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Actionstrength Limited (t/a Vital Resources (formerly t/a Morson Alltrades)) (company number 2761631) (Appellants) v. International Glass Engineering In.Gl.En. SpA and others (Respondents)
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
Actionstrength Limited (t/1 Vital Resources (formerly t/a Morson Alltrades) (company number 2761631 (Appellants)
International Glass Engineering In.Gl.En. SpA and others (Respondents)
THURSDAY 3 APRIL 2003
The Appellate Committee comprised:
Lord Bingham of Cornhill
Lord Walker of Gestingthorpe
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Actionstrength Limited (t/a Vital Resources (formerly t/a Morson Alltrades) (company number 2761631 (Appellants) v. International Glass Engineering In.Gl.En. SpA and others (Respondents)
 UKHL 17
LORD BINGHAM OF CORNHILL
1. Section 4 of the Statute of Frauds was enacted in 1677 to address a mischief facilitated, it seems, by the procedural deficiencies of the day (Holdsworth, A History of English Law, vol VI, pp 388-390): the calling of perjured evidence to prove spurious agreements said to have been made orally. The solution applied to the five classes of contract specified in section 4 was to require, as a condition of enforceability, some written memorandum or note of the agreement signed by the party to be charged under the agreement or his authorised agent.
2. It quickly became evident that if the seventeenth century solution addressed one mischief it was capable of giving rise to another: that a party, making and acting on what was thought to be a binding oral agreement, would find his commercial expectations defeated when the time for enforcement came and the other party successfully relied on the lack of a written memorandum or note of the agreement.
3. In one of the five specified classes of agreement, relating to contracts for the sale or other disposition of land, this second mischief was mitigated by the doctrine of part performance. Implementation of an agreement (even if partial) could be relied on to prove its existence. This doctrine was expressly preserved by section 40(2) of the Law of Property Act 1925, when section 4 of the Statute of Frauds (in its application to real property) was effectively re-enacted in section 40(1). A majority of the House gave the doctrine of part performance a broad interpretation in Steadman v Steadman  AC 536. By section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, following a report by the Law Commission (Transfer of Land: Formalities for Contracts for Sale Etc of Land, HC2, June 1987, Law Com. No 164), section 40 of the 1925 Act was superseded by a requirement that contracts for the sale or other disposition of land should be made in writing.
4. By the Law Reform (Enforcement of Contracts) Act 1954, section 4 of the Statute of Frauds was repealed in its application to three of the five classes originally specified. Section 4 now applies only to the class of agreement which is at issue in this appeal, an agreement under which it is sought "to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person".
5. The facts assumed to be true for purposes of these proceedings at this stage have been helpfully summarised by Lord Walker of Gestingthorpe, whose summary I gratefully adopt and need not repeat. If tested at trial those facts might or might not be established. But if, as must be assumed, they are correct, they illustrate the second mischief to which I have referred above. Actionstrength agreed with Inglen to supply labour to enable Inglen (the main contractor chosen by St-Gobain) to build a factory for St-Gobain. Inglen's deficiencies as a contractor led to Actionstrength being drawn, more closely than would be normal for a labour-only sub-contractor, into the oversight of Inglen's performance. From an early date Actionstrength had difficulty obtaining payment by Inglen and considerable arrears built up. Actionstrength was contractually entitled to terminate its contract with Inglen on 30 days' notice if duly approved invoices had not been paid within 30 days and remained unpaid. Such termination would have been seriously prejudicial to St-Gobain, whose interest was to take expeditious possession of a completed factory. Actionstrength threatened to withdraw its labour. St-Gobain induced it not to do so by promising that, if Inglen did not pay Actionstrength any sums which were or became owing, it (St-Gobain) would do so. On that undertaking Actionstrength forebore to withdraw its labour and continued to supply labour to Inglen, whose indebtedness to Actionstrength increased fivefold over the weeks that followed. St-Gobain received the benefit of the work done by the labour which Actionstrength supplied. When Actionstrength, unable to obtain payment by Inglen, sought to enforce the agreement against St-Gobain, that company relied on the absence of a written memorandum or note of the agreement to defeat Actionstrength's claim.
