Orders of the Day — Contracts (Rights of Third Parties) Bill [Lords]
House of Commons, 1 November 1999.
ARBITRATION PROVISIONS
David Lock (Labour, Wyre Forest)
I beg to move, That the clause be read a Second time.
Betty Boothroyd (Speaker, West Bromwich West)
With this it will be convenient to discuss Government amendment No. 1.
David Lock (Labour, Wyre Forest)
The new clause deals with arbitration and will ensure that, where appropriate, the Arbitration Act 1996 applies to the enforcement of third-party rights under the Bill. No one disputes that that is the right policy, but the subject is technical and—I apologise to the House for introducing further amendments on such a subject at this late stage—concerns that were raised during the recess have made us examine the wording carefully. I record my gratitude to those who raised the concerns and to the arbitration experts who helped us ensure that the drafting was right. Subsection (1) of the new clause will bring in the provisions of the Arbitration Act where the third party's right to enforce a substantive term in his favour is subject to a term providing for the submission of disputes to arbitration. Subsection (1) will also ensure that when a third party whose right of enforcement is subject to the dispute being referred to arbitration seeks to enforce his right by litigation, the promisor—the other party to the contract—will be able to seek a stay of the proceedings under section 9 of the Arbitration Act. The Bill as now drafted would not allow that course of action if the third party, whose right under the Bill is subject to arbitration, chose to litigate instead. The Government have decided that it would probably not be safe to rely on the court's using its inherent power to stay the proceedings brought by the third party. Subsection (2) of the new clause is concerned with situations in which the "conditional benefit" approach will not apply—for example, where the contracting parties give the third party a right to arbitrate a dispute other than one concerning a right conferred on the third party under clause 1, such as a tort claim made by the promisor against the third party. We do not believe that such situations will occur often, but to require the third party to arbitrate where there is no other benefit to him would be to impose a pure burden on him, which would be contrary to the policy of the Bill. Subsection (2) therefore brings in the Arbitration Act only where the third party has chosen to exercise the right to arbitrate. Amendment No. 1 would delete clause 7(4), which is being replaced by the new clause on arbitration.
John Burnett (Liberal Democrat, Torridge and West Devon)
I am grateful to you for calling me, Madam Speaker, because this is the first opportunity that I have had publicly to welcome both the new Parliamentary Secretaries to the Lord Chancellor's Department, the hon. Members for Wyre Forest (Mr. Lock) and for Liverpool, Wavertree (Jane Kennedy), to their Front-Bench posts. I congratulate them on their appointments. Promotion to the Lord Chancellor's Department seems to be the precursor of further preferment, so I wonder where both hon. Members will be in a year's time. I am especially delighted because I believe that the hon. Member for Wavertree has set a precedent, in that she is not a lawyer. I do not know whether she is the first non-lawyer ever to be a Minister in that Department, but if so the precedent is welcome, especially to me, because I am the only lawyer among the 26 new Liberal Democrat Members of Parliament. I shall draw the precedent to the attention of our new party leader. I pay tribute to the Law Commission for its excellent work on the Bill. I am also grateful to the Parliamentary Secretary for his letter to me of 18 October and for advance notice of new clause 1. He will be aware that I raised several points on Second Reading that were dealt with by his predecessor, the hon. Member for Leicester, East (Mr. Vaz), in his letter to me of 12 July. For reasons of certainty and to incorporate various other provisions—for example, guarantees of performance by third parties given by banks or insurance companies—most commercial organisations will continue to insist on written agreements with third parties, which are usually called collateral warranties or collateral agreements. I hope that the Parliamentary Secretary will make it clear when he responds that if there is a conflict between a written collateral warranty or agreement and the Bill—including the parties agreeing to contract out of the Bill—the provisions of the written agreement will prevail. I welcome the new clause, because it will go some way to meeting the problems that I envisaged on Second Reading and that were dealt with by the letter I received from the hon. Member for Leicester, East.
