Commercial Contracts Undermined by Lockdown - Where Do Losses Fall?

Lockdowns put into force in response to the COVID-19 pandemic have rendered many commercial contracts unprofitable if not entirely inoperable. In a guideline case, the High Court considered where unforeseen losses arising under a local authority contract for the management of leisure facilities should fall.

A company was awarded the minimum 10-year contract after a tendering exercise. It took the form of a concession agreement whereby, in general terms, the company paid management fees to the council and, in return, retained profits generated by the facilities. The contract operated successfully for some years but, after the first lockdown was introduced, the company began to suffer heavy losses.

After negotiations, revised financial arrangements were agreed. Save in the event of the company receiving central government support, the council agreed to waive its management fees during lockdown. It also agreed to make certain payments to the company so that it was able to meet its salary costs. The council, however, sought judicial guidance after the parties were unable to reach agreement in principle as to how risks under the contract should be allocated.

Ruling on the matter, the Court noted that the sophisticated contract was drawn up in standard form with the assistance of skilled professionals. It provided that financial arrangements under the contract could be modified in the event of circumstances being transformed by unforeseen changes in the law. It was common ground that the restrictions imposed on the use of leisure facilities during lockdown constituted such a change.

The company's plea that the council was obliged to ensure that it was 'no worse off' as a result of the change in the law fell on fallow ground. On a true construction of the contract, the Court found that management fees payable by the company could be cut to zero, but not beyond. They could not be reduced into negative territory so that sums became payable by, rather than to, the council. The contract made provision for payments in one direction only, not both, and the management fees could therefore not fall below zero in any one contract year.

The Court, however, went on to rule that the council was entitled under the contract to make one-off capital or lump-sum payments to the company in order to assist it in implementing lockdown restrictions, offsetting its losses and meeting its salary costs. The Court's interpretation of the contract would form the basis of future negotiations between the company and the council and the resolution of any disputes arising between them.