Richard McMeeken: Reforming UK contract law to cope with COVID-19
Scottish lawyer Richard McMeeken details new proposals to deal with the contract law implications of the current crisis.
Following a meeting on 7 April 2020 of the British Institute of International and Comparative Law attended by (among others) Lord Neuberger, Lord Phillips, Sir David Edward and Sir William Blair a ‘concept note’ has been produced on the effect of the pandemic on commercial contracts.
The basis for the note is simple. There will be a plethora of contractual defaults following this crisis and these defaults may cause damage to the economy. The contracts in question may deal with any such crisis by way of a contractual force majeure clause but many contracts won’t. Even where they don’t, of course, the common law can deal with the matter by way of material adverse change, supervening illegality and frustration or, indeed, clauses which simply bring the contract to an end.
However, bringing the contract to an end is perhaps not always the best option. Further, the concept note recognises that the present crisis does not have an easy analogy in past case law. In at least one other jurisdiction (Singapore) measures have been adopted to offer relief to specified businesses and individuals which are unable to fulfil contractual obligations because of COVID-19. It may be thought, of course, that some of the measures already being introduced such as extended moratoriums in insolvency proceedings, prohibitions against lodging winding up petitions and a general reluctance (in Scotland at least) on the part of the courts to deal with any monetary debts at all, provide sufficient protection.
The concept note argues that additional protections may be possible without prejudicing the need for legal certainty. In the common law, the paper suggests that the scope of the doctrine of frustration may be something to be considered. Alternatively, rules as to the implication of terms and the debate over long-term relational contracts and good faith may be relevant. In that regard, one of the newly appointed Supreme Court justices, Lord Leggatt has recently produced a paper on contractual duties of good faith and suggested that it is time that a default duty of good faith ought to be implied into commercial contracts given that contracts are inherently about co-operation and ought to work to parties’ mutual benefit. Finally, equitable readjustment of the parties’ rights and obligations through the doctrine of unjustified enrichment may be possible so that one party will not be unintentionally enriched at the expense of the other (that sort of readjustment is probably already possible under Scots law).
On the procedural side, it is easy to wonder whether some of what is suggested in the concept note will see the advent of a more prescriptive mediation process. The note suggests that encouraging conciliation is one obvious way to give breathing space to parties. That encouragement may well turn into a mandatory process if the point of it is primarily to give parties time to get their affairs in order and make arrangements to perform the contract and remedy a default within a reasonable time. No doubt views will be mixed on these suggestions and creditors may well feel that their implementation would be a further interference with commercial rights. As a litigator it is easy to take that view given that we only see the relationship at its worst. However, as Lord Leggatt outlines - contracts are not 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”. The law needs to have a proper modern legal framework in place to protect these benefits.
Richard McMeeken is a partner and solicitor advocate at Scottish law firm Morton Fraser.