Government guidance has contracting parties on their best behaviour

The Cabinet Office has recently published a report providing guidance on contractual behaviour where contracts are impacted by the COVID-19 pandemic.

The guidance applies with immediate effect to both the private and public sectors in England only.

The thrust of the guidance is to ask parties to act fairly and responsibly in the performance and enforcement of contracts – ‘bad behaviour’ will not be looked upon favourably.

Fair and responsible behaviour is strongly encouraged when contracts have been impacted by COVID-19. In such circumstances, contracting parties are asked to:

• act reasonably and proportionately when either performing or enforcing contracts;
• act in a spirit of co-operation; and
• 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.

The guidance lists scenarios where contracting parties are especially encouraged to follow the principles of fairness and responsibility. This includes parties asking for or considering granting relief under a contract impacted by the pandemic, for example requesting or allowing extensions of time for payment or for delivery of goods. The guidance also asks parties to be reasonable in taking action under force majeure clauses or the doctrine of frustration. See our guidance on force majeure clauses here.

In particular, parties should act fairly and reasonably in the face of a potential dispute. As the guidance says, disputes can be destructive to good contractual outcomes. Parties should consider alternatives such as contract variations or alternative dispute resolution before going to court.

It is important to note that the guidance is not legally binding. The government makes it clear that this guidance does not override existing law and policy or the terms of each contract.

The guidance applies generally to all sectors, but government advice and recommendations are likely to follow for specific industries, to account for the individual challenges that each sector faces. The construction industry is one which has already taken steps to produce further guidance.

The government will continue to monitor contractual behaviour and may yet introduce policies or even legislation to enforce the behaviour that the government is requesting. This would follow the previous path taken in relation to the lockdown itself, as government guidelines to stay at home were shortly backed by legislation. This leaves contracting parties with an element of uncertainty – in the future enforcing contractual rights may not be as clear cut as it once was. The first review of this guidance is expected by the end of June, so further updates may follow.

For further advice tailored to your circumstances please do not hesitate to contact us.