calling of bonds or guarantees, initiating winding up proceedings.
- Claiming breach of contract and enforcing events of default and termination provisions.
- Making and responding to requests for information.
- Giving notices, keeping records and providing reports under the contract.
- Making and responding to requests for contract changes and variations.
- Making and responding to requests for consents.
- Commencing and continuing formal dispute resolution procedures and requests for mediation or other alternative or fast track dispute resolution.
- Enforcing judgments.
Unlike in many civil law jurisdictions, there is no general principle of good faith which regulates the behaviour of parties to a contract under English law. Generally, commercial parties are free to conduct themselves as they see fit as long as they do not breach rules on dishonesty and fraud (or any applicable fiduciary duties where there is a trust or partnership relationship). Consequently, what some might regard as ‘sharp practice’ or opportunistic behaviour being taken in response to the current crisis will not amount to an actionable breach of contract. The exception to this is where a contract includes an express obligation to act in good faith or in certain limited circumstances an implied obligation. Whilst a detailed discussion of when an implied obligation may arise is outside the scope of this article1, the exercise of a contractual discretion may be subject to such a qualification, as may obligations under what have been coined ‘relational contracts’ which are typically long-term agreements requiring a high degree of cooperation and collaboration between the parties.
It seems that where contractual issues arise as a result of COVID-19, the government has tried to fill the legal “gap” and import an implied good faith standard by encouraging parties to act “fairly” and “in the spirit of cooperation” (see paragraph 14 of the guidance). Whilst these terms do not reflect the current position of English law – the fundamental tenets of which are freedom of contract and contractual certainty – similar sentiments have recently been expressed by senior members of the judiciary in response to the expected impact COVID-19 will have on contractual performance, with Sir William Blair, a former Judge of the London Commercial Court saying “new thinking is going to be required if the law is to play its full part in getting international commerce back on its feet – within the principle of legal certainty, space needs to be found for renegotiation, and if the contact is no longer viable, equitable solutions.”2
Undoubtedly, this crisis is unprecedented in living memory and parties may feel that even contracts with sophisticated risk allocation mechanics do not adequately respond to the impacts COVID-19 is having on performance. Applying the strict letter of a contract may lead to outcomes that are perceived as inequitable and this could lead to an explosion in disputes, which the guidance is trying to avoid, noting that this would be destructive to good contractual outcomes and the effective operation of markets. Where disputes do arise, the guidance strongly advises parties to consider negotiation, mediation or similar before formal dispute resolution procedures. Again, this chimes with recent statements from the judiciary, with Lord Neuberger and Lord Phillips, both former Presidents of the UK Supreme Court, among those calling for negotiated solutions to disputes arising from the crisis.
Although the spirit of the guidance may appear attractive at a macro level, it is difficult to see how at individual contract level it will actually impact party behaviour. For example, directors owe duties to their shareholders to act in the best interests of the company, not a company’s counterparty. So where, for example, a company has cash flow issues, aggressively pursuing unpaid debts may be the appropriate course of action, even though that may appear to be a hardship to the debtor. Equally, the very purpose of a force majeure clause is to make provision for unexpected events such as this and thus the statement that parties should act fairly and responsibly when “making, and responding to, force majeure, frustration, change in law, relief event, delay event, compensation event and excusing cause claims” (see paragraph 15(c)) appears to amount to little more than a statement that the terms of those provisions should be followed, given that is how the parties fairly agreed at the time of contract unexpected risks would fall. Finally, companies will generally always seek to resolve disputes without recourse to formal dispute resolution, given the attendant costs and uncertainty of litigation and arbitration, so the guidance really says little more than the obvious.
The intended message from the government appears to be that parties should not take an opportunistic approach to contract performance and enforcement, and should instead focus on maintaining business continuity where possible. Whilst it is not mandatory, there is the threat of further intervention, including through legislation, if the guidance is not followed. However, what following the guidance will actually look like in practice is less clear given that it expressly states that it is not intended to usurp contractual rights or remedies available at law. Given the limitations of the guidance, we expect that it will be unlikely to radically change party behaviour over the coming weeks and months.