§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
§ Dr. Russell Thomas (Southampton)
This Clause purports to grant relief where there has been frustration. Sub-section (5) excludes charterparties to some extent, contracts of insurance in a general sense, and any contract to which Section 7 of the Sale of Goods Act applies and to other exceptions in regard to the sale of goods. My intention is to speak on the question of why insurance contracts are left out of this Bill. That is a large and most important group. It is highly re- 1742 grettable that, in spite of the remarks made on the Second Reading, His Majesty's Government have not seen their way since then to do something about this matter. The Bill is a very well-devised one, and will do a great amount of good, but it is unfortunate that this matter has been left out. In July, 1940, the Trading with the Enemy Joint Insurance Committee issued a circular, of which I will read a paragraph:On an insurer becoming an enemy the policy is frustrated with the result that (a) no liability under the policy attaches to the insurer with respect to any loss or damage happening thereafter to the subject matter of the insurance, (b) the insurer is not under any liability to make a return of premium to the insured in respect of the unexpired portion of the premium.On the Second Reading of this Bill, the learned Solicitor-General gave a reason for this. He said:With regard to these, it is felt that there are clear and well-defined principles of maritime and commercial law applicable, and it would not be right to interfere with these principles, and thus affect not only the position as it is understood to-day but the carrying on of these important activities which are so necessary to our national life."—[OFFICIAL REPORT, 23rd July, 1943; col. 1343, Vol. 391.]He did not define those principles of commercial law. He said nothing about them. I hope that the learned Attorney-General will say a little more about that to-day. What does the Solicitor-General mean when he talks of the position as it is understood to-day and it not being right to interfere with these principles because they are necessary to our national life? The question is a simple one. A premium is paid perhaps to cover the property for one year. There is frustration by a declaration of war or because a country has fallen into the hands of the enemy. Lloyds underwriters or the insurance company are unable to carry out their obligations to the full. Why, therefore, should not part of the premium, covering the period from frustration to the expiry of the contract, be refunded? The learned Solicitor-General said that this would involve retrospective legislation. He said:The retrospective legislation for which he"—referring to myself—and the hon. Members are asking would be true retrospective legislation, and would be contrary to the law as it has been under- 1743 stood."—[OFFICIAL REPORT, 23rd July, 1943; col. 1347, Vol. 391]It seems extraordinary that after such a demonstration of retrospective legislation as we had in the Finance Bill the learned Solicitor-General should make statements of that kind. His Majesty's Government had not the slightest qualms in introducing retrospective legislation. I did not think they would have dared to argue on that ground; nor indeed do I think there is real retrospection. It would be a matter of common justice to allow a portion of these premiums to these unfortunate people. Is this not money which Lloyds and other insurance companies have received for services, which they have not rendered; or, only partially rendered? Therefore, for the part they have not rendered, should they not honourably be prepared to make the equivalent refund?
The Seventh Interim Report of the Law Revision Committee was referred to by the Solicitor-General on Second Reading, and he said it contained no recommendation that alterations should extend to insurance contracts. I must disagree with him. While it does not specifically refer to insurance contracts, surely they are included in the following words: The Report said:We therefore recommend that where the purpose of a contract is frustrated in whole or in part and any money is paid or has been agreed to be paid at the time of the completion of the contract the following rule should apply unless the contrary intention appears in the terms of the contract. Money paid by one party to the other in pursuance of the contract should be recovered and subject to deduction of such sum as represents a fair allowance for expenditure incurred by the payee in the performance of, or for the purpose of performing the contract.There is no exclusion whatever of insurance contracts in the paragraph I have just quoted. Again, in connection with the Fibrosa case—I regret by a mental transposition of my notes I said that the Fibrosa Company sued the underwriters for the return of premiums; that was not quite so. In connection with this case, the Solicitor-General said, that it is manifest and must be accepted that the House of Lords did not intend to apply that principle to insurance cases. Again I must differ from him. I shall be glad if the learned Attorney-General will show me anywhere in the judgment of the House of Lords where it in any way excluded insurance premiums from the 1744 general principles which are laid down. In the judgment it was pointed out that the rule in Chandler and Webster, which was the rule of law on which the insurance companies base their claims not to return any insurance premium, was wrong, and was based on a misapprehension of legal principles. There was no reference to insurance or to any other contracts. They were not under consideration, but the principle of law was. The principle was the same and applies to all. May I read one or two small extracts from that judgment to show that I am not exaggerating? The