A party seeking to restrict another's commercial activities must consider whether such terms are normal in similar, factual and contractual circumstances.
It is perhaps a measure of these unusual times that the UK Government has published guidance that essentially asks business to “play nicely”.
The Cabinet Office has published guidance asking individuals, businesses (including funders) and public authorities to act responsibly and fairly and “in the national interest” in performing and enforcing their contracts.
The guidance asks parties to contracts to support the individual personal responses to Covid-19 and protect jobs and the economy by engaging in “responsible and fair behaviour”, whilst the Government faces criticism that its own financial support schemes are an “implicit bail-out for banks and landlords” and failing to protect those on the frontline.
What does responsible contractual behaviour look like?
The Government gives explicit examples of areas contracting parties are asked to improve, including:
- fulfilling your obligations as best you can in the circumstances and maintaining cashflow by paying invoices promptly;
- minimising disputes and being flexible where performance is reduced or delayed but still effective;
- returning deposits or part payments and not punishing another party for circumstances beyond their control;
- protecting effective supply chains and market structure even if there are temporary weaknesses due to insolvency;
- keeping accurate records and sharing information without delay;
- doing business in a way which is sustainable in the long-term to enable economic recovery after the Covid-19 outbreak.
These suggestions will come as no surprise to organisations who have already invested in their commercial relationships. Supply chains thrive where contracts fairly apportion risk and reward collaborative working; contracts are a key tool in establishing those expectations at the outset.
What is unusual is the suggestion that the Government will “review behaviours in contracting, including public sector procurement, performance, prompt payment and contract management arrangements”. Whilst market behaviour can be scrutinised by the Competition and Markets Authority, procurement, performance, prompt payment and contract management are typically matters for the Courts.
Creating a duty of ‘good faith’?
The guidance has many similarities with the principle of ‘good faith’ (which does not automatically apply to contracts in England and Wales) where the parties can act in their own self-interests and prioritise their own commercial interests, but these must not be pursued at the expense of honesty, fair dealing and integrity. However, the guidance is not enforceable or intended to override specific guidance, procurement policy notes, legal or regulatory obligations. Instead, it is a political plea to strongly encourage good behaviour and avoid ‘bad behaviour’. The guidance doesn’t discourage parties from exercising remedies in respect of impaired performance or claiming breach of contract and enforcing events of default and termination but asks that parties act reasonably and proportionately in responding to performance issues and enforcing contracts.
Parties who fail to acknowledge the inter-dependency of their market, may find that maximising profits results in long-term damage to their economic recovery. Take financial advantage of your suppliers and you’ll soon find yourself unable to source key materials.
Objectives of responsible and fair behaviour
There are limited financial reserves available and the guidance adds to the existing difficulty of balancing the competing interests of shareholders, beneficiaries, regulators and investors. However, it is also a reminder that contractors, customers and employees are all feeling the effects of the Covid-19 outbreak. Once organisations have satisfied their own legal duties, a just and equitable approach to contract management can serve as an investment in its own economic ecosystem.
It will be interesting to observe how much appetite the Government has to rein in market practice, and whether these expectations of “responsible and fair behaviour” will be put on a more enforceable, statutory footing in the future.
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