HL Deb 29 June 1943 vol 128 cc136-51

Order of the Day for the Second Reading read.

THE LORD CHANCELLOR (VISCOUNT SIMON)

My Lords, I beg to move the Second Reading of this measure. If your Lordships have looked at the Bill some of you at first sight may have thought it to be of a rather technical character, but I hope to be able to show very briefly that it is in fact a measure of real importance to the ordinary man and that what we are here proposing to do will be a great improvement in the present law. The situation with which the Bill deals is what is called the "frustration" of contracts. Of course in the ordinary way when parties enter into a lawful contract the law merely requires that each party shall perform what he has agreed to do until the contract is carried out, and the only other duty of the law may be to enforce the contract, to award damages if one: side breaks it, or to give some other remedy. But it sometimes happens— and it is specially likely to happen in connexion with war—that the contract is "frustrated"—that is to say, that some supervening event occurs which discharges both parties from any further performance so that the performance of the contract ends at the moment of frustration.

I will give one or two simple instances which lawyers have had to consider. You may have, for example, a contract entered into before the war by a British engineer to build to specification machinery and then to deliver it to the other party to the contract who may be resident in Germany or in one of the countries now overrun by Germany. That was a perfectly lawful contract to enter into before the war, and in the ordinary way all that would remain would be to see that it was properly carried out. But when war breaks out it becomes unlawful for any British firm to continue to execute a contract made with an enemy, and the consequence is that the contract is discharged by frustration. I will take another example which greatly exercised the lawyers some forty years ago. It had nothing to do with war. When King Edward VII fell suddenly ill just before the day appointed for his Coronation, there were already a very large number of contracts that had been entered into for letting rooms and windows and seats on the line of the intended Coronation procession. In many cases people had paid in advance for the accommodation. In some cases special action had been taken by the other party with a view to everything being ready for the day of the Coronation. Then came the announcement that his late Majesty had fallen ill and the Coronation would have to be postponed. The question was what was to happen, because manifestly when people entered into contracts of this sort they did not agree to pay £100 or £150 merely for a few hours' occupation of a room looking into Pall Mall. The contract was made because both parties assumed that there was going to be a Coronation procession. Those are illustrations of the sort of difficulty that arises in connexion with frustration of contracts.

How does the present law stand about the matter? It was for many years a matter of doubt, although it has now been finally settled as far as England is concerned. If the case is one in which there has been a prepayment—and it constantly happens in commercial contracts that you pay so much down before the other party begins to build your machinery or before he begins to build your house, and it may be so much more at a certain intermediate stage—if there has been prepayment made before the date of frustration, there is no doubt now that the English law is that the man who has received that prepayment has got to hand it back. The party that made the payment has not got what he contracted for, and the man who received the money must hand it back. That is a very simple rule; but as your Lordships will see it is sometimes a very harsh rule, because of course the person who has received the prepayment may very well have done a good deal towards carrying out his contract. He may have acquired materials or he may have already started manufacture and, though the goods may still be on his own premises, he has none the less done work or expended money. Yet if there is frustration for which neither party is in the least to blame, which is due to some external cause, he has got under the present law to hand the money all back.

The first object of this Bill is to alter that, and this is done in Clause 1 (2). To put it in simple terms, without being too meticulously exact, the provision is this: that though in principle a man who has received a prepayment has to pay it back in the event of frustration, he is entitled to set off against that amount the expenditure which he has already incurred in, and in connexion with, the execution of the contract. He cannot ask for more, but it may, in many cases, mean that he can keep the whole of the prepayment. If, for example, there has been £1,000 paid in advance, or if the contract that has been made confers the right to prepayment, and if he can show that he has already spent £800 in part performance, he is not required to return the £1,000, but only the balance of £200. I think that will commend itself to everybody as good sense, and it is undoubtedly a great improvement in the law.

