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that this was not necessary "?-We have found ourselves unable to concur in the Admiralty view.

6420. Sir Oswyn, have you anything to say on this paragraph and on the points which have been put?-(Sir Oswyn Murray.) I do not know whether anything arises on the first sentence of the paragraph. Sir Malcolm says now, I think, that he was raising no point except the necessity for Treasury sanction. But, of course, the first sentence of the paragraph does suggest a different question. It suggests the question whether there was any administrative failure which was, so to speak, being covered up by this alteration in contract. I do not know whether that question is raised. (Sir Malcolm Ramsay.) I did not mean at all to suggest that the payment is excessive. Later on I say that it is possible in a case like this that the expenditure might have been contributed to by undue precipitancy in placing the contract, but on that particular point I had no information. I felt, however, that one reason for raising a point of this kind is that very often extra-contractual payments of this nature have been due in some sense to a fault of the Department. (Sir Oswyn Murray.) If there is any question about it and the Committee wish to be satisfied on the point, I should be very glad to explain to them fully what the facts were, but I do not wish to do so if no question is raised.

6421. That will rest with Members of the Committee. I notice that in the middle of the second sub-paragraph of paragraph 7 of Sir Malcolm's Report he says: "It was recognised at the time that additional expense would be caused to the contractors, and in due course they presented claims amounting to £36,000 "-and in fact they were settled for about £15,000 a little later. That is much less than half. Can we have any information on that, and could we briefly have information upon the other point which has been raised relating to the Treasury? Then unless any Member of the Committee asks questions about it I understand I am not required to say what the circumstances were in the placing of the contract, in order to defend the Admiralty from the charge of undue precipitancy. (Mr. Fass.) We have not suggested from a Treasury point of view that the delay was anything but inevitable.

6422. I think it might shorten matters if at this stage Sir Oswyn perhaps made


a brief reference to that, since it appears to be clear that Members of the Committee will want to ask some questions? -(Sir Oswyn Murray.) These were 16-inch shells for 16-inch guns of the “ Rodney and "Nelson," which of course were a new type of gun, a larger type of gun than had ever before been made, and the shell was also of a new pattern. Trials of the gun with the shell took place in due course, and apparently things were satisfactory.

Sir Fredric Wise.


6423. Do you mean with the gun or with the shell?-I mean both. Apparently they were both satisfactory. That was in the middle of 1924. It was at a later date in the construction of the ship than that at which we would ordinarily have reached the point of trial, owing to the fact that there had been considerable difficulty in getting out a satisfactory type of 16-inch gun, and deciding on all the details of construction of the shell. It was necessary for our technical experts to decide whether the result of the trial was satisfactory enough for them to tell the manufacturers to go ahead or not; and they decided that the results were satisfactory enough. By means of later trials it was found out that the constant firing of these shells in the guns affected the guns, and that the guns were going to have a much shorter life than thought satisfactory. It was therefore thought desirable to hold up the manufacture of the shells and investigate how we could get over the difficulty and give a longer life to the guns. We had to consider whether it was necessary to alter the chamber of the gun, or to alter the shape of the shell, and it was for that reason, in order to secure a longer life to the gun, that this change was made. Then on the point of whether we should have got Treasury sanction, I would say this. We have been in correspondence with the Treasury, and their final letter, the effect of which Mr. Fass has mentioned, was dated 13th June, and has not yet actually been thoroughly considered by the Board.* But what we feel is that at any rate it is difficult to say that this was a case of departure from the contract -which is what the Comptroller and Auditor General says-because we took action under a condition of contract which provides that "The Director of Navy Contracts may from time to time propose modifications in the standard

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designs, specifications drawings specified in the Schedule, and, should the progress of the work on the articles permit of the modifications being made, then the effect of any such change upon the price and time for delivery shall, if not settled by mutual agreement in writing, be determined by the Director of Navy Contracts, provided also that the tender schedule and conditions, including those relating to damages, shall apply as if the substituted design and the new figures (if any) as to cost and time for delivery had been originally inserted therein." It was under that clause that we called upon the contractors to hold up their work in order that we might consider a modification of the design, and I maintain that under that clause of the contract we were entitled to do so, and therefore this was not a departure from the contract. (Mr. Fass.) Perhaps the Committee will allow me to read the letter to the Admiralty to which Sir Oswyn Murray has referred. It sets out the principles we think should be followed. We were not 60 much concerned with the departure from the contract, but in our minds, if the Admiralty had required the plant to be kept idle for such and such a time, there was a probability of a claim on the part of the contractor for payment whether under the contract or not. From our point of view if a payment had to be made for the standing idle of this plant at the Admiralty request, it would be a payment of compensation rather than a payment under contract.

