On 7 May 2020, the Government published a short guidance note (the “Guidance”) entitled “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency”. Whilst non-binding, the Guidance applies to all contracts which have been and continue to be affected by the coronavirus pandemic. Its purpose is to encourage parties to act responsibly and fairly in dealing with the consequences of any disruption caused so that the outcomes achieved are equitable.
It is important to note that the Guidance does not apply in the devolved administrations, nor is it intended to override:
- Specific guidance or procurement policy notes issued by the Government. Both public bodies and suppliers should be aware of the Cabinet Office’s Procurement Policy Notes (“PPN”) and associated documents relating to procurement and payment of suppliers in the face of COVID-19 – see our detailed updates on the Government’s PPN including PPN 01/20 (Responding to COVID-19), PPN 02/20 (Supplier Relief), and PPN 03/20 (Use of Procurement Cards).
- Specific relief covered by express contract terms. If your contract contains force majeure, business continuity or other provisions providing an “express and clear” allocation of the risks arising from the “effects of global or national public health emergencies or pandemics”, the Guidance is unlikely to apply.
However, many commercial contracts are unlikely to have comprehensive contractual provisions dealing with the specific pressures and issues arising from COVID-19. General force majeure provisions are often too vague to fall under the exception listed above, and typically provide relief to one party to the significant detriment of the other. Disputes relating to those types of provisions appear to be what the Government is trying to prevent, suggesting that such behaviour is irresponsible and unfair in the current climate where businesses (irrespective of sector and industry) are grappling with the effects of COVID-19. Parties to commercial contracts will therefore need to carefully consider whether the Government’s guidance applies.
So, what does the Guidance recommend?
The non-binding Government advice strongly encourages all individuals, businesses (including funders) and public authorities to act responsibly and fairly when performing and enforcing contracts in order to support the response to COVID-19 and to protect jobs and the economy.
Whilst the Guidance pays particular attention to supply chains where contractual performance is crucial to the nation’s immediate response to COVID-19 and the protection of public health, the Guidance is much more wide-reaching. The Guidance encourages fairer commercial dealings in order to preserve cash flow, protect wages and jobs, and to avoid unnecessary disputes and insolvencies. Similarly, the Guidance encourages parties to apply the principles to non-essential contracts so that commercial relationships can be preserved until after the COVID-19 emergency has passed in order to kick-start the economy; this plea hits particularly hard as we hear news that the UK is now entering a period of recession.
The Guidance fails to clearly set out what is meant by acting “responsibly and fairly”. However, an indication is given in paragraph 14 which states that contracting parties should:
- Be reasonable and proportionate when responding to performance issues and enforcing contracts (including dealing with any disputes);
- Act in a spirit of co-operation; and
- Aim to achieve practical, just and equitable 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.
Similarly, paragraph 15 gives broad examples of the situations in which parties are “strongly encouraged” to act “responsibly and fairly” including when dealing with impaired performance, payment, remedies, notices, enforcement, claiming breach of contract and termination.
The Guidance also extends notions of “responsible and fair behaviour” to dispute resolution, encouraging parties to explore and utilise Alternative Dispute Resolution procedures (particularly negotiation and mediation) in lieu of court proceedings. This plea is not unsurprising in the current circumstances as court lists and the number of sitting judges have been reduced and concerns have been raised surrounding court procedure (for example, service of documents and conducting remote hearings).
The Construction Leadership Council has since issued its Covid-19 Contractual Best Practice Guidance, applying the principles of the Government Guidance to the construction industry and offering practical advice for those dealing with construction contracts. Bevan Brittan will be publishing an update shortly, looking at the implications of the Contractual Best Practice Guidance for parties to construction contracts.
Implications of the Guidance
Whilst parties may seek to rely on the Guidance as evidence of good practice, non-compliance (referred to as “bad behaviour” in the Guidance) is likely only to risk souring commercial relations and/or losing face. However, this is based on the Guidance continuing to be non-statutory and non-binding.
The Guidance and contractual dealings are being kept under review, with the first review due to take place on or before 30 June 2020. If there is evidence to suggest that the Guidance is being ignored, the Government has intimated that it is open to intervening in the commercial sphere by means more radical than a non-statutory policy note if necessary. There is therefore the possibility that legislation codifying some or all of the recommendations may follow at a later date.
It is also possible that third parties asked to resolve contractual disputes (for example, expert determiners or arbitrators) might take the Guidance into account when reaching their decision, especially if the decision maker is permitted to use elements of discretion.
Therefore, notwithstanding (for the time being at least) the lack of legal effect, commercial parties should consider and where appropriate comply with the Guidance.
Should you require more advice or support on how the Government Guidance may affect your contractual relationships, or on the effects of COVID-19 on your contracts more generally, please contact Adam Kendall, Head of Bevan Brittan’s Litigation, Advisory and Regulatory Team.