“We’re all in this together”: Performing or enforcing commercial contracts affected by COVID-19

Posted on May 20, 2020
Posted by Marion Kennedy

When Rishi Sunak revived George Osborne’s famous “we are all in this together” slogan, he was talking specifically about the economic support measures available to businesses affected by COVID-19. Based on the latest Government guidance on commercial contracts affected by COVID-19, that collaborative spirit very much extends to the way in which the Government expects contractual (non-)performance to be managed by businesses as the pandemic rolls into the summer months. 

COVID-19 has created the ‘perfect storm’ of challenges for businesses to overcome. Lockdown and social-distancing restrictions, outbreaks of illness in the workforce, restrictions on movement of goods, compliance with COVID-Secure guidelines, and the temporary closure of many workplaces have all caused severe disruption – and in many cases growing cash-flow issues – for businesses throughout the UK. 

Acknowledging this ‘across the board’ disruption, and channeling the Sunak/Osborne mantra, the Government has published guidancestrongly encouraging” businesses to adopt a “reasonable and fair” approach when managing legal contracts and agreements which have been affected by COVID-19 – “in particular in dealing with potential disputes.

What is “reasonable and fair” will of course depend on the specific terms of your contract and the way in which COVID-19 has impacted it. Below, we set out five key steps your business might consider taking in light of the guidance – with an important caveat. Ultimately, the new guidance is advisory in nature, and the terms of the contracts you have agreed will (in the absence of a change to the law) continue to have full legal force. Whilst a more collaborative, less combative, approach to resolving disputes should be welcomed, businesses should not disregard their contractual legal obligations or use the guidance as an excuse to re-negotiate terms they have historically disliked. 

 

1. Review your contracts and understand the terms

Perhaps an obvious first step, but you should ensure you understand the terms of your key commercial contracts. Reviewing your contracts will enable you to identify which are most at risk of COVID-19 disruption, and what the default position is under each of those contracts. Rather than using this as the basis for legal threats or action, however, the guidance suggests this default position should be the starting point for a more collaborative discussion about the contract and its underlying purpose. Any potential disruption or contractual issues should be managed pro-actively, rather than responded to reactively. 

 

2. Be understanding about delays and performance issues caused by COVID-19

If COVID-19 renders you, or a business you are contracting with, unable to supply goods or services by the agreed date under a contract, or in full or to the usual standard, a “fair and reasonable” resolution should be sought. The guidance recommends that businesses should be flexible in accepting practical alternatives to normal service, acting in a spirit of co-operation. Rather than taking a combative approach to performance issues, in the first instance you should try to seek a reasonable solution which works for your business. Accepting a temporarily reduced level of service for a proportionate reduction in price, may be fair. In other cases, simply accepting a reasonable delay or alternative delivery date might be more reasonable if there is good reason for it and it does not adversely impact your business. Always remember, however, that unless you agree otherwise the terms of your contract will continue to have legal effect. It is also important to bear in mind that, where changes to contractual terms are intended to be a ‘one off’, it should be made clear in writing that this is the case and that temporary changes do not constitute a waiver of existing rights and obligations going forward. 

3. Consider more flexible payment terms

Businesses are increasingly facing cash-flow issues as a result of COVID-19, and payment terms which were acceptable in the “pre-COVID” world may now be unworkable. If your business, or a business you are expecting payment from, has temporarily stopped trading, or significantly reduced its operations due to COVID-19, the guidance recommends an understanding approach. Structuring a lump-sum payment in reasonable instalments, agreeing an alternative price or payment method, or simply allowing additional time to pay, might all be considered before demanding payment. In each case, in situations where COVID-19 has had a material impact, it will be better to engage in discussion pro-actively before payment is due rather than waiting until a payment is late before making contact. If you do find yourself in a situation where payment is late, see our Q&A on Dealing with late payments without going to court for further guidance about your options.

 

4. Find alternative ways of resolving disputes

In the current climate, even if you adopt the pro-active and collaborative approach recommended by the guidance, business disputes are inevitable. The Government guidance has been published in the expectation that the number and frequency of disputes will increase in weeks and months to come. If you are unable to agree a way forward in the first instance, rather than resorting straight to legal threats and aggressive pursuit of debts, you should seek alternative mechanisms for resolving disputes before they escalate. Further negotiation, mediation and other fast-track dispute resolution mechanisms can help avoid costly and destructive legal disputes. Embarking on legal proceedings which could drive a distressed business into insolvency is likely to serve little practical purpose, and is strongly discouraged. See our Q&A on Handling and resolving disputes for further .

 

5. Don’t let your guard down too far…

Remember, however, that ultimately this guidance is only advisory in nature. It does not replace the terms of individual contracts you have negotiated, nor does it relieve you from liability under a contract where you have failed to perform your obligations. Although the Government is keen to encourage businesses to work together and avoid resorting to legal claims to resolve disputes, at present it is unclear to what extent (if at all) the courts will interpret or use this guidance in COVID-related commercial disputes. In addition, you do not want to leave your business in a position where your forbearance causes cash-flow difficulties of your own. Remember that the intention of the guidance is to mitigate the impact of COVID-19, rather than to re-write legal agreements or initiate an across the board re-negotiation of existing commercial contracts. 

 

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