UK Government publishes new guidance for contractual behaviour during the Covid-19 pandemic

In May 2020, the Government issued guidance on responsible contractual behaviour in dealing with the performance and enforcement of contracts impacted by the Covid-19 emergency.

The document is not legally binding, however, parties are strongly encouraged to follow its guidance for not only their own benefit but for the long-term benefit of the UK economy. 

The purpose of the guidance

The Government makes the point that everyone in the UK needs to work together to pull through the current situation and protect not just the NHS and other public services but also jobs and the UK economy as a whole.

If businesses are too quick to enforce contracts against parties who are having difficulty in complying because of the pandemic, profitable relationships may break down and the economy will suffer as companies are forced out of business.

Conversely, considerate behaviour stands a chance of saving many companies, despite the possibility of some short-term disadvantages. In the long-term, the more businesses that are able to survive the disruption, the faster the economy will recover.

Objectives of responsible and fair behaviour

As well as behaving responsibly in their personal and work lives, by staying at home, socially distancing and self-isolating, there is also a need for those in charge of businesses to ensure their commercial activities are assisting in the effort against the disruption caused by the pandemic. This means that individuals, companies, financial institutions and public authorities are being asked to play their part by taking into account the overall impact of their business decisions and consider these as being part of the national response.

It is hoped that responsible and fair actions now will result in better economic outcomes and quicker recovery for businesses.

The objectives include complying with contracts where possible and ensuring cash flow to both the workforce and other businesses and individuals.

It is hoped that where contracts cannot be performed, disputes and insolvencies can be avoided. By preserving markets and supply chains as far as possible, there is a better likelihood of business resuming successfully once the worst of the emergency is over.

Responsible and fair behaviour

In the event of contractual difficulties such as performance issues or failure to fulfil a contract, responsible and fair behaviour will include acting in a reasonable and proportionate way, acting in a spirit of cooperation and aiming to achieve practical, just and equitable contractual outcomes. 

It is recommended that the parties take into account the impact on others, the availability of financial resources and the protection of public health and the national interest.

The Government has detailed circumstances in which they are asking for responsible and fair behaviour, including the following:

• Dealing with relief for impaired performance, such as timescales, availability of goods and services and the making of payments;
• Asking for extensions of time or changes in performance of a contract, including compensation for increases in costs;
• Dealing with force majeure claims and claims under other contract provisions such as changes in the law, delays and compensation;
• Requesting and making payments under a contract;
• Dealing with claims for damages;
• Returning deposits or part payments;
• Implementing remedies in respect of reduced performance. This includes forfeiture or repossession of property and the calling of bonds or guarantees as well as commencing insolvency or winding-up proceedings;
• Making claims for breach of contract and default;
• Raising requests for information and data;
• Serving notices, record keeping and reporting in accordance with contract terms. The Government notes however that there will remain a necessity of keeping records of contractual behaviour and decisions;
• Making and responding to requests for contract variations and changes;
• Making and responding to requests for consents, to include those made by financial institutions and those providing funding;
• Dealing with or commencing formal dispute resolution procedures, to include court proceedings;
• Requesting and responding to requests for alternative dispute resolution, to include mediation;
• Enforcement of judgments.

The Government notes that disputes, and in particular a proliferation of disputes, can be destructive and reduce the smooth running of businesses and markets. For this reason, it is strongly encouraging the use of negotiation, mediation or other alternative or fast-track dispute resolution. The aim is to avoid escalation into a long-running and damaging dispute.

Professional bodies may have their own adjudication and conflict avoidance procedures.

Changes to the insolvency rules were introduced by the Government on 20 May 2020 with the Corporate Insolvency and Governance Bill and we will be providing further details on those changes. 

Bill Marsh, a Commercial Mediator of Independent Mediators shares his views on the guidance and the encouragement of mediation, stating, “It is no surprise to me that the Government’s guidelines encourage the use of mediation to resolve commercial disputes at this difficult time. The process offers an invaluable forum for parties to focus on pragmatic and commercially relevant solutions to their disputes, quickly and cost-effectively, rather than getting lost in the detail of court procedures and the letter of the law.”

As we shift to remote working and become reliant on digital platforms to perform everyday tasks, Marsh goes on to say that in his experience, ‘most clients are content to mediate via a web-based platform, such as Zoom or Microsoft Teams, and that sensible deals are getting done that way”.

In summary

Approaching commercial decisions in light of the difficulties being faced by everyone is essential. By maintaining a flexible approach, businesses will be helping with the national effort to keep commerce and the economy functioning throughout the disruption.

Keeping the lines of communication open is a key part of maintaining good relationships. If someone fails to respond to queries, it can immediately cause concern and bad feeling. But by having conversations and being open to negotiation, business allies can work together with understanding to solve problems and find solutions to difficulties.

While operating may be difficult in the short-term, many companies may find that lessons learned now will stand them in good stead in the future, as they learn to adapt and react in a responsible and fair way, even when they may be legally entitled to ask for more.

The opportunity exists for businesses to help each other and gain a reputation for being approachable and easy to work with. Bonds built now stand a good chance of lasting into the future.

Read more on the impact of Covid-19 and force majeure.

At Lincoln & Rowe we understand the importance of helping our clients protect their reputation. We have wide-ranging experience in commercial law and were named as the ‘Best Firm for Commercial Disputes in London’ in the 2019 SME Legal Awards as well as ‘Boutique Litigation Law Firm of the Year’ in the 2019 Global Awards by ACQ5.

If you would like to talk to one of our expert legal team about any queries you may have regarding business contracts, particularly in light on the Covid-19 disruption, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.