The other provision which this Bill contains is in subsection (3) of Clause 1 and has to do with the other party to a transaction. There are many cases in which a contract is frustrated, is brought to an end in the middle, where the other party has already received some benefit. The contract may be a contract to deliver and instal machinery, and it may be that already there has been a delivery of a portion of the machinery, or some action taken which is beneficial to the other party before the time came for the contract to be declared frustrated. In those cases where the other party has received a valuable benefit we propose to provide that—contrary to the present existing law —he must pay for it. At present, if a contract is frustrated, even although he has received valuable benefit he has not to pay anything for what he has received until the time comes to pay for the completion of the contract and under frustration that time will never arrive. Of course in some cases the work which is done up to the time of the frustration of the contract will not be worth very much to this party. But in a case where a benefit has been conferred on him we think that he ought to be made to pay fair value for the benefit which he has enjoyed. It will be obvious—to take a humble illustration —that if a decorator has undertaken to paint the whole of your house inside and out, has done half the work, and then there comes a Defence of the Realm Regulation which says that no more paint is to be used except for ships, so that of course the contract is frustrated, none the less you have got your house half painted and therefore you ought, we submit, to pay a fair amount for the benefit which you have received.

I hope that I have put in simple and intelligible language the two main provisions of this Bill. When your Lordships turn to the text you may, perhaps, be surprised that lawyers should put it in such very unstimulating language. I may say that steps have been taken to consult a number of authorities which are interested in this subject, including the Association of Chambers of Commerce, and I think I may safely say that the objects of the Bill are generally approved. Further, it is widely recognized both by lawyers and laymen—indeed there was a leading article in The Times upon the subject only the other day—that as the law works out at present it really is not in all cases fair. I would only say this for the law and still more for the Judges. I beg your Lordships to remember that in these matters the Judges have to decide what the law is. It is not for them, in cases in which they find that the law works hardly, to declare it something different to what it really is. There are historical reasons which I need not go into, why the law is what it is. The duty of Parliament when there is a situation which is not really fair under the law, is to make an Amendment, and the Amendment is in this Bill. If this Bill becomes law it will be part and parcel of the law of the land.

I need not delay your Lordships by going into details of the Bill, because these are the two provisions which sum up its main purpose. I would like, however, to mention shortly two other matters. If this Bill is passed, how soon will it apply? There are a great many cases where the best thing is to ensure that your new Statute will not apply to anything at all which has even begun to exist until after the Statute is passed. In view of the fact that this injustice, as I consider it to be, may and does arise from time to time now, it seemed to me better in this Bill to make provision of a slightly different kind. Clause 2 (1) of the Bill provides: This Act shall apply to contracts, whether made before or after the commencement of this Act, as respects which the time of discharge is on or after the first day of July, nineteen hundred and forty-three, but not to contracts as respects which the time of discharge is before the said date. This Bill is already well known in the commercial community and it will be known more fully after the debate to-day. It seems to me to be a right provision to make that the relief which it affords shall apply in cases of existing contracts providing it only applies where such a contract becomes frustrated after a future date which we have not yet reached.

The other provision which I had better mention is of particular interest to the shipping community. It is Clause 2 (5) which reads: This Act shall not apply to any charter-party, except a time charterparty or a charter-party by way of demise, or to any contract (other than a charterparty) for the carriage of goods by sea. This provision may seem to have a rather special and technical air. It is a provision that the Act shall not apply to certain shipping contracts. I will offer this brief explanation, if only for the purpose of getting it on record. It will be observed that Clause 2 (5) exempts from the operation of the Bill charterparties (other than time charters or charters by demise) and other contracts for the carriage of goods by sea. The reason for this is that there have long been established as part of the general maritime law the two principles th;:.t advance freight is not repayable even though ship and cargo be lost before delivery can be effected, and secondly that unless otherwise agreed freight (other than advance freight) is only payable if the contract is completely performed.

These principles have for many years been acted upon by the business community (very often not only by British subjects, but also in connexion with arrangements made by British shipowners with foreign customers) and any alteration would involve substantial modification of the present insurance practice. This seems to be both unnecessary and undesirable. On the other hand, there is no similar generally accepied rule as to hire payable under a time charterparty or a charterparty by way of demise and, though many such contracts, in terms provide that any hire payable in advance and not earned shall be returned (which provision would be saved by subsection (3) of this clause), it has been thought right that these contracts should, in general, be brought within the ambit of this Bill. That may sound a little technical, and to some it may sound a little archaic, but it may be of interest to one or two members of your Lordships' House to know that charters by way of demise —what are sometimes called "bareboat charters"—although they were rare in commercial practice before the war, have again come into common use both by the British and by the American Governments in cases where, for operational or other reasons, it has not been practicable or convenient for the ships to be manned by the owners' own crews.

