HomeFWJ takeawayTakeawayBanks & financial institutionsLitigation and dispute resolutionGovernment guidance on responsible contractual behaviour: key takeaways

Last month, the government published its non-statutory guidance on responsible behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency. Here we review the key takeaways from the guidance.

What is the purpose of the guidance?

The intended purpose is for the guidance to encourage parties to ‘act responsibly and fairly, support the response to COVID-19 and protect jobs and the economy’.  The government is strongly encouraging individuals and businesses to consider their behaviour in order to protect business and to ensure that ‘contractual and economic activity can be preserved and will be ready to continue in a sustainable way once the current emergency is over, supporting the restart of the economy and maximising UK productivity and growth’.

The government guidance recognises that some parties to contracts may struggle or find it impossible to perform their duties in accordance with agreed contractual terms as a direct result of the COVID-19 emergency, such as employee illness, restrictions of the movement of people and goods, the closure of business or the reduction in a party’s readily available financial resources.

It is guidance only and is not intended to override any legal duties or obligations with which the parties to a contract are bound to comply with.

Who does the guidance apply to?

The guidance sets out that it applies to both public and private sector contracts impacted by the COVID-19 pandemic. The guidance note does make specific mention to ‘funders’ numerous times, ensuring that the intention is for the guidance to be applicable to them.

The guidance does not override specific support and relief available in contract, law, custom or practice.

The government’s note highlights that the Construction Industry Council and the Royal Institute of Chartered Surveyors have developed their own guidance and recommendations in respect of contractual disputes.

The guidance does set out other sectors to which the guidance would not apply (in paragraphs 7 -9).

What is ‘responsible and fair behaviour’?

In creating the guidance note, the government is requesting that UK businesses take an ‘extraordinary’ approach in order to overcome the COVID-19 emergency. ‘This includes being reasonable and proportionate in responding to performance issues and enforcing contracts… acting in a spirit of co-operation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party’.

Paragraph 15 of the guidance sets out areas in which ‘responsible and fair behaviour is strongly encouraged’ and include, but are not limited to:

  • Relief for impaired performance, including in respect of time for delivery, the nature and scope of goods, works and services, the making and operation of payment
  • Allowing extensions of time
  • Requesting and making payment under the contract
  • Commencing and continuing formal dispute resolution procedures, including proceedings in court

The guidance states that the fair and reasonable behaviour should continue to apply so that fair and equitable outcomes can be achieved. However it is noted that the guidance fails to set out examples of the behaviour that is expected.

What are the practical implications of the guidance?

The guidance is overridden by agreed contractual terms. It is therefore understandable and foreseeable that parties may be reluctant to adhere to the recommendations under the guidance in order to protect their own business over the wider economy.

Some consideration of the guidance will be needed and may have a role in encouraging parties to enter into discussions in order to reach a resolution that would enable the contract to continue.

The guidance further highlights the courts’ overriding objective and the need for parties to attempt to resolve any contractual issues/disputes in a proportionate, equitable and fair matter, encouraging the use of alternative dispute resolution.

What’s next?

The guidance sets out that it will be reviewed on, or before, 30 June 2020. It also states that it may lead to further measures, including legislation. Changes have already been made to the insolvency regime with the Corporate Insolvency and Governance Bill being put before Parliament on 20 May 2020.

The guidance hints at the possibility of a supplemental ‘Frequently Asked Questions and Answers’ document. Such a document may give further insight as to what types of behaviour the government is expecting of contracting parties.

If you require any assistance with regard to the government’s guidance on responsible contractual behaviour, please do not hesitate to get in touch.

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