Still play nicely – contractual performance in the time of COVID-19: an update

England and Wales

Businesses continue to face a challenging environment owing to the global COVID-19 crisis and consequent measures introduced by governments worldwide. The scope and nature of these measures is constantly evolving, with the focus now shifting to an easing of restrictions and facilitating a bounce back of the economy. As part of their response to such measures, businesses will be continuing to look at how best to deal with potential contractual disputes, or considering if some contracts can be terminated.

The UK Government has taken various steps aimed at protecting businesses that may be impacted by COVID-19. A summary of the key provisions that were in force as at 21 May 2020 can be found here. Here, we provide an update on some of the issues summarised in that Law-Now.

The Government Guidance

On 30 June 2020, the Cabinet Office published an update (“Update”) to its guidance on ‘responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency’, first published on 7 May 2020 (“Guidance”). The Update makes clear at the outset that, unless specifically amended, the provisions of the Guidance will continue to apply. It re-iterates that both the Guidance and the Update are non-statutory. The Update again emphasises that parties to contracts should “act responsibly and fairly, support the response to COVID-19 and protect jobs and the economy”. The Update deals with three ‘issues’, which are set out in turn below.

  • Payment – Parties are strongly encouraged to make “prompt payments in accordance with contractual terms, legal requirements and applicable guidance”. This is especially important where the receiving party is an SME or an individual. It also recognises that “more work continues to be required to improve payment culture in the UK”.
  • Extensions of time – In light of the challenges that may be faced by businesses in fulfilling their contractual obligations as a result of illness, restrictions on movement of people and goods, or modifications to the ways of working, contractual parties should “consider carefully, and reasonably, what reliefs may be available”. This may include an extension of time or considering whether terms should be renegotiated.
  • Avoidance and resolution of disputes – Before instituting formal proceedings, parties should consider if affected contractual arrangements can be modified by an “equitable adjustment or accommodation”. Parties are also strongly encouraged to resolve disputes through negotiation, mediation or early neutral evaluation. Other options include fast-track dispute resolution procedures, such as the Pandemic Business Dispute Resolution Service developed by the Centre for Effective Dispute Resolution (CEDR) and CIArb. Finally, parties are asked to consider how they deal with potential disputes given the current circumstances, including signing up to initiatives such as the RICS Conflict Avoidance Pledge.

Although non-binding, parties may well refer to the Guidance and Update in their discussions with counterparties, particularly in light of the emphasis on avoiding commencing formal proceedings where possible, paying promptly where obliged to do so and considering, where appropriate, reasonable requests for extensions of time as set out above.

Corporate Insolvency and Governance Act

The Corporate Insolvency and Governance Bill, the relevant provisions of which were summarised in our previous Law-Now, received Royal Assent and became an Act on 25 June 2020 (“Act”). The key provisions of the Act are summarised here. The aim of the Act is to prevent struggling businesses being forced into an insolvency process because of problems caused by COVID-19. It will impact the tactical steps that might otherwise be adopted in the course of a dispute, in particular in relation to statutory demands and winding up petitions, as follows:

  • If a statutory demand is served between 1 March 2020 and 30 September 2020, it cannot be used as the basis of a winding up petition presented on or after 27 April 2020.
  • If the basis of a winding petition is a statutory demand served before 1 March 2020, or one of the other grounds in the Insolvency Act 1986, the petition may be presented between 27 April 2020 and 30 September 2020 only if the petitioner has reasonable grounds to believe that (i) COVID-19  has not had a financial effect on the company; or (ii) where the underlying facts leading to the alleged non-payment would have arisen in any event.
  • In any case, where it appears to the court that COVID-19 had a financial effect on the company before the presentation of the winding up petition, the court cannot make a winding up order unless it is satisfied that the basis for the petition would apply even if COVID-19 had not had a financial effect on the company.

Even before the Act came into force, the courts were taking its provisions into account in their judgments.  The two cases of Re a Company [2020] EWHC 1406 (Ch) and Re a Company [2020] EWHC 1551 (Ch) resulted in the court granting injunctions preventing the petitioners from presenting or advertising their winding up petitions, on the assumption that provisions in the Bill would remain the same in the Act.