6. While section 4 of the Statute of Frauds has been repealed or replaced in its application to the other four classes of contract originally specified, it has been retained in relation to guarantees. In 1937 the Law Revision Committee (in its Sixth Interim Report, Statute of Frauds and the Doctrine of Consideration, Cmd 5449, paragraph 16) recommended the repeal of so much as remained of section 4. But a minority headed by Goddard J dissented in relation to guarantees, on the grounds
No action was taken on the 1937 report. In 1953 the Law Reform Committee (First Report, Statute of Frauds and Section 4 of the Sale of Goods Act 1893, Cmd 8809) endorsed the recommendation of its predecessor that section 4 of the Statute of Frauds should be largely repealed but, agreeing with those who had earlier dissented, unanimously recommended that the section should continue to apply to guarantees. Effect was given to this report by enactment of the 1954 Act. Whatever the strength of the reasons given by the dissenting minority for retaining the old rule in relation to conventional consumer guarantees, it will be apparent that those reasons have little bearing on cases where the facts are such as those to be assumed here. It was not a bargain struck between inexperienced people, liable to misunderstand what they were doing. St-Gobain, as surety, had a very clear incentive to keep the Actionstrength workforce on site and, on the assumed facts, had an opportunity to think again. There is assumed to be no issue about the terms of the guarantee. English contract law does not ordinarily require writing as a condition of enforceability. It is not obvious why judges are more fallible when ruling on guarantees than other forms of oral contract. These were not small men in need of paternalist protection. While the familiar form of bank guarantee is well understood, it must be at least doubtful whether those who made the assumed agreement in this case appreciated that it was in law a guarantee. The judge at first instance was doubtful whether it was or not. The Court of Appeal reached the view that it was, but regarded the point as interesting and not entirely easy:  1 WLR 566, 568,  EWCA Civ 1477, paragraph 2. Two members of the court discussed the question at a little length, with detailed reference to authority.
7. It may be questionable whether, in relation to contracts of guarantee, the mischief at which section 4 was originally aimed, is not now outweighed, at least in some classes of case, by the mischief to which it can give rise in a case such as the present, however unusual such cases may be. But that is not a question for the House in its judicial capacity. Sitting judicially, the House must of course give effect to the law of the land of which (in England and Wales) section 4 is part. As Mr McGhee for Actionstrength correctly recognised, that section is fatal to his client's claim unless St-Gobain can be shown to be estopped from relying on the section.
8. Neither party suggested, nor could it be suggested, that the ordinary rules of estoppel are inapplicable to guarantees. The well-known case of Amalgamated Investment & Property Co Ltd (In Liquidation) v Texas Commerce International Bank Ltd  QB 84 is one in which a party was held to be estopped from disputing the assumed effect of a guarantee. But the same approach should be followed as in other cases. On the facts of this case that involves asking three questions: (1) What is the assumption which Actionstrength made? (2) Did St-Gobain induce or encourage the making of that assumption? (3) Is it in all the circumstances unconscionable for St-Gobain to place reliance on section 4? It would, as Mr Soole QC for St-Gobain submitted, be wrong in principle to ask the third question before both of the first two.
9. It is implicit in the assumed facts that Actionstrength believed itself to be the beneficiary of an effective guarantee. Its difficulty, in my view insuperable, arises with the second question. For in seeking to show inducement or encouragement Actionstrength can rely on nothing beyond the oral agreement of St-Gobain which, in the absence of writing, is rendered unenforceable by section 4. There was no respresentation by St-Gobain that it would honour the agreement despite the absence of writing, or that it was not a contract of guarantee, or that it would confirm the agreement in writing. Nor did St-Gobain make any payment direct to Actionstrength which could arguably be relied on as affirming the oral agreement or inducing Actionstrength to go on supplying labour. If St-Gobain were held to be estopped in this case it is hard to see why any oral guarantor, where credit was extended to a debtor on the strength of a guarantee, would not be similarly estopped. The result would be to render nugatory a provision which, despite its age, Parliament has deliberately chosen to retain.
10. For these reasons, and those given by Lord Hoffmann, Lord Clyde and Lord Walker of Gestingthorpe, with which I agree, I am of the reluctant but clear opinion that the appeal must be dismissed. I agree with the order which Lord Walker proposes.LORD WOOLF My Lords,
11. I have read the speeches of Lord Bingham of Cornhill, Lord Hoffmann, Lord Clyde and Lord Walker of Gestingthorpe.
12. I agree with them that this appeal has to be dismissed for the reasons they give. I also do so with regret. There is nothing on the facts that are before us which could establish the estoppel on which the appellant seeks to rely.LORD HOFFMANN
13. The appellant ("Actionstrength") was a labour-only subcontractor providing services to the main contractor ("Inglen") in connection with the construction of a float glass factory in East Yorkshire for the respondent ("St-Gobain"). Actionstrength has obtained a default judgment against Inglen for about £1.3m but Inglen is insolvent and there is unlikely to be a dividend. In these proceedings, Actionstrength sues St-Gobain on an alleged oral guarantee of Inglen's liability. It says that the guarantee was given on behalf of St-Gobain by a Mr Watkinson on 11 February 2000, when Inglen owed Actionstrength about £197,000. Actionstrength was threatening that unless it was paid, it would withdraw its labour from the site. It alleges that to avoid this happening, Mr Watkinson promised that if he could not persuade Inglen to meet its obligations, St-Gobain would itself pay Actionstrength out of money withheld from what was due to Inglen under the main contract. Relying on this promise, Actionstrength went on providing labour to Inglen on credit for about another month until the indebtedness reached £1.3m.
