Mona Patel Partner
Covid-19: New UK Government guidance on responsible contracting
At a time when companies are working through the impact of Covid-19 on their business, employees, contracts and supply chains, the Government has issued guidance on ‘responsible contractual behaviour’ for contracts ‘materially impacted’ by Covid-19 (i.e. those too difficult or impossible to perform). It calls on parties to act responsibly and fairly during the Covid-19 pandemic in order to protect businesses, jobs, supply chains and the UK’s economic recovery.
Whilst the Guidance is not binding, it is clear from the tone of the note that the Government considers the behaviour of individuals, businesses and public authorities part of the national response to the Covid-19 emergency. In fact, the Guidance “actively encourages” contracting parties to adhere to it. We set out below in a Q&A format the main aspects of the Guidance, which can be accessed here.
What are the objectives of the Guidance?
The Government is keen that parties to contracts should act responsibly and fairly to (a) maintain contractual performance, (b) ensure cash flow in those contracts is maintained, (c) avoid destructive disputes and insolvencies, and (d) ensure that contractual and economic activity can be preserved.
What is fair and responsible behaviour?
The Guidance does not clearly define ‘responsible’ and ‘fair’ behaviour, but says that it includes:
- being reasonable and proportionate in responding to performance issues and enforcing contracts. In particular, the Guidance suggests that before escalating into formal disputes parties should engage in negotiation, mediation or other alternative or fast-track dispute resolution
- acting in a spirit of cooperation
- aiming 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
The above is similar to the principle of ‘good faith’ which regulates the behaviour of contractual parties in a number of civil jurisdictions (there is no such general principle in the UK).
Does it apply to me?
The Guidance applies with immediate effect to both the private and public sector in England (not the devolved administrations). It is not clear whether the Guidance specifically applies to contracts with performance in the UK or simply those governed by English law. Mindful that the Guidance note is limited to England alone, the authors consider the latter is unlikely.
The Guidance does not apply to speculative contracts (e.g. financial markets) and specifically states that it is not intended to override:
- contracts whose primary purpose is to allocate risks (e.g. insurance contracts)
- specific guidance or procurement policy notes issued by the Government
- specific support or relief available (a) in express contractual provisions, (b) in law, custom or practice, or (c) from the Government in response to Covid-19
- other legal duties or obligations with which a party is contract
It does however provide a fairly detailed and non-exhaustive list of the contractual matters in relation to which the Guidance is expected to be borne in mind. These include:
- impaired performance
- extensions of time
- claims for damages and breach of contract
- deposits or part payments
- contractual remedies
- enforcing default and termination provisions
- requests for information
- giving notices, keeping records and providing reports under the contract
- requests for contract changes and variations
- requests for consent
- dispute resolution procedures
Is the Guidance binding?
The Guidance is strongly encouraged but non-statutory and not binding, which means it does not carry the force of law. Whilst it is possible that third parties may take such guidance into consideration when determining a party’s use of their discretion in contractual arrangements (e.g. mediators, arbitrators, judges, etc.) it is unlikely that the guidance will influence formal legal proceedings. In particular, a court would not be able to use the Guidance for enforcement because it does not set out the particular factors to be taken account of or to be applied to decisions.
Whilst the Guidance does not disapply express legal or contractual provisions it is clear that the Government wishes parties to act reasonably when considering how to manage contracts impacted by Covid-19. The Guidance may serve as a useful point of reference for parties attempting to negotiate revised terms and it expected that many parties will refer to the Guidance to argue that their position is ‘fair’.
The Guidance and contractual practices will be reviewed at the end of June. Whilst the Guidance has no legal effect and is unlikely to have a substantial impact in and of itself, the Guidance leaves open the possibility of active intervention in commercial agreements (e.g. by way of legislation) if it is not followed.
The above does not constitute legal advice nor does it consider a complete list of issues to consider in the context of Covid-19. Should you have any queries, please do not hesitate to contact the authors of this article or your usual contact at Ince.