The Cabinet Office and the Infrastructure and Projects Authority have jointly prepared non-statutory guidance for contracting parties impacted by the COVID-19 pandemic.The guidance is principles-based and high-level and is summarised at the outset in the statement that "parties to contracts should act responsibly and fairly, support the response to COVID-19 and protect jobs and the economy".
The guidance "strongly encourages" contracting parties to abide by it. Nevertheless, the guidance does acknowledge that it cannot override parties’ contractual rights and obligations under general law and that the guidance is subordinate to any detailed guidance or policy notes published later by the Government.
Aside from the general principles it sets out, the guidance is particularly noteworthy because of its statement that the Government is considering ways in which it can legitimately intervene in commercial relationships between contracting parties.
Additionally, businesses should be aware of the guidance in the context of any disputes because adjudicators may take it into account, in particular where deciding on the exercise of a party's discretion.
Acting "responsibly" and "fairly"
The guidance asks contracting parties to:
- respond reasonably and proportionately to performance issues and in enforcing contracts (including in dealing with any disputes);
- act in a spirit of co-operation; and
- aim 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.
Although English law does not impose a general concept of good faith on contractual relations, the principles set out in the Guidance come close to describing a 'good faith'-type duty. Unlike in civil law systems, in English law the starting premise is that parties are free to negotiate and pursue their own commercial position as they see fit.
There are some exceptions to this rule including contracts giving rise to fiduciary duties such as those creating partnerships or trusts, contracts which contain express obligations of good faith and 'relational contracts' into which 'good faith'-type obligations may be implied according to the principles set out in case law such as Yam Seng.
However, in general under English law, while outright deception is often actionable, sharp commercial practice is not.
The Guidance aims to encourage contracting parties to set aside this rule during the COVID-19 pandemic and in effect behave as if a general high-level duty of good faith applies to their relationship.
How will the guidance be used in practice?
We do anticipate that businesses will seek to rely on the Guidance to argue that their position is “fair”, in particular where parties are already under a contractual duty to exercise a discretion in a fair or reasonable way. However, it is unlikely that the guidance will carry sway in the context of formal legal proceedings due to its non-binding status and the generalised form of its principles.
In particular, a court would be unable to use the guidance for enforcement because it does not set out any specific factors to be taken into consideration or to be applied to decisions.
The guidance does not state whether it is intended to apply equally to all contracts or only to contracts where there is a significant disparity in bargaining strength. Applying the guidance will be particularly difficult where contracts have been closely negotiated by two parties of equal bargaining power who have explicitly allocated risk between them in advance.
The guidance seems to be encouraging those parties to adopt a non-specific standard of objective "fairness" to the allocation of the financial pain caused by COVID-19, rather than referring to the contract's pre-agreed allocation of risk.
This is the crux of the issue underpinning the guidance: to what extent are the parties to a contract being expected to ignore the explicit provisions of the contract? For example, if a contract contains a precisely drafted force majeure clause, should the coronavirus pandemic provide a reason to depart from such a clause, in particular if a pandemic is precisely the sort of circumstances in which such a clause was intended to take effect? The guidance suggests that this may be the case, but leaves it open as to what “responsible and fair behaviour” would look like in making a claim under such a clause and from whose perspective such "fairness" would be judged.
Is closer regulation forthcoming?
The guidance makes it clear that “the Government will continue to review behaviours in contracting … as we emerge from this public health emergency to ensure that contractual arrangements can function effectively and maximise their contribution to jobs and the economy” and that “further measures may be taken in respect of the guidance and recommendations in this note, including legislation”.
In considering legislation, it is likely that the Government will be looking at relationships characterised by significant disparity of commercial strength rather than intervening in contracts between commercially-sophisticated parties. Focusing on contractual behaviour in specific markets dominated by a small number of major players such as retail banking and large-scale housing development is also likely to be a Government priority.
The Government may look to the limited number of examples of other jurisdictions taking steps to intervene in contractual relations if legislation in this area is considered. Singapore is likely to be the most useful example.
The Singaporean Parliament enacted the COVID-19 (Temporary Measures) Act 2020 at the beginning of April, introducing wide-ranging temporary measures to Singapore's contract, insolvency and company laws. The Act applies to specific types of contract (including notably construction contracts, certain loan facilities, performance bonds in construction contracts, business-related hire-purchase agreements (such as ones for plant, machinery, or commercial vehicles), and leases and licences for non-residential property) entered into before 25 March and provides general relief from the consequences of non-performance. To qualify for that relief:
- the relevant party must be unable to perform an obligation that was due to be performed on or after 1 February;
- that inability must be caused to a material extent by the pandemic, or by the operation of coronavirus-related law of Singapore or of any other country; and
- the relevant party must serve an appropriate notification on the other parties to the contract.
Steps have also been taken in countries where Governments rule by decree. While those examples will be of less use to the UK Government in informing its approach, they should provide some useful information about the effects of such measures. The Iraqi Government, for example, declared the coronavirus pandemic a force majeure event “for all projects and contracts” in March. This is likely to introduce a significant degree of uncertainty into international commercial contracts involving Iraq, in particular those governed by foreign law.
Businesses are unlikely to significantly change their contractual behaviour as a result of the guidance being published because, even in normal circumstances, commercial negotiation and alternative dispute resolution are generally preferred by businesses over litigation for a variety of reasons. Not having any direct legal effect in itself, the current guidance is unlikely to have a significant impact.
However, it may be useful as a point of reference where parties are already under a contractual duty to exercise a discretion in a fair or reasonable way and may encourage trade bodies to create voluntary codes of practice aimed at demonstrating to the Government that legislative intervention in their sector is unnecessary. The Construction Leadership Council has already done so, having published comprehensive guidance for companies in the construction supply chain on how to minimise potential disputes on the same day as the Government's guidance.
The Government's guidance makes it clear that there will be further work undertaken in this area. In particular, it suggests that it may be supplemented with “a set of Frequently Asked Questions and Answers as the situation develops”, as well as being “revised and reissued as necessary”, with the first review planned no later than 30 June 2020.
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