COVID-19 and contracts: Government guidance asks businesses to behave responsibly

COVID-19 and contracts: Government guidance asks businesses to behave responsibly

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On 7 May 2020, the government released non-statutory guidance on how parties whose contracts have been impacted by the COVID-19 emergency can behave fairly and responsibly. Although this guidance has no legal effect, it calls upon parties to support the government’s response to COVID-19 for their collective benefit, as well as to protect jobs and the economy.

The guidance

According to the guidance,‘responsible and fair’ behaviour in relation to performance issues and contractual enforcement includes:

  • Acting reasonably and proportionately (especially when dealing with disputes).
  • Cooperating.
  • Considering practical, just and equitable outcomes for both parties, with regard to each party’s financial resources and the protection of public health.

The guidance also ‘strongly encourages’ businesses to be fair and responsible in relation to the following:

  • Requesting and giving relief for impaired performance, particularly in relation to the timing of delivery/completion, the nature and scope of goods, works and services, the making of payments and the operation of payment or performance mechanisms.
  • Requesting and allowing extensions of time, substitute or alternative performance and compensation.
  • Making and responding to force majeure, frustration, change in law, relief event, delay event, compensation event and excusing cause claims.
  • Requesting and making payment under the contract.
  • Making and responding to claims for damages.
  • Returning deposits or part payments.
  • Exercising remedies in respect of impaired performance.
  • Requests for variation or alternative performance, claiming breach of contract and enforcing events of default and termination provisions.
  • Enforcing judgments.

What does this mean?

The government has recognised that the circumstances cause by COVID-19 are likely to give rise to a number of contractual disputes, particularly as businesses struggle or fail to adhere to their contractual obligations.

The guidance therefore consistently encourages parties to exercise restraint when deciding whether or not to enforce their strict contractual rights and to only litigate as a last resort. Indeed, there is a significant emphasis on negotiation and using alternative dispute resolution methods to resolve issues, particularly given that what is ‘fair and reasonable’ will be different in every circumstance.

What practical impact will this have?

This guidance is not legally binding and there is no expectation that the Courts will change or pause the principles of contract law due to the COVID-19 crisis. Parties should therefore revert to their original contracts at the start of negotiations, before they consider negotiations.

However, businesses should review the guidance and consider being lenient to their business suppliers/contacts, particularly when the business is likely to experience its own difficulties in the imminent future.

Contract variations

If, after negotiations, variations to the contract are agreed, businesses should ensure that these variations are documented correctly. Particular care should be taken as to whether variations can be agreed orally or whether they need to be in writing, signed by both parties.

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