School Facility Management Ltd & Ors v Governing Body of Christ the King College & Anor (Rev 1)

A public body’s lack of statutory power to enter a contract means that it lacks contractual capacity and the contract is void. Public-law unlawfulness in the exercise of an existing contractual power does not automatically invalidate the contract in private law. The facts must also establish a recognised private-law defence, with the counterparty’s notice potentially relevant.

A finance lease is borrowing when its economic substance transfers substantially all the risks and rewards of ownership. The classification depends on substance rather than contractual labels. A finance lease entered into by a maintained school without the Secretary of State’s consent was beyond the school’s capacity.

The claimants sought payment under a 15-year hire contract for a modular sixth-form building entered into by the governing body of a maintained voluntary-aided school. The contract rights were subsequently assigned to the claimants. The College stopped paying and relied on ultra vires arguments. The Council denied liability and disputed that it was a contracting party.

The principal issues were whether the College acted as the Council’s agent; whether the contract involved unauthorised borrowing because it was a finance lease; whether other statutory, regulatory or public-law defects invalidated the contract; and what remedies arose in contract, misrepresentation, negligent misstatement and unjust enrichment.

1. Contracting party. The College, not the Council, was the contracting party. The statutory treatment of delegated funds under School Standards and Framework Act 1998, s.49(5), did not make the Council the principal in contracts entered into by the College. The statutory deeming provision concerned the character of expenditure, not the identity of the contracting party (paras [82]-[107]).
2. Public law and private law. A lack of statutory power to enter a contract gives rise to lack of contractual capacity and renders the contract void. Where a public body has power to enter a contract of that type but exercises the power unlawfully, the unlawfulness does not automatically invalidate the contract. The facts must establish a private-law defence, such as abuse of authority coupled with relevant notice (paras [150]-[162]).
3. Unauthorised borrowing. Schedule 1, para. 3(4)(a) of the Education Act 2002 imposed a condition precedent requiring the Secretary of State’s written consent to borrowing. The requirement applied both to borrowing and to granting security. Borrowing was to be determined by economic substance, not by labels or contractual form (paras [171]-[183]).
4. Finance lease. Applying IAS 17, the contract was a finance lease. The present value of the minimum lease payments amounted to substantially all of the fair value; the building was specialised; and the lease term consumed its economic life. The building’s bespoke design and the economic impracticality of relocation supported the conclusion. The contract therefore involved borrowing and was void for want of the required consent (paras [184]-[250]).
5. Other grounds. Regulations 6 and 7 of SEYFER 2012 regulated the use of funds and did not generally restrict contractual capacity. Breaches of the Council’s financing scheme, standing orders, best-value requirements, the Roberts v Hopwood duty and Wednesbury rationality did not invalidate the contract on the facts, absent a private-law defence based on those breaches (paras [255]-[316]).
6. Alternative claims. The misrepresentation claim under s.2(1) of the Misrepresentation Act 1967 failed because there was no contract and the Council was not a contracting party. The negligent misstatement claims also failed for want of actionable reliance and loss. The proper claimant in unjust enrichment was SFM, as owner of the building. SFM could recover the market value of the College’s use after September 2017, while its change-of-position defence defeated the College’s repayment claim for earlier payments (paras [346]-[504]).
7. Disposition. The contractual and statement-based claims failed. SFM’s unjust-enrichment claim succeeded for the period from September 2017 to judgment and was to be quantified by reference to market rental value. The College’s and Council’s Part 20 claims failed (paras [505]-[508]).