Our Legal Heritage: The Scots contract case that influenced English law

The outbreak of war in 1914 prompted a business dispute that ultimately reached the House of Lords and influenced reform to English law. Kate Scarborough explains the details of the case.

Cantiere San Rocco SA v Clyde Shipbuilding and Engineering Co Ltd [1923] SC (HL) 105 concerned a contract between two shipbuilding companies which became frustrated when the First World War prevented its completion.

In considering the case, the law lords presented an account of Scots contract law that began with principles received from Roman law and drew comparisons with the equivalent English provisions. The case clarified the law of the day in situations in which unforeseen circumstances prevent the fulfilment of an agreement.

Facts of the case

A few months before the outbreak of war in 1914, two shipbuilding companies – Clyde Shipbuilding and Engineering Cantiere San Rocco (which was Austrian at the time of the contract, but Italian by the time of the case) – entered into a contract for the manufacture and delivery of a set of marine engines for a price of £11,550.

The money was to be paid by Cantiere San Rocco in designated instalments. As per the contract, the Austrian company paid 20 per cent of the total price (£2,310) on signing the contract.

When the war broke out, Clyde Shipbuilding had not yet started work under the contract, beyond making plans and ordering some materials, and the war made it illegal for them to fulfil the terms of the contract.

When the war was over, Cantiere San Rocco brought an action against Clyde Shipbuilding Company for the repayment of the £2,310 already paid, on the grounds of failure of consideration.

The case went before Lord Hunter, as Lord Ordinary, and he found the contract was abrogated by the war, and the appellants were entitled to repayment of the instalment, subject to any counterclaims by the respondents.

An appeal was made by the Glasgow company and, by a majority, the interlocutor of the Lord Ordinary was recalled and Clyde Shipbuilding Company did not have to pay back the money. There was a dissent from Lord Mackenzie.

Cantiere San Rocco appealed to the House of Lords.

House of Lords

Cantiere San Rocco sought recovery of the first instalment on the ground of failure of consideration as the respondents had not supplied the engines and, beyond preparing some plans, had not done any work under the contract.

Their claim was based on the principle of restitution, which they attested had been uniformly applied throughout the history of Scots law.

Counsel for the appellants said: “There is nothing in this contract to show that the money was paid for any other purpose than in consideration of the respondents supplying the engines.”

The respondents, however, claimed that it was an ordinary contract case which should be determined by the law of contract common to both countries, for which they cited a French case.

They claimed that under Scots law, the principle of restitution did not apply and where a contract could not be fulfilled due to an unforeseen circumstance, the loss is left to lie at the moment where it fell and neither party can claim.

Furthermore, they argued that the only way that consideration may play a part is where there has been a “total failure” of consideration, but that was not the case here.

The judgment

The Law Lords emphasised that this case must be determined on Scots law, which was different to the position under English law as a result of the former’s Roman law heritage.

In England, the law at that time was, as the defence counsel had attested, that when a contract was frustrated any resulting losses or enrichments lay where they fell.

The Earl of Birkenhead explained that this was not the case under Scots law as it had received the condictio causa data causa non secuta from Roman law centuries earlier, through the Scottish action of restitution.

He described it as “the process to recover money or things which had been parted with by the owner at such time as he became entitled to reclaim them.”

He then considered the position of modern Scots law. For this, he referred to the case of Watson & Co v Shankland (1871) 10 M. 14, and the judgment in that case – delivered by Lord President Inglis.

The ruling by Lord President Inglis was considered by the Earl of Birkenhead to be “a celebrated judgment which has since been regarded as an authoritative statement of the law”.

It stated: “If money is advanced by one party to a mutual contract, on the condition and stipulation that something shall be afterwards paid or performed by the other party and the latter party fails in performing his part of the contract, the former is entitled to repayment of his advance, on the ground of failure to consideration.”

Although none of the cited cases dealt directly with what should happen where a contract had been abrogated by war, the Earl of Birkenhead considered that there was no fundamental difference between that circumstance and any other unforeseen circumstance where neither party is at fault.

He said that in his opinion the appellants were entitled to succeed on the basis that the instalment was not allocated to any particular stage or the completion of any part of the contract. The money was regarded as being on the same footing as if the whole sum had been paid as the payment was made in consideration of the entire completion of the contract and the end product being delivered.

Therefore, he applied the general principles of restitution from Scots law and concluded that the interlocutor of the Lord Ordinary should be restored. Clyde Shipbuilding Company would have to pay back the original sum as well as be liable to pay the costs of the court hearings at the Court of Session and the House of Lords.

Each of the other judges, Viscount Finlay, Lord Dunedin, Lord Atkinson, and Lord Shaw of Dunfermline, provided their own account of the history of Scots law but ultimately each came to the same conclusion.

English law vs Scots law

The difference between English and Scots law was a key feature in this case. The Earl of Birkenhead highlighted this in his analysis of the law and presentation of the history of Scots law. So too did Scottish judges Lord Shaw of Dunfermline and Lord Dunedin.

Lord Shaw commented: “I am not surprised that there is in high legal quarters a feeling both of uneasiness and of disrelish as to the English rule.”

Lord Dunedin also suggested that the English law was perhaps not the best. Of the English frustration cases, he remarked: “None of these cases reached your Lordships’ House, and it has been mooted that some at least of them were wrongly decided. I do not propose to consider any such question. Perhaps some day I may have to do so; but for the moment, sitting as a Judge of Scottish law alone, I assume they were rightly decided. I can, however, confidently affirm that some of them at least would have been decided otherwise in Scotland.”

Twenty years later the English courts changed their approach in the case of Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 and Parliament passed the Law Reform (Frustrated Contracts) Act 1943.

Cantiere remains an important case for the affirmation of the Scots law on frustration and unjust enrichment, and its influence on English law.

Professor Hector MacQueen told Scottish Legal News: “Cantiere is one of the few cases where Scots law can be seen influencing change in English law.

“The case is an important example of the use of Roman law as a source of Scots law. But perhaps the key dictum on that is by Lord Dunedin, that ‘the Roman law, though interesting, is only of service as showing the foundation on which the Scots law rests. The real question must always be what is the law of Scotland’.”

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