Stone King successfully defends school in High Court judgment over commercial contract worth £7 million

The High Court has handed down a significant judgment that releases a voluntary-aided maintained school from paying more than £7 million in rental payments, as covered by The Times. The Court ruled that the contract was void against the school on the basis that the Secretary of State had not provided written consent. The nature of the contract required the Secretary of State’s written consent to be obtained. The judgment is likely to have an impact on both the existence of current contracts as well as future contracts between maintained schools and private entities. The effect of the judgment will also apply to other public bodies that contract with private entities.

National law firm and leading education law specialists, Stone King LLP, represented Christ the King College, an 11-18 school based on the Isle of Wight. The school had obtained approval to expand to provide sixth-form provision; however, did not have space to accommodate sixth-form pupils. Following the government’s decision to cancel the Building Schools for the Future programme in 2010 (the school had significantly progressed its application at the time of the cancellation), the school looked to alternative ways to obtain a sixth-form building. The school was introduced to Built Offsite (now Darwin Group Ltd), a company specialising in the construction of modular buildings. Following extensive discussions, the school entered into a 15-year hire contract in 2013 with BOSHire Ltd (a company linked to Built Offsite Ltd) to lease a modular building for its sixth form pupils. Under the contract, the school was charged annual rental payments of approximately £700,000 plus VAT.

In 2017, the school was unable to meet the annual rental payment due for 2017/18. This led to the owner of the building issuing a formal notice of default and ultimately a termination of contract. According to the contract, the school would at this point have to, in effect, pay all outstanding annual payments together with interest and the costs incurred in recovering the building, amounting to over £7 million. Proceedings were issued against the school and 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) for breach of contract in November 2018.

Maintained schools are subject to various statutory restrictions including that they can only borrow money with the written consent of the Secretary of State.

The school’s main defence, led by Stone King LLP, was that, on review of the terms of the contract, it was a finance lease and therefore amounted to borrowing. The Secretary of State’s written consent had not been obtained to enter the contract; therefore entering the contract was beyond the school’s powers and the contract was void.

On 7 May 2020, following a two-week trial, the High Court ruled in favour of the school and declared that the hire contract was a finance lease and an unlawful borrowing because the Secretary of State’s written consent had not been obtained. The High Court also determined that the correct rental amount was in the region of £250,000 to £270,000.

Jonathan Copping, Senior Associate in Stone King’s Dispute Resolution & Litigation Team, said: “This judgment is of key importance to maintained schools, not only in respect of any similar contracts relating to modular buildings, but other contracts with private entities. The terms of contracts and the process in which a maintained school has decided to enter the contract need to be analysed carefully to determine whether a contract is enforceable or not. The judgment also has wider implications for all public bodies that enter contracts with private entities.

With budget constraints in the wake of the financial crisis, there are less funds available to the public sector for capital projects, which has led to a rise in the number of contracts between private and public bodies. This judgment is a useful reminder to maintained schools, and other public sector bodies, to check statutory regulations when they enter commercial contracts, and that a contract could be deemed void if they have in fact exceeded their powers.

The firm is running a free webinar on the issue of void contracts and maintained schools in response to the significant judgment, on 9 June at 10.30m. For more information and to book, please follow the link.

The full details of the judgment can be read here.

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