As we ease out of lockdown, businesses continue to work hard to overcome the challenges brought about by the Covid-19 pandemic. Notwithstanding these efforts, the economic shock of Covid-19 persists and many businesses are still struggling to meet their contractual obligations and to enforce their contractual rights. How should contractual disputes be dealt with in the wake of the pandemic?
Parties to a contractual dispute should bear in the mind the Government’s guidance on the performance and enforcement of contracts impacted by Covid-19 (the “Guidance”). The Guidance strongly encourages “responsible and fair behaviour” in performing and enforcing contracts.
Such behaviour is described as being reasonable and proportionate in responding to performance issues and enforcing contracts, 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, the availability of financial resources, the protection of public health and the national interest.
As commercial contracts are unlikely to contain many, if any, of those objectives, evidently the Government’s aim is to encourage contracting parties to shoulder some of its burden in devising a response to the pandemic.
This encouragement to act “responsibly and fairly” applies to almost every issue which could arise in the operation of a contract, provided that Covid-19 has had a material impact on that contract.
The Government issued an update to the Guidance on 30 June 2020 to deal with the specific issues of payment, extensions of time and alternative dispute resolution (ADR).
Regarding payment, parties are strongly encouraged to make prompt payments in accordance with contractual terms. This is in the aim of maintaining cashflow and avoiding financial distress, particularly for SMEs or sole traders who lack the resources of larger businesses. The nature of a contracting party will be a relevant factor in dealing with payment issues. For instance, suppliers to public bodies may wish to make use of the financial continuity relief which is set out in the Government’s Procurement Policy Notes 02/20 and 04/20.
Time Delays in Contractual Performance
The Guidance encourages parties to commercial contracts to consider carefully, and reasonably, what reliefs may be available, including whether an extension of time for performance should be granted, how additional costs should be dealt with and whether terms should be renegotiated to preserve the viability of the contract.
Alternative Dispute Resolution
Parties are very sensibly encouraged to resolve contractual disputes via ADR rather than escalating to court proceedings. ADR mechanisms such as negotiation, mediation, early neutral evaluation and fast-track dispute resolution procedures developed in response to the Covid-19 emergency are all strongly encouraged. This approach to dispute resolution was well-founded even prior to the outbreak of Covid-19 but it has become even more critical at a time when:
- the Courts are having to adapt to remote hearings and have inevitably adjourned some hearings, causing backlogs and delays; and
- the Government has enacted legislation which restricts certain legal action with the aim of protecting businesses in these challenging times. The Corporate Insolvency and Governance Act 2020 has brought sweeping changes to insolvency law including a prohibition on issuing statutory demands and winding up petitions in connection with Covid-19 related debts, among other reforms.
In practice, an analysis of a contractual dispute will depend on the express wording of the contract combined with the circumstances of the parties at the time that the contract was entered into. The Guidance does not fundamentally change that legal position.
The aims of the Guidance will be difficult to achieve in circumstances where companies, who answer to their shareholders, will be focusing on little else other than survival in this unprecedented operational climate. The Guidance is also non-statutory and is therefore not legally binding.
Nevertheless, the Guidance does merit some consideration, as parties could argue in legal proceedings that there should be negative costs consequences in circumstances where the Guidance was not followed. The Guidance could also impact parties’ interpretation of an express contractual obligation to act in “good faith”.
When dealing with contractual disputes, businesses should contemplate the increased scrutiny being applied on business practices during these testing times and the potential reputational fallout of a contractual dispute being deemed mishandled. The Guidance points out that the Competition and Markets Authority is monitoring business practices during the Covid-19 emergency and that unfair business practices can be reported at www.coronavirus-business-complaint.service.gov.uk.
Here at Morrisons Solicitors LLP, we can help you to navigate this challenging environment by working with you to find a swift and cost-effective solution to your contractual dispute.