Government guidance for commercial contracts impacted by Covid-19

Through the Cabinet Office, the government recently published its guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency.

The guidance applies with immediate effect to parties in the private and public sectors operating in England (although notably not in the other devolved UK nations).

The key takeaway message is that the government is now actively urging parties to work together constructively, when faced with contractual performance issues, and to have in mind “objectives of responsible and fair behaviour”.

In the guidance the government provides a non-exhaustive list of scenarios and actions amounting to fair conduct. These examples include requesting and giving “relief for impaired performance” in respect of the delivery of goods and/or services, requesting extensions of time or proposing alternative performance or compensation and contract variations. If the complexities prevent the parties from voluntarily agreeing a more simple resolution, then alternative dispute resolution procedures, such as mediation, are actively encouraged. 

Although the guidance is non-statutory and only advisory (i.e. not enforceable by law nor does it override any rights or obligations under contract), it will be of significant interest to many parties across the country, particularly those in intolerable and commercially compromised positions.

Over the lockdown period, we regularly work with clients to assist in reviewing their options – particularly those engaged in the manufacturing, hospitality / events sectors where contractual performance was (and still is) severely impacted by social distancing and other lockdown measures.

Considering the individual circumstances and reviewing what the contract says is always the starting point. If the contract contains a well-drafted “force majeure” clause and the impact of the force majeure event genuinely makes performance impossible, the contract may provide some form of protection. However, this is a high threshold to meet, and more often than not, the best available option is to open up negotiations with a view to achieving a commercial compromise.

With a view to appealing to the other party’s sense of civic or moral duty, no doubt parties will be quick to reference this new guidance in correspondence and negotiations. Disregarding the recommendations arguably opens up the dismissing party to the risk of adverse publicity and other corporate social responsibility consequences. However, as there is no concept or requirement under English contract law for parties to act in good faith and the guidance is not binding or enforceable, ultimately parties may not be prevented from strictly enforcing contractual rights and obligations, if that is what they choose to do.

Despite the limitations of the guidance, the aim and sentiment of the guidance will be appreciated by many parties, particularly those facing material performance issues caused by this public health crisis.