§ 3.31 p.m.
§ Lord Harris of High Cross rose to ask Her Majesty's Government whether they accept that the findings of 1188 the European Court of Human Rights on the terms of compensation under the Aircraft and Shipbuilding Industries Act 1977 (c.3) provide a precedent for the expropriation, nationalisation, or renationalisation of British-owned assets at home or abroad, and are contrary to the principle of prompt, adequate and effective compensation which British governments have previously supported as a rule of law.
The noble Lord said: My Lords, this Question was framed with the assistance of my noble friend Lord Shawcross, who has sent me a communication, since he is unable to be with us, that he has authorised me to read to the House. It goes to the heart of the Question. My noble friend says:
The problem created by the Strasbourg judgment was discussed at a recent meeting in Copenhagen of the International Association for the Promotion and Protection of Private Foreign Investments, APPI.
I should explain that this organisation was founded in the 1950s by Herr Hermann Abs, the famous German industralist and banker, Monsieur René Massigli, the French ambassador, and Sir Hartley Shawcross, as he then was, for the purpose precisely indicated by its title. It was set up because of the number of nationalisations and expropriations taking place in various foreign countries and to support what its members considered the established rule of international law about the payment of adequate, effective and prompt compensation.
The council of APPI expressed concern at its meeting that the majority judgment of the European Court would give foreign countries some justification for expropriating property without the payment of proper compensation. It felt that the matter was one on which representations should be made to the Government as the danger of confiscatory cases of nationalisation remains a real one in many parts of the world.".
§ In raising this Question, I feel that I should start by setting out some of the facts as briefly as the complexity of the situation allows. It started in 1974 with the election of a Labour Government—a minority Labour Government—committed to nationalising the aircraft and shipbuilding industries. Over a year later, in March 1975, Mr. Wedgwood Benn announced that the compensation would be based on the value of 43 companies in the six months' reference period preceding the election; that is to say, from September 1973 to February 1974. Values would be based on Stock Exchange prices for the one quoted company and on agreement or arbitration for the remainder which were either unquoted private companies or subsidiaries of public companies.
§ In March 1977, after delay s to which I shall return, the Aircraft and Shipbuilding Industries Bill received Royal Assent. In April 1977, the aerospace companies were vested in the state, followed by the shipbuilding companies in July. Negotiation over compensation was thereafter conducted between the Department of Industry and representatives of stockholders with an arbitration tribunal in reserve. In May 1979, it may be recalled, a Conservative Government were returned to power. Sir Keith Joseph became the Secretary of State responsible for continuing the negotiations with the outstanding companies which accounted for by far the greater part of the assets.
§ Between September 1977 and June 1981 a number of plaintiffs petitioned the Commission of Human Rights in Strasbourg for a declaration that the proposed compensation terms violated a number of articles of the European Convention for the Protection of Human Rights and Fundamental Freedoms. In 1189 January 1983, the commission declared most of the applications to be admissable, thereby completely rejecting Her Majesty's Government's argument that the case depended entirely upon the 1977 Act and was therefore out of time. The commission invited the petitioners and the Government to seek to resolve their differences by the established procedure known as a friendly settlement. Alas, it takes two to make friends, and the Government declined to play their part.
§ Accordingly in March 1984, over a year later, the case returned to the commission, which, by a majority vote, expressed the opinion that there had been no breach of the convention but that such important issues were raised that it should be referred to the European Court for a final judgment. Then in 1985 the case was heard against Her Majesty's Government, who conducted a vigorous defence and even asked the court specifically to declare that the compensation met the international law standard in that it was "prompt, adequate and effective".
§ Finally, on 8th July this year, the court found by a majority decision against the plaintiffs on the six alleged breaches of the convention. However, on the central issue of Article 1. Protocol 1, which entrenches the general right of every person "to the peaceful enjoyment of his possessions", five out of 18 judges found that a violation of the convention had taken place. They criticised the compensation provisions of the Act because of the remoteness of the reference period, and they criticised the way that the Secretary of State had applied those terms five and more years later to produce what they called "unreasonable and disproportionate distortion" in the payments made to at least three applicants: namely, Kincaid, Vosper Thornycroft and Brooke Marine, all of which were paid compensation less than the value of the cash in their accounts.