14. St-Gobain, on the other hand, has a very different version of events. It agrees that Actionstrength was claiming to be unpaid and threatening to withdraw its labour and disrupt the contract in other ways. But it says that it told Actionstrength that this would be counter-productive. It said it had paid Inglen enough to enable it to meet its obligations to Actionstrength and offered to help try to resolve any dispute between Actionstrength and Inglen. That was enough to persuade Actionstrength to continue to perform the subcontract. But St-Gobain says that it certainly did not promise to pay Inglen's debts. On the contrary, it had made it clear that it would not make a direct payment to a subcontractor.
15. This is a fairly common dispute over who said what; in the ordinary way it would have been resolved by a judge hearing the witnesses and deciding which of them he believed. But St-Gobain says that a hearing is unnecessary because, even if Actionstrength's version were to be accepted, the promise would be unenforceable by virtue of section 4 of the Statute of Frauds 1677:
16. So St-Gobain applied for summary judgment on the ground that the action had no real prospect of success (CPR 24.2). The application was refused by Mitting J on the ground that it was arguable that St-Gobain's promise was not "to answer for the debt of another person" and therefore outside the statute. But the Court of Appeal held that it plainly was and this finding has not been challenged in your Lordships' House. Instead, Mr McGhee for Actionstrength submits that St-Gobain should not be allowed to rely on the statute because, on the facts as alleged, and which must for present purposes be assumed to be true, it would be unconscionable for St-Gobain not to keep its promise.
17. This argument received short shrift in the Court of Appeal. Simon Brown LJ said ( 1 WLR 566, 576-577) that it was "quite hopeless" and dismissed it in one paragraph. The other members of the court had nothing to add.
18. If one assumes that a judge would find that Actionstrength's version of events was right, to hold the promise unenforceable would certainly appear unfair. Actionstrength would have supplied Inglen with services which were indirectly for the benefit of St-Gobain, because they enabled Inglen to perform the main contract, in reliance on St-Gobain's promise to pay for them. Morally, there would be no excuse for St-Gobain not keeping its promise. On the other hand, if one assumes that a judge would find that St-Gobain's version was right, the statute enables it to dispose summarily of proceedings which should never have been brought.
19. In an application for summary judgment such as this, which is in the nature of a demurrer, one has to assume that Actionstrength's version is true. And that naturally inclines one to try to find some way in which the putative injustice can be avoided. It is, however, important to bear in mind that the purpose of the statute was precisely to avoid the need to decide which side was telling the truth about whether or not an oral promise had been made and exactly what had been promised. Parliament decided that there had been too many cases in which the wrong side had been believed. Hence the title, "An Act for prevention of frauds and perjuries". It is quite true, as Mr McGhee said, that the system of civil procedure in 1677 was not very well adapted to discovering the truth. For one thing, the parties to the action were not competent witnesses. But the question of whether the Act should be preserved in its application to guarantees was considered in 1953 by the Law Reform Committee (First Report, Statute of Frauds and Section 4 of the Sale of Goods Act 1893, Cmd 8809) and the recommendation of a very strong Committee was to keep it.
20. The terms of the statute therefore show that Parliament, although obviously conscious that it would allow some people to break their promises, thought that this injustice was outweighed by the need to protect people from being held liable on the basis of oral utterances which were ill-considered, ambiguous or completely fictitious. This means that while normally one would approach the construction of a statute on the basis that Parliament was unlikely to have intended to cause injustice by allowing people to break promises which had been relied upon, no such assumption can be made about the statute. Although the scope of the statute must be tested on the assumption that the facts alleged by Actionstrength are true, it must not be construed in a way which would undermine its purpose.
21. It its original form, section 4 of the 1677 Act also applied to sales of land, promises by executors or administrators to answer damages out of their own estates, agreements made in consideration of marriage and agreements not to be performed within a year. Sales of land were removed to section 40 of the Law of Property Act 1925 (which has since been replaced by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989) and promises by executors or administrators, agreements in consideration of marriage and agreements not to be performed within a year were deleted by section 1 of the Law Reform (Enforcement of Contracts) Act 1954. That left only promises to answer for the debt etc of another.
