Westminster City Council v Sports And Leisure Management Ltd

A contractual change-in-law mechanism must be construed by examining its language in context. Where a contract incorporates an existing variation procedure, the incorporation may extend to the process without importing every substantive outcome stated elsewhere in that procedure. A specific change in law did not guarantee that the contractor would remain no worse off, nor did it place every resulting loss on the authority. The management fee, defined as payable by the contractor to the authority, could be reduced to zero but could not become a reverse payment. However, the contractual mechanism permitted a lump-sum or capital payment by the authority where reasonably agreed or determined under the dispute resolution procedure.

The claimant local authority and the defendant leisure-services contractor were parties to a long-term concession contract for the operation of leisure facilities. Restrictions imposed during the Covid-19 pandemic prevented or limited the operation of those facilities and constituted specific qualifying changes in law under the contract.

The parties disagreed about the financial consequences. The council sought declarations that the management fee could not fall below zero and that it was not required to make any payment to the contractor. The contractor contended that the fee could become negative or, alternatively, that the contract permitted a payment to compensate for the resulting losses. The court was required to determine the proper construction of the change-in-law provisions and their relationship with the authority-change procedure.

1. Construction approach. The court applied the approach identified by Lord Hodge JSC in Wood v. Capita Insurance Services Ltd [2017] AC 1177. Textualism and contextualism were complementary tools. The contract was sophisticated and professionally drafted, so its language was particularly important, although the drafting contained imperfections.
2. Effect of a specific change in law. Clause 39.5.2 incorporated the process in clause 37, adapted to a change compelled by law and therefore not capable of withdrawal. It did not import the outcome of the authority-change procedure. The parties had to act reasonably to agree the financial consequences, subject to the contractual dispute resolution procedure.
3. The incorporated process did not establish a general rule that the contractor must be no worse off. Nor did the contract require the contractor to bear all losses arising from a specific change in law. The financial outcome was therefore determined by reasonable agreement or, if necessary, dispute resolution.
4. Management fee. The definition of Management Fee and clause 26.1 made clear that it was payable by the contractor to the authority. It could not become payable in the opposite direction. The fee could be reduced to zero for a contract year, but could not become negative.
5. Lump-sum or capital payment. The references to a capital payment in clause 39.5.2 and a lump-sum payment in clause 37.10.1 were not intended to create materially different categories. The financial consequences of a specific change in law could therefore include a lump-sum payment by the authority to the contractor.
6. The court did not need to decide whether the contra proferentem principle applied, because the contractual issues could be resolved by ordinary principles of interpretation.

not stated in the judgment.