6424. You refer to the letter of the 13th June, 1927?-Yes. That is the letter which the Admiralty have not yet finally considered. It sets out what the Treasury feel is the principle which ought to be the guide in these matters.

Sir Fredric Wise.

6425. It is a letter of the 13th June, 1927, dealing with a contract in August, 1924? Yes, but it is really on the general point of the principle. The letter says. "I am to say that My Lords agree that if the Lords Commissioners of the Admiralty by asking a contractor to expedite delivery of goods, involve him in extra expense, such additional expense may normally be refunded by the Admiralty as an acceleration charge without reference to this Department. In that case the payment is for work actually done; the Admiralty receive a


definite consideration for the expenditure. If, on the other hand, the Lords Commissioners of the Admiralty delay a contractor in the completion of his contract by suspending work while some modification is under consideration, any additional expenditure will normally be for maintenance of idle plant or for work not performed, i.e., it will be primá facie, a payment of compensation or of a nugatory character. The mere fact that the contractor will in most cases be legally entitled to some reasonable extra payment does not remove the necessity for that inquiry by this Board which Parliament requires for payments of this nature. While therefore they offer no objection to the inclusion in Admiralty contracts of the clause quoted in the fifth paragraph of your letter of the 5th April last, My Lords consider nevertheless that a case of this kind should have been submitted for their consideration before the Admiralty were committed to the payments. In the case now under notice My Lords are still of the opinion that the circumstances are such as would require notation for the information of Parliament and they observe that the Comptroller and Auditor General has mentioned the matter in his report." That is the principle as we seek to lav it down.

Mr. Ellis.

6426. Mr. Fass, your complaint is under two heads. One complaint is the mixing up of the accounts, and the other is taking into the Admiralty's own hands a decision to pay a claim which ought to have been remitted to the Treasury first? Yes, that is broadly speaking


6427. The latter, I gather, you regard as the more serious one of the two?I do not weigh one or the other. We feel that where the payment is a payment of the nature of compensation t ought to be brought to the notice of Parliament, and the Treasury ought to be advised of it before-hand. That is a principle which we think is important. I would go on to say that where there is any doubt as to whether it is a payment of compensation or a payment within the terms of the contract, the bias should be to regard it as a payment of compensation so that these cases should come to the notice of Parliament, rather thar the other way.

6428. The Treasury is entitled to have everything before it unless it can be said

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to be a payment arising directly out of the contract ?—Yes.

6429. Sir Malcolm, at the end of your paragraph you raise the question whether there had been undue precipitancy in placing the contract, and you say that was a point on which you had no information. I take that to mean that your suggestion is that had they looked into the details more carefully beforehand it might not have been necessary to have those variations ?-(Sir Malcolm Ramsay.) I think I tried to explain my position about that earlier. Very often one finds —at any rate my common experience is to find that when extra-contractual payments have to be made there is some contributory default on the part of the Department, and that is one of the reasons why in the past this Committee has been particularly anxious to be informed of unusual payments under contracts. In this particular case I had no evidence, and I had not been privileged to hear the explanation which Sir Oswyn has now given to the Committee as to the trials and the course of proceedings. If I may say so, on his explanation I do not wish to suggest there was precipitancy in this particular connection, but when I wrote this paragraph I had no information which enabled me to tell whether that was a factor or not in this pase.

6430. I follow that. The explanation which Sir Oswyn has now given clears up the question which you felt it your duty to put in the absence of explanation? Yes. I felt bound to raise it as a matter of principle. I do not think it is so important for the purposes of this Committee whether this is strictly a contractual payment or not, but I venture to think the Committee will be well advised to require any unusual incident of a contract to be brought to the notice of the Treasury, who, if necessary, can then secure that it shall be brought before the Committee. If the matter had gone before the Treasury and had got Treasury sanction, I think very likely I should not have troubled this Committee at all with the matter. That is a matter, of course, in which one must use one's discretion.