Nick Hawkins (Conservative, Surrey Heath)
I join the hon. Member for Torridge and West Devon (Mr. Burnett) in his congratulations to the hon. Members for Wyre Forest (Mr. Lock) and for Liverpool, Wavertree (Jane Kennedy) on their appointments. It is an especial pleasure to welcome them because I worked with the hon. Lady on cross-party matters in the previous Parliament and because the hon. Gentleman and I come from the same chambers in Birmingham. I am sure that he will join me in welcoming the fact that, in addition to his appointment and mine, the head of our former chambers—now called St. Philip's chambers—is the new leader of the Midland and Oxford circuit. Our chambers therefore has triple cause for celebration. Like the hon. Member for Torridge and West Devon, the official Opposition accept that new clause 1 is a useful clarification. The Parliamentary Secretary was kind enough to write to me as well to explain the new clause and, as somebody who was at one stage an associate member of the Chartered Institute of Arbitrators and dealt with cases involving collateral warranties, I recognise that the Government are right to doubt whether it would be safe to rely on an inherent power in the court to stay proceedings brought by the third party in the circumstances mentioned by the Parliamentary Secretary. New clause 1(2) is a wise change, because it will bring in the Arbitration Act 1996 only in cases in which the third party has chosen to exercise the right to arbitrate. It is helpful that the Parliamentary Secretary has given the Opposition parties advance notice of the Government's intentions, and we welcome the clarification contained in the new clause.
David Lock (Labour, Wyre Forest)
I can confirm to the hon. Member for Torridge and West Devon (Mr. Burnett) that it is the Government's understanding that new clause 1—and, indeed, the whole Bill—will not affect the operation of collateral warranties. It will be up to the parties themselves whether they choose to enter into collateral warranties or rely on the terms of the Bill. Indeed, under the terms of the Bill, the original parties to the contract will be able to specify the extent to which, if at all, the contract will apply to third parties and can, if they choose, contract out of the third party rights in their entirety. In those circumstances, it is correct to say that the provisions of any collateral warranty will take precedence over any rights under the Bill. I am grateful for the kind words from the hon. Members for Torridge and West Devon and for Surrey Heath (Mr. Hawkins), and I concur with what the latter said about the position of our previous chambers. I also welcome the appointment of my hon. Friend the Member for Liverpool, Wavertree (Jane Kennedy) to prove that the Lord Chancellor's Department is neither an all-boys club nor entirely a lawyers club.
NORTHERN IRELAND
David Lock (Labour, Wyre Forest)
I beg to move, That the clause be read a Second time.
Betty Boothroyd (Speaker, West Bromwich West)
With this, it will be convenient to discuss Government amendment No. 3.
David Lock (Labour, Wyre Forest)
In 1998, the Law Reform Advisory Committee for Northern Ireland issued a report which recommended for Northern Ireland reforms similar to those contained in the Bill. As contract law in Northern Ireland has traditionally paralleled that in England and Wales, it was originally the Government's intention to implement the Law Reform Advisory Committee's recommendations by extending the Bill directly to Northern Ireland. However, as the prospect of devolution grew ever closer, it was decided that, as contract law will fall within the transferred area of competence, the reforms should be a matter for decision by the Northern Ireland Executive and Assembly. Regrettably, however, the Assembly is not yet up and running, and the Government have decided that this valuable piece of law reform should therefore be extended directly to Northern Ireland. Amendment No. 3 directly extends the provisions of the Bill to Northern Ireland, subject to the consequential amendments that are contained in the new clause. Subsections (1), (2) and (3) of the new clause make minor consequential amendments to clauses 6 and 7 of the Bill, so that the references to legislation will apply to the equivalent statutory provisions in Northern Ireland. Subsection (4) of the new clause repeals section 5 of the Law Reform (Husband and Wife) (Northern Ireland) Act 1964, which has no direct equivalent in England and Wales. That section modifies the rule of privity of contract in respect of contracts that expressly confer a right on the spouse or child of the contracting parties. As the Bill before us makes comprehensive provision for third-party beneficiaries under a contract, there will no longer be any need for that provision on the Northern Ireland statute book when the Bill receives Royal Assent. Subsection (4) also makes a minor consequential amendment to section 6 of the Law Reform (Husband and Wife) (Northern Ireland) Act 1964, which takes account of the repeal of section 5 of that Act.
