Newham College started judicial review proceedings over the Further Education Funding Council’s handling of last month’s expansion cash crisis.But lawyers were celebrating this week after the FEFC issued new guidance lifting a ban on colleges signing new deals after the end of January.

Newham had claimed the funding council acted illegally when it effectively imposed a cut-off for new contracts because it did not consult colleges in advance.

Peter Pendle, chair of the governors at Newham, said all the major points raised by the college had been conceded.

He said: “We have shown essential leadership and made considerable progress on behalf of the further education sector as a whole.

“We have established the rights of colleges as independent institutions to be treated lawfully and fairly and to be consulted on issues that affect our business.

“It is a shame that the Association of Colleges did not initiate or support such action on behalf of the sector.

“Political pressure has worked well, but it would not have achieved such a comprehensive result as this.”

The argument centres around a letter sent to colleges by FEFC chief executive David Melville at the height of the crisis over demand-led funding last month.

Professor Melville warned colleges the budget which pays for colleges to expand beyond their targets could be axed - and warned them not to take on new work after January 28.

Colleges reacted with fury, saying the mid-term deadline threw plans and delicate negotiations into chaos.

But last week Professor Melville sent fresh guidance after ministers agreed to foot most of the #163;84 million bill for college expansion up to the end of the academic year. Funding for colleges to expand beyond their targets will now end in September.

Now the FEFC says colleges are free to take on new work during this academic year - as long as they do not exceed the estimates submitted last autumn.

Colleges were this week assessing detailed FEFC proposals for coping with the loss of expansion cash, known as the demand led element (DLE).

Newham principal Martin Tolhurst said: “We will continue to work politically on these issues in order to convince all sides that DLE, far from being an undesirable market mechanism, is actually an opportunity mechanism for those institutions that wish to develop genuine open access and comprehensive further education, as well as use its ability to fuel strategic partnerships, growth and investment.”

Mike Bourke, chief executive of Waltham Forest College, which joined Newham’s legal challenge, said: “Whatever mechanism the FEFC chooses to deal with these issues in the coming year, it will have a very significant impact on all colleges. However, it is critical that growth and business partnerships, the success stories of the sector, are not blamed for this crisis.”

John Hall, of Eversheds solicitors, who led the action, said: “These colleges have done the sector as a whole a great deal of good.”

But John Brennan, policy director of the Association of Colleges, sounded a note of caution. He said: “It is certainly a big step forward from where we were three or four weeks ago, but it’s not clear it has resolved all the issues.”