COVID-19 - what the Government wants – responsible and fair contracting

In its guidance on “responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency” (the Guidance) issued on 7 May 2020, the UK Government lays the foundations for encouraging contracting parties to act “responsibly and fairly, support the response to COVID-19 and protect jobs and the economy”.

While such legal obligations already exist for parties to act this way, this new Guidance may help alleviate the parties’ burdens during the current pandemic and/or give them opportunities to seek leniency from each other in the performance of their obligations.

Objectives and scope of the guidance

In encouraging individuals, businesses and public authorities to adopt responsible and fair behaviour, it is hoped that better long-term outcomes for jobs and the economy will be achieved. The Guidance is not mandatory, and not intended to override any specific support or available relief. It sets out recommendations for contracting parties in public and private sectors where the performance of contracts is materially impacted.

It is important to note that contracting parties cannot be excused for failing to perform their contractual obligations in reliance on the Guidance.

The Government is asking for an extraordinary response as regards contractual arrangements which includes:

  • continuing contractual performance as far as possible
  • ensuring cashflow is maintained including payments to the workforce, individuals and businesses throughout the supply chain
  • ensuring contracts can be preserved even when a continued performance has not been possible
  • avoiding destructive disputes and insolvencies
  • generally ensuring that economic activity, through contractual arrangements, will be ready to continue once the emergency situation has passed.

What is responsible and fair behaviour?

The Guidance describes “responsible and fair contractual behaviour” as the efforts made by the parties to act in a spirit of co-operation, with an aim of achieving practical, just and equitable contractual outcomes.

Contracting parties are advised to have regard to the impact COVID-19 is having on the other party’s financial resources, but also the protection of public health and the national interest.

Parties should be more flexible when dealing, for example, with impaired performance, time for delivery and completion and the making of payments. This flexibility which is sought will be addressed by the parties, for example, when choosing alternative dispute resolution procedures over litigation, also much encouraged by the Guidance. Indeed, the government warns that a “plethora of disputes” would be destructive to the effective operation of markets.

The construction industry at risk

The construction and maintenance industry often involves multiple parties and long supply chains is considered particularly at risk. The Government singles out this sector in its guidance, recognising the vital role it plays in helping the economic recovery from the pandemic.

Furthermore, the Construction Industry Council strongly encourages Alternative Dispute Resolution  and the Royal Institution of Chartered Surveyors (RICS) has developed fast track procedures for early resolution of disputes in support.

In addition to the Government Guidance, the Construction Leadership Council (CLC) COVID-19 Task Force has published its Best Practice Guidance for all companies involved in the construction supply chain. Similar to the Guidance, the CLC advocates a collaborative approach between parties towards successful project delivery. It also provides detailed alternative dispute resolution guidance, and supporting sample templates of dialogue letters, contracts and notices (starting at page 9).

Next steps

Recognition is given in the Guidance to the evolving nature of this emergency. The Guidance (which only applies in England) states that it may be amended and reissued as necessary. The Government is keen to emphasise that behaviours in contracting will be scrutinised as England emerges from the pandemic. They have not discounted that legislation on some of these issues may be required. As with all aspects of the pandemic, it is very much a case of watch this space to see how contractual relationships fair in challenging times.

In conclusion

Immense efforts will be required from both sides in circumstances where parties are likely to suffer from hurdles – many outside their control – in the performance of their contractual obligations. Many contracting parties will consider that they have legitimate excuses not to perform their part of the deal during the pandemic and it may be naïve for the Government to think that they will work harmoniously for the preservation of contracts in times of such urgency. It goes without saying that in the spirit of overcoming the pandemic fallout, parties should co-operate – how this can be achieved in a dispute without more specific and binding requirements around what is reasonable and fair, remains to be seen.

Government guidance.

With thanks to Intern Laura Omnes for their assistance with this blog.