Government Guidance on Contractual Rights in the Context of COVID-19
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.
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:
According to the guidance, “responsible and fair” behaviour when performing and enforcing contracts materially impacted by COVID-19 includes:
The guidance goes on to say that the kind of behaviours mentioned above are “strongly encouraged” in respect of:
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.
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.
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