Change in law can reduce management fee to zero: the sport straw

A management company were awarded a 10 year contract in 2016 to provide sport and leisure facilities to a Council. The contract was modelled on similar ones used by local authorities, using standard terms from Sport England. Certain clauses dealt with changes in circumstances. A “qualifying change in law” needed to be either a discriminatory, specific, or a general change in the law to benefit from these provisions.

Restrictions put in place in response to the the Covid-19 pandemic, prevented leisure centres from opening fully, if at all. This caused the contract between the Council and the management company to become unprofitable. Both parties agreed that the enforced restrictions fell under a “specific change in law,” however, the parties disagreed as to how the loss of customer revenue should be apportioned between them.

The Council argued that the contract did not oblige them to reimburse the management company in respect of any losses in excess of the agreed management fee. The management company contended that the contract required the Council to bear any financial losses arising from a specific change in law.

The court held that, unlike a general change in law, where the risk naturally falls on a contractor, a specific change in law generates some impact on the financial arrangements in favour of the contractor. The contract did not impose an obligation on the Council to indemnify the management company for losses, however, the financial consequences of a specific change in law could include a reduction of the management fee to zero, as well as the payment of a lump sum by the Council to the management company.