Cost Cutting Cornwall Fails - Local Authority Pushes The Principle Of Pure Ultra Vires To The Limit In An Attempt To Jump Out Of Its Contractual Obligations

It is an unattractive feature of public law that allows public bodies to escape contracts with private parties by evoking their own lack of capacity.

However, the recent Court of Appeal case of Charles Terence Estates Limited ("CTE") v Cornwall Council will be welcomed by private businesses dealing with local authorities.

In this ground breaking case, the Court of Appeal has upheld an appeal against the High Court decision that had allowed Cornwall Council to rid itself of what it considered to be bad bargains by evoking its own, or rather its predecessor district authorities (Restormel's and Penwith's) lack of capacity.

Background

Between 2007 and 2008, CTE had granted 30 leases of houses to Cornwall's predecessor authorities to allow the local authorities to house vulnerable homeless people in good quality accommodation and reduce the use of temporary accommodation. This was a unique arrangement designed to assist the local authorities in meeting their statutory duties to house the homeless.

High Court Decision

The High Court reluctantly found that the local authorities had breached their fiduciary duties to their council tax payers by failing to have regard to market rents when negotiating the terms of the leases. The High Court felt that Section 17 of the Housing Act 1985, which confers on local authorities the power to acquire land, should be read as a power to require such land at a reasonable price. The Court felt therefore that Cornwall's singular failure to have regard to market rents meant that Cornwall had lacked capacity when entering into the leases. Accordingly, all 30 leases were void and of no effect. The irony was that the fault was all Cornwall's (in fact the High Court Judge, Sir Ross Cranston, the former attorney general accepted that CTE acted completely in good faith) and the council were in fact seeking to argue that their own bad behaviour should allow them to avoid their own contractual liabilities freely entered into.

Appeal

CTE duly appealed and the issues for the Court of Appeal to determine were:

The "threshold" question of whether Cornwall (or its predecessors) had breached their fiduciary duties in the first place. If the authorities had breached their fiduciary duties was that enough to null and void the leases i.e. should the concept of pure ultra vires allow a local authority to be released from its obligations in circumstances where it had the power to enter into a contract but had not used that power in...