On 07 May, guidance was issued by the Cabinet Office on responsible contractual behaviour in circumstances where the Covid-19 emergency has a material impact on a party's performance of a contract (Guidance). The Guidance has general application covering public and private sector contracts but does not override specific guidance such as the Policy Procurement Note 02/20 or the guidance issued by the Infrastructure and Projects Authority in relation to PFI/PF2 contracts. The Guidance is also expressed not to apply to the devolved administrations.
The context to the Guidance is, of course, the Covid-19 pandemic and the extraordinary challenges presented by this public health emergency. There is an overriding imperative for contracting parties to respond collectively to the impact of the pandemic on the performance of their contracts, avoiding an over-reliance on contractual rights and remedies which would risk a slower and less effective response. Solutions to the unique challenges presented by Covid-19 are in most cases required now, not in the many weeks or months it could take to agree or determine an extension of time or relief claim or to process a necessary contract variation. Also, how the relevant contracting parties behave now, is likely to influence how those parties view and apply contract rights and remedies, once the pandemic has subsided and some semblance of operational normality returns.
This is particularly pertinent when it comes to long term PPP concession contracts with operational terms which often extend to 25 years or more. The impact of Covid-19 on the management and operation of many infrastructure assets has been immediate and significant. Relying on a strict application of the contract in such an emergency will either not provide an answer at all or it may provide an answer that is unreasonable, unfair or disproportionately punitive.
In such a time of extraordinary national challenge, the Guidance looks to contracting parties to behave not just in accordance with their own self-interest but also to take into account a higher national interest in supporting the country's response to the Covid-19 emergency.
The Guidance sets out a number of areas in respect of which responsible and fair behaviour is strongly encouraged, from requesting and giving relief for impaired performance and requesting and making contract payments to proposing and responding to requests for contract changes and variations and commencing formal dispute resolution procedures.
On this last aspect, the Guidance strongly encourages parties to seek to resolve any emerging contractual issues responsibly - through negotiation, mediation, or other alternative or fast track dispute resolution.
For those PPP projects where the relationship between the counterparties before the coronavirus pandemic was strained, difficult or on the verge of breaking down, perhaps a more positive experience of a joint and collective response to Covid-19, may provide an opportunity for the parties to reset the way they work together, in a more collaborative and mutually beneficial environment.
Of course, that is often far easier said than done. The risk is that for some parties, a look back assessment of how their counterparty responded and performed during the height of the emergency won't always be positive. If necessary changes to contract performance, rapid implementation of variations and understandings as to relief from performance, have not been recorded sufficiently in writing at the time, a positive joint effort to support the public health emergency may be relatively quickly forgotten as parties struggle to agree how they should now adjust performance and payment under the contract, to account for actions and responses looking back over a number of months.
For some PPP projects where the relationship between the parties continues to be or becomes challenging in the period following the Covid-19 emergency, the appointment of a project mediator may well be worth considering to assist in unlocking a successful reset of the parties' relationship and to support the maintenance of that relationship on a more positive basis over the remaining contract term.
A project mediator is retained by contracting counterparties to call upon when the parties' own discussions cannot resolve a particular dispute of difference or when the parties need to find a different perspective to an issue requiring a joint solution. More often than not, involvement of a project mediator will be introduced as part of an existing tiered dispute resolution procedure. The mediator will get to know the parties and build up a detailed knowledge of the project over time. As an independent, neutral third party experienced in the field, a good project mediator will be well placed to facilitate positive communication between the parties and constructive dialogue when the parties themselves may otherwise struggle to resolve issues in their contractual relationship.
Mediation has the benefit of being a voluntary and flexible process which allows the mediator to look beyond the immediate contractual rights and obligations of the parties to their wider interests and motivations. Such a broader view is often essential for a mediator to understand the rationale underlying the behaviour of the parties and actively to assist the parties to work towards a negotiated agreement to resolve the relevant dispute or difference.
Where a project mediator is appointed, any mediations or assisted negotiations will be conducted on a confidential and without prejudice basis. Conversations between the project mediator and each party will be confidential. No private information will be passed by the mediator from one party to the other, without the relevant party's express permission, allowing each party to talk openly to the mediator in a protected and confidential environment.
There is no third party determination with mediation and the parties remain the decision makers. For a long term PPP project, such an approach is far more likely to sustain and strengthen the relationship between the parties, avoiding the escalation of disputes to formal third party determination, with all the associated cost consequences that can have.
Undoubtedly, some contracting parties are facing difficult and unpredictable challenges in maintaining performance to contract standards, as a consequence of the Covid-19 pandemic. Those challenges are likely to continue for some time yet and may well shape the way the parties view their relationship for the remaining contract period. There will inevitably be bumps in the road for some contracts transitioning out of the current health emergency to whatever post pandemic operational normality looks like. Some thought now as to how any such bumps in the road might best be negotiated to avoid relationship damage, may well help parties to remain on the front foot when it comes to protecting and strengthening their long term partnership.
More generally, the Guidance also serves as a timely reminder that regardless of the particular circumstances, if contracting counterparties do, as a matter of course, act fairly and responsibly towards each other in performing and enforcing their contracts, the relationship outcomes will almost certainly be more positive overall and areas of mutual gain are far more likely to be identified and realised over the contract term.
See our related article about how the legal sector and the courts may help parties to behave responsibly following the Cabinet Office Note.