6431. I should just like to put one question to you, Sir Oswyn. In dealing with these two firms you have a contract, and you have certain costs for your first contract. That contract does not altogether come up to expectations, and certain costs are incurred as a result


Do you think it is quite fair accounting as far as we are concerned to lay those extra costs on to the next contract and the next payments that are going to be made in regard not to the same things -they may be somewhat similar but still on a different contract and a different arrangement altogether? In other words, do you think it is fair accounting that you should spread loss No. 1 over the costs of No. 2 contract?-(Sir Oswyn Murray.) I look upon the whole transaction as the cost of getting a satisfactory article. It seems to me on all-fours with any case in which, in the course of building a ship, we decide upon an alteration or an addition to the design. Very often that involves holding up work and having men standing idle while we decide details of the change, and also perhaps the scrapping of work that the contractor has already done on the ship. Yet it has never been suggested that we should go to the Treasury for approval whenever we make an alteration or addition in the course of building a ship.

6432. My suggestion does not go anything like to that extent. It is not a small matter, it is rather a radical question, when for some time a whole contract is held up and very considerable demands are made for overheads and other things during the period of suspension. It then becomes material from our point of view what is the cost of the suspension. You do have a very distinct hiatus between the two periods in such cases. So you might, in the building of a ship, when you are held up for an alteration of design; and items corresponding to each of these might form part of the contractor's claim for what is called an extra on the contract.

6433. Then the question would be whether sufficient care had been taken in all the preliminaries to prevent the possibility of this taking place?-I thought we were dealing with the propriety of taking the cost of work done previously on the old design and undone for the sake of the new design.

6434. Forgive me, I am not very much concerned about propriety, but rather about accounts, and the justification for treating them in a certain way.—I mean the propriety from an accounting point of view of lumping all this together. I was saying that we have constantly done that, and must do it I think every time we have an alteration in a ship that is building. And I do not think the Treasury would suggest that we ought to

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sub-divide the price of an extra and come to them for that part of it which is idle time.


6435. But if there do appear to be very substantial claims for substantial alterations, would not that be a which should be submitted to the Treasury? (Mr. Fass.) My feeling is that where you can segregate a payment of this sort it ought to be segregated for the very purpose of calling Parliament's attention to it. You will remember the Committee were considering a case the other day where there had been delay, which involved the holding up of a contract, and we had to pay substantially more. In the same way it might have been claimed in that case that it was only part of the whole price the taxpayer had to pay. The taxpayer had to pay something in addition to the contract price for the delay. Unless we insist that compensation due to delay is segregated where it can be, that sort of case will not come to us or to Parliament at all. 6436. That is my point, Sir Oswyn. Unless these cases are treated in this particular way we may never have the opportunity of examining the question as to whether the payments were justified or not. The point the Comptroller and Auditor General takes is that there may have been undue precipitancy in placing the contract, and if you take the view that such a question might reasonably be smothered up in the general charges then we have no opportunity whatever of examining the position created by such a condition.-(Sir Oswyn Murray.) I quite see the honourable Member's point. The point I trying to make is that if this principle is going to be applied in every case where it is possible by examination of the price of an extra to segregate some part of it as a nugatory payment as due to men standing idle, and everyone of those cases goes to the Treasury, there is going to be an enormous lot of correspondence. Are we to decide by the magnitude of the payment, or how?


6437. I think there is a difference between meal and malt, after all, in my point. Magnitude has something to do with it. Relative importance is surely a term which would be well understood by all Departments, and which would be agreed upon between the Treasury and other Departments, and I hope under


stood by this Committee. I will not say more than that.

Sir Robert Hamilton.

6438. Have you in your experience of the Admiralty had similar cases to this where the Admiralty has paid compensation for idle time-I mean cases similar in general outline to this?—I do not know that we have had any exactly similar cases to this, but we have had many, many cases in which we have paid compensation for idle time as part of the price of getting the improved article.

6439. Is this the first case in which this point has been raised of getting Treasury sanction?-This was the first case in which the point has been raised. In this instance I think I am right in saying the Comptroller and Auditor General first raised the case as being a nugatory payment. We replied that it was not a nugatory payment, and explained our view of it, and he then took the point that it was a departure from contract. When the Treasury take up the matter they apparently disagree with the Comptroller and Auditor General, and they agree it is not a departure from contract, but they say it is a nugatory payment. (Mr. Fass.) On that point perhaps it is important to have the words of the clause on which the Admiralty contention is based.