Lord Chancellor said:Turning to the main contention, he said, that although the rule in Chandler and Webster that money paid before the date of frustration could not be recovered had been considered to be the law of England for nearly 40 years, the primary duty of their Lordships was to secure that the law on an important matter was correctly expounded and applied, and if the view that had hitherto prevailed was founded on a misapprehension of legal principles it was of great importance that those principles should be correctly defined.And again later:It must be for the legislature to decide whether provision should be made for equitable apportionment of prepaid sums which had to be returned in view of the frustration of the contract in respect of which they had been paid.He was talking of the principle in general. In no way was the contract of insurance referred to in the case at all. The report that I have read was taken from "The Times" of 16th June, 1942. The Law Revision Committee went into this matter very thoroughly, and some very striking remarks were made by eminent people, many of them Lords of Appeal, Judges and eminent lawyers. Lord Shaw describes in the Cantiare case, the rule in Chandler & Webster as the "something for nothing doctrine" and that this result under other systems of jurisprudence might be viewed as monstrous. Lord Atkin, in Russkoe & Sterk, said:I venture to doubt whether any two business people in the world would ever really make a contract that if certain unforeseen events happened the contract should be at an end and the moneys paid remain exactly as they were. It seems impossible that that should be deliberately done by business men.Sir Frederick Pollock said that Chandler & Webster would have been decided the other way in Scotland.
§ Dr. Thomas
I quite understand that it has not, but the Solicitor-General talked about the principles being generally applicable. In quoting what Sir Frederick Pollock said, I am not referring to Scot- land for discussion. Finally, may I quote this from the Law Revision Report?:A reversal of the rule in Chandler & Webster would not be a radical innovation or in conflict with well settled principles of the common law.It might be interesting to the Attorney-General also to read this opinion of the learned Attorney himself, in which he said:Some legal authorities have always taken the view that if a case raising this principle had gone to the House of Lords that body might decide that a principle which had been complained of by commercial men and others was not in accordance with the common law of England and some other principle might be substituted for it which would remedy what is complained of. I am sure it would be far more satisfactory if this problem could he dealt with by the Courts Overruling the principle than by trying to find an appropriate form of words in an Act of Parliament.That opinion was given, I believe, when the Fibrosa case was pending, and the Attorney-General thought that a decision of the court might give future guidance in the matter, and he did not contemplate at that time that legislation would be required. I believe that all those who are interested in the matter thought that one of the main things dealt with would be insurance contracts. The Solicitor-General said the difficulty with regard to an insurance contract is that it is difficult, and in his opinion impossible, to apply the word "frustration." Let us instead call it "cancellation." In these contracts surely some agreement can be arranged in such cases. Why should underwriters receive money for carrying a risk for 6 months instead of 12? I will give an example the opposite way round. Suppose an insurance policy is granted for one year but before the premium had been paid the policy was frustrated and the insured person whose risk was covered escapes payment. I am sure that no reasonable man would say that he should, I hope that the Attorney-General will give some satisfactory answer and promise to look into this matter.
§ Mr. Moelwyn Hughes (Carmarthen)
Nobody objects to the principle in this Bill. It is perfectly clear and proper. Two persons have entered into a con- 1746 tract, and payment has been made. The fulfilment of the contract has been interrupted, and the Bill provides that there shall be an equitable adjustment. There shall be payments back according to the benefits received. In the Clause we are discussing there is a Sub-section which provides for contracting out. It tells the court in terms that if the contract provides otherwise, then, according to the equitable rules laid down in the Bill, they shall have regard to it. In other words, any parties to a contract can contract out of the equitable and reasonable rules laid down in Clause I. We have been told that the substance of this Bill has been agreed by chambers of commerce and various bodies of that kind who are interested in the contracts which are for the most part affected. The overwhelming proportion of contracts that will be affected by this Bill are contracts upon forms and in a shape which are not arrived at by negotiations between the parties but which are pre-determined by either the chamber or the council or the association which governs a particular trade or activity, or, in the case of insurance companies, which are decided by them among themselves. You cannot get insurance policies except upon those terms. Therefore, if these bodies have agreed, and as these bodies are the persons who pre-determine the shape of a contract, why cannot there have been inserted in the Bill a term to the effect that the provisions of Clause 1 shall apply notwithstanding anything to the contrary? I would ask the Attorney-General why in these circumstances provision has been made in this Clause to allow contracting parties to contract out of the equitable provision of the Clause?