I apologize for that lapse into technicality, and I return to the more popular view of this Bill, which is none the less also the accurate view. I submit that the two changes which we seek to make in the law are changes of very considerable general importance, which will work out for the benefit of ordinary citizens, and I hope that your Lordships will sec your way to give this Bill a Second Reading. I beg to move that the Bill be now read a second time.

Moved, That the Bill be now read 2a. —(The Lord Chancellor.)

LORD NATHAN

My Lords, the noble and learned Lord Chancellor has put very shortly before your Lordships, in an illuminating fashion and, to any who realize the complexity of the problem, in amazingly simple terms, the object of this Bill. He did not tell your Lordships, as he was entitled to do, that the law as finally settled on this subject over twelve months ago—settled so as to do what would commonly be accepted as justice, as against incomplete justice—depends for its leading judgment upon the Lord Chancellor himself. I see also in your Lordship's House to-day the noble and learned Lords, Lord Wright and Lord Macmillan, who both participated in the judgments given by a tribunal consisting of no fewer than seven members of your Lordships.' House on that occasion.

It is with no false modesty that I say that I speak to-day with more than my usual trepidation, because the noble and learned Lord Chancellor is the head of the judiciary and, while I work in the same general field, it is on an infinitely lower plane, and in only a limited area of that field; but in my professional avocation, as a solicitor practising in commercial affairs, I have time and again met with the very problem with which this Bill is designed to deal. I have often felt uncomfortable when the advice which I have had to give has seemed not only to me but also to my clients to be harsh advice, and undoubtedly it has left in the minds of many of them a feeling that less than justice was being done to the situation in which they found themselves. Until the law was finally settled in the Fibrosa case, in 1942, to which I have referred, the principle for forty years had been, as the noble and learned Lord Chancellor has pointed out, that the loss should lie where it fell; and, lying where it fell, it often worked the gravest injustice, as the noble and learned Viscount has made clear.

This Bill radically alters the law as it existed for forty years. The argument has been advanced—and, indeed, it is in general a recognized principle of the administration of justice in this country— that, except for good reasons, a generally-established custom, or the law as generally understood by the community, and upon which the members of the community have for a long time acted, should not be altered "by judicial decision. Here, however, was a case which had become the subject of controversy and ill-feeling—controversy amongst lawyers, and ill-feeling amongst the commercial community—for a period of upwards of forty years. I think that this House, sitting in its appellate quality, did well when it decided, in the judgment of the Lord Chancellor, notwithstanding the fact that one view of the law had so long prevailed, to establish definitely that that view of English law was wrong. It it perhaps worth noting that that judgment settles the law so as to bring it in line with the existing law of Scotland and with a number of Continental systems.

Your Lordships may say that if that judgment of your Lordships' House settled the law, why is it necessary for this Bill to be introduced into your Lordships' House? The answer—I think that the noble and learned Lord Chancellor made this clear, though he did not put it quite in the way in which I am presuming to put it—is that something more is required than merely to accept the position as it was left by the judgment which I have mentioned. The opportunity has been taken by this Bill to give effect to the principles which underlay the decision of this House in its appellate quality. It is no part of the function of this House in its appellate quality—nor, indeed, was the matter before the House on the occasion in question—to go further than to decide the immediate question put before it by the parties to the litigation. The decision in that case was, in general and non-technical terms, that a prepayment should, notwithstanding the previous law, be recoverable. That however, did less than justice to the position, for reasons which the noble and learned Lord Chancellor has indicated, and this Bill is directed to remedying that injustice.

Moreover, the judgment in question dealt only with the case viewed in one of its aspects—namely, where the prepayment was made by the party to whom for the sake of simplicity and clarity I will refer as the buyer, the purchaser. He was, under the rule established by that judgment, entitled in the event of frustration to recover from the seller. It still left the injustice that, in the case of frustration, the seller might find himself, by reason of having to make the repayment, in a position of qreat loss; so that although the loss did not lie where it fell it was made to fall, if the matter had been left there, in such a way as to work perhaps only a little less injustice than did the rule which had previously existed. It is to remedy that that this Bill is brought forward.

