On 7 May 2020, the Cabinet Office published a guidance note with the catchy title: “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency” (the “Guidance”). In this relatively concise note (which can be accessed here), the Government set out its view of the type of responsible behaviour it expects of parties to contracts.
The overriding theme is that “parties to contracts should act responsibly and fairly, support the response to Covid-19 and protect jobs in the economy”. This is in keeping with the recently announced guidance and proposed legislation – about which we have previously written, including here and here – that parties (in particular commercial landlords) should not take enforcement action against their counterparts where the latter’s financial difficulties have arisen as a result of the Covid-19 pandemic.
Whilst the aim of the Guidance seems admirable, it seems difficult to envisage what practical effect it will have on parties’ relationships. Indeed, the Guidance expressly confirms that “it is non-statutory guidance but Government strongly encourages parties to contracts to follow this guidance for their collective benefit and for the long-term benefit of the UK economy”. It will therefore be interesting to see in the coming months what, if any, bearing the Guidance will have when the Courts have to consider whether a party’s conduct was reasonable, and whether particular conduct constitutes “bad behaviour”.
Additionally, the Guidance states that “it is guidance only and is not intended to override any other legal duties or obligations with which a party to a contract is bound”. This then poses yet further questions. Take for example the company director who procures his company (“C”) to take recovery action against a contracting party, the proceeds of which would help avoid C from entering an insolvency process. Whilst the director may have upheld their duties to C (because they have taken a step that is likely to have been in the C’s interests) will C be penalised (perhaps in the form of a costs order) for taking recovery action against the spirit of the Guidance? In turn that costs order against C could constitute an act of misfeasance by the director (because they allowed the company to incur a costs order), for which they could be personally liable.
Paragraph 14 of the Guidance goes on to state that: “Responsible and fair behaviour… 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”. Litigators will note this is reminiscent of the wording of Rule 1 of the Civil Procedure Rules (“CPRs”) (a rule known as the Overriding Objective) and the various pre-action protocols that specify the type of behaviour with which parties to litigation are expected to comply before commencing proceedings. Advisors will already as a matter of course be explaining to clients how to act reasonably and in the spirit of the CPRs, so one wonders what effect (if any) the Guidance will have on such advice, particularly given its lack of statutory footing.
Likewise, the Guidance emphasises that it is “not intended to override any specific support or relief available: (i) in the relevant contract… (ii) in law, custom or practice (including any equitable relief)”. If for example a contract permits a lender to take enforcement action in a specific manner (say, by serving a statutory demand for immediate payment), would that behaviour be deemed to be unreasonable, notwithstanding that the borrower’s failure to pay is linked to Covid-19? Again, this will be something the Courts will have to grapple with in the near future.
On a related note, insolvency professionals continue to await further detail on the Government’s recently proposed Corporate Insolvency and Governance Bill 2020. At the time of writing no draft Bill has appeared, but it does seem as though this legislation remains part of the Government’s agenda. Indeed, on 14 May 2020 the FCA’s website published a press release which repeated the aims of the new legislation.
We will keep monitoring the progress of the Bill and provide further details as they emerge. If you have any queries about this topic, please contact Ali Zaidi or any member of the Covid-19 Business Protection Team.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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