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Freedom of contract: Does it still exist?


A provocative title, to be sure.

But on 7 May 2020, HM Government published through the Cabinet Office a document entitled “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency” (the “Note”)

It is important to state that this represents ‘guidance’ only. It is not any part of Statute law.

Paragraph 3 of the Note states:

“This note sets out guidance and recommendations for contractual behaviour where impacted by the Covid-19 emergency. In summary, the Government is strongly encouraging all individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts, to support the response to Covid-19 and to protect jobs and the economy.”

Paragraph 6 of the Note provides:

“This note sets out guidance and recommendations for parties to contracts, in both the public and private sectors, where the performance of contracts (including an obligation to make payment) is materially impacted by the Covid-19 emergency. It is non-statutory guidance but Government strongly encourages parties to contracts to follow this guidance for their collective benefit and for the long-term benefit of the UK economy.”

Confusingly, paragraph 7 of the Note states (in part) that:

“Whilst this guidance has general application to all active contractual arrangements materially impacted by Covid-19, it is guidance only and is not intended to override:              …

(b) any specific support or relief available:

(i) in the relevant contract (for example relief given in express provisions in the contract),

(ii) in law, custom or practice (including any equitable relief), …

(c) any other legal duties or obligations with which a party to a contract is bound to comply…”

Even more confusingly, paragraph 8 states:

“It is not intended to override specific contracts whose primary purpose is to make express and clear provision for, and allocate risks in respect of, the effects of global or national public health emergencies or pandemics, especially contracts of insurance, although the Government would encourage responsible and fair behaviour where possible.”

The, under the heading “Responsible and fair contractual behaviour” the following is stated:

“14. Responsible and fair behaviour is strongly encouraged in performing and enforcing contracts where there has been a material impact from Covid-19. This includes being reasonable and proportionate in responding to performance issues and enforcing contracts (including dealing with any disputes), acting in a spirit of co-operation and aiming to achieve practical, just and equitable contractual outcomes having regard to the impact on the other party (or parties), the availability of financial resources, the protection of public health and the national interest.

  1. In particular, responsible and fair behaviour is strongly encouraged in relation to the following:

(a) requesting, and giving, relief for impaired performance, including in respect of the time for delivery and completion, the nature and scope of goods, works and services, the making of payments and the operation of payment and performance mechanisms;

(b) requesting, and allowing, extensions of time, substitute or alternative performance and compensation, including compensation for increased cost or additional performance;

(c) making, and responding to, force majeure, frustration, change in law, relief event, delay event, compensation event and excusing cause claims;

(d) requesting, and making, payment under the contract;

(e) making, and responding to, claims for damages, including under liquidated damages provisions;

(f) returning deposits or part payments;

(g) 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 (or equivalent) proceedings;

(h) claiming breach of contract and enforcing events of default and termination provisions (including termination rights arising by reason of the insolvency or potential insolvency of a party);

(i) making, and responding to, requests for information and data under the contract;

(j) giving notices, keeping records and providing reports under the contract (recognising that the need to keep records of contractual behaviours and decisions, including the behaviours referred to in this guidance, is important);

(k) making, and responding to, requests for contract changes and variations;

(l) making, and responding to, requests for consents (including funder consents);

(m) commencing, and continuing, formal dispute resolution procedures, including proceedings in court;

(n) requesting, and responding to, requests for mediation or other alternative or fast-track dispute resolution; and

(o) enforcing judgments.

Paragraph 16 of the Note states:

“The responsible and fair behaviour described in paragraphs 14 and 15 should continue to apply in circumstances where the relevant contract is materially impacted by Covid-19, so that fair and equitable outcomes can be achieved in contractual arrangements and the objectives described in paragraph 13 can be met.”

Paragraph 17 of the Note then advises against litigation (or arbitration) and instead recommends ADR to resolve disputes.

I comment as follows on this extraordinary Note:

  • The legal status of this Note appears to be nil. It amounts only to Government advice and recommendation, which has no legal status in relation to the resolution of contractual disputes.
  • The recommendations in the Note fly in the face of the fundamental principle of freedom of contract.
  • The reference in paragraphs 7 and 8 to it not being intended to override certain matters does no more than state the obvious. If the inference is that – aside from the matters set out in paragraph 7 and 8 – it is ‘intended to override’ other aspects of the parties’ contracts, then such inference is valueless and has no legal force or effect.
  • No explanation – in relation to remedies – is given as to how the Note is intended to operate as regards the operation of binding Statute law, viz. the Law Reform (Frustrated Contracts) Act 1943.
  • No explanation is given as to the sanctions for what may be perceived (by whom?) to be non-responsible or non-fair behaviour by a contracting party? It is difficult to conceive of what the sanction might be? Or is the Government intending to direct Courts and Tribunals not to grant remedies to which contracting parties are otherwise entitled?
  • If the Government wishes to intervene, then the only appropriate way so to do is by way of Parliamentary legislation. Paragraph 23 of the Note refers to the possibility of bringing forward legislation, but it is not explained why an appropriate Government Bill has not already been brought forward.
  • None of this is to say that every sympathy should not go out to contracting parties caught up in the present terrible situation. But the way forward is to legislate, not to publish non-binding and non-enforceable advice.

Link to the Note:

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