It must not be thought, however, that the frustration of a contract always imposes a loss upon the seller. The noble and learned Viscount took the case of a contract for the manufacture and delivery of agricultural machinery which had been frustrated—that was in general the Fibrosa case—but in the event it may very well be that the seller, having manufactured wholly or in large part an article in such great demand as agricultural machinery, finds himself in a very much better position than he would have been in had the contract not been frustrated. I mention that not in any way to derogate from the value and importance of this Bill but merely to indicate that frustration may in certain circumstances bring of itself advantage to one of the parties to the frustrated contract.

There was one point to which the noble and learned Viscount did not refer—he obviously thought it unnecessary—which has occasioned me just a little doubt, but I am very ready to be told that I am entirely wrong. That is in Clause 1 (5), where it is provided that in assessing the sum to be recovered or retained under the general principles to which I have referred, no account is to be taken of money recoverable under a contract of insurance. I am a little troubled by that provision because, insurance being a contract of indemnity, the person insured is not entitled to recover more than his loss, though he is entitled to recover up to the limit under the conditions of the insurance. If money received on insurance is not to be taken into account, may it not be that to that extent this provision will enure to the advantage of the insurance company and not to the advantage, as was intended, of the party to the frustrated contract?

The noble and learned Viscount has directed your Lordships' attention to the provisions of Clause 2 of the Bill under which—I will not say it is made retroactive, but under which it applies to contracts made before the Bill is passed, though only to frustrations arising after the first of July of this present year. Perhaps the noble Viscount, if he has an opportunity of speaking later in this debate, would give some consideration to this relatively small but perhaps not unimportant point, unless I completely misapprehend the position, which indeed I may well have dons. It is this. Since the Fibrosa judgment: and by reason of it certain rights have accrued in this sense, that persons who before that judgment would have felt and been advised that they were entitled to no right of action for recovery of prepayments, upon that judgment becoming law became entitled to institute proceedings for recovery, subject to the Statute of Limitations. At least, that is how I apprehend the position to stand. I believe it is usual in Bills of this kind to insert a saving clause for litigation—at least litigation which may have already been instituted—if the right to that litigation looked as if it would be debarred by subsequent legislation.

The noble and learned Viscount may say there is nothing in this provision which debars litigation on the footing of the Fibrosa judgment for frustrations prior to the 1st July, 1943, but I am just a little apprehensive that the explicit statement contained here that this Act applies to frustrations after the 1st July, 1943, but not to contracts as respects which the time of discharge is before the said date, might possibly be held to operate either to prevent proceedings being instituted which but for this Bill might have been instituted by virtue of the Fibrosa judgment, or to stay proceedings which have actually been instituted by virtue of and following that judgment. Far from wishing to be in any way dogmatic, I indicate the point which I have in mind, because it would be well, I think, if it were possible, to alleviate doubts upon the subject.

I have no doubt that this Bill will be welcomed by the whole commercial community. If I may make a general observation it is this. The subject matter of this Bill was in large part considered by the Law Revision Committee appointed by the noble and learned Viscount, Lord Maugham, when he was Lord Chancellor, of which the noble and learned Lord, Lord Wright, was Chairman, whose Report was published I think in the middle of 1939 in Cmd. Paper 6009. The Bill in many respects follows closely the Report made by that Committee; or shall I put it the other way and say that most of the recommendations contained in the Report of that Committee are incorporated in the Bill, though others have been added? And I think perhaps it is due to the noble and learned Lord, Lord Wright, and his colleagues to indicate the value of such a Report as that.

Finally, I will address a general observation, if I may, to the Lord Chancellor, unrelated to this particular Bill. The Law Revision Committee—the exact terms under which it operates I do not know, but it is irrelevant—has based a number of Reports on matters that have been submitted to it of some complexity, which raise no political questions, indeed I might almost say no controversial questions in the sense in which we understand "controversial" in your Lordships' House. I do not know whether time and opportunity will permit during the war, but I would venture to suggest to the Lord Chancellor, if it be at all practicable, that it would be a most valuable public service if there could be a tidying up of various difficult points that are outstanding of the nature of that which was considered by Lord Wright's Committee in this particular case, so that when the war is over we may be a little more prepared, with the legislation tidied up and certain necessary, though not vital, work already done. I do not know how far it is possible for this Committee to consider such other problems as the Lord Chancellor may think fit to submit, but it would be an additional public service on his part if something could be done to get some of these difficult points out of the way so that we may be readier than otherwise we might be when the war comes to an end. I commend this Bill to your Lordships for all the reasons given by the Lord Chancellor, for some additional reasons which I may have been able to adduce, but perhaps most of all because it does remedy an injustice and will certainly ease the situation and clarify the position of the commercial community as a whole.

