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Picking up the COVID tab: Who carries the burden of changes in law?

March 01, 2021

In response to the COVID-19 pandemic, governments continue to introduce guidelines and legislation which significantly impact on revenue streams in all sectors. As businesses seek to establish where those losses lie (and from whom they can try to make some recovery), the English courts have handed down judgment on a change in law provision triggered by COVID-19 events. The decision provides useful commentary on how the court will interpret allocation of risk in concession and similar agreements.

“The terms of this competitively tendered contract are quite nuanced in allocating risk.”

You would be forgiven for thinking Mr Justice Kerr was talking about an energy contract in his recent judgment (Westminster City Council v Sports & Leisure Management Ltd [2021] EWHC 98 (TCC)). He had been asked to give a declaration on the construction of change in law provisions in a contract impacted by COVID-19 restrictions, using the ‘fast track’ process available under Part 8 of the Civil Procedure Rules.

In fact, Kerr J was looking at a contract by which a leisure management company agreed to provide sport and leisure facilities and management services to a local authority in London. However, the findings in the judgment are useful for companies in the energy sector, whose contracts often contain change in law and price escalation provisions. This is particularly so in contracts which are longer term or where one party is a state / state-owned entity, for example production sharing or concession agreements and long term offtake and power agreements).

In this case, it was common ground that the change in law provisions were triggered by COVID-19 events, which mandated the closure of leisure facilities. What was in dispute was the consequence of the change in the law. Under the contract, the company was obligated to pay a ‘Management Fee’ to the authority. It argued that the financial consequences of the changes in law meant the ‘Management Fee’ should become negative and therefore was payable by the authority to the company. The contract distinguished between “General” changes in law and “Specific” changes in law. The company argued that the standard terms on which the contract was based (Sport England) demonstrated an “industry norm” allocating all risk of General changes to the contractor and all risk of Specific changes to the authority. The judge said the standard terms provided for a balance of risk but were “adjustable and only a starting point for negotiation”. This is a reminder that the English courts will not treat the terms, or accepted risk allocation, of standard form contracts as conclusive if the parties have then negotiated and amended those provisions (as is commonplace in the energy industry).

The company argued that the change in law provisions were intended to ensure that it was not made financially worse off by a Specific change in law. The judge’s interpretation was that this was not necessarily the case as a matter of construction. He focussed on the words of the actual contract, which he noted were “imperfectly drafted”, applying the usual rules of contractual interpretation as set out by the Supreme Court in Wood v Capita Insurance Services Ltd [2017] AC 1177. The Management Fee was clearly defined as a payment to and not by the authority and the payment provision required the company to pay and not receive the Fee. The judge therefore found that it would be inconsistent for the Fee to become payable to the company. He rejected the idea that the definition described the situation at the start of the contract and could be adjusted in the event of a change in law: “A definition written in shifting sands would need to be expressed as such using clear words of qualification, absent here.” He further noted that this would be inconsistent with the nature of a concession agreement in which the relationship is defined by the contractor assuming and bearing the risk of running the concession in return for retaining all or part of the revenue.

The courts have long been reluctant to interpret contracts generously in times of economic suffering. If a party is financially impacted by events outside its control under the terms of an existing contract, the court will not ‘make good that bad bargain’. We saw this in the wake of cases after the 2014 oil price crash and here, in one of the first COVID-19 related commercial cases we have seen in the English courts, the court has taken the same approach even though it will result in severe financial hardship for the contractor. If the parties want price adjustments to work in both directions, they need to say so expressly. That said, it may be always be difficult to negotiate bi-directional adjustments for items like concession fees.