School Facility Management Ltd v Governing Body of Christ the King College

JurisdictionEngland & Wales
CourtQueen's Bench Division (Commercial Court)
JudgeMr Justice Foxton
Judgment Date07 May 2020
Neutral Citation[2020] EWHC 1118 (Comm)
Docket NumberCase No: CL-2018-000732
Date07 May 2020

[2020] EWHC 1118 (Comm)

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS

OF ENGLAND AND WALES

QUEENS BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice

Rolls Building

Fetter Lane

London, EC4A 1NL

Before:

Mr Justice Foxton

Case No: CL-2018-000732

Between:
(1) School Facility Management Limited
(2) Boshire Limited
(3) GCP Asset Finance 1 Limited
Claimants
and
(1) Governing Body of Christ the King College
(2) Isle of Wight Council
Defendants

Timothy Straker QC and Pia Dutton (instructed by Stephenson Harwood LLP) for the Claimants

Peter Oldham QC and Christopher Knight (instructed by Stone King LLP) for the First Defendant

Daniel Stilitz QC and Rupert Paines (instructed by DAC Beachcroft LLP) for the Second Defendant

Hearing dates: 2 to 5 and 9 to 12 March 2020.

Post-hearing submissions: 1, 7 and 8 April and 4 and 5 May 2020.

Mr Justice Foxton

INTRODUCTION

1

On 10 February 2009, the Isle of Wight Council (“the Council”) approved a request by the Governing Body of Christ the King College (“the College”) to expand its age range and open a sixth form. This decision fell to be implemented against the background of the budgetary constraints which impacted the public sector in the wake of the financial crisis, which significantly reduced the funds available for capital projects. The solution which the College ultimately adopted in the face of that dilemma was to enter into what was described as a hire contract (“the Contract”) for the construction and hire of a modular building and associated equipment (“the Building”).

2

The Building was provided and assembled by a company called Built Offsite Limited (“BOS”), a specialist in modular construction. The transaction was structured so that BOS sold the Building to BOSHire Limited (“BOSHire”) (a joint venture company in which BOS held a 50% interest), who in turn entered into the Contract to lease the Building to the College. Subsequent assignments led to School Facility Management Limited (“SFM”) and then GCP Asset Finance 1 Limited (“GCP”) obtaining the right to payments made by the College under the Contract.

3

Against the background of an increasing budget deficit, the College failed to pay the annual instalment under the Contract which fell due in September 2017. The present proceedings followed a year later, in the course of which the legal characteristics of the Contract, and the process by which it came to be entered into, came under much greater scrutiny within the College and the Council than they had received when the College signed the Contract, and the Council signed a letter supportive of the Contract, back in 2013.

4

Both the College and the Council now allege that the Contract was beyond the capacity of the College and outside the authority of those who signed the Contract on a wide range of grounds. The College resists the claims for debt and damages under the Contract, and seeks to recover the amounts it has already paid in unjust enrichment. In response, the Claimants contend that the Contract was binding on both the College and the Council as the College's principal, but in the alternative advance claims in misrepresentation, misstatement and unjust enrichment. The College and the Council also bring contingent claims against each other.

5

In Credit Suisse v Borough Council of Allerdale [1995] 1 Lloyd's Rep 315, 373, Colman J noted that the case before him “demonstrates that banks and other lending and credit providing institutions that deal with local authorities are exposed to the major risk of finding that their contracts are unenforceable in circumstances not encountered when dealing with the directors and officers of companies”. This case shows that this may be equally true of those who lease equipment, goods or buildings to local authorities, or the schools they maintain.

THE PARTIES

6

BOSHire is the joint vehicle of two companies, BOS and Summit Asset Management Limited (“SAM”). As noted above, BOS designs, manufactures and installs modular buildings, principally (but not exclusively) for customers in the education and healthcare sectors. SAM was involved in asset finance, raising finance for transactions for the sale or hire of assets under various forms of asset finance agreements.

7

BOSHire was originally formed in 1993, its role being to put together finance packages for customers who wished to acquire modular buildings from BOS, under an arrangement whereby BOSHire would purchase a building from BOS and then enter into a lease contract with the customer under which regular payments of hire would be made. BOSHire procured external financing for these transactions (which provided the means to pay BOS and a profit element for BOSHire) by selling the income stream constituted by the payments due under the hire contracts.

