Balancing legal rights and commercial sensitivity when enforcing contracts in the COVID-19 era

Speaker, Negotiator and Contracting Expert, Tiffany Kemp from Devant discusses the challenges of managing contracts during COVID-19

How many times in a normal week would you refer to a contract?

If you’re in a business management, sales or operational role, I’d expect that to be a very small number. It might even be zero, on the basis that “you only take the contract out of the drawer if things have gone badly wrong!”

Since the beginning of lockdown, many business professionals have found themselves crawling over contracts far more often than they’d like.

They’ve been worrying about issues that have arisen because of COVID-19:
• How to get out of contracts for services the business can no longer afford
• Problems meeting commitments because staff, materials or other resources are not available
• Customers cancelling or postponing events, orders and contracts

When faced with these challenges, it’s important to have a clear understanding of what your legal rights and obligations are. The contract is a great starting point for this, but you might also need to look at your email correspondence, published documents and legislation.

How do you know what you’re entitled to?

Remember that a contract is just an agreement that is enforceable through the courts – effectively, it’s the arrangement made by you and your customer or supplier, setting out how you’ll work together. If it’s not clear, or is poorly written, it could be difficult to identify your rights or obligations with any certainty. This means there’s a good chance that the other party to the contract may have a different view to yours. Deciding which of you is correct can be a drawn out and painful exercise.

Ultimately, the only way to be absolutely sure what rights or liabilities you have (if you and your counter-party can’t agree) is to go to court. This is time consuming, expensive, uncertain and disruptive, so it’s not surprising many businesses will go to great lengths to negotiate a settlement rather than litigating their dispute. So how hard should you push, to enforce what you believe you’re entitled to?

Should a contract be ‘fair’? And do we have to act ‘fairly’ in enforcing it?

Historically, English law was based on freedom of contract – the principle that contracting parties of equal bargaining power could agree pretty much anything, even if it represented a bad bargain for one of them. It was also expected that the courts would enforce the agreement as drafted, rather than attempting to make it ‘fair’.

Many European legal systems incorporate the concept of ‘good faith’, under which each party is expected to deal honestly and fairly, and not to deliberately act so as to disadvantage the other. English law doesn’t share this expectation. Under English law, you’re perfectly entitled to act entirely in your own self-interest, even if it significantly disadvantages the other party.

This suggests that you should push as hard as you possibly can to enforce whatever rights you might have under a contract, to get the best outcome for your organisation regardless of the consequences for the other party.

Recent guidelines published by the UK Government (Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency) suggest that the current pandemic has moved the goalposts in contract enforcement.

The new Government guidance (which isn’t legally binding) suggests that companies should demonstrate ‘responsible and fair behaviour in contractual arrangements’. In particular, it suggests this should apply to the way we deal with problems in contractual performance and making claims, where issues have been caused by COVID-19.

How can we use the Guidance to help us negotiate an agreed way forward?

Non-binding Government guidance can be a double-edged sword. On the one hand, if your contractual position isn’t especially strong, and you are seeking some help and support from the other contracting party, it could be useful to point them at the Guidance. Asking them to be ‘responsible and fair’ in their dealings with you could encourage them to overlook the fact that they’re entitled to terminate your contract because of your late payment, and agree to a revised payment plan, or a payment holiday, instead.

On the other hand, if you’re well within your legal rights to terminate a contract that no longer works for you, but your termination will cause significant harm to the other party (potentially leading to their business failure), you may feel under pressure NOT to act in your own self-interest, but to take their needs into account too.

So in this C-19 era, you might want to consider looking at the broader picture, rather than just your contract, in deciding which rights and obligations you’re going to enforce. Think about acting with a little more humanity, a little more ‘good faith’, and less self-interest. Because even though the Government Guidance is non-binding, the reaction of several retired judges suggests that it may influence the outcomes of commercial cases over the coming months. Companies that have shown ‘responsible and fair behaviour’ may well find that the courts give them the benefit of the doubt over their more hard-nosed counterparties. Perhaps the tide is turning, and being one of the ‘good guys’ will finally pay off.