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Update 13/07/2020: the Cabinet Office produced an update on 30 June 2020. The update confirmed the guidance will continue to apply unless further amended or withdrawn. It focused on three issues covered in the original guidance – payment, extensions of time (and associated costs) and avoidance and resolution of disputes. The update should be read together with the original guidance.
Prompt payments are strongly encouraged. SMEs and individuals are name-checked regarding prompt payment as they may not have the same resources as large businesses.
The dispute resolution provisions were tweaked to also refer to an early neutral evaluation and CEDR and CIArb’s Pandemic Business Dispute Resolution Service.
The guidance reminded people that unfair business practices regarding COVID-19 can be reported at https://www.coronavirus-business-complaint.service.gov.uk/.
Consistent with the Government’s subsequent guidance in relation to recovery and transition from COVID-19 (see separate article here), the Government wants parties to contracts to learn COVID-19 lessons quickly. The update encourages all parties to commercial contracts to (i) support the restart of the economy, (ii) prevent unnecessary insolvencies and (iii) support the long-term viability of contracts and businesses.
On 7 May 2020, the Cabinet Office published “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency“. It has immediate effect in England, but is non-binding.
To whom does the guidance apply?
The guidance:
- applies to both public and private-sector contracts where performance is materially impacted by Covid-19 (funders are name-checked three times to make clear they are in scope).
- does not apply in Wales, Scotland or Northern Ireland.
- does not override Cabinet Office PPNs or support or relief available in the relevant contract, by law or from the Government.
- makes clear that the Construction Leadership Council has its own guidance and recommendations regarding disputes for the construction sector, as Alan Tate has analysed separately (Alan’s article can be found here).
- does not apply to certain other sectors (see paragraphs 7-9 of the guidance).
What is the purpose of, and reason for, the guidance?
Three paragraphs of the guidance are particularly relevant to its purpose:
- “The guidance in this note is that parties to contracts should act responsibly and fairly, support the response to Covid-19 and protect jobs and the economy“. The Cabinet Office inserted the bold text for emphasis. (The same bold text was included in their update of 30 June 2020.)
- “generally, ensuring that contractual and economic activity can be preserved and will be ready to continue in a sustainable way once the current emergency is over, supporting the restart of the economy and maximising UK productivity and growth“. This is one of the four express objectives and seems to echo a number of the Chancellor’s recent comments, including in relation to the Coronavirus Job Retention Scheme.
- “Responsible and fair behaviour is strongly encouraged in performing and enforcing contracts where there has been a material impact from Covid-19. This includes being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of cooperation and aiming to achieve practical, just and equitable contractual 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.“
The guidance also lists 15 areas in which “responsible and fair behaviour is strongly encouraged“. These include relief for impaired performance, time extensions, substitute or alternative performance and compensation, payment under the contract and enforcing judgements. However, no examples are provided of the behaviour expected.
The trigger for this guidance is not clear. The Government may be concerned about sharp practice and opportunistic behaviour. In this vein, the Government is said to be considering banning dividends and restricting executive pay and bonuses for companies using the Coronavirus Large Business Interruption Loan Scheme and the Bank of England’s Covid Corporate Financing Facility[1]. As set out in more detail below, contractual behaviour is evidently being monitored by the Government and further measures (including legislation) may follow.
Will the guidance be effective in practice?
As contract terms override the guidance, contracting parties may understandably be reluctant to place the wider economy above their own interests, particularly where: their contract includes relevant rights and remedies; and/or associated risks were allocated and priced in. In addition, directors have statutory duties, such as to promote the success of the company, which may be hard to reconcile with the guidance.
However, the Government clearly has its concerns regarding contractual behaviour. As a result, contracting parties should, at least, consider the guidance – perhaps especially where one or more is a public-sector organisation and/or a dispute is looming. Time will tell whether the sentiments behind the guidance result in the imposition of a more specific and effective behavioural code. No doubt, though, the Cabinet Office is mindful of the practical difficulties of legislating in a context which has an overlay of hundreds of years of case law.
Is there an obligation to act in good faith?
The text of the guidance suggests an attempt to introduce some form of good faith into English contracts. There is currently no general duty of good faith imposed on parties to contracts in English law and we think that it is unlikely that the courts would reverse this clear general position on the strength of the guidance. It could, though, have some influence where one of the parties is seeking an ‘equitable remedy’ (such as an injunction), in which case they are expected to have ‘clean hands’. This is different from many civil law jurisdictions, where a number of our clients have been able to rebalance their contracts as of right, where they have been economically affected by Covid-19.
Contracting parties may consider including a good faith provision in future contracts or any Covid-19-related variation, with a more detailed explanation of what they consider to be good faith for the purposes of the relevant contract.
For example, picking up on certain themes in the guidance, this might state that each party must deal honestly with the other and be candid at all times, including in relation to likely delays and cost changes, as well as disclosing its own breaches and anticipated breaches. This should be with a view to encouraging constructive discussions to find mutually-acceptable solutions which allow the contract to continue for the benefit (although, perhaps not as much benefit as hitherto) of both parties.
How does the guidance interact with the current law?
The guidance is very wide and leaves a number of questions unanswered. For example:
- How should one balance a supplier’s request for extended time or alternative performance, against a customer’s right to liquidated damages and release of payment obligations?
- From whose perspective is it judged whether behaviour is responsible and fair?
- What is the meaning of certain, key terms, such as “materially impacted“?
In addition, the guidance touches upon areas such as:
- force majeure, that tend to be the subject of detailed provisions in the relevant contract; and
- making and responding to claims of frustration. The concept of contractual frustration goes back to at least the 19th century and has been the subject of many cases.
This links to the recent guidance in PPN02/20 (relating only to public sector contracts) that discourages the use of force majeure provisions or arguments around frustration, where these could affect post-pandemic continuity.
Will the guidance be relevant, if there’s a dispute?
There are several references to disputes and types of dispute resolution in the guidance. More than ever, parties who are unable to reach agreement should consider options other than recourse to the courts. There may be suitable, alternative dispute resolution provisions in their contract. Whilst the non-binding guidance does not take precedence over the contract, referring issues the parties cannot resolve themselves to a quicker, less costly (both financially and in terms of staff time) form of dispute resolution than that set out in the relevant contract may be highly desirable This might also provide an opportunity to stipulate that the mediator, adjudicator or expert must take the guidance into account. Whilst there are risks in doing this, parties should also consider the effect on their relationship of a protracted dispute.
In addition to the schemes referenced in paragraph 17 of the guidance, other schemes are available such as the SCL’s adjudication scheme for technology contracts.
What happens next?
We anticipate the Government may intervene further. The final three paragraphs of the guidance clarify that it:
- will be reviewed on or before 30 June 2020;
- may lead to further measures, including legislation. In other areas such as changes to the insolvency regime, a draft bill followed several weeks after the Government published broad proposals. Douglas Hawthorn‘s analysis of such changes can be found here; and
- “may be supplemented by a set of Frequently Asked Questions and Answers as the situation develops“. The FAQs may give examples of what the Government means by responsible and fair contracting behaviour (rather than the areas in which this applies).
In practice, there is very considerable difficulty around legislating in this arena, where to do so might impose after-the-event changes to the respective rights and obligations of contracting parties. In most instances these will have been carefully balanced at the outset, in the context of a sophisticated, common law system, developed over a very long period. Thus, legislation may be limited to specific industries or sectors, perhaps as an explicit or tacit quid pro quo for Government support.
If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Nathaniel Lane in our Commercial team, or your usual Michelmores’ contact.
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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.
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