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Are you Acting “Responsibly and Fairly” in your Contractual Endeavours?

May 13, 2020, Covington Alert

The UK Cabinet Office has published ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency’ (the Guidance). The Guidance is expressly stated to be non-statutory and non-binding, and its purpose is to encourage what it coins, “responsible and fair contractual behaviour” in light of COVID-19. It warns against the risk of a “plethora of disputes.”

What does this mean for English businesses and contractual parties? Contracting parties are strongly encouraged to act responsibly and fairly in their performance and enforcement of contracts during the UK’s response to the pandemic, and to resolve contractual disagreements outside of formal dispute resolution proceedings.

The Guidance does not affect the legal rights of parties to English law contracts, and so it does not restrict those who choose to enforce their rights strictly. What it does is encourage a broad concept of “fairness” to govern contractual relations at this time.

What does the Guidance ask of parties to contracts?

  • The heart of the Guidance provides that “[t]he Government strongly encourages responsible and fair performance and enforcement of contracts during this public health emergency.” We consider the application of this further below.

When does the Guidance apply?

  • The Guidance applies to individuals, businesses and public authorities.
  • All existing contracts which are “materially impacted” by COVID-19 are caught by the Guidance (other than contracts which are speculative in nature in respect of risks similar to COVID-19, or to financial market transactions). No guidance is given, however, as to what constitutes a “material impact.”
  • The Guidance does not apply in the devolved administrations, and it is not clear whether it is intended to apply only to citizens and companies resident or incorporated in England, or whether it is intended to apply more broadly to all English law governed contracts irrespective of the parties’ nationalities.

What is “Responsible and Fair” Contractual Behaviour?

  • Describing the present circumstances as “unprecedented” and “exceptional”, the Guidance encourages “responsible and fair” contractual behaviour where there has been a material impact from COVID-19. What constitutes “responsible and fair” is not expressly defined but is said to include “being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of co-operation 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” [emphasis added].
  • The Guidance gives 15 examples of situations in which fair and reasonable behaviour is strongly encouraged, including:
    • Requesting and giving relief for impaired performance (notably including in respect of “the making of payments,” which are often left unclear in circumstances of force majeure);
    • Exercising remedies for impaired performance (including enforcement of security and insolvency or winding up proceedings);
    • Requesting, and making, payment under the contract;
    • Claiming breaches of contract and exercising termination provisions; and
    • Making and responding to force majeure, frustration, and change in law claims.
  • Notably, the Guidance uses the phrase “spirit of co -operation.” Whilst there is no generally implied duty of good faith in contractual relationships as a matter of English law, and this Guidance certainly does not introduce such a duty, it may perhaps be regarded as a recommendation that parties engage in good faith conduct. At the least, it calls for a relaxation of the strict adherence to contractual and legal rights in these extreme times, with the objective of avoiding formal disputes and preserving supply chains, the economy, and businesses.

What is the effect of the Guidance?

  • The Guidance is not legally binding, but it signals behaviours which are expected by the UK Government of commercial actors, by using the language of the Government “strongly encouraging” parties to comply “for their collective benefit and for the long-term benefit of the UK economy.” The Guidance is temporary in nature and will be reviewed on or before 30 June 2020.
  • The Guidance is clear that it does not take precedence over, inter alia, the following:
    • Any relief already available to parties in: (i) the relevant contract (such as force majeure provisions), (ii) law, custom or practice (such as the doctrine of frustration), or (iii) the Government’s response to COVID-19 (such as by way of loans and grants), nor other legal duties or obligations; or
    • Contracts whose primary purpose is to make express and clear provision for, and allocate risks in respect of, the effects of global or national public health emergencies or pandemics (e.g. insurance contracts).
  • The Guidance reinforces the Pre-Action Protocol and the Civil Procedure Rules’ promotion of the use of ADR and early settlement of disputes, by strongly encouraging parties “to seek to resolve any emerging contractual issues responsibly – through negotiation, mediation or other alternative or fast-track dispute resolution – before these escalate into formal intractable disputes.”

It remains to be seen how this broad request to act fairly and responsibly plays out in the commercial world, where parties may well have different views as to what this means, and also have responsibilities to their stakeholders.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Commercial Litigation practice.

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