Responsible contractual behaviour and litigation

The UK government has published “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency”, which was updated on 30 June 2020.

This is non-statutory guidance applying only in England and not in the devolved administrations. It is also stated not to apply to financial market transactions.

The aim of this unusual document is clearly laudable:

“the government is strongly encouraging all individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts, to support the response to Covid-19 and to protect jobs and the economy”

Most businesses will in any event wish to take a sensible stance to contractual obligations in the current crisis. Few if any businesses are unaffected and there is therefore a good deal of empathy for others’ difficulties. Businesses in the regulated sector will also be only too aware of the requirement to treat customers fairly, though determining where to draw that line in such unprecedented circumstances may not be easy.

Impact of the guidance

Nonetheless, there will be situations where a failure to perform contractual obligations is unrelated to the health emergency, or where that is being used to hide the true reasons. What effect does the government’s guidance have in this situation?

The starting point is that this is non-statutory guidance. At paragraph 7 it states that it does not override relief available in the relevant contract or in law, or “any other legal duties or obligations with which a party to a contract is bound to comply”.

The guidance is broad and necessarily vague about what the desired fair and reasonable behaviour in relation to contracts will involve. It does, however, set out a (lengthy) list of circumstances in which such a standard of behaviour is expected, including:

• requesting and allowing extensions of time;
• returning deposits or part payments;
• claims for damages, including liquidated damages;
• enforcing of security and repossession of goods;
• making and responding to force majeure and frustration claims; and
• commencing and continuing formal dispute resolution procedures including court proceedings.

Of course, what appears fair and reasonable to one party may appear anything but to another, particularly where there are chains of interlinked obligations. If a party is not going to receive its money back from a supplier whose services it no longer needs, it is unlikely to view repaying its own customers’ deposits as fair and reasonable.

Disputes

It is clear from the guidance, and the further emphasis in the 30 June update, that the government is keen to avoid a plethora of disputes, which it states will “be destructive to good contractual outcomes and the effective operation of markets”. However, by encouraging parties to be reasonable in “making and responding to” (emphasis added) claims of frustration and force majeure, this guidance may raise expectations among parties keen to avoid their obligations. Frustration of contract is notoriously difficult to make out and force majeure is of very limited scope under English law. Parties seeking to take positions that are not legally sustainable are likely to make much of this, but are unlikely to prevail.

Will the courts take account of the guidance when determining contractual disputes? It seems unlikely, save in perhaps a few circumstances. Examples may include where a party exercises a contractual discretion or there is a dispute over whether contract terms have been orally modified or waived by conduct. In situations where the court is considering the broader circumstances of the parties’ actions, it may consider the guidance as a relevant factor.

Even here though, most judges are likely to dismiss arguments based on the guidance. What the English courts will be keen to avoid is allowing non-statutory guidance from the government, however in tune with the mood of the country, to introduce uncertainty into English contract law.

One situation in which the guidance may have an impact in legal proceedings is where one party wishes to mediate or use some other form of informal dispute resolution and the other party resists. This is already viewed dimly by the English courts and can lead to costs sanctions, as recently seen in Wales v CBRE. Through the guidance, the government seeks to strongly encourage the use of “negotiation, mediation or other alternative or fast-track dispute resolution” mechanisms.

We have also seen directions from lower courts requiring witness statements from parties who decline invitations to mediate explaining why, or even adjourning trials and requiring parties to file a questionnaire of they do not manage to settle the claim. Courts may feel further emboldened by this guidance to move towards forcing parties to mediate and imposing even tougher penalties on those who unreasonably refuse.

It may of course be that mediators, adjudicators and arbitrators will take more heed of the guidance than the courts, having more scope to consider the merits of parties’ positions beyond the letter of the law. The update shows the Government’s preference for companies to re-negotiate their contracts or engage with ADR, rather than commencing court proceedings. Whilst a renegotiation may buy some time, it may not eradicate the underlying problem and at some stage commercial entities may feel like that have little choice but to enforce their contractual rights.

Taking it further

The guidance states that “Further measures may be taken in respect of the guidance and recommendations in this note, including legislation”. Any such legislation would be a dramatic step and its exact scope would be contentious, but it would not be unprecedented globally.

Singapore has already introduced legislation aimed at protecting parties who are unable to perform their contractual obligations as a result of the health crisis. The UK government itself has passed legislation temporarily suspending the provisions of the Insolvency Act relating to wrongful trading (for more on this, see here) and introducing a moratorium on forfeiture of commercial leases for non-payment of rent in the Coronavirus Act 2020. If the UK government concludes that parties are unfairly taking advantage of the crisis for their economic benefit, it may well look to further constrain parties’ ability to enforce their rights. However, the update to the guidance does not suggest that anything is imminent.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.