VISCOUNT HAILSHAM

My Lords, after the clear and lucid explanation given by my noble and learned friend on the Woolsack both as to the mischief which the Bill is designed to remedy and the means proposed to deal with it, I should not feel justified in taking up your Lord- ships' time in expressing my welcome to the Bill were it not for the fact that during my years at the Bar I had occasion to deal with these frustration cases both in argument in Court and in advice in Chambers. I saw a great deal of the hardship inflicted by the law. In those days we accepted the law laid down in what were known as the Coronation cases —Krell versus Henry, Chandler versus Webster—and we thought that where money had become payable under a frustrated contract before its restriction the loss fell on the payer; the loss lay where it fell. In the Fibrosa case your Lordships have decided that that is wrong, and that the payments are recoverable so that the loss falls on the payee. No doubt that does remedy the absurdity that where the money is payable under a frustrated contract the question of who loses the money depends on whether the payment was stipulated to be made in advance or not. But that does not, and cannot, alter the fact that the loss is exclusively borne by one of the parties and not by the other, although it is possible that the other party may make a profit out of what ought to be a common misfortune.

The Common Law cannot empower the Court to make any equitable adjustment of the loss. That is a matter for the Legislature. The aim of the Common Law in contract is to give effect to the intention of the parties as expressed by the language they have used in their contract, but, unless in exceptional circumstances, that has no application to a case where the contract has been frustrated. People when they make a bargain look forward to its performance, and do not expect or make provision for the event of its frustration. As I understand this Bill, it does not propose to compensate either party for the loss of his bargain. What it does is to provide that where one party has benefited and the other party has suffered an expense, the Court may adjust the benefit to the expense and the expense to the benefit. I congratulate my noble and learned friend on the introduction of this Bill, and wish it a smooth and speedy progress to the Statute Book. I have been asked by my noble and learned friend Lord Maugham to say that he, too, regards the Bill as one calculated to remedy injustices, and he gives it his blessing.

LORD WRIGHT

My Lords, I intervene for a very brief moment simply in order to congratulate the Lord Chancellor on introducing this Bill. I have for a long time thought that such a Bill would be an improvement in the law. It was overdue, in my opinion, and indeed the substance of the measure was recommended in the Report of the Law Revision Committee in May, 1939. I happened to be Chairman of that Committee, and in substance, for reasons which are there set out, the present measure was recommended as a desirable reform. Since then the Lord Chancellor, as he has told your Lordships, has taken the opinion of all the Chambers of Commerce in Great Britain, and they have given their unqualified approval to this measure. I venture to think it will be a great improvement and will meet with the applause of the commercial and legal community.

LORD TEVIOT

My Lords, it is with great respect and some humility that I, the only layman to take part in this debate, say a few words. When I explain that I happen to be treasurer of the Association of British Chambers of Commerce, your Lordships will realize how important this Bill is to that organization. We are extremely glad that this Bill has been introduced, and we congratulate the Government, particularly my noble and learned friend on the Woolsack, who has taken so much trouble in this matter. This Bill is welcomed most whole-heartedly by at least 100 or more Chambers of Commerce and 50,000 industrial and commercial firms. There is news that the Chambers of Commerce in London, Birmingham, Liverpool, Edinburgh, and so on have sent a message to say how glad they are that this Bill is being brought forward. It will undoubtedly remove a great anxiety from the minds of a great many business men who find themselves, through circumstances over which they have no control, in a very difficult position.