§ The Attorney-General
I will endeavour first to deal with the points made by the hon. Member for Southampton (Dr. Thomas), and I hope to do justice to them. The object of this Bill is not to extend the cases in which the law regards a contract as frustrated, but to make provisions, subject to certain exceptions, for what shall be the position as between the two parties when an event has happened which under our law has been treated as frustrating the contract. My hon. Friend complained about the provisions of Clause (5, b), excepting the contracts of insurance. My view is that the results will be the same as if that Clause were 1747 not there. It is well settled law that where you have a contract of insurance and the premium is due and paid—or due, whether paid or not—at the beginning of the year, that premium is not repayable in whole or in part provided the subject-matter of the insurance is at risk for any part of the period. If I insure against sickness on 1st January and die on 1st February, my executors cannot get back 11/12ths of the premium. That has always been and is recognised as being the implications of a binding contract of insurance. If the parties make a different contract, they are free to do so, but that has been well settled as being the position under an ordinary contract of insurance. It is not altogether unfair. It very often happens that after the premium is settled the risk goes up very much, but the insurance company cannot come back and say, "You must increase the premium." Sometimes the risk goes down very much, and, equally, none of the premium is repayable. In the case put, it may disappear altogether before the end of the period, but it is well settled, and the whole insurance business of London, which is the insurance centre of the world, is conducted on the basis that once a premium has become due no part of it is repayable even if the subject-matter of the risk disappeared during the period covered.
My view is that an insurance contract is not frustrated in law by the destruction of the subject-matter, and I believe therefore that this Bill, apart from paragraph (5 b), would have left insurance contracts where we desire to leave them, that is to say, where they are; but as a result of the decision in the House of Lords to which my hon. Friend referred in the Coronation cases, somebody suggested that possibly the over-ruling of those cases might be regarded or suggested as altering this general and well settled principle of insurance law. We do not desire any uncertainty in the matter. We do not desire to alter this principle of insurance law. There is no general complaint about it by people who insure. The actuarial calculations of insurance companies are based upon it. It is not unfair when you take into account that the premium is fixed in the light of events as they are known at the time. If the matter becomes at more risk the insurance company cannot say, "We want more premiums." If the 1748 matter becomes of less risk the insurer cannot ask for the premium back. It is better to leave things where they are, and that is our intention. This sub-paragraph was put in out of caution, possibly excessive caution, but to make it clear that we do not propose and we do not desire to alter the general law governing insurance contracts where the subject-matter ceases to be at risk. If my hon. Friend thinks that is bad principle, he must address himself to Lloyds and the insurers and persuade them to put their contracts in a different form. No doubt that would have its effect upon the agreement. We do not desire to alter the general law and that is why we put this Clause in. I appreciate that my hon. Friend does not agree with that, but I think he will realise that the policy of the Bill is not to alter the law as to what contracts are frustrated, but to deal with the position when a contract is in law frustrated.
The hon. Member opposite asked me why we put in the Clause about contracting out. I think what I said just now is relevant. We simply desire to deal with the position which arises when a contract is in law frustrated. We do not want to restrict the freedom of contract. That is not part of the Bill or of the recommendations of the Law Revision Committee. If it is desirable to do that, it must be by a different Bill, which, on the face of it, will be one controlling contracts. We do not desire to prevent people, if they foresee frustration or impossibility, from making such arrangements as may seem satisfactory to themselves to deal with it.
