Resolving contractual breaches during COVID-19: Judges call for a 'creative' approach

It is sometimes said that commercial parties 'only take their contracts out of the drawer when things go wrong'. If so, recent events may be causing parties who are used to dealing with each other on a constructive commercial footing to dust off their contracts and assess their options. For those struggling to perform their contracts, they may be considering arguments around force majeure, frustration, change of law, termination and variation rights. For those looking at how to enforce contractual performance, this might include leveraging the position of liquidated damages or service credits, rebutting the other parties’ arguments for non-performance, and taking a hard line on variations. Where parties cannot agree a way ahead they may be tempted to pursue litigation.

In this context it is particularly interesting that leading judicial figures are publicly asking whether, '[a litigated] outcome which leaves one party a winner, and the other a loser, will not take full account of the market/social contextualisation of the crisis. Is there a case for adopting a more creative, graded, but nevertheless rigorous approach, without prejudicing legal certainty'?

This question was asked by two former Presidents of the UK’s highest Court and a group of leading legal thinkers in a recently published Concept Note. The Note has no legal weight as such, but it represents the view of some persuasive legal voices and it taps into a number of issues which had already gained strong traction in the Courts before the pandemic began.

Drive towards alternative dispute resolution

The Note calls on the Courts to further 'encourage' the use of alternative dispute resolution mechanisms, with litigation as a last resort. The Courts appreciate that such mechanisms have the distinct advantage of allowing solutions to be reached, potentially freed from the shackles of strict contractual interpretation, enabling a fairer and more equitable solution, and allowing the commercial relationship to continue.

Exactly how the Court might further 'encourage' such mechanisms remains to be seen. However, the Court rules already contain various levers that could be used to push parties in this direction. In particular, in recent cases even before the pandemic, the Court has severely restricted the ability of a winning party to recover their legal costs where, in the Court's view, there had been an unreasonable refusal to pursue alternative dispute resolution. Perhaps we will see this develop further.

Prominence to 'good faith' in contracts

The Note expressly links into a piece of persuasive thinking by another judge of the UK’s highest Court, Mr Justice Leggatt, who called for further development of the law of 'good faith' in English contracts. He made the case, that contracts forming part of longer term commercial relationships (which he called 'relational contracts') should contain a 'duty to cooperate' (or at least a duty not to engage 'in conduct that would be regarded as 'commercially unacceptable' by reasonable and honest people'). With impressive prescience given the pandemic, he noted that 'it is impossible to foresee and to provide in express terms for all the contingencies that may occur during the performance of a contract – especially when the contractual relationship is intended to endure for a long time and where the performance of the contract requires complex interactions between the parties.' He argued that good faith obligations should guide the parties when subject to those unforeseen contingencies.

In arguing for such duties of good faith to be expanded (beyond those contracts which expressly contain such an obligation), Mr Justice Leggatt said: 'I believe it is a mistake to see contracting as an essentially adversarial activity. It is not what economists call a ‘zero sum game’ in which one party’s profit is automatically the other party’s loss. The essence of trade and commerce is reciprocity which benefits both parties and makes each party better off. To achieve such mutual gain, the parties agree to cooperate with each other in various ways. Contract law facilitates such cooperation by giving it legal backing.' Again, even prior to the pandemic, there were (recent) cases in which the UK’s highest Court prevented parties exercising certain contract rights capriciously, and cases in which good faith obligation have been implied.

A creative approach to achieving a just outcome

The Concept Note, goes further in speculating on (what would be) some very substantive changes to the law. For example, it considers whether the law of ‘unjust enrichment’ could be expanded to allowing the relationship between the parties to 'be equitably readjusted by the Court so that the one will not be unintentionally enriched at the expense of the other'. 

Even without going that far, the idea of pointing contacting parties towards trying to co-operate first, to avoid a potentially unfair 'zero sum game', is a common thread in the suggestions concerning alternative dispute resolution and good faith obligations. Such an approach in connection with the current pandemic is also being fostered by The UK Government, in particular through its recent Public Policy Notes urging contracting authorities to 'take a pragmatic approach' and 'if a supplier seeks to invoke a clause relating to a form of contractual relief that would allow them to suspend performance, such as force majeure…[to] first work with the supplier to amend or vary contracts instead.'

Where does this thinking take us?

What does this crystal ball gazing mean for parties taking their contracts out of the drawer, or those parties who cannot see a mutually agreeable way forward who are now considering litigation? There are no concrete takeaways, but there is pause for thought.

The Concept Note recognises that parties litigate to achieve 'legal certainty' and there is a risk of prejudicing this by adopting any divergent approach. So none of this suggests that parties should not be considering their contractual rights. However, it also recognises that a 'strict approach' to force majeure, frustration and termination provisions will not have the effect of 'encouraging a legal environment which is conducive to optimism and a global recovery' and will instead lead to a 'zero sum game'. This might suggest that the Court may employ stronger drivers to push parties toward finding ‘fairer’ or ‘pragmatic’ solutions through alternative dispute resolution. It perhaps also suggests that, where the Courts are nevertheless called upon to determine the dispute, they may be willing to adopt a less 'strict approach' to force majeure, frustration and termination arguments, in order to do justice between the parties. 

That is an uncertain prospect that parties might want to carefully consider when determining if litigation is the best option.

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