HL Deb 21 October 1997 vol 582 cc616-32

3.23 p.m.

The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Baroness Hayman)

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.;(Baroness Hayman.)

On Question, Motion agreed to.

House in Committee accordingly.

[The CHAIRMAN OF COMMITTEES (Lord Boston of Faversham) in the Chair.]

Clause 1 [Functions to include power to enter into contract]:

Baroness Hayman moved Amendment No. 1:

Page 1, line 19, after ("financier") insert (", or any insurer of or trustee for the financier.").

The noble Baroness said: In moving Amendment No. 1, I wish to speak also to Amendment No. 9 which deals with the same area of the Bill. Subsection (1) of Clause 1 makes it clear that a statutory provision which confers a function on a local authority also confers power to enter into certain sorts of contract with the private sector. These are contracts for the provision or making available of assets or services for the purposes of, or in connection with, the discharge of the function concerned.

Subsection (2) makes it clear that the authority has power to enter into a contract with a person providing finance in connection with a contract for the provision of assets or services. Typically, such a contract would allow the financier "step-in rights"; that is, rights to intervene where the contractor is unable to meet his obligations to the authority or the financier. The aim of this arrangement is to ensure that the financier's interests in the contract are protected.

In the course of further consultation on the Bill it has been brought to our attention that other parties involved in a public-private partnership scheme may be given step-in rights by the local authority. First, there may be an arrangement whereby the financier's insurer, who covers the risks undertaken by the financier in financing the project, is given a right to intervene in the contract when things start to go wrong. In this way, he looks after his interests as insurer and forestalls a claim by the financier.

Secondly, there may be an arrangement with a trustee appointed by a group of loan stockholders or other persons providing finance for a public-private partnership scheme. The step-in rights given by the authority to protect the interests of such investors are given to their trustee and not directly to them. Again, the purpose of the step-in rights is to protect the interests of investors when it seems that the contractor is getting into difficulty with the discharge of his obligations.

All these arrangements are sensibly designed to forestall the claims and financial problems that can arise when a contractor becomes insolvent or is for some other reason unable to carry on effectively with a project. Amendment No. 1 