By Christa Band and Jane Larner

Law360 (June 26, 2020, 6:16 PM EDT )

Christa Band

Jane Larner

On May 7, the Cabinet Office issued guidance explaining that "parties to contracts should act responsibly and fairly, support the response to COVID-19 and protect jobs and the economy." It is described as strong encouragement and recommendations which should be followed for the collective benefit.

As to scope, the guidance is expressed to be of "general application to all active contractual arrangements materially impacted by COVID-19" and applies in England only.

There are important exclusions. The guidance is "not intended to override specific contracts whose primary purpose is to make express and clear provision for, and allocate risks in respect of, the effect of … pandemics, especially contracts of insurance" and it does not apply to financial market transactions. Further it is not intended to override any specific support or 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 covers both the performance of contracts and their enforcement. Under it, responsible and fair contractual behavior includes:

being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of cooperation and aiming to 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 sets out a nonexhaustive list of contractual issues which the government hopes parties will approach in this responsible and fair manner. These include dealing with requests for extensions of time, accepting substituted performance or variations to terms, renegotiating payments due, enforcing events of default and termination provisions, instituting dispute resolution procedures and enforcing judgments.

There is bound to be room for debate in individual situations as to what responsible and fair behavior looks like. That scope is all the greater in situations where the parties' rights and obligations are governed by English law with its reticence about recognizing — in a way many other countries have — a duty of good faith in the performance of a contract.

It is worth noting, too, that even where a duty of good faith does apply — perhaps through an implied term of particular scope or in a relational contract — it does not mean that one party has to subjugate its interests to those of the other.

That this government guidance is unusual is clear, but so are the circumstances that have given rise to it. This is not law, nor is it regulation. The guidance cannot create new rights or obligations. It does not give parties a claim or a defense where they don't otherwise have one. It does not seem to be directed at contracts governed by English law as such, but rather at English parties to contracts.

Neither the guidance, nor the sentiment behind it, will of themselves shape the established English law principles of contractual construction and enforcement. However, the point could fairly be made that to approach the guidance as if it were a piece of legislation or contractual term misses the point.

What the guidance does is to underscore a notion already variously illustrated in the media, namely that a party's commercial conduct is likely to be judged in reputational terms even if it is legally entitled to act in a particular way. Bad behavior — a description used in the guidance — is unlikely to be answered by reference to the terms of a contract and much more likely at present to be judged in its broader social and economic context.

One way in which the guidance — at least the sentiment behind it — may find expression is through the approach taken by the courts to whether a party has waived its rights where the other party is in breach.

There are various practical steps which can be taken to preserve rights but there is also some room for the application of the legal principles to the particular facts with the British Institute of International and Comparative Law recommending that "the law should be slow to find that negotiations have resulted in a waiver or otherwise prejudiced parties' contractual rights since that could have a chilling effect on parties' willingness to compromise."

The guidance is also interesting in relation to its approach to dispute resolution and in that regard echoes comments already being voiced by others: The global pandemic is inevitably going to give rise to many disputes and parties, courts and tribunals are going to have to adapt in order to enable those disputes which need the assistance of formal processes to be resolved.

The BIICL has published two recent concept notes that consider the impact of the pandemic on dispute resolution strategies and processes. Echoing commentary by former Supreme Court Justices in BIICL's first concept note, the guidance notes that a plethora of disputes from the COVID-19 pandemic would be destructive to good contractual outcomes and the effective operation of markets.

They encourage commercial parties to consider alternative ways of dealing with the disruption to their contractual relationships COVID-19 has caused. The notes recognize that contractual certainty remains a fundamental principle of English law though "a discussion of the present crisis has to recognise that it does not have an easy analogy in past case law."

The BIICL also recognizes in its notes that there are some cases which will require the involvement of the court to resolve them and that precedent setting is important, particularly where the established legal principles are going to have to be applied to COVID-19 facts. However, the notes emphasize that a more conciliatory approach will be needed from parties in the future.

Resolving disputes by negotiation, discussion and mediation may preserve those contracts which, although impacted by the pandemic, are still viable, even if on a different basis or terms. Those contracts that are no longer viable should be terminated in accordance with established legal principles, but with the gloss that this should be done in the fairest and most equitable way for both parties.

As BIICL argues in its second concept note, "new thinking is going to be required if the law is to play its full part in getting international commerce back on its feet." English procedural law already encourages parties to consider alternative dispute resolution and whether there is a way of settling at an early stage. This encouragement may be given more forcefully going forward.

The guidance is scheduled for review on or before June 30. The government has indicated it may intervene with further measures.

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Christa Band is a litigation partner and Jane Larner is a counsel professional support lawyer at Linklaters LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. 

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