Void contract, misrepresentation and unjust enrichment
School Facility Management Ltd & Ors v Governing Body of Christ the King College & Isle of Wight Council  EWHC 1118 (Comm)
This case concerns a contract for the long term lease of modular buildings worth around £700,000 per year. The court declared the contract void because the college which had procured the contract had acted “ultra vires” – outside its own powers – in doing so. As a consequence the contractor, who had brought a claim for unpaid sums due under the contract, was unable to rely on the terms of the (void) contract to support its claim. The contractor was also unsuccessful in its allegations of misrepresentation against the college.
Although both the contractual and misrepresentation claims were unsuccessful, the court ordered the college to pay the contractor around £250,000 per year for continued use of the buildings on the basis of “unjust enrichment”. However that sum was very significantly below the contractual rent of around £700,000 per year.
Following on from the leading case of Anisminic the judgment is a useful summary of some of the key cases in this area, including Credit Suisse and Charles Terence Estates. The Court held that breach of duty or Wednesbury unreasonableness (among other public law principles) may form the basis of a defence in private law proceedings, depending on the circumstances and facts of the case.
In 2009 the Isle of Wight Council (the “Council”) approved, by way of a signed letter of support, the plans of Governing Body of Christ the King College (the “College”) to extend educational provision in the form of a new sixth form college. The decision was made to enter into a hire contract for the purchase of off-site constructed modular buildings and equipment which were to be leased to the College for 15 years for an annual rent of around £700,000 (the “Contract”). By 2017 the College could no longer meet the annual payments. Proceedings were brought by the contractor for unpaid sums due under the Contract.
A public authority can only act within the powers given to it by statute. Any action which is not so authorised (whether directly or by implication) is ‘ultra vires’ (beyond the authority’s power). There are two elements to the doctrine of ultra vires: (1) whether the authority has capacity to do what it is wanting to do; and (2) the manner in which the authority exercises the relevant power or duty. The judge in this case summarised the point as follows:
“…as a matter of public law, a decision of a public body may be void not simply because the body exceeded the letter of its powers, but also if the decision was taken for an improper purpose, or was substantively irrational … or because the decision was reached taking into account irrelevant considerations or failing to take into account relevant considerations, or because the process by which the decision was arrived at was unfair.”
The Statutory Regime
A number of statutory provisions were relied upon by the College and the Council as limiting the vires of the College to enter into the Contract.
The College in this case was a voluntary aided school, maintained by the Council. The relevant statutory provisions are set out in the School Standards Framework Act 1998 and the Education Act 2002 (the “EA 2002”). Those Acts contain among other things, provisions limiting the College’s power to borrow money.
Additionally, the School and Early Years Finance (England) Regulations 2012/2991 prescribes school budgets and sets out matters which cannot form part of a local authority's schools budget. This includes capital expenditure and expenditure on capital financing
Capacity to enter into the Contract
The judge found that the lease back of the buildings and equipment from the contractor was a finance lease and a form of borrowing which required the consent of the Secretary of State under the EA 2002 Consent had not been given and this rendered the lease ultra vires for lack of contracting capacity, and therefore void.
The judge drew a distinction between “the private law consequences of an absence of a public law power to enter into a contract of the relevant kind (no capacity) and a case where the power has been exercised in breach of public law duties”. In this case the College’s decision (to enter into the lease) was ultra vires as a consequence of its lack of capacity to make such a decision in the absence of the Secretary of State’s consent.
An interesting point that came out of the judgment was that the parties were aware when entering into the Contract of the statutory restrictions on the College, so attempts were made to describe the Contract as something other than a finance lease, in an attempt to bring it within the College’s vires. On this point the judge ruled that the parties’ own naming of the lease did not change the real economic substance of the transaction.
With the vires point settled and the contract declared void, the contractor made an alternative claim for misrepresentation and negligent misstatement. This claim was based on statements made by the College and Council in letters prior to the signing of the Contract in early 2013. The Contractor alleged that it was led to believe that it could have entered into a valid contract with the College, and suffered loss as a result of this not being true.
Since the judge had found that that the Contract was ultra vires and void, it followed that any promise, representation or assumption to the contrary was also void. Put another way, the College’s ultra vires act prevented the misstatement claim advanced against it.
The judge also rejected the suggestion that the contractor had relied upon the Council’s letter of support when forming its own view as to the College’s ability to enter into the Contract. The contractor had itself drafted the letter of support in deliberately broad terms in the hope that the letter would not face internal scrutiny at the Council. This resulted in the Council approving the letter within one day which was recognised by the contractor as remarkably quick. The judge concluded that these factors demonstrated that the Council was unlikely to have undertaken any detailed scrutiny or obtained advice on the contents of the letter, on which the contractor could not therefore have placed reliance.
The judge found that the College was, however, required to pay the contractor a sum for continued use of the buildings in question. This is unsurprising as the College would have been unjustly enriched had it been able to avoid any payment at all for the buildings from which it had benefitted. However, the amount ordered (around £250,000 per year) was significantly less than the contractual rent of around .£700,000.
The case is a helpful reminder of the potential risks faced by financiers and contractors who enter into contracts with statutory bodies. It provides a useful discussion of the principles of vires, agency and misrepresentation in the formation of contracts. These are issues which can have very significant financial consequences if, as in this case, the statutory body lacks the legal powers to enter into the contract in question. Appropriate due diligence during contract negotiations can help to avoid these pitfalls. .