There is a point I should like to mention. The whole thing depends on whether the contracting parties have not got in their contracts something in regard to a possible frustration. This is unusual in contracts, but I would say that this Bill does not interfere in any way with the habit of some firms who, in every contract, may have a clause to provide for almost every eventuality. Another point is that the laws of England and Scotland on this subject should be assimilated, but any new legislation—this is the point—should not interfere with the liberty of parties, as I have instanced, to put in a frustration clause. It should not in any way limit that liberty. As far as we can see, this Bill meets those views. There has been a good deal of discussion on a much wider proposition for amending the present law, which is not covered I think by this Bill. I do not complain about it, but I would like my noble and learned friend later on to say, if he will, why it is not covered in this Bill, that is, if I am right in thinking it is not. It is suggested that whether there has been prepayment to one party or pre-benefit to the other or not, the Court should effect adjustment by awarding an allowance for expenditure incurred and setting it off against allowances for benefits accruing under the partly performed contract. If I am wrong perhaps my noble friend may be able to explain why it was thought that this was inadvisable. If something of that kind could be put into the Bill it is thought that it would help towards amicable settlements without recourse to litigation. It may be necessary later on to bring forward other points in regard to the Bill on the Committee stage, but I can say that this Bill is welcomed by every business institution in the country and I heartily congratulate my noble friend and the Government in having brought the Bill in. I beg to support the Motion for Second Reading.

THE LORD CHANCELLOR

My Lords, I will not detain the House on this matter for more than a moment or two for we have other business, and interesting business, to do this afternoon; but I must just be allowed, in a few words, to thank noble Lords who have spoken for the welcome which they have given to the Bill. If I may take those who have spoken in the reverse order. I would first say how glad I am to learn from Lord Teviot that I may expect to find the Bill supported by the bulk of the commercial community represented in the associated Chambers of Commerce. That is very important indeed. The noble Lord is quite right in saying the Bill does not provide the very much wider treatment of those difficulties which he very clearly indicated and which possibly we may have to discuss at a later stage. I will only say now that when you are enacting, as you are enacting here, that the Court, the Judge, is to intervene and is to decide what is the right thing, you must never forget that you are putting upon the Judge a very difficult task. It is not like deciding who is right or wrong in law; it is a question of the distribution of responsibility. My own strong view is that it is much better that this Bill should deal with the specific points that it does deal with. I think it would be a mistake to appoint even persons as fair-minded and eminent as British or Scottish Judges to undertake a very much wider obligation and in effect to remake contracts for people in all sorts of circumstances. It is a practical matter. I think what I have suggested would be the wiser course. However, we may consider that later.

The noble Lord is right when he says the Bill does not in any way seek to force people to make contracts in any particular form. I would call attention to subsection (3) of Clause 2, which provides that if there is a contract which contains a provision to meet the cases of frustration should they arise, that it is the bargain made which is to be enforced and not some different bargain which the Courts make. A quite usual instance is a contract which provides that if war breaks out such and such a thing shall happen. Of course if that is the case, though the war may have frustrated the contract, there would be some instances, at any rate, where that special provision would apply.

I am greatly indebted to my noble and learned friend Lord Wright, and indeed very grateful to Lord Nathan for filling in a deficiency of my own. I should have acknowledged in the first instance that the inception of this Bill and a great deal of the effort that has gone to building it up, is all to be found in the report of the Law Revision Committee of which my noble friend Lord Wright was Chairman and which has worked very hard at this and other subjects. I know that great benefit has been conferred on the community thereby. Nothing would be more grateful to me or your Lordships generally than the speech of my noble and learned friend Lord Hailsham. It was like old times to hear him: when I think how many times he and I, either in consultation or in opposition, have endeavoured to make sense of the present law on this subject of frustration and how constantly we have confided to one another that we thought the present law is all wrong, it is a very great satisfaction to me to have heard him in what I hope is the death of the old bad law.

Last, but by no means least, I would wish to thank Lord Nathan for his very kind and very helpful speech. I think the answer to his question about insurance is really this. The provision he refers to is in the first part of subsection (5) of Clause 1. It is intended to preserve the rights of insurance companies either by limiting the losses or giving subrogation rights; but I will look into it again in the light of what he has said. As regards the first subsection of Clause 2 on which he also made a comment, frankly I do not feel exactly as he does, and he advanced his own point about it very tentatively. It is quite clear that the provision in Clause 2 (1) applies only in the case where frustration occurs in the future. I do not see how anybody could have started an action in order to recover his rights upon frustration under the law as it now is, because a contract has been frustrated, if the contract has not yet been frustrated at all. I think, therefore, if he will look at that again, he will be satisfied that the clause is reasonable. I feel I have occupied quite enough of the time of the House this afternoon and I hope your Lordships will now allow me to have the Second Reading.

On Question, Bill read 2a, and committed to a Committee of the Whole House.