Following a two week trial in the Commercial Court,
Foxton J has today (7May 2020) handed down a very significant
judgment concerning the application of the ultra
vires doctrine to contracts with public bodies, specifically the powers of
education bodies to enter into finance leases, in School Facility Management
Ltd & others v Governing Body of Christ the King College & Isle of
Wight Council [2020] EWHC 1118 (Comm).
The case concerned the entry by the College, a voluntary aided
maintained school on the Isle of Wight, into a contract with the Claimants for
the provision of a sixth form building, which was to be constructed using
relocatable units built off-site, and leased to the College for 15 years from
2013 at an annual rent of nearly £700,000. The College found itself unable to make
the payments under the lease and ceased doing so in September 2017.
The Claimants claimed in breach of contract for the
remainder of the sum due under the contract for the hire period, and added the
Council as a second defendant on the basis that the College had entered into
the contract as the Council’s agent by virtue of section 49(5) of the School
Standards and Framework Act 1998. The College, supported by the Council,
defended the claim on the basis it had had no vires to enter into the contract, raising a variety of breaches of
its public law duties to that effect. The Claimants advanced an alternative
claim in misrepresentation, to the effect that if the contract was ultra vires and void, the College and
Council had represented its validity (in letters of comfort required by the
Claimants from the College and the Council and drafted by the Claimants’
representatives), and also a claim for unjust enrichment, to which the College
responded with a counterclaim for unjust enrichment.
In a judgment of over 500 paragraphs, Foxton J held that
the contract was ultra vires the
College, and so void and of no effect. Having heard expert accountancy and
property valuation evidence, he accepted the argument of the College and
Council that the contract was a finance lease rather than an operating lease, and
therefore a form of borrowing. A
maintained school cannot borrow without the Secretary of State’s consent, which
had not been obtained: see paragraph 3 of Schedule 1 to the Education Act 2002.
The judgment contains a detailed review of the authorities on public bodies’
powers to enter into commercial arrangements, from the swaps litigation
onwards, concerning what species of public law breach will constitute a valid
defence to a claim for breach of contract. Foxton J concluded that only
breaches which went to capacity necessarily operated as a private law defence
and accordingly rejected, obiter, reliance on other grounds of public
law illegality, including breaches of the Council’s school finance scheme,
breach of fiduciary duty and irrationality.
Foxton J further rejected the claim that section 49(5)
deemed the College to have entered into the contract as the Council’s agent,
holding that such a construction would be an incorrect interpretation of the
legislation read as a whole.
The Claimants’ misrepresentation claim also failed, the
Court holding inter alia that it is
not open to well-informed commercial parties to generate representations on
which they then seek to rely. The College’s unjust enrichment claim against the
Claimants was subject to a successful change of position defence. The
Claimants’ alternative claim in unjust enrichment against the College was
successful, but at an assessment of the market value of the building which was
nearly a third of that under the contract.
You can read the judgment here.
Peter Oldham KC and Christopher Knight appeared for the
College, instructed by Stone King.
Daniel Stilitz KC and Rupert Paines appeared for the Council, instructed by DAC Beachcroft.
