Covid and leisure management contracts

Post-Covid, every local authority contract lawyer will want a high-spec, future-perfect crystal ball to supplement their phone and laptop. For in our previous primeval state of COVID-innocence, few drafters would have considered making specific, detailed provision for a major show-stopping pandemic. But when the unthinkable happens, it is time to start thinking. And that fell to Mr Justice Kerr on 22 January in the Technology and Construction Court when unravelling matters for a local authority and its sports and leisure management contractor, once the Covid whistle went and the government stopped play (Westminster City Council v Sports and Leisure Management Ltd [2021] EWHC 98 (TCC)).

Following a tendering exercise on 23 June 2016 the council entered into a concession contract with Sports and Leisure Management Ltd (SLM) for the provision of sports and leisure facilities, the management of various indoor and outside sites and the development of a new facility. The contractor was to be entitled to keep customer revenue in return for payment of a management fee, that is ‘the net fee payable by the contractor to the authority in consideration of the right for the contractor to use the facilities and provide the services in accordance with this agreement’. All went routinely until Covid struck, resulting in operational restrictions rendering the business loss-making. Consequently, ‘revenue from customers dwindled and, during periods of enforced closure, dried up altogether’. The question therefore was how the loss of customer revenue should be dealt with between the parties.

Clauses 37-39 of the contract (fully included in the judgment’s appendix) dealt with contract changes including those arising from changes in the law. The three kinds of ‘qualifying change in law’ (that is, those unforseeable at the contract date) were a ‘discriminatory change’ (one which applies expressly to the contract services and not to similar projects or to other persons); a ‘specific change’ (that is, one specifically referring to the provision of the same or a similar contractual service – agreed as applicable here); and a ‘general change’ (one neither specific nor discriminatory).

By clause 39.5.2, specific or discriminatory law changes ‘shall be put into effect as provided in clause 37 and 38’ as if the authority had issued a ‘notice of change’ and ‘any changes to the management fee (or, if applicable and agreed by the authority, a capital payment) shall be reasonably agreed between the parties’. The contractor’s response to any notice of change must (per clause 37.3) include, in relation to the change, the contractor’s opinion on (among other things): 1. Whether compliance relief is required; 2. Service provision impact; 3. The need for any resultant contract amendments; 4. Any impact on income generation; and 5. Any capital expenditure required following the change. Then (by clause 37.4.1.): ‘As soon as practicable after the authority receives the contractor’s response, the parties shall discuss and agree the issues set out in the contractor’s response.’ And under clause 37.10.1: ‘Where the authority agrees to any adjustment set out in the contractor’s response the authority and contractor shall agree either a lump sum payment or an adjustment to the management fee.’

Kerr J opened his judgment by remarking that the parties need to know where Covid closure losses will fall under the contract. The council had consequently issued the present claim seeking declaratory relief as to the true meaning and effect of the contract. The court noted that the applicable principles are conveniently found in the judgment of Lord Hodge in Wood v Capita Insurance Services Ltd [2017] AC 1177 where Lord Hodge had (among other things) remarked that: ‘Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation.’ These are tools ‘to ascertain the objective meaning of the language which the parties have chosen to express their agreement’.

In the judgment of Kerr J the cross-reference to clause 37 in clause 39.5.2 imports the process but not the outcome of the notice of change procedure. He rejected SLM’s contention that the management fee can drop below zero and become payable by the council to SLM. However, the judge did agree that if, as he found, the payment of the management fee cannot be reversed then there is contractual provision in clause 37.10 (read with clause 39.5.2) for a capital payment to SLM.

There had been disagreement between the parties as to whether the contra proferentem principle could assist SLM. As Lord Mustill noted in Tam Wing Chuen v Bank of Credit and Commerce Hong Kong Ltd (in liquidation) [1996] 2 BCLC 69 this principle is where ‘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’. However, Kerr J considered that the principle is ‘one of last resort’ and he could satisfactorily resolve the issues here by applying Lord Hodge’s approach in Wood.

The court therefore found (among other things) that: (i) a specific change in law requires the parties to operate the clause 37 process, suitably adapted to address the non-withdrawable change; (ii) the outcome is determined by agreement between the parties acting reasonably or as determined under the dispute resolution procedure; (iii) the management fee cannot be less than zero for any contract year and cannot include its becoming payable to the contractor rather than to the council; and (iv) the financial consequences can include reduction of the management fee to (but not below) zero and can include payment of a lump sum by the authority to the contractor. This decision may well be of assistance to other authorities with similar agreements.

Nicholas Dobson writes on local authority, public law and governance