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A question of capacity: College gives contractor expensive schooling in public law

Increasingly, public bodies with limited capital expenditure programme budgets are entering structured transactions with the private sector, allowing building costs to be met from periodic payments which can be treated as revenue expenditure.

In last month’s High Court judgment, School Facility Management Ltd & others v Governing Body of Christ the King College & Isle of Wight Council [2020] EWHC 1118, the court decided that such an agreement between a voluntary aided college on the Isle of Wight and a contractor was unenforceable, because it was in effect a credit agreement, requiring prior approval by the Secretary of State which had not been given. The judgment shows the importance of ensuring a public sector body has legal capacity to enter the relevant contract.   

Unpaid rent

In 2013, the College had entered into a contract with Built Offsite Limited ("BOS"), a specialist contractor, for the provision of a modular building for its sixth form students. The contract took the form of a fifteen year lease with annual rent payments to the contractor of around £700,000. The College defaulted in September 2017.  Through assignments, the right to the rental payments had by then transferred to School Facility Management (“SFM”). 

SFM sued the College for the unpaid rent, and the Council on the basis the College had been acting as agent for the Council.

In its defence, the College argued that the contract was void. This was because, it said, under the applicable standard accounting rules (‘IAS 17’) the contract was a finance lease, a form of credit arrangement. Schedule 1 of the Education Act 2002 prohibits maintained schools from borrowing money without the consent of the Secretary of State, which had not been given. FM countered this by arguing the contract was, properly construed, an operating lease, permissible without SoS consent. 

SFM brought an alternative claim in tort for negligent misrepresentation: prior to entering into the contract, the College and the Council had both issued letters of comfort to BOS, stating the College had legal authority to enter into the contract. 

Finally, SFM argued that, if the contract was indeed void, it was entitled to compensation on the basis that the College had been unjustly enriched at its expense through having use of the building. 

Illegal contract

The Court accepted that the contract was illegal, finding that it was a finance lease rather than operating lease. This was not a straightforward matter, the parties relied on conflicting accounting and valuation expert evidence to support their respective positions. 

SFM’s misrepresentation claim also failed:  such a claim can only be made where one party’s misrepresentation (here, the letters) induces the other to enter into a contract. Here, there was no contract as it was void. Secondly, and in any event, the Court decided BOS had not relied on the letters.    

As regards unjust enrichment, the Court accepted the claim against the College but reduced the sum payable significantly, at the market value of the building, which was considerably less than the payments which the College had undertaken to pay. 

Practical Points

The judgment clearly warns private sector parties contracting with the public sector to do their own due diligence, seek advice and ensure that public bodies do indeed have legal capacity to deliver on the deal, in this case four years after signature. 

The judgment recognised that Courts should be wary of public bodies seeking to escape private law liabilities by reference to their own breach of public law duties.  In Charles Terence Estates Ltd v. Cornwall CC [2011] EWHC 2542 (QB), [64], Cranston J said "in general a public authority making a contract in breach of internal rules and procedures should not be able to invoke these when they are not readily visible to the counterparty and the counterparty has acted in good faith".      

This judgment confirmed that not every public law breach will defeat a private law claim. Indeed, the Court considered irrelevant certain other alleged breaches invoked by the College. However, it may be difficult to differentiate between breaches which go to capacity and those which do not. Timely advice and diligence will provide the safest course.   

This article was written by Kevin Forsyth and Paul Henty. For more information, please do not hesitate to contact Kevin or your usual Charles Russell Speechlys contact.

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