In a significant judgment handed down on 7 May 2020, the High Court determined that a hire contract entered into by a school is ultra vires the school and void. Stone King LLP represented the school in the proceedings (School Facility Management Ltd & others v Governing Body of Christ the King College & Isle of Wight Council  EWHC 1118 (Comm)).
In 2013, the School entered into a 15-year hire contract (“the Contract”) with the Claimants. In accordance with the Contract, the School was required to pay an initial amount of £1,001,762, a second payment of £333,920 and further annual payments of around £700,000
The School is subject to various statutory restrictions, including those set out in paragraph 3 of schedule 1 of the Education Act 2002.
Paragraph 3 of schedule 1 provides that a governing body may do anything which appears to them to be necessary or expedient for the purposes of, or in connection with the conduct of the school. In particular, the governing body has the power to borrow such as sums as it thinks fit and in connection with such borrowing, to grant any mortgage, charge or other security over any land or other property of the governing body. However, the ability to borrow money and grant security may only be exercised with the written consent of the Secretary of State.
Prior to entering the Contract, the Claimants were aware of the risks that the Contract could be ultra vires the School. Two letters were prepared, one for the School and one for the maintaining authority, Isle of Wight Council, to sign to confirm that both the School and the Isle of Wight Council took the view that the Contract was an operating lease not a finance lease. Both the School and the Isle of Wight Council signed the letters.
By 2017, the School was in financial difficulties and it was unable to pay the annual payment for 2017-18. In November 2017, the Claimants sent a formal notice of default under the Contract and subsequently terminated the Contract in April 2018. In accordance with the Contract, upon termination, the School had to in effect pay all outstanding annual payments together with interest and the costs incurred in recovering the Building.
The Claimants issued proceedings in November 2018 against the School as well as the Isle of Wight Council (on the basis that the School had acted as the Isle of Wight Council’s agent in entering the Contract). The Claimants brought three claims against the School:
- Breach of contract;
- Misrepresentation; and
- Unjust enrichment.
In defending the breach of contract claim, the School raised a number of public law and private law defences. The School’s main defence was that the Contract was a finance lease and as such it amounted to borrowing for the purposes of the Education Act 2002 Schedule 1, paragraphs 3(3)(a) and (4)(a), for which the Secretary of State’s permission had not been obtained. In the absence of consent, the Contract was beyond the School’s capacity and void.
The Court determined that in light of the expert evidence presented by the parties, the Contract was a finance lease and therefore constituted borrowing. The lack of Secretary of State consent meant that the Contract was an unlawful borrowing and ultra vires the School.
The Court also dismissed the misrepresentation claim on the basis that the School and Isle of Wight Council made true representations and, in any event, no reliance was placed on the content of the letters by the School and the Isle of Wight Council, instead the Claimants formed their own view on entering the Contract.
The Court did accept the unjust enrichment claim brought against the School, however it ruled that the annual market rent payable was significantly less than the annual sum in the contract.
Whilst this judgment focused specifically on the provisions of the Education Act 2002, this will have a significant wider impact on contracts between private and public entities. In recent years, with budgetary constraints impacting the public sector in the wake of the financial crisis, central funds available for capital projects have been reduced and contracts between private and public bodies for capital expenditure have increased.
This Judgment is a useful reminder to public sector bodies that a contract could be deemed void if they exceed their powers in entering into a contract. It is well established in case law that a public law error can be relied upon in answer to a private law claim, such as breach of contract. Such public law error is not just limited to making a decision that exceeds powers, but also if a decision was taken for an improper purpose, or was substantially irrational, or because the decision was reached taking into account irrelevant considerations/failing to take into account relevant considerations, or because the process by which the decision was arrived at was unfair.
The Stone King team instructed on this case was Tony Pidgeon (Partner) Jonathan Copping (Senior Associate) and Simon Stone (Associate).
The judgment can be read here.