John Burnett (Liberal Democrat, Torridge and West Devon)
I shall not delay the House long. In the absence of any Member of Parliament from the Province, I simply ask whether full consultation has taken place with the legal and other professional bodies in the Province, and have they raised any objections, or any points requiring clarification, concerning the Bill's impact on the Province?
Nick Hawkins (Conservative, Surrey Heath)
I, too, can be brief. I was simply worried about what the Minister said in his covering letter to me, when he raised the question of uncertainty over the Northern Ireland Assembly. The future of Northern Ireland is in all our thoughts, for reasons much more serious than the contents of the Bill. I wonder whether the Minister might say a word or two about what he meant by the uncertainty over the Northern Ireland Assembly. I also associate myself with the concerns raised by the hon. Member for Torridge and West Devon.
David Lock (Labour, Wyre Forest)
In answer to the hon. Member for Torridge and West Devon, yes, there has been consultation, and yes, as I said, these provisions arose from a report of the Law Reform Advisory Committee for Northern Ireland published last year and, as far as I am aware, no substantive objections have been made to the extension of the rights in the Bill—which is a Law Commission Bill—to Northern Ireland. In answer to the hon. Member for Surrey Heath, I do not feel that it would help the delicate position in Northern Ireland to say anything further at the Dispatch Box this afternoon about the relationship between Britain and Northern Ireland, save that I do not feel that it is right that, given that these rights will be of value to people in Northern Ireland, we should hold up their implementation while other political events continue elsewhere.
EXCEPTIONS
David Lock (Labour, Wyre Forest)
I beg to move amendment No. 2, in page 5, line 4, after '2', insert 'or 3'. Amendment No. 2 adds part B of schedule 3 to the Carriage by Air Acts (Application of Provisions) Order 1967 to the list of international transport conventions in subsection (8) of clause 6. Contracts that are subject to the rules of the conventions in this list are excluded from the effects of the Bill because we do not believe that we should interfere where other legislation deals expressly with the question of third-party rights. This schedule, which was inserted after the Law Commission had published its report and which was therefore not in the original Bill, is concerned with the regulation of the international carriage of cargo by air.
SUPPLEMENTARY PROVISIONS RELATING TO THIRD PARTY
SHORT TITLE, COMMENCEMENT AND EXTENT
David Lock (Labour, Wyre Forest)
This welcome Bill is the result of another excellent piece of work by the Law Commission and has met with support from all sides, both in another place and in this House. I should like to express my gratitude to the Law Commission for all its work on this Bill, and to all the organisations and individuals who have contributed to the development of our policy, including all those who have taken part in the debates during the Bill's passage through this House and in another place. I am particularly grateful to Professor Andrew Burrows for his continued help after the Law Commission's Report was published in 1996. Although this is a short Bill, it is immensely technical in character. Virtually every word reflects a careful policy decision by the Law Commission, for which the Government are grateful. This important Bill reforms the common law rule of privity of contract, under which a person can take action to enforce a contract only if he is a party to it. It might be helpful if I gave a brief example of the benefits of the Bill. Let us assume that a couple are getting married. A relative goes to a shop where a wedding list is kept, buys them a three-piece suite as a wedding present and arranges to have it delivered directly to them. It is made clear in the discussions with the furniture shop that holds the list that the suite is a gift for the couple. Under the rule of privity of contract, the couple would not have any recourse against the shop because they were not parties to the contract. Any action against the shop for breach of contract would have to be taken by the relative who was one of the original contracting parties. The Bill provides that a third party will have the right to enforce a term of a contract, both where the contract expressly provides that he should and where the contract purports to confer a benefit on him, provided that it does not appear that it was not the parties' intention that the term should be enforceable by the third party. In my example, the Bill would allow the couple who received the suite as a wedding present, and who are third-party beneficiaries of the contract between the relative and the shop, to take action directly against the shop for any breach of contract. In view of the questions that were asked on Second Reading and in Committee, I should stress that whether the Bill applies to a particular contract will depend on the express or implied intentions of the original contracting parties. I must also stress the need for clear and careful drafting of contracts so that the intentions of the contracting parties are obvious. I am grateful to the hon. Member