Responsible contractual behaviour: Updated government guidance and what this means for business

As references to government guidelines begin to appear in commercial dispute documents, Ann Benzimra, Paul Barton and Abigail Cannon discuss the potential implications of these non-statutory directions for contracting parties.

  Following its guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by Covid-19 issued on 7 May 2020 (read our summary here), the UK government has reflected on how parties to contracts have responded to the pandemic and amended its recommendations accordingly.

The updated guidelines, issued on 30 June, highlight three key objectives: 1) to support the restart of the economy; 2) to prevent unnecessary insolvencies and 3) to support the long-term viability of contracts and businesses.

The update reaffirms the previous guidance that responsible and fair behaviour is strongly encouraged in a variety of situations, including dealing with force majeure events, requests for extensions of time, changes in the law, impaired performance and dealing with events of default – to name but a few.

It also focuses on three core issues – payment, extensions of time and avoidance of disputes – and provides some practical guidance on how parties should approach their interactions with each other.

1. Payment

Cash flow is highlighted as essential to support the performance and viability of contracts and ultimately the viability of businesses.

The government refers to the package of various financial support measures – including CBILs, CLBILs, BBLs, the Future Fund, the CCF and the furlough scheme (CJRS) – it has made available for businesses and individuals to preserve cash flow.

Public bodies are also being encouraged to provide relief to suppliers, including, where appropriate, continuity of payment to help ensure money continues to flow through supply chains.

Emphasis is placed on the importance of prompt, fair and effective payments in contracts, and the Prompt Payment Code remains in force.

Parties are therefore strongly encouraged to make payments in accordance with contractual terms, legal requirements and applicable guidance. This is particularly important where suppliers are SMEs or individuals who lack the financial resources that may be available to larger businesses.

2.  Extensions of time (and associated costs)
 
It is recognised that the impact of COVID-19 may make it difficult or even impossible for some parties to meet all their contractual obligations. In these cases, available reliefs should be considered, including:
 

• Whether an extension of time should be permitted;
• Whether terms should be renegotiated to preserve the viability of the contract; and
• How additional costs should be dealt with.

 
3.  Avoidance and resolution of disputes

Suitable adjustments or temporary allowances should be considered in preference to formal disputes.
Where disputes arise, parties should seek early and responsible resolution by negotiation, early neutral evaluation or mediation.

Parties are reminded that many industries have developed their own processes to resolve disputes, and these should be referred to in the early stages of a dispute.

Alternative fast-track resolution services options are also now available to parties, including a recently created Pandemic Business Dispute Resolution Service created by the Centre for Effective Dispute Resolution and the Chartered Institute of Arbitrators.

Guidance, recommendations and resolution services should be utilised by parties where early intervention and negotiation has not resolved the dispute.

What does this mean in practice?

The guidance does not override existing policies or legislation, nor does it override any relief expressly provided for in contracts. In other words, it lacks legal effect, which shows the government is reluctant to interfere with existing contractual relationships at this point in time.

The government has however indicated that it will keep the guidance under review to see how parties respond to the pandemic when enforcing their contractual obligations. While contracting parties may not risk formal penalties for ignoring the guidance to act fairly and responsibly, reputational damage may deter a party from being over-zealous when enforcing contractual rights.

We have recently seen examples of parties referring to the 7 May 2020 guidance in correspondence where a dispute has arisen, notably where a party believes that the other has not been acting responsibly or fairly.

Parties citing the guidelines have threatened to draw behaviour that is inconsistent with the guidelines to the attention of the court in the event that proceedings are issued, suggesting a high degree of confidence that judges will take the government recommendations into consideration when presiding over a dispute.

It is too early to say whether these non-statutory guidelines will affect the outcome of disputes, but parties should certainly bear them in mind when deciding whether and how to enforce contracts, or when putting together their defence for non-fulfilment of contractual obligations.

While the requirement for parties to seek to resolve disputes in advance of litigation is nothing new (it is  after all, enshrined in the Civil Procedure Rules), the guidance reinforces the need for parties to ensure they can demonstrate that they have acted reasonably, or possibly face the wrath of the courts.

Ann Benzimra is a dispute resolution lawyer and partner at Fieldfisher; Paul Barton is a technology lawyer and partner at Fieldfisher. Abigail Cannon is a trainee solicitor at Fieldfisher.

For more information on dealing with contractual disputes in light of COVID-19, please contact one of the authors or visit the commercial litigation pages on the Fieldfisher website.