In the first case, the Judge decided that on the evidence there was a strong case that COVID-19 had had a financial effect on the company, and that the facts on which the petition would be based would not have arisen but for the financial effect of COVID-19 on the company. The Judge concluded that the grant of an injunction to restrain the presentation of the petition was powerfully supported by the clear policy objectives of the Bill.

The second case provides some helpful guidance on how the provisions in the Act will be interpreted. As to the question of whether the winding up petition may be presented, the Judge considered how a petitioner would make out the test described above, namely that it has reasonable grounds for believing (i) that COVID-19 has not had a financial impact on the company, or (ii) that the relevant provision of the Insolvency Act 1986 would apply even if COVID-19 had not had a financial effect on the company. The Judge acknowledged that few petitioners would be able to demonstrate (i); and that in determining whether it has reasonable grounds to believe (ii), account is to be taken of the events known to the petitioner as at the date of presentation of the petition.

In relation to whether it could make a winding up order, the court was firstly required to consider whether it appeared that COVID-19 had a financial effect on the company before the presentation of the petition. The court held that the evidential burden of showing such a financial effect is on the company and not on the petitioner. This was found to be a low threshold – the requirement is that ‘a’ financial effect must be shown, the pandemic need not be the (or even a) cause of the company’s insolvency.

Secondly, the court needed to determine if it was satisfied that the facts or grounds underlying the winding up petition would have arisen irrespective of COVID-19. The Judge concluded in this case that unless further evidence on this issue were to be produced, the court could not be satisfied that the underlying ground would apply in any event and therefore there was no real chance of a winding up order being made on the petition. To permit its advertisement would be oppressive and unfair, such that it was appropriate to order an interim injunction preventing such advertisement.

We anticipate that there will be further case law as businesses seek to benefit from the new protections offered by the Act.

Procurement Policy Notes

Part of the Government’s response to the pandemic included the publication of two Procurement Policy Notes aimed at supplier relief. While these notes provide information and guidance for public bodies only, they contain guidance that may well be useful for all businesses in considering how best to handle supplier issues caused by COVID-19 and transition to a new sustainable contracting framework.

On 20 March 2020, the Cabinet Office issued a Procurement Policy Note (“PPN 02”) requiring public authorities to accelerate their payment practice from the usual 30-day period, and pay suppliers “as quickly as possible” so that cash flow is maintained and jobs are protected. Other measures of supporting suppliers included “payment against revised/extended milestones or timescales, interim payments, forward ordering, payment on order or payment in advance/prepayment”. On 25 June 2020, a further Procurement Policy Note (“PPN 04”) was issued with the aim of ‘recovery and transition from COVID-19’, effective from 1 July 2020 to 31 October 2020.  The Government announced that the provisions of PPN 02 and PPN 04 also apply to PFI, PPP and PF2 contracts. While noting that the supplier relief provisions in PPN 02 may still be appropriate, PPN 04 includes the following further provisions:

  • Public authorities and suppliers now need to work in partnership to “plan an eventual exit from any relief and transition to a new, sustainable, operating model taking into account strategic and reprioritisation needs”.
  • If a public authority considers that a contract is no longer viable, it should cooperate with the supplier in seeking to terminate the contract. However, the authority is required to have reasonable expectations around transfer of risk and cost, as there is otherwise likely to be an “increase [in] the probability of contract failures and may mean suppliers exit the market and weaken competition”.
  • Treasury consent is granted for payment of suppliers, of up to 25% of the total value of the contract, in advance of need where “the Accounting Officer is satisfied that a value for money case is made by virtue of securing continuity of supply of critical services in the medium and long term”. However, it is emphasised that suppliers are “not automatically entitled to payment or other relief”.

Comment

The overarching message continues to be one of support by the Government and encouraged cooperation among parties. Businesses will likely find it helpful to take the above provisions into account when entering into any negotiations with a counterparty. For those involved in contractual arrangements with a public authority, they should also familiarise themselves with any obligations imposed on the authority by the PPNs. Businesses may wish to take other measures to safeguard their interests and mitigate their risk, particularly in the absence of certain remedies now precluded by statute. Consideration should be given to the protection and enforcement of other legal rights, which may still be available.

Links to the key documents are below: