Government Guidance on Contractual Rights in the Context of COVID-19

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Government Guidance on Contractual Rights in the Context of COVID-19

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In our series of articles on the impact of the current pandemic on UK businesses we have focused on contractual issues such as force majeure clauses, which may entitle a party to suspend or even extinguish its obligations under a contract. Whether an unforeseen pandemic is sufficient for the purposes of a force majeure clause is a matter the courts will continue to consider, but the Government has not been slow to recognise the impact the virus is having on relationships built on contracts not designed to deal with pandemics or enforced lockdowns. We have seen their responses in the new legislation and proposals intended to protect businesses in distress.

 

In early May, the Cabinet Office published a document entitled “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency”. The guidance is intended to encourage parties whose contracts have been affected by COVID-19 to act responsibly and fairly, to support the Government’s response to COVID-19, and to protect jobs and the economy.

In publishing this guidance, the Government is encouraging businesses to act responsibly and fairly “particularly in dealing with disputes”,as this will result in a better outcome for economic recovery and jobs. It wants affected parties to work together to avoid relying on the default provisions of their contracts where possible and - where that’s not possible - to follow the guidance in managing disputes for their collective benefit and for the longer term benefit of the UK economy.

 

Overview

 

The guidance is non-statutory and has no binding legal effect; it is simply guidance. It is aimed at both the private and public sectors in England (but not in areas of devolved government). It does not attempt to superimpose itself over existing contracts; rather, it sets out what the Government considers to be responsible and fair contractual behaviour for those impacted by COVID-19.

 

The Government hopes to achieve the following objectives through the guidance:

  • where possible, to maintain the level of contractual performance needed to support the immediate response to COVID-19 and to protect public health, jobs and the economy;
  • to ensure that cashflow is maintained so that individuals and businesses can be paid throughout the supply chain;
  • to ensure that contractual and economic activity can be preserved while avoiding destructive disputes and insolvencies;
  • to ensure that contractual and economic activity can be preserved in a sustainable way once the pandemic is over; and
  • to support the restart of the economy and maximise UK productivity and growth.

 

What are considered Responsible and Fair Contractual Behaviours?

 

According to the guidance, “responsible and fair” behaviour when performing and enforcing contracts materially impacted by COVID-19 includes:

  • being reasonable and proportionate in response to performance issues and contract enforcement (including dealing with any disputes);
  • acting in a spirit of cooperation; and
  • aiming to achieve practical, just and equitable outcomes while having regard to the impact on the other party and availability of their financial resources as well as the protection of public health and the national interest.

 

The guidance goes on to say that the kind of behaviours mentioned above are “strongly encouraged” in respect of:

  • requesting and giving relief for impaired performance, including allowing extensions of time for delivery and completion, the making of payments and the operation of payment and performance mechanisms;
  • requests for extensions of time and compensation for increased costs;
  • making and responding to requests for recognition of force majeure events or the frustration of a contract, or requests for accommodations arising from changes in the law,
  • requesting, and making payments, under a contract;
  • making and responding to claims for damages, including under liquidated damages provisions;
  • returning deposits or part payments;
  • exercising remedies in respect of impaired performance, including enforcement of security, forfeiture or repossession of property, calling of bonds/guarantees or the initiation or continuation of insolvency/winding up proceedings;
  • claiming breach of contract and enforcing events of default and termination provisions;
  • making, and responding to, requests for information and data under the contract;
  • making, and responding to, requests for contract changes and variations;
  • commencing and continuing formal dispute resolution procedures, including proceedings in court;
  • requesting, and responding to, requests for mediation or other alternative fast-track dispute resolution procedures; and
  • enforcing judgments.

 

The Government believes that by adopting responsible and fair behaviours parties affected by COVID-19 will be better able to achieve fair and equitable outcomes. These outcomes are considered to be beneficial to the effective operation of markets. Where contractual issues or disputes arise,  businesses are encouraged to act responsibly in resolving those issues, preferably through negotiation, mediation or by means of one of the available fast-track dispute resolution procedures. The work of the Construction Industry Council and RICS in developing the “Low Value Disputes Model Adjudication Procedure” and the “Conflicts Avoidance Pledge” is held out as an example of how industry sectors can work to develop initiates to avoid disputes from becoming protracted and more likely to impair economic recovery.

 

It will be interesting to see how the Courts interpret and apply the recommendations set out in the guidance. Many contracts contain provisions which require a party to act or exercise its discretion  “reasonably”.  Even where no explicit obligation of reasonableness applies, Courts have in the past implied such obligations where one party is given a discretionary right under a contract.  The Courts are also not blind to contextual considerations when deciding how and to what extent legal costs should be awarded. 

 

Conclusions

 

The recommendations set out in the guidance do not have binding legal effect and do not directly affect contractual or legal rights, although they may prove relevant in legal proceedings where parties have discretionary rights and in relation to the award of costs by the Court However, it is hoped that by adhering to the recommendations better outcomes will be achieved for the parties concerned, the wider community or supply chain in which they operate and influence, and the economic recovery more generally.

 

The Government will carry out a review on or before the end of June to assess the extent to which  the guidance and recommendations are being heeded. Further measures may be taken to enforce its recommendations, including through the introduction of new legislation if the Government considers that further intervention is required in order to protect jobs and the economy.

 

If you would like to read the Guidance please click here

 

If you have questions about how the recommendations may affect your relationships with your suppliers or customers, we’re here to help.  Please get in contact Noel Ruddy or Ian Lindley.

The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. PDT Solicitors LLP accepts no responsibility for the content of any third party website to which this webpage refers.

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