§ Due to the untiring efforts of Sir William lithgow, a major shareholder, the most famous case is that of Kincaid, a successful manufacturer of diesel engines. Sir William claims that assets valued at £18 million in 1977 including £5 million in ready cash were seized in exchange for compensation of a paltry £3.8 million. Other less publicised examples included Vospers which received £5.3 million for assets valued at £37 million including £5.5 million in cash. There was Yarrows, the naval shipbuilding firm, who were paid £6 million for assets valued at £16 million, later sold to GEC for £34 million. For the outstandingly successful British Aircraft Corporation, Vickers and English Electric claimed £350 million compensation and were awarded £95 million.
§ It is only since the July judgment this year that it has been revealed that Her Majesty's Government achieved this pyrrhic legal victory by relying entirely on the papers prepared by Mr. Wedgwood Benn and by trying to persuade stockholders' representatives to take less than the Government's advisers suggested as a fair minimum. I need not remind some noble Lords that back in 1976 when the Bill to nationalise these industries was before the House, leading Conservative and Cross-Bench Peers vied with one another in denouncing the provisions for compensation in such 1190 choice terms as derisory, disastrous, a disgrace, unfair, confiscation and expropriation. However, I wish to be fair in the matter to the Labour Party and to the noble Lord, Lord Bruce. w ho is to take part later in the debate. The Labour Party was far from being wholly to blame for this unfair final outcome. Nationalisation is, after all, a legitimate if not entirely sensible course that governments may pursue. It does not necessarily involve the punishment of the shareholders.
§ Likewise, the court and others have accepted in principle that the choice of a "reference period" before Stock Exchange prices were affected by the threat of nationalisation is a tolerable starting point. Again, the Labour Party can hardly be blamed that spirited opposition, both in the Commons and in this House, over the important matter of hybridity as well as over the issue of compensation, led to a long delay from the first introduction of the Bill in April 1975 until March 1977 when it passed through the Lords only under the provisions of the Parliament Act. Nor I think was the Labour Party to be held responsible for Mr. Heath's three-day week and control over dividends, which inevitably depressed the value of productive assets in the reference period. However. if the Labour Party was not responsible for the explosion of the oil price, it must accept some blame for the accelerating inflation to record levels which debased the value of the 1974 compensation pound to 55p by 1977 and to 40p by 1980 when much of the compensation was still outstanding.
§ It was as a result of these developments that most companies were plainly worth a great deal more in money as well as in real terms in 1977 than any necessarily arbitrary estimate relating to a vanished world of 1973 prices and values. Obviously, a Conservative Government had good cause to reconsider the outcome of blindly applying the 1973–74 formula. Indeed, at the very centre of the European Court's divided verdict was the unanimous judgment that a sovereign government enjoy a wide margin of discretion in assessing compensation.
Thus, on page 44 of the judgment we read:
The Court's power of review … is limited to ascertaining whether the decisions regarding compensation fell outside the United Kingdom's wide margin of appreciation; it will respect the legislature's judgment in this connection unless that judgment was manifestly without reasonable foundation".
Thus the difference between the majority and minority verdicts on this central issue might be simply expressed by saying that 13 judges thought that the compensation was at least above the lower limit of discretion, while five judges thought that it was below that minimum. The paradox which we have to raise is that Sir Keith Joseph, as Secretary of State, on 7th August 1980, in a Written Answer in the House of Commons, seemed to have conceded the minority view against his own decision. In the Official Report in another place, at col. 290, Sir Keith wrote:
We recognise that some previous owners and many members of this House and of the public believe that the terms of compensation imposed by the 1977 Act were grossly unfair to some of the companies and we share this view".
However, he went on to regret that,
amending legislation to establish new compensation terms retrospectively would be unjust to the many people who sold shares on the basis of the previous terms".
§ From long personal acquaintance with and great affection for Sir Keith Joseph, I have sadly come to the conclusion that his quite exceptional integrity led him here into a double error. His first error was in thinking that retrospective legislation would then have been necessary when, as the European Court unanimously agreed, he enjoyed a wide discretion in applying the 1973–74 formula. The second misconception, which is plain to almost any observer who will contemplate the matter, was pointed out by Sir Nicholas Goodison as chairman of the Stock Exchange. He explained in September 1980 that all dealings in shares can take place only on the basis of information and expectations available at the time and can never be invalidated or challenged in the light of subsequent events. Incidentally, on retrospection the Employment Act 1982 showed how compensation could be made available to remedy past injustices.