8

Mr Timothy Spring, a director of both SAM and BOSHire, described BOSHire's “strategic business model” as being:

“to supply modular buildings to customers in the public sector – principally health and education – where end-user customers are predominantly NHS Trusts, schools or colleges that are subject to statutory restrictions on incurring capital expenditure”.

9

It will be apparent that BOSHire is one of a number of companies who operate in the commercial space which has come into existence as a result of limitations on the monies available to public bodies for capital expenditure (whether from allocated or borrowed funds), a space which has been increasingly filled by structured transactions intended to allow the cost of equipment and buildings to be met from periodic payments which, for regulatory and accounting purposes, the public body can treat as revenue expenditure.

10

In circumstances which I describe in greater detail below, on 30 April 2013 BOSHire entered into the Contract with the College for the supply of the Building for a 15-year period. On 5 June 2013, BOSHire assigned the benefit of the Contract to SFM, a subsidiary of BOSHire created for the purpose of raising finance for the Contract. By a Receivable Sales Agreement (“RSA”) dated 4 July 2013, SFM assigned its rights, title and interest in rental income under the Contract to GCP, a third party funder from whom BOSHire had raised debt finance for the transaction.

11

The College is a voluntary aided school maintained by the Council. It was formed in 2008 from the merger of two middle schools – one Anglican and one Roman Catholic – and its mission is to provide Christian secondary education on the Isle of Wight. At the times material to the dispute before the Court, the College's governing body (“the Governing Body”) was chaired by David Lisseter, its Principal was Mrs Pat Goodhead and its Business Manager was (and still is) Ms Kathrin Williams.

12

The Council is the unitary local authority for the Isle of Wight. Its functions include the provision of maintenance and funding to voluntary-aided schools on the Island. The Council is not responsible for the funding of sixth form education. Between April 2010 and March 2012, sixth-form funding was the responsibility of the Young People's Learning Agency (“YPLA”), and, thereafter, the Education Funding Agency.

THE WITNESSES

The Claimants' witnesses

13

The Claimants called evidence from Mr Timothy Spring and Mr Richard Pierce.

14

Mr Spring is a director of both SFM and BOSHire, with principal responsibility within BOSHire for co-ordinating the financing of transactions and the contractual arrangements between BOSHire and the end-user. I found him a careful and honest witness, who was clearly well-informed about the ultra vires risk which arises in dealing with public authorities, and who had sought to manage that risk in relation to the Contract. Mr Spring candidly recognised that the more conservative the approach taken to managing the vires risk, the less profitable the Contract would be for BOSHire, and the less attractive BOSHire's funding proposal would be when seeking to attract financing in the secondary debt market. He was understandably keen to defend the efficacy of the risk management steps which had been taken.

15

Mr Pierce is the chairman and director of BOS, which is a family business, and which specialises in the manufacture and supply of modular buildings. Modular buildings are assembled from prefabricated sections manufactured off-site. In some cases, it is feasible to disassemble a building when it is no longer needed, and use the modules elsewhere (the practicality of doing so in this case is an issue on which I have heard evidence, and to which it will be necessary to return). Mr Pierce was also an honest and careful witness. He was very knowledgeable about the technical aspects of modular building construction, and was able to deploy this knowledge to his advantage in the course of his cross-examination. He understood the regulatory sensitives which attached to the BOSHire business model, and was careful in his dealings with the Council to describe the transaction and its legal incidents appropriately. While Mr Pierce left the detail of the financial and contracting issues to Mr Spring, he was clearly alive to the legal implications of issues canvassed with him in evidence such as the potential re-sale market for the Building if the College stopped using it at the end of the Contract. For reasons I explain below, I have concluded that the prospects of marketing the Building to a third party purchaser at the end of the Contract were distinctly bleaker than Mr Pierce's evidence suggested.

The College's witnesses

16

The College called two witnesses: Mrs Patricia Goodhead, who was the Principal of the College from its foundation in 2008 until she retired in 2018,...

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