Sir Fredric Wise.

6440. And the amount.-(Sir Malcolm Ramsay.) The amount paid was £15,000, and I think the amount involved in the contract was getting on for £500,000. One of the things I had in my mind was this. It is rather curious that the Admiralty should place a firm contract involving £500,000 for shell, which, on the facts before me, did not seem to have been tried out. I was not then favoured with the explanation on that point which Sir Oswyn has now given. (Mr. Fass.) The clause of the contract provides that "the Director of Navy Contracts may from time to time propose modifications in the standard designs, specifications or drawings specified in the Schedule, and, should the progress of the work on the articles permit of the modifications being made, then the effect of any such change upon the price and time for delivery shall, if not settled by


23 June, 1927.]


mutual agreement in writing, be determined by the Director of Navy Contracts, provided also that the tender schedule and conditions, including those relating to damages, shall apply as if the substituted design and the new figures (if any) as to cost and time for delivery had been originally inserted therein." In our mind that does not necessarily cover a payment for plant lying idle, because the department concerned had to take time necessarily in this case, as we agree, to consider a modification of the design. I do not want to lay too much stress upon whether the payment was tractual or not, but rather on the general principle that a payment in the nature of compensation should be noted, and where it was doubtful whether the payment was of that character or not the preference should be in favour of bringing it to the notice of the Treasury.

Sir Robert Hamilton.


6441. Sir Oswyn, I gather from what you have said that it would lead to a great deal of correspondence if you had to adhere strictly to the suggestion that Treasury sanction should be given for all extra-contractual payments? (Sir Oswyn Murray.) No-for all nugatory payments included in extra payments.

6442. But I understand you to say that in your experience you have no case in mind similar to this one?-You asked if there was any case precisely similar to this, and I said no; but we have a great number of cases which would come under the strict rule that has been laid down just now by the Treasury: that where you can identify a nugatory payment in an extra price you should get Treasury sanction for that part of the extra price. That would take place many many, perhaps hundreds of times in the year. (Mr. Fass.) I am not familiar with the details of these contracts, but we should put in such a word as "substantial."

Chairman.] May I just say from the chair that I think the material points for the consideration of the Committee at the end of the Session are now quite clear. The principle has been put so plainly that it is easily before us now.

Major Salmon.

6443. I should like to know this, Sir Oswyn. Supposing you had had the wording in your contract "subject to trials," would not a lot of this difficulty

have been overcome, because if the trial with the shell and the gun was not satisfactory you would have had a right under your contract to have held it up until you had a satisfactory shell?-(Sir Oswyn Murray.) I think perhaps the Honourable Member was not here when I gave the explanation. The point was that the initial trials were satisfactory, but it was found subsequently that the continual firing of these shells in these guns led to the gun being unduly worn and having a shorter life than it ought to have.

6444. That was a thing which you could not anticipate?-You could not anticipate it, and you could not discover it except by prolonged trials.

6445. What rather alarms me on that point is not so much this particular case, which seems reasonable on the face of it, but it is the statement which you make that in a large number of cases you find it necessary in the working out of your contracts to pay extra money to contractors for lost time because of certain events that arise from the contract. You say it you had to notify the Treasury it would mean a great deal of correspondence on your part. I feel that if it is as important as you say it is all the more important that the Treasury and we should know exactly what is really involved in that? It is important from the point of view of the large number of cases involved, and, therefore, from the point of view of the clerical work which would be involved in bringing these cases forward; but they are mostly small modifications made in the course of building a ship. No ship is ever built exactly as it is designed. Small difficulties arise. When a ship reaches a certain point it is decided perhaps to put in a bulkhead slightly differently from what was arranged, and the work is perhaps held up for half a day or a day while a decision is reached as to what alteration in the designs should be made.

6446. But that would not involve a huge sum of money?-It would not involve a huge sum of money, but I say that if we are to take that small sum of money that is involved in the extra, and if we are to identify in it some part of it which is a nugatory payment, and go to the Treasury for sanction to pay that part of it which is a nugatory payment, it means a lot of waste of time.

6447. Would it not be possible to lay down a basis of percentage increase up

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