On 7 May, the Cabinet Office issued a guidance note on responsible contractual behaviour in circumstances where the Covid-19 emergency has a material impact on a party’s performance of a contract (the ‘Guidance’)…

The Guidance has general application covering both the public and private sectors active in the rail industry, with the exception of the devolved administrations in Scotland, Wales and Northern Ireland. Where specific guidance on any matters has been issued by the Government, that specific guidance takes precedence, but otherwise parties should take account of the requirements in the Guidance.

The Guidance has been published to help organisations face the extraordinary challenges of the Covid-19 pandemic and to encourage all individuals, businesses and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts. It acknowledges that requirements placed on individuals to change working patterns and for most businesses, at the very least, to alter working practices, will put a strain on many contractual relationships.

A request to act responsibly and fairly

One thing that the Guidance does not do is replace any of the specific rights and remedies that parties have in their contracts. These still remain and can be used to enforce delivery or payment obligations or to try and apply remedies and reliefs, such as force majeure. However, enforcing rights or trying to obtain contractual remedies takes time and is not always as effective as it seems when the contract is drafted. Solutions to the unique challenges presented by the Covid-19 pandemic are, in most cases, required now and not in the many weeks or months it could take to obtain a contractual remedy.

The Guidance sets out a number of areas in respect of which responsible and fair behaviour is strongly encouraged. These include:

• Requesting, and giving, relief for impaired performance – including time for delivery and completion, nature and scope of goods, works or services, the making of payments and the operation of payment and performance mechanisms.

• Requesting, and allowing, extensions of time, substitute or alternative performance and compensation (including compensation for increased cost or additional performance.

• Making, and responding to, force majeure, frustration, change in law, relief event, delay event, compensation event and excusing clause claims.

• Requesting, and making, payment under the contract.

• Making, and responding to, claims for damages, including under liquidated damages provisions.

• Exercising remedies in respect of impaired performance – including enforcement of security, forfeiture or repossession of property, calling of bonds or guarantees or the initiation or continuation of insolvency or winding up procedures.

• Claiming breach of contract and enforcing events of default and termination provisions.

• Making, and responding to, requests for contract changes and variations.

Where there are contractual disputes, the Guidance strongly encourages parties to seek to resolve such disputes responsibly. This focuses on negotiation, mediation or other, alternative or fast-track dispute resolution. Using the courts is discouraged as in comparison with these other solutions they are relatively slow and expensive.

Record the outcome

A key area for any party following the spirit of the Guidance is to accurately and adequately record in writing what the issue was and what the parties agreed as the outcome. The risk is that while there is the current push to act responsibly, once the Covid-19 emergency is no longer so intense, the joint effort to manage contracts effectively may be forgotten. This is particularly so if the parties continue to struggle to meet their contractual commitments. If there is no written record it is much more difficult to show that extensions of time have been given or changes to scope agreed.

The Guidance itself does not change the contractual relationship between the parties or the terms of the contract. It works through the parties agreeing to accept changes in the way in which the contract is performed. It requires actions by both parties and communication is the key. If it looks like there will be problems in meeting a contractual commitment, the relevant party should flag the problem sooner rather than later. It is the responsible thing to do in the circumstances and potentially help can be provided without a problem becoming a crisis.

It should be noted that the Guidance does not require relief to be given for general poor performance. The Guidance is clear that it is designed to deal with the effects of the Covid-19 pandemic. It is not a ‘get out of jail free’ card to be used to simply avoid obligations or change a commercial position. The contractual terms still exist and can be used to seek damages, apply payments for poor performance or even terminate the contract if appropriate to do so.

Looking at the bigger picture

Many organisations in the rail industry have long standing relationships with customers and clients. How the relevant contracting parties behave now is likely to influence how each party views and applies contractual rights and remedies once the pandemic has subsided and a level of operational normality has returned. By having an alternative way of dealing with issues, contract managers are provided with a level of support to consider solutions which look at the medium and longer term as well as the short term. There is also a greater level of certainty that if an organisation looks to deal with its counterparties as recommended in the Guidance, those counterparties will do the same.

The Guidance is clear that it expects all contracting parties to behave, not just in accordance with their own self-interest, but to also take account of a higher national interest in supporting the country’s response to the Covid-19 pandemic. How this shows itself in a practical application will not be known for some weeks, but by then it may provide a good indication as to how easily the country will emerge from the pandemic and its associated economic downturn.

Martin Fleetwood is a Consultant at Addleshaw Goddard’s Transport practice. The Rail Team has over 30 lawyers who advise clients in both the private and public sectors across a wide range of legal areas. As well as contractual issues, the team advises on operational matters, franchises, concessions, finance, regulatory, property, employment, environmental and procurement issues.

Disclaimer: This article is for informational purposes only and does not constitute legal

advice. It is recommended that specific professional advice is sought before acting on

any of the information given.