Ultra vires contracts and maintained schools in the Commercial Court

Following a two-week trial in the Commercial Court, Foxton J has 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. Barristers at 11KBW explain the ruling.

The case of School Facility Management Ltd & Ors v Governing Body of Christ the King College & Anor [2020] EWHC 1118 (Comm) 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.

Peter Oldham QC and Christopher Knight of 11KBW appeared for the college, instructed by Stone King.

Daniel Stilitz QC and Rupert Paines of 11KBW appeared for the council, instructed by DAC Beachcroft.