Is your (contractual) behaviour acceptable?

As part of the ongoing and far reaching response to the Covid-19 emergency, the government has recently published guidance calling for "responsible and fair" behaviour in the enforcement of contract terms. The guidance can be found here.

The guidance applies where the performance of contracts (including a party's ability to make payment) is materially impacted by Covid-19. The guidance is "non-statutory" but strongly encourages parties to act responsibly with a view to better long-term outcomes for jobs and the economy. It does not, however, have the force of law and also does not extend to the devolved administrations.

The key points are found at paragraphs 14 and 15 of the guidance where parties are asked to be "reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in the spirit of co-operation and aiming 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". Specific examples are then given of circumstances where the guidance seeks such behaviour. They include:

• the requesting or making of payments;
• making and responding to force majeure and frustration claims (though it is made clear that the guidance is not intended to override specific contracts which have made provisions for pandemics, for example);
• making and responding to damages claims;
• claiming breach of contract and enforcing events of default;
• making and responding to requests for contractual changes or variation;
• commencing formal dispute resolution procedures or processes, including issuing proceedings or ADR; and
• enforcing judgments.

Perhaps understandably, the guidance is foreseeing a steep rise in contractual disputes as business begin to understand what a post COVID-19 economy might look like. It seeks for parties to find a way through differences with a view to a longer-term benefit to the wider economy.

What the guidance cannot guard against are the commercial realities which now face businesses in a struggling economy. A big focus is already being placed on cash flow (and means of maximising it including enforcing contractual rights where prospects are good) and directors are still required to perform their duties. While parties will still give full consideration to options open to them, the guidance appeals a greater sense of commerciality for the common good and looks to deter opportunism in difficulty economic times. 

We are seeing the early involvement of legal advisors becoming increasingly paramount for businesses seeking to plan for potential contractual issues, understand their options and manage risk. If you'd like to discuss an issue or potential issue arising from a contract, please get in touch.