This article is an update to our previous post on the government’s guidance on responsible contractual behaviour for contracts impacted by COVID-19.
The government has updated its guidance on responsible contractual behaviour for contracts impacted by COVID-19. The original guidelines continue to apply, with the update providing further guidance on three issues: (i) payment (ii) extensions of time and (iii) avoidance and resolution of disputes. Public procurement and construction contracts are the focus of the update but it “…strongly encourages all parties to commercial contracts” to take steps to (i) support the restart of the economy (ii) prevent unnecessary insolvencies and (iii) support the long-term viability of contracts and businesses.
The guidance encourages prompt payment to maintain cash flow. Whilst this section is focused at contracting authorities, with cross-references to the series of Procurement Policy Notes which have been issued for public procurement, PFI, PPP and PF2 contracts, the section states more generally that “It is recognised that more work continues to be required to improve payment culture in the UK. The Government is reviewing what more can be done to change payment culture for the better”. This suggests that direct intervention on a wider basis could be on the horizon. Indeed, the government has already demonstrated a willingness to take legislative steps where it considers it necessary to do so by implementing restrictions on the exercise of termination clauses in the new Corporate Insolvency and Governance Act 2020 (although it is worth noting that in other respects the Act permits companies in financial distress not to make payments which is obviously not consistent with the sentiment of the guidance).
Extensions of time
The original guidance expressly stated that it did not usurp the terms of parties’ contracts and although the updated guidance does not change that position, it encourages parties to consider renegotiating contracts to accommodate the impact of COVID-19. This suggests that where contracts do not provide relief for COVID-19 impacts (for example the force majeure clause does not cover COVID-19), the government nonetheless wishes companies to consider granting such relief. This is likely to be unattractive to contracting parties, particularly where the risk allocation for unforeseen events may have been subject to extensive negotiation and consideration at the time of contract. Again, there seems to be an implication in the guidance that if this is not done the government will take more direct action.
Avoidance and resolution of disputes
The government again tries to head off a wave of COVID-19-related litigation and dispute resolution by re-emphasising that “equitable adjustment or accommodation” should be preferred to formal dispute, suggesting parties consider negotiation, mediation or early neutral evaluation. It also advocates fast track dispute resolution procedures (click here for details of our COVID Resolve fast track DR offering). However, whilst fast track dispute resolution might be attractive, it will not be suitable for all disputes and we are already seeing COVID-19-related cases being referred to court (e.g. the Travelport v Wex MAC clause litigation).
The guidance ends with a cryptic statement about how future contractual arrangements should reflect the lessons learned about how contracts have responded to COVID-19. The government says that it will “work with the market to do that” in the procurement space but encourages parties to all commercial contracts to take lessons learned on board. As with the initial guidance, the update has no legal status and may not be sufficient to persuade parties with the contractual upper hand to forgo contractual entitlements. However, the threat remains that further legislative intervention may be on the horizon.