You may have missed one of the more unusual pieces of guidance by the UK government, in a note published by the Cabinet Office on 7 May 2020, to businesses to encourage them to behave “responsibly” in relation to disruption in their commercial dealings caused by the Coronavirus.
Why has this come out now?
Well, while some European jurisdictions are now beginning to emerge from their respective “lockdowns”, the grim fact is that a number of jurisdictions around the world have now spent more time in 2020 under restrictive emergency measures introduced to combat the Coronavirus than not.
UK wise, it feels at the moment as if our emergence from lockdown and the resumption of economic activity will continue to be a slow and steady affair.
This however, continues to impact massively on commerce locally and internationally, creating disruption in the workforce and in supply chains, meaning that some businesses cannot trade at all and severely curtailing the economic activities of others.
Disputes are inevitable in the context of such unprecedented commercial turmoil, which for many will seem like (and may in fact be) a fight for survival. Unless resolved by compromise, those disputes are likely to lead to an outcome where one party wins and the other party loses.
Paragraph 3 of the note states:
“This note sets out guidance and recommendations for contractual behaviour where impacted by the Covid-19 emergency. In summary, the Government is strongly encouraging all individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts, to support the response to Covid-19 and to protect jobs and the economy.”
Unlike some jurisdictions, which have been proactive and introduced primary legislation obliging parties to certain contracts (including commercial ones) to give each other breathing space to get through the crisis, the UK government has been more circumspect.
Other than via private law matters via, for example, the furlough scheme, the moratorium on the forfeiture of tenancies and requirements as to forbearance in consumer finance arrangements, it has steered clear of any meaningful intervention in commerce, which continues to be based on the freedom of businesses to contract with each other – until now.
So what to make of this guidance?
To start with, in the current environment, many businesses are already starting to think from the outset in terms of compromise on a contractual matter, in parallel with the legal merits.
Issues around what scope there may be for compromise, whether service levels or levels of supply could be temporarily reduced, whether payment terms could be temporarily relaxed are no less important to consider and get advice on than, for example, technical legal advice from us on the operation of a Force Majeure clause.
That is not to say however, that contracts should be ignored. Parties should always build and make sure they have sound and effective agreements and processes, consider their contracts carefully and take advice as to their legal rights and obligations.
This includes being alive to related matters such as their insurance position, including the existence of any trade credit insurance policies. These policies typically provide protection against non-payment of trade debts due to counterparty insolvency or default, and any business with a trade credit insurance policy should review and seek advice as to its terms in conjunction with any decision-making about how to respond to events likely to be covered by the policy.
In terms of the UK government note, it has no legal status in relation to the resolution of contractual disputes and its recommendations run counter to the fundamental principle of freedom of contract.
We continue to support all of our clients with creating good templates and process with the commercial team that I work as part of (https://www.spiresolicitors.co.uk/business-services/corporate-and-commercial-law/) and also advising on contractual issues via the experienced specialists in our dispute resolution team (https://www.spiresolicitors.co.uk/individual-services/dispute-resolution/.
For all the sensible thinking behind the Cabinet Office note though, unless and until there is any legislation in this jurisdiction, parties to commercial contracts are still very much on their own.
Is it realistic I wonder, to expect individual businesses, which in many cases are facing a genuine and significant threat to their viability in the short term, to prioritise the greater good or the longer term view over the immediate crisis?
The key advice to you has to be that:
- Your contractual agreements and processes are as robust as possible to avoid the issues arising in the first place; and
- If contract issues do arise, to take early and full advice via our dispute resolution team.
The Coronavirus has proven itself to be the mother of a number of modernisations and innovations in many aspects of the business of law and legal services – I hope that businesses looking holistically at their contractual processes will ensure that as many functioning commercial relationships as possible are preserved for the better days that we all hope lie ahead.
Stay safe and well.