Let me take quite a good example, one of the obvious frustration cases in theory and in law. A man makes a contract to decorate a house, and the terms of the contract are that nothing is payable until he has finished doing the whole job. By the time he has done part of it, the house is blown up or burnt, or the top is knocked off; and that is a frustrated contract. He cannot complete. If nothing is said in the contract, the provisions of the Bill will apply. We do not want to prevent a builder or decorator who foresees this possibility, as to what he shall get in the event of the contract being frustrated in that way. It would be quite wrong to do that. Therefore, we put in a clause again to remove doubts. I think the probable result would have 1749 been arrived at if we had not had it, but we did not want there to be the argument, "This contract has been frustrated. There is an Act of Parliament which says what is to happen when a contract is frustrated. Although clause 16 of the contract says what is to happen, the Act of Parliament is to be taken as overriding what is to happen under the contract." We do not want to produce that result. My hon. Friend has said that forms are put before people and they have to sign them.
§ The Attorney-General
I do not agree. There are many contracts which are made at arms length and where the contracting parties on each side have their associations and their advisers. The buyers scrutinise the form of the contract just as much as do the sellers, and it is a perfectly even-handed thing. If there is a provision of those contracts as to what is to happen if the thing becomes impossible of performance, we do not wish to interfere with that. If there are cases, and there may be some, in which in some particular area my hon. Friend may be able to say, "Here is a form drawn up by a great and powerful association, and you more or less have to take this form," that is a special matter to be dealt with by special legislation.
The great virtue of this Bill is that it lays down general principles applicable over the whole law of contract, and it does not desire to interfere with freedom of contract. If people are so minded as to make special provision as to how the rights shall be adjusted, and if the contract becomes impossible of performance, we do not by this Bill desire to interfere with them. All we are seeking to do is to say how the courts shall adjust their rights if the contract is frustrated in law and no provision has been made by them to cover the event. I hope that my hon. Friend will allow us to have the Bill in this form, and on some later occasion when he produces specific cases, that may or may not be a proper matter for consideration.
§ Dr. Thomas
I quite agree with my right hon. and learned Friend that the degree of risk may fluctuate during the period over which it is covered. But surely some equitable arrangement can be made for those unfortunate people who 1750 had paid their premiums in regard to property in enemy countries.
§ Mr. Tinker (Leigh)
Could I put it this way? Is the position this, that by this Bill you are trying to establish what has been the custom for a long time; it has been altered by some litigation, and you want to establish the old custom which had been prevailing?
§ The Chairman
That is really a matter for Second Reading, not on the Question, "That the Clause stand part of the Bill."
§ The Attorney-General
I do not think this Bill could deal with that. That would be retrospective. We are not altering the general law.
§ Question, "That the Clause stand part of the Bill," put, and agreed to.
§ Clause 3 ordered to stand part of the Bill.
§ Bill reported, without Amendment.
§ Motion made, and Question proposed, "That the Bill be now read the Third time."—[King's Consent signified.]
§ Mr. Tinker
I would like the point cleared up. I will put it again. Do I take it that this is for the purpose of continuing by law a custom which has prevailed up to the present time which has been altered by some litigation? Will the Attorney-General explain?
§ The Attorney-General
I will if I can No, that is not the position at all. This Bill deals with this case: First of all, two parties have had a contract. One of the terms of that contract is that A should pay B £100 before it starts. Then before ever it does start the subject matter is completely destroyed, and therefore the contract cannot be carried out. This Bill, in accordance with a recent decision of the House of Lords, and contrary to what has been thought to be the law up to this, provides that the man who has paid the £100 before the thing ever started can get it back. It also provides that the man who has had it and therefore is primarily liable to pay it back can say, "No, you ought not to have it all back, because I incurred some expense getting ready to perform the contract or in pursuance of the contract." This provides for that 1751 adjustment. The other case is this. Suppose I have a contract with a man to decorate my house. He paints the drawing room and kitchen, and then the Ministry of Supply says, "You cannot have any more paint." As the law stands at present, he cannot claim the reward under the contract because he has not been able to do what he undertook to do—decorate my whole house. But I have in fact had my sitting room and my kitchen painted, and I ought to pay for that. This Bill provides that, although it has become impossible to carry out the contract in accordance with its terms, I ought to pay a sum which represents the benefit I have received. It I can say that I have incurred expenses, that can be taken into account in computing what I ought to pay.
§ Question, "That the Bill be now read the Third time," put, and agreed to.
§ Bill read the Third time, and passed, without Amendment.