§ It must be remembered that the majority of the European Court did not say that the terms were fair but only that they were above the lowest conceivable margin of the wide discretion available to Sir Keith. For obvious reasons an international court will be reluctant to appear to direct an elected government on how they should exercise an acknowledged element of discretion. Even so, five of the 18 judges explicitly condemned Her Majesty's Government for failing to give their subjects the protection of their property guaranteed by the European Convention.
In the final reckoning, therefore, I am arguing that it is not the Labour Party as instigators, but the Conservative Government as implementors, who are principally guilty of invading the property rights of Sir William Lithgow and others. Whatever the legal quibbles offered to deflect responsibility from Her Majesty's Government I would, as a layman, take my stand with the distinguished Supreme Court Judge, Sir Robert Megarry, who on another occasion declared:
The Crown is the traditional fountain of justice, and justice is not confined to what is enforceable in the courts.".
§ As must already be apparent, my interest in this issue is that of neither a lawyer nor a politician but as a citizen and only after that as an economist. As a citizen I have an urgent concern shared by all others—including, I suppose, the Duke of Westminster—that such possessions as I may build up or legally acquire shall not be forcibly taken from me by another (not even by the Government) on arbitrary terms that would widely be judged unjust. Where others may not share my objections to the court's view—for example, on leasehold enfranchisement—I venture to say that most impartial observers who grasped the essential facts of this case would conclude that Sir William Lithgow and others have been unjustly treated. They have been cheated of a large part of the value of their possessions.
§ Yet security of private property is the bastion of individual freedom, which chiefly distinguishes our Western societies from the slave states of Eastern Europe. Our superior economic and social progress depends on harnessing the energies, thrift and enterprise of free people, to maximise long-term future social output. Governments may tax, they may regulate, they may even nationalise, but civilised governments may not pillage and should not do so 1192 even in their own interests. If their exactions undermine every man's expectation of continuing to enjoy sufficient of the fruits of his own efforts, then short-sighted politicians will have struck at the roots of long-run economic and social progress.
§ I would argue that both principle and expediency point to the need for secure entrenchment of property rights. As an economist, I would briefly assert that the reason Hong Kong flourishes and is free, while much of Africa languishes and is in chains, is that Hong Kong guarantees the sanctity of property even including the property each has in his own person, whereas many African governments notably fail to provide security of person or property.
§ Her Majesty's Government have been congratulated that the Hong Kong treaty commits China, after 1997, to the principle of paying "the real value of the property" as compensation in similar circumstances to those before Strasbourg. Yet, I ask this question: Is it realistic to expect a Communist power to honour property rights which the British Foreign Office, in this case, before the Commission, in camera, explicitly said did not exist in Britain? My question is whether Her Majesty's Government accept that, even by inadvertence, or through the misplaced political scruples of Sir Keith Joseph, they have set a thoroughly bad example at home and abroad for the further undermining of property rights on which the liberties and future prosperity of every one of us chiefly depend.
Lord Bruce of Donington
My Lords, before the noble Lord sits down, in order to clarify a point and to save time, will the noble Lord say whether or not he accepts the earnings basis as being a valid way of determining the true valuation of a concern and of the shares in it?
§ Lord Harris of High Cross
My Lords, I would not wish to get involved in a long argument on matters of accountancy with the noble lord. However, as I understand it, in the absence of a Stock Exchange quotation, which applied to only one of the 43 companies, an attempt was made to create hypothetically a Stock Exchange valuation on the basis of the assets in 1973–74. When we look at the progress of many of these companies after 1974, until 1977, the whole issue is that where a share price might at least be enlarged for those companies that had the prospect of good future earnings, the cash assessment of the asset value at the time of 1973–74 might miss out that factor. The British Aircraft Corporation was a highly successful, expanding and growing company and to value it on an asset basis would not take into account the prospective earnings in future years, as a share valuation would have done.