22. Very soon after the statute of 1677, the courts introduced the doctrine of part performance to restrict its application to sales of land. It was held that a contract, initially unenforceable because of the statute, could become enforceable by virtue of acts which the plaintiff did afterwards. The doctrine was justified by a combination to two reasons. The first was a form of estoppel: as Lord Reid said in Steadman v Steadman  AC 536,540:
23. The second reason was that the acts done by the plaintiff could in themselves prove the existence of the contract in a way which could be an acceptable substitute for the note or memorandum required by the statute. These two reasons did not cover the same ground: acts which satisfied the first might fail to satisfy the second. In Steadman's case the House of Lords gave priority to the first reason and relaxed the need for the acts of part performance to be probative of the contract. It was however still possible to adhere to the reconciliation of the statute and the part performance doctrine which the Earl of Selborne LC gave in Maddison v Alderson (1883) 8 App Cas 467, 475-476:
24. The reconciliation thus draws a distinction between the executory contract, not performed on either side, and the effect of subsequent acts of performance by the plaintiff. The former attracted the full force of the statute while the latter could create an equitable rather than purely contractual right to performance. The statute and the doctrine of part performance could co-exist in this way because contracts for the sale of land almost always start by being executory on both sides and usually remain executory until completed by mutual performance.
25. What Mr McGhee submits in this case is that the estoppel principle which partly underpins the doctrine of part performance is wide enough to be applied to contracts of guarantee. On the facts presently alleged, it is also the case that, in Lord Reid's words, St-Gobain stood by and let Actionstrength prejudice its position, by extending credit to Inglen, on the faith of the guarantee being valid. There is authority for saying that estoppel is a principle of broad, not to say protean, application: see, for example Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd (Note)  QB 133. Although he cited no case in any jurisdiction in which estoppel had been applied to avoid the application of the statute to a guarantee, Mr McGhee says that there is no argument of principle against it.
26. The difficulty which faces this submission is that while the nature of a sale of land is such that the contract and part performance can co-exist in their respective domains, no such co-existence is possible between the statute and the estoppel for which Mr McGhee contends. It is in the nature of a contract of guarantee that the party seeking to enforce it will always have performed first. Unless he has advanced credit or forborne from withdrawing credit, there will be no guaranteed debt for which he can sue. It will always be the case that the creditor will have acted to his prejudice on the faith of the guarantor's promise. To admit an estoppel on these grounds would be to repeal the statute.
27. Mr McGhee argues that the estoppel need not apply in every case. What makes this case different, he says, is that (a) Actionstrength continued to supply Inglen only because of St-Gobain's encouragement (b) St-Gobain knew that without such encouragement Actionstrength would not continue to perform its contract with Inglen (c) St-Gobain stood to suffer loss and delay if Actionstrength did not continue to perform and gave the guarantee to avoid this and (d) St-Gobain knew that if Actionstrength continued to perform, there was a real prospect that it would suffer substantial loss unless the guarantee was honoured.
28. In my opinion none of these features are different from those which attend the giving of every guarantee. If a creditor or prospective creditor asks for a guarantee, it is always a reasonable inference that without the guarantee he would not have extended or continued to extend credit. The guarantor may reasonably be expected to know this. It is frequently in the interest of the guarantor to give the guarantee; for example, when it secures the indebtedness of a company he controls, a business associate or even a spouse. And it must be obvious that the creditor may suffer loss if the guarantee is not honoured. No doubt in each case there will be differences in degree, but no distinctions that could be drawn without throwing the law into total confusion.
29. It is not necessary to consider whether circumstances may arise in which a guarantor may be estopped from relying upon the statute. It is sufficient that in my opinion the estoppel which Actionstrength seeks to rely upon in this case would be inconsistent with the provisions of the statute. I would therefore dismiss the appeal.
30. The appellant in the present appeal ("Actionstrength") agreed with the first defendant ("Inglen") to provide construction staff to the first defendant in connection with the construction of a factory by the first defendant for the second defendant (St-Gobain"). Inglen has failed to pay all the sums due by it to Actionstrength. Actionstrength lodged a claim against both defendants for the amount due to it under the contract. Default judgment was obtained against Inglen but it has gone into liquidation and no dividend is expected from the liquidator. So we are only concerned with the claim against St-Gobain. That company is the respondent in the present appeal. The claim against St-Gobain is based upon an alleged agreement between Actionstrength and St-Gobain made orally on 11 February 2000.
31. The essentials of the alleged agreement were set out on behalf of the claimant Actionstrength in paragraph 5 of the particulars of claim where it was stated that on or about 11 February 2000:
32. St-Gobain denies that such an agreement was made and in any event invokes the Statute of Frauds 1677. It is now accepted that the agreement falls within the scope of section 4 of the Statute of Frauds. But Actionstrength replies that St-Gobain is estopped from relying on the statute and that is now the only question which remains in the case.