Louis Sebastian analyses a High Court dispute between a council and a leisure centre provider over where losses arising from closure of facilities during the current coronavirus pandemic fall.
We have previously written about the impact of Covid-19 on council-owned leisure centres and, in particular, on the complexities involved when those leisure centres are operated under contract by leisure services providers. A particular complication arises where the contract in question allocates the risk (and cost) of certain changes in law to local authorities.
This was the case in Westminster City Council v Sports and Leisure Management  EWHC 98 (TCC) where the closure of leisure centres by government regulations responding to the Covid 19 pandemic meant that the contract became loss-making for Sports and Leisure Management (SLM). It was common ground between the parties that the regulations that imposed restrictions on leisure centre operation were a "Specific Change in Law" as defined in the contract meaning the council accepted some of the risk. This accords with the position generally accepted by the industry (including by the Local Government Association and Sport England). The question in this case was how the contract allocated the "Specific Change in Law" risk and how much this risk could cost the council.
SLM argued that the contract required the council to bear the full cost of the Specific Change in Law meaning that "the Contractor should not be worse off" than it would have been if the regulations had not been imposed. The council argued that its maximum exposure to the Specific Change in Law was that the concession payment ("Management Fee") it ordinarily receives from SLM is reduced to zero – and it was not required to make any further payment to SLM.
In order to resolve the disagreement, the council issued a Part 8 claim asking the Court for a declaration of the meaning and effect of the relevant contractual clauses.
In his judgement, Kerr J focused his analysis on the correct interpretation of the contractual drafting. He noted that while the contract may have been based on the Sport England suite of template contracts for leisure centres it had been drafted and negotiated with the help of legal professionals and so needed to be interpreted on its own merits – without influence from any "industry standard" positions contained in the Sport England precedent.
Accordingly the Court found as follows:
- "A Specific Change in Law requires the parties to operate the "Authority Change" process, adapted so that it addresses the Specific Change in Law and cannot be withdrawn.
- The outcome of that process is determined by agreement between the parties acting reasonably or as determined under the dispute resolution procedure; the outcome is not necessarily that the Contractor is "no worse off"; nor that the Contractor bears all the losses from the Specific Change in Law.
- The financial consequences of a Specific Change in Law cannot include Management Fee becoming payable to the Contractor instead of vice versa; the Management Fee cannot be less than zero for any contract year.
- The financial consequences of a Specific Change in Law can include reduction of the Management Fee as far as (but not below) zero and can include payment of a lump sum by the Council to the Contractor."
The points of interest to take away from this case are:
- This case turned on the drafting in this particular contract. Having helped nearly 20 local authorities vary their leisure contracts since March 2020 we can definitively say that no two are the same. The specific drafting of each contract needs to be considered on its own merits to inform both parties as they discuss the financial implications of the continuing pandemic. It should not be taken for granted that the Sport England precedent drafting has been adopted without alteration.
- The conclusion of the court – that the council could be required to pay additional sums but is not on the hook for a full indemnification of costs – chimes with the approach that many local authorities and leisure providers are taking already. We have seen that the best, and most cost effective, results have come from where councils and operators have worked together to agree the minimum support needed.
- We note that no reference is made to any "Financial Adjustments" clauses in the Contract. The Sport England precedent contracts (and many other PPP/PFI type contracts) contain these clauses which set out provisions for how the Management Fee is impacted in a Change in Law scenario. It would have been interesting to see how the Court interpreted these clauses and we can only assume they were not included in this particular contract. The added clarity that these types of clause can bring might have avoided the dispute in the first place.
- This case is a helpful reminder of the principles of contractual interpretation, summarised in the judgment of Lord Hodge JSC in Wood v. Capita Insurance Services Ltd  AC 1177 – noting the need to balance "textualism" and "contextualism" when determining the intent of a contract. The both the contract's text and its context can play a part in interpretation.
- This case also reminds us that the contra proferentem principle (which states that "a person who puts forward the wording of a proposed agreement may be assumed to have looked after his own interests, so that if the words leave room for doubt about whether he is intended to have a particular benefit there is reason to suppose that he is not") is a "principle of last resort" and indeed it was not applied by Kerr J in this case.