SFM v Christ the King College (2021) – A lesson in the counter-restitution principle

School Facility Management Ltd & Others v The Governing Body of Christ the King College [2021] EWCA Civ 1053

Summary

The governing body of a school, whose contract with a construction company was previously found to be ultra vires and void, unsuccessfully appealed to claim restitution for overpayments on a school building. The case and its importance were demarcated by the Court of Appeal defining the counter-restitution principle explicitly for the first time, alongside a change of position defence.  

Introduction

The Governing Body of Christ the King College (the “Appellant”/“College”) entered into a contract with School Facility Management Limited (the “Defendant/“SFM”) to build a sixth form building. The College did not have the capital to outright pay for the building, so entered into a hire contract (the “Contract”) for the construction and hire of a modular building. The modular building was provided and built by a company named Built Offsite Limited (BOS). BOS then sold the building to BosHire Limited, who entered into the Contract, and later one of their subsidiaries created for the Contract became party to it – School Facility Management Limited (SFM), before GCP Asset Finance 1 Limited (GCP) were assigned right to payments.

The Contract stated that if there was a termination for “any events of default”, all hire charges for the unexpired minimum period of the contract would become payable. Between 2013 and 2017 – the First Period, the College made hire payments valued at ~£3.2 million. The Second Period covers the time from when the College stopped paying, after failing to make annual payment due to the budget deficit not being approved by the College’s Council, to the first trial in 2020. SFM alleged that the College was in breach of contract for failing to make the subsequent payments. SFM subsequently sent the College a formal notice of default and in 2018, the College stated that the contract was ultra vires and that they were not going to pay. SFM then cancelled the contract and stated that the College were no longer in lawful possession of the Building and that they should stop using it.

At trial (SFM and Ors v The Governing Body of Christ the King College [2020] EWHC 1118), the contract was found to be ultra vires and void, and SFM then claimed in unjust enrichment, as the college had used the building for a significant period of time during which they were not making payments. SFM sought restitution for the benefit of the use of the building during the Second Period. The College said that they would make counter-restitution and give ‘credit’ for the value of the use of the building. This was subsequently defeated by SFM’s change of position defence: “a defence to a claim for unjust enrichment” which was established in Lipkin Gorman v Karpnale Ltd [1991]. This left “the losses to lie where they fell”.  

Sole Issue – the College appealed on the basis of whether claims of counter-restitution must be applied before the change of position defence, and that their payments during the First Period should be set off against those that they didn’t make during the Second Period.

Judgement

Sole Issue – earlier overpayments from the First Period should not be considered as a “restitution voucher” for the Second Period. Whilst the payments were not applicable to any future use, they were referable to the Building’s use in the First Period and the capital element of the lease.

As the Contract was previously found to be a finance lease, thus ultra vires and void, as it was contradictory to the Education Act 2002. They agreed that the High Court was correct in ordering the Appellant to make payment for the Second Period, from when the Contract was void. The Contract being void also did not result in earlier payments in the First Period being reclassified as viable to pay for the Second Period.

The Defendant’s rigid application of the four elements to unjust enrichment that Lord Steyn set out in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 227 regarding the counter-restitution principle was found to be inconsistent with what was later said by Lord Reed in the Investment Trust Companies v Revenue & Customs Commissioners [2018] AC 275. They only provide a framework.

SFM had received the initial payments from the College in good faith and had spent the proceeds on their other financial obligations before they were in a position to know of the contract being ultra vires. The Court held that it would be inequitable to demand any form of significant payment.

The Judge also alluded to the idea that no one defence could beat the other – the counter-restitution principle does not always “trump” a change of position defence. Furthermore, considerations must be held on a case-by-case basis and their individual facts – Lord Reed’s emphasis on the four elements do not insinuate the opposite. The appeal was therefore dismissed.

Application

What is perhaps most significant is that Popplewell LJ defined the counter-restitution principle. He said “I would not state the counter-restitution principle any more narrowly than being that the benefits for which the claimant must give credit are those which are sufficiently closely connected with the benefits provided to the defendant that justice requires him to do so”. This gives the application of the principle a certain amount of flexibility so that justice can be achieved on the facts of each separate case, rather than requiring adherence to a rigid rule.

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