On 22 January 2021 the High Court (Kerr J) handed down an important judgment in Westminster City Council v Sports And Leisure Management Ltd  EWHC 98 (TCC) regarding the contractual allocation of risk in respect of losses arising from the Covid-19 pandemic under a substantial leisure services contract (“the Contract”) between Westminster City Council and Sports and Leisure Management Limited (Everyone Active), one of the UK’s largest leisure services providers.
Following the introduction of national ‘lockdown’ and other legal measures in response to the Covid-19 pandemic, user levels across Westminster’s leisure centres and sites was very significantly reduced, leading to substantial losses arising under the Contract.
It was common ground that certain of the legal measures introduced to combat the pandemic constituted a “Specific Change in Law” for the purposes of the Contract. However, the Council and SLM were far apart as to the legal and financial consequences of such a Change in Law under the Contract.
SLM contended that, in line with the widely used Sport England contract terms, the Contract required the Council to bear the financial consequences of a Specific Change in Law. The Council contended that the maximum possible effect of a Specific Change in Law was – subject to its agreement – to reduce the management fee ordinarily payable by SLM to zero, and that it could not be obliged to make any payment to SLM.
In order to resolve the disagreement, the Council issued a Part 8 claim for declarations confirming the true meaning and effect of the disputed contractual provisions.
In a detailed written judgment, Kerr J held that the Contract does not necessarily impose a duty on the Council to indemnify, or hold harmless, SLM in respect of all losses caused by a Specific Change in Law. But that it could result in the Council making lump sum payments to SLM by way of compensation for losses incurred as a result of a Specific Change in Law. The Court accordingly declared (at §75) that the correct interpretation of the contract was that:
“(1) A Specific Change in Law requires the parties to operate the clause 37 process, adapted so that it addresses the Specific Change in Law which cannot be withdrawn.
(2) The outcome 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.
(3) 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.
(4) 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 Authority to the Contractor.”
James Goudie QC and Joseph Barrett of 11KBW appeared for the Claimant
Jason Coppel QC of 11KBW appeared for the Defendant
A copy of the judgment can be found here.