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Responsible Contractual Behaviour -what you need to know

On 7th May 2020, the Cabinet Office and Infrastructure and Projects Authority published non-statutory guidance in respect of contractual behaviour between parties where performance of the contract is adversely affected by the COVID-19 emergency. The guidance had immediate effect and will be reviewed on or about 30th June 2020. The guidance does not apply in Scotland, Wales and Northern Ireland. The guidance can be found here.

The overall objective of the guidance is to encourage all contract parties, including private and public sector, to act responsibly and fairly in the national interest when performing and enforcing their contracts to support the response to COVID-19, with the aim of protecting jobs and the economy.

The guidance is clear in so far as its legal application is concerned. It is not intended to override other specific guidance issued by the government or any specific support or relief available, including those within the contract in question, in law or custom or practice – including equitable relief.

In addition, it is not intended to override specific contracts whose primary purpose is to assist in dealing with global or national public health emergencies. 

So what is responsible contractual behaviour? 

The Government says that it is “strongly encouraging” all individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts but what does this actually mean in practice? 

The guidance recognises that it will be difficult or impossible for some parties to certain contracts to be able to perform those contracts within the agreed terms, such as time restraints for example, compared to how they would normally. Restrictions on movement of people and goods, revised ways of working and the closure of a party’s business are all cited in the guidance as recognised issues.

Being responsible and fair includes being reasonable and proportionate in responding to both performance issues and enforcing contracts (including dealing with any disputes) acting in the spirit of cooperation whilst aiming to achieve practical, just and equitable outcomes for all parties involved in the contract. 

This includes consideration of availability of a party’s financial resources. Examples of such behaviour are provided in the guidance:

  • “a.  requesting, and giving, relief for impaired performance, including in respect of the time for delivery and completion, the nature and scope of goods, works and services, the making of payments and the operation of payment and performance mechanisms; 
  • b. requesting, and allowing, extensions of time, substitute or alternative performance and compensation, including compensation for increase cost or additional performance; 
  • c. making, and responding to, force majeure, frustration, change in the law, relief event, delay event, compensation event and excusing cause claims; 
  • d. requesting, and making, payment under the contract; 
  • e. making and responding to, claims for damages, including under liquidated damages provisions; 
  • f. returning deposits or part payments; 
  • g. exercising remedies in respect of impaired performance, including enforcement of security, forfeiture or repossession of property, calling of bonds or guarantees of the initiation or continuation of insolvency or winding up (or equivalent) proceedings; 
  • h. claiming breach of contract and enforcing events of default and termination provisions (including termination rights arising by reason of the insolvency or potential insolvency by a party); 
  • i. making, and responding to, requests for information and data under the contract; 
  • j. giving notices, keeping records and providing reports under the contract (recognising that the need to keep records of contractual behaviours and decisions, including the behaviours referred to in this guidance, is important); 
  • k. making, and responding to request for contract changes and variations; 
  • l. making and responding to, requests for consent (including funder consents); 
  • m. commencing, and continuing, formal dispute resolution procedure, including proceedings in court; 
  • n. requesting, and responding to, request for mediation and other alternative fast track dispute resolution; and 
  • o. enforcing judgments.”

The guidance says that the above behaviour should be reflected in contractual dealings between parties, so long as the contract is materially affected by the current pandemic. This is to achieve the overall objective of fair and responsible behaviour within contractual arrangements to ensure that contract performance is maintained, together with other elements of the contract, such ensuring cashflow, with the aim that the contractual and economic activity can be preserved.

Alternative Dispute Resolution (“ADR”)

At Paragraph 17, the guidance specifically mentions Alternative Dispute Resolution (“ADR”). You can read our blog on that topic, published in April 2020, here.

The guidance states that “the Government would strongly encourage 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 is recognised that a “plethora of disputes” can be “destructive to good contractual outcomes”. This has always been the case, but the scope for disputes has widened considerably since the pandemic began and lockdown measures changed how we all operate as businesses, possibly for the long term, or for ever.

The Government is therefore encouraging a spirit of collaboration and stability between the parties to a contract and, where disputes arise, to seek to resolve them in ways other than formal court proceedings. 

As with any ADR process, this will require all parties to the contract to engage in the process and the spirit of it. 

Remember that the guidance is non-statutory and whilst the aim is undoubtably worthy, it remains to be seen how, and if, parties to a contract will adopt the guidance. Swift and possibly unrecorded changes to an established contractual arrangement could lead to further problems if the nature of the variation of the contract is not fully considered. 

So what do I do now?

Whilst non-statutory guidance only, it is worthy of note that requests for responsible contractual behaviour are encouraged and records of such requests, and the responses to them, are said to be “important”. There is no specific reason given for this but as the situation develops and further guidance is issued, it can do no harm to keep those records of your requests or responses. 

If requesting some flexibility, it might be worth pointing out the guidance.

You should also consider whether or not any issues can be ironed out between you and the other parties to the contract without a formal dispute arising. If that is possible then the parties can move on. 

However, the guidance does not overrule your contractual rights and it may well be that the Government guidance will be overridden by the commercial reality of businesses protecting their contractual rights and remedies.

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