Responsible Contractual Behaviour in the Covid-19 emergency

Wednesday 15 July 2020

On 30 June 2020, the government released updated guidance and recommendations on what they deem as ‘responsible contractual behaviour in the performance and enforcement of contracts’ in the Covid-19 pandemic.

The full guidance can be viewed here.

In the guidance, the government encourages all parties to ‘act responsibly and fairly, support the response to Covid-19 and protect jobs and the economy’ and recommends parties to consider their conduct in respect of payments, extensions of time and the avoidance and resolution of disputes where possible.

Parties are encouraged to make prompt payments, in accordance with the relevant contractual terms, legal requirements and applicable guidance for their particular contract. This is highlighted as being of particular importance where the recipient is a smaller business who may not have the resources available to cope with any delay in payment.

The government further asks that where a party is unable to make payment as per their contractual obligations, that any potential reliefs are considered by the other party, including whether an extension of time can be given, additional costs can be waived or if the terms of the original contract could be renegotiated.

The guidance lastly suggests that where possible, formal disputes in respect of unpaid contracts are avoided in favour of equitable adjustments, negotiation, mediation or any other early neutral evaluation method.

The Legal Position

The guidance does not overrule the party’s legal rights/obligations under the contract. At best, the guidance could be seen to imply a duty of ‘good faith’ into contracts during this period.

However, there is no general duty of good faith implied into contracts in English Law. The only way a requirement for a party to act in good faith would normally be considered by the court is if there is an express clause within the agreement requiring the same.

There has been a trend in recent years that commercial contracts may contain such a clause, but the courts have typically not viewed the same as any sort of shield to a claim relying on a breach of contractual obligations and seeking payment.

The case of Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHX 111 (QB) did go so far as to find that an implied requirement to act in good faith could exists where it matches the intention of the parties to the contract.

However, since Yam Seng, findings that there has been an implied requirement to act in good faith are relatively rare and even if found, any breach of the same is unlikely to be a defence to a claim for breach unless the conduct is suitably severe.

Conclusion

In short, the government’s guidance is not binding and should not have any effect on a party’s right to enforce contractual obligations.

It is unlikely that that any alleged breach of a good faith requirement (whether express or implied under the principle of Yam Seng) will be a valid defence to a claim brought to enforce contractual obligations in respect of payment/performance.

However, it is possible that where such an argument is run, the court may then take the guidance into account as to determining if actions were in fact in good faith.

It is of course open to the parties to consider the guidance and offer extensions or to potentially renegotiate payment terms. This would clearly be within the spirit of the guidance and would be seen to be behaving reasonably in the current circumstances.

However, parties should be careful if they adopt this approach to check if they are potentially waiving any breaches or giving up a right to bring a claim in the future.

Here to help

If you require assistance or any further information in relation to the above, please email or call us on 0113 227 9355, or contact any member in our Commercial Dispute Resolution team.