Commercial Contracts & Acting Responsibly

In May 2020 the government released guidance on the conduct and enforcement of contractual arrangements impacted by the Covid-19 pandemic. The guidance is intended to protect supply chains, preserve economic and commercial activity and ensure the continued economic viability of as many UK businesses as possible. 

The guidance is however non-statutory, meaning that it cannot directly override contractual rights and obligations that parties have signed up to. Instead, it expresses a wish that that parties must act ‘responsibly and fairly’ when performing and enforcing contracts.  

So what exactly is meant by ‘responsible and fair behaviour’, and how are businesses expected to act? 

Responsible and fair behaviour

This is a new concept in the administration of commercial contracts, and at a glance appears almost entirely subjective in its application. English contract law doesn’t have rules obliging parties to act either ‘fairly’ or ‘responsibly’ for the practical reason that the legal interpretation and application would be easy to draw too wide, creating vague or unreasonable expectations.

The new guidance gives specific examples of responsible and fair behaviour including:

• Requesting and allowing for extensions of time;
• Responding to or addressing force majeure notices;
• Observing prompt payment terms;
• Engaging in mediation or alternative dispute resolution at an early instance.

In practice, the first three examples will have limited impact, as well-drafted contracts will already include provisions on force majeure, timings and payment terms. Many contracts also allow the option for the parties to vary the terms by mutual agreement, in writing.

The fourth example suggests that the government wishes to keep disputes out of the (already very overstretched) courts. The implication is that it would be nice for businesses to engage in constructive discussions or mediation regarding contractual changes rather than resorting to litigation. 

Does the guidance impose a duty of ‘Good Faith’?

The duty of ‘good faith’ as applied to commercial contracts comes in three flavours - general, implied and specific.

General Duty

The government’s guidance appears to suggest a general duty to act in ‘good faith’. This usually means:

• Observing realistic commercial standards of fair dealings
• Acting in accordance with the other party’s reasonable expectations 
• Adhering to the general intention of a contract

While this all sounds fair and sensible, it is unlikely to have much practical impact as English law also doesn’t impose a general duty of ‘good faith’. This means there is no strict definition to apply, and contractual provisions requiring either party to act generally in ‘good faith’ are usually considered too subjective and therefore ineffective. This ultimately means that any disputes will still have to be resolved in the courts if other forms of negotiation or mediation are unsuccessful.

Implied Duty

In some cases, the courts will also enforce an implied obligation to act in ‘good faith’ by inserting terms into a commercial contract. This happens in very limited circumstances and must meet the normal requirements for implying terms into a contract, i.e. 

• The term is so apparently obvious to the dealing, that it need not be said
• It is necessary to give commercial efficacy to the contract

The implied duty of ‘good faith’ is usually (but still rarely) enforced within relational contracts, where the parties must co-operate, communicate and work together on a longer-term basis, with a substantial degree of commitment. Examples would include Joint Venture agreements or long-term distributorship agreements. The new government guidance might wish to broaden this to a wider range of cases, but without being more specific and having the force of law, the fallback position would still be that only the courts could imply terms into contracts.

Specific Duty

Contracts can also include specific provisions requiring parties to act in ‘good faith’, but to be effective these must clearly identify the term, obligation or provision to which they apply. The new guidance will not have the legal force to override specific provisions like these.

How this works in practice

While undoubtedly well-intentioned, the new government guidance appears at first to be a toothless instrument, lacking specific and legally binding rules. 

However, we believe it would be a mistake to assume that nothing has changed. We will soon see the first cases tested in the courts and if businesses continue rigidly to enforce contracts as they did pre-Covid they risk their actions being seen as disproportionate. We may also see the courts take a harsher view in industries more seriously affected by Covid-19.

For businesses struggling with their supply chains, we suggest a degree of caution before going straight to the courts to enforce contractual rights. More than ever it is good practice to try and resolve issues through dialogue or mediation first. One final cautionary note though – be reasonable, but be very careful not to give up any fundamental contractual rights which you know you will have to rely on in the future.

About the Author:

Evie Clemance is a Corporate and Commercial Property Associate at Backhouse Solicitors. Located in the city of Chelmsford, Backhouse Solicitors helps thousands of businesses and individuals solve their legal problems each year.