"Change in law" provisions: COVID-19 and leisure facilities

Westminster City Council v Sport and Leisure Management Ltd [2021] EWHC 98 (TCC)

The question

Which party to a contract bears the losses flowing from a change of law as a result of the COVID-19 pandemic?

Key takeaway

The consequences of an event (eg a change in law) should be clearly specified to provide certainty as to the allocation of risk under the contract – even if the change is due to unprecedented circumstances.

The background

Sports and Leisure Management Limited (SLM) and Westminster City Council (Council) had entered into a contract for the management of leisure services (Contract), under which SLM paid a regular “Management Fee” to the Council for the concessions that SLM provided for customers at the leisure facilities.

The enforcement of COVID-19 lockdown closures and restrictions in England meant that the Contract became loss making to SLM. The parties agreed that the introduction of lockdown restrictions was both a “Specific Change[s] in Law” and a “Qualifying Change[s] in Law” under the Contract, resulting in changes to the financial arrangements. However, the parties interpreted the Contract – and the financial consequences – differently.

SLM argued that the Contract was a standard template used by numerous local authorities (including the Council) and so the “industry norm” was for the Council to bear all financial consequences arising from a Specific Change in Law. As such, they argued that the Council was obliged to pay a “reverse management fee” to reimburse SLM for the financial loss.

The Council disagreed and sought declaratory relief that, on the proper construction of the Contract, a Specific Change in Law:

• did not oblige the Council to indemnify SLM in respect of any losses in excess of the Management Fee
• did not oblige the Council to indemnify SLM against all losses.

The decision

Whilst Kerr J acknowledged that the drafting lacked precision in places, the Contract was to be interpreted on its own merits through careful examination of the wording for each clause. The “industry norm” argument was rejected – it was not on industry standard terms; the template was adjustable and provided a starting point for negotiations.

The High Court agreed with the Council that the management fee could not drop below zero and become payable to SLM. The fee was defined as a payment to, and not by, the Council and the contractual mechanism provided for one-way payment only. SLM’s interpretation was also inconsistent with the nature of a concession agreement, where a contractor bears the risk of running the concession in return for retaining all or part of the revenue. However, it was recognised that the management fee could reduce to zero in the circumstances and that the Council might be required to pay a lump sum to SLM to meet, for example, its salary costs.

Why is this important?

Whilst the judgment turns on the interpretation of the specific wording of the Contract, it provides a useful indication of the courts’ approach to numerous claims that are expected to follow as parties seek to protect themselves from the extensive and unexpected financial consequences arising from the COVID-19 pandemic.

The Court was clearly unwilling to interpret (or rewrite) the financial provisions to deal with unexpected circumstances – even if this meant the contractor would face financial hardship.

It is also a reminder that the English courts will look at the merits of each contract and consider the balance between “textualism” and “contextualism” when establishing the intent of the parties. Parties should also not assume that the contra proferentem rule (the interpretation of ambiguous words against the beneficiary) will be applied automatically – as Kerr J noted, it should be used only as a last resort.

Any practical tips?

Whilst the case does not introduce new law, it is a reminder that clarity of drafting is key when interpreting the meaning and effect of relevant provisions. The operational or financial consequences, and which party bears them, should be clearly specified. Also consider how unforeseen or unexpected consequences should be addressed – is there enough flexibility for these to fall within existing provisions, or should they be excluded and dealt with on a different basis?