Contract interpretation: Westminster City Council v Sport and Leisure Management Ltd [2021] EWHC 98 (TCC)

22 February 2021

his is the transcript to my latest Weekly Law Review vlog which is available on my LinkedIn profile and my YouTube channel.

It has been a while since I have looked at a contract interpretation case and so this week, in my weekly review, I have chosen the case of Westminster City Council v Sport and Leisure Management Ltd [2021] EWHC 98 (TCC).

The claimant, Westminster City Council, and the defendant, a leisure company entered into a contract in 2016 for a 10 period. It was agreed that the defendant would manage various leisure sites within the council’s area. When this contract was entered into, it was projected to be a profitable project and it proceeded that way, until the current pandemic hit early last year, 2020.

The contract included some pricing tables. The management fee and other financial provisions were to be calculated by reference to the tables. If there were ever a surplus of income in any contract year, the surplus was to be shared equally between the claimant, defendant and a third-party development fund. The surplus was any excess of income after expenditure. Though the agreement provided for the surplus to be shared when the times were good, the contract did not provide for the allocation of risk if things did not go as planned. The pandemic meant that the contract became loss-making.

The parties were in dispute about how the losses under the contract should be dealt with. There were clauses in the contract which dealt with what would happen if there was a change in the law. It was common ground between the parties that the coronavirus restrictions were a relevant change in the law but the parties disagreed about the clauses’ impact.

The defendant had argued that the terms of the contract meant that they should not be financially worse off because of the change in the law. It was their position that, if the management fee became a negative number, the council would be liable to pay a reverse fee. The council disagreed with this and naturally wanted some certainty. The council therefore issued proceedings to ask court to make a declaration about the true meaning and effect of the contract.

The judge was not persuaded by the defendant’s submissions that the management fee could become payable by the council by way of
a reverse payment. The court held, amongst other things, that the management fee was defined as being a payment to, and not a payment by, the council.

When reaching his conclusion, the judge restated the principles relevant to constructing or interpreting a contract. The judge kept, “firmly in mind the approach set out by Lord Hodge JSC’s judgement in Wood v Capita Insurance Services Ltd”.

The court must try to ascertain the objective meaning of the language used in the contract. The court will look at the contract as a whole when doing this. It may also be necessary to look at the quality of the drafting, the nature of the contract and how formal the contract is. If there are two competing meanings in the contract, the court will look at which meaning is more consistent with business common sense. Each of the competing meetings will be checked against the wider terms in question and the court will consider the commercial consequences of each of the possible different constructions.

You can see the way in which the judge applied these principles at paragraph 37 to 75 of the judgment.

When reading this judgment, it crossed my mind the council must have felt very confident that it would win. However, it is important to remember that judges are experts in setting out their conclusions in a very logical way and it is impossible to know what was really going on behind the scenes with each legal team.

The key takeaway point with this case, is to be extra careful in drafting agreements. The judge noted that the agreement was clearly drawn up with the “assistance of skilled professionals“. The judge also said that, “the drafting was not bad for the most part… but it did not display surgical linguistic precision”.

To be fair to the lawyers involved in the drafting, had the coronavirus pandemic not hit, the contract would probably have proceeded without any dispute about its interpretation. As I stated, the contract was projected to be profitable. Therefore, it is understandable why the lawyers may have decided not to invest time much and costs working on an eventuality which was not in the parties’ contemplation.

If you have any queries or comments about this case please do get in touch and you can see all of my vlogs on my YouTube channel.

© Melissa Worth 2020

The Dispute Adviser

A legal blog by Melissa Worth
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