for Surrey Heath (Mr. Hawkins) who made a similar point on Second Reading. We have also been asked whether the Bill should state that it binds the Crown, so that where the Crown is the promisor it may be sued by a third party. The Bill does not impose any obligation or restraint on the Crown. It is simply an enabling measure for the benefit of parties to contracts, to make it possible for them to give third parties enforceable rights by agreement. The language of "binding the Crown" is inappropriate here. It is the Crown Proceedings Act 1947 that enables proceedings in contract to be brought against the Crown, whether they are brought by the promisee or by a third party. The construction industry has shown a keen interest in the Bill, both through the hon. Member for Surrey Heath in this House, and in the other place. I was grateful to the hon. Gentleman for the opportunity to meet representatives of the Construction Confederation to hear their concerns. Having heard those concerns, I hope that it may be helpful if I explain the policy behind two of the Bill's clauses. First, the intention of clause 1(5) is that all the remedies available to a person bringing a claim for breach of contract should be available to a third party seeking to enforce his rights under the Bill, and that the normal rules relating to damages, injunctions, specific performance and other relief should apply accordingly. It has been suggested that we should amend the Bill so that it specifies that the rules on foreseeability in damages claims should apply. If the Bill listed only one of the rules on damages, it could cast doubt on the application of the other rules on damages, such as the duty to mitigate loss. Nor is a comprehensive listing necessary because the clause refers to the rules relating to damages". That means all the rules that the courts have deemed necessary to regulate the assessment of damages. It would be inconsistent with our aim to try to set out all the common law rules that could apply and to freeze the statute in time in the face of a developing common law. Our intention is that the Bill should avoid that by setting out the principles of fundamental change which it makes to the law without descending to the level of unnecessary detail. The other issue on which I have promised to provide further explanation is concerned with the use of the term "variation" in clause 2. The clause will affect provisions in construction contracts which allow the items of work under a contract to be varied as the construction proceeds, so as to accommodate changing circumstances. The construction industry's concern, which I accept is legitimate, arises because the Bill uses the word "variation" in its strict and correct legal meaning—a variation of the terms of an agreement by further agreement between the parties to the original agreement. But when the construction industry uses the term it often refers to alterations to the work done within the terms of the original agreement and without varying its terms. The usual situation is a contract which allows one of the parties to change the specifications of work unilaterally, subject to a change in the amount to be paid. The Law Commission was aware of the way in which the construction industry used the term when it produced its report, and made it clear that such changes to work specifications would not be covered by the restrictions in clause 2, even if they were described in the industry as variations to the work. The point is dealt with at paragraph 9.37 of the Law Commission's report, with which I agree. As clause 2 does not apply to variations of work rather than of the terms of contract, the third party's rights will be subject to any provisions in the contract which allow what has been built to be varied unilaterally. If the hon. Member for Surrey Heath has been persuaded that the Law Commission was not correct, I may respond, with the leave of the House, to any concern that he may raise. I am grateful to the hon. Members for Surrey Heath and for Torridge and West Devon (Mr. Burnett) for their constructive and helpful approach to this valuable law reform measure. I commend the Bill to the House.
Nick Hawkins (Conservative, Surrey Heath)
I greatly welcome the Minister's helpful clarification. I am grateful to him for meeting a delegation of leaders of the construction industry which I took to see him a few weeks ago. He made it clear then that he was prepared to clarify these points so that we could rely on what has been said in future cases, in line with the Pepper v. Hart decision, and I am grateful to him. The industry has continuing concerns but is prepared to accept the Minister's helpful clarification. The Opposition echo what the Minister said about the value of the Law Commission's work, and we made it clear in Committee and on Second Reading that we greatly welcome the Bill, which is a helpful, and perhaps overdue, change in the law. As the Minister has clarified matters specifically to help the construction industry, I can do no other than welcome what he has said.
John Burnett (Liberal Democrat, Torridge and West Devon)
I am grateful to the Minister for clarifying the provisions on variations. I am grateful also to the Law Commission for its excellent work and for promoting this Bill, which we support and will not impede.