Amy Callahan-Page sets out the key points from a recent High Court ruling on risk allocation between a council and a leisure centre operator.
The case of Westminster City Council v Sports and Leisure Management  EWHC 98 (TCC) arose out of the government’s response to the COVID-19 pandemic, and specifically the regulations requiring closure of leisure centres and subsequent re-opening with additional cleansing and social distancing requirements. The parties agreed that those regulations amounted to ‘Specific Change in Law’ as defined by the Contract.
Nonetheless, the parties disputed the risk allocation and the amount (or indeed the existence) of any reduction or reversal in the Management Fee payable following the Specific Changes in Law. In addition, it was disputed whether the Council could be obliged to make any payment to Sports and Leisure Management [SLM].
The Council sought declarations that a Specific Change in Law:
(1) Does not reduce the Management Fee to below zero; and
(2) Does not oblige the Council to make any payment by way of reverse or negative Management Fee or at all, to SLM (emphasis added).
On the other hand, SLM sought declarations, amongst others, that:
(3) The Contract requires that they should not suffer financial loss as a result of a Specific Change in Law; and
(4) If the Management Fee cannot be reversed so as to require a payment to SLM, then the Contract requires that sums necessary to secure payment to SLM are to be paid by the Council to SLM as lump sums or capital payments.
The Judgment and Order
Kerr J considered the interpretation of the contractual drafting, with a focus on the principles and approach of Lord Hodge JSC in Wood v Capita Insurance Services Ltd  AC 1177. His judgment summarised the approach to be followed by the parties when faced with a Specific Change in Law, namely that the balance of the risk did not require that SLM be “no worse off”, but equally (and crucially) that they did not have to bear all the losses that arose.
Some commentary on the case suggests that the Council were awarded the declarations as sought. However, in the approved Order, Kerr J expressly recorded his observation that: ‘To grant the declaration sought by the Claimant would mislead: the words “does not oblige the Claimant to make any payment […] at all” would not be correct.’ He went on to comment that whilst the Council succeeded in establishing that the Management Fee cannot, based on the bespoke contractual provisions in dispute, drop below zero ‘that success was tempered by the possibility of having to pay a lump sum’.
SLM were successful in showing that it did not bear all the risk of a Specific Change in Law, albeit they were not able to convince Kerr J that the entirety of the risk should sit with the Council as would occur in an Authority Change. It was determined that the parties are, acting reasonably, to determine the outcome by agreement or as determined by the Contract’s dispute resolution procedure. In the context of mass closures of leisure centres across the country and the inevitable reduction in income, the declaration that the Council is obliged to act reasonably when agreeing the outcome of a Specific Change in Law and the declaration that the outcome can include both a reduction of the Management Fee to zero and receipt of a lump sum payment, is a positive one. Indeed, Keer J described the declaration in respect of a lump sum payment as a ‘considerable consolation’.
Standard Sport England contract
It is worth noting that whilst the standard Sport England leisure service contract was put forward in evidence to show the industry norm of risk allocation for a Specific Change in Law, the Contract in dispute was bespoke. For example, the Sport England contract specifically allows for a positive (i.e. payable by the contractor to the authority) or negative (i.e. payable by the authority to the contractor) management fee depending on whether there is a surplus or deficit annual payment.
As Kerr J points out, the Sport England contract provides for a balance of risk to be struck where the law changes mid-contract. This includes express provisions that govern an Authority’s obligation to pay the Contractor for additional Capital Expenditure caused by Qualifying Changes in Law (including Specific Changes in Law) for which the Contractor has otherwise been unable to obtain funding.
Had the standard Sport England contract been used, it is likely that the outcome would have been very different in that those terms do expressly require the contractor to be placed in a “no better and no worse” position following a Specific Change in Law. On the facts in this case, this would have resulted in a reversal of the Management Fee in order to leave the contractor in a “no better and no worse” position.
As such, this case is a reminder that each contract for the management of leisure facilities will need to be considered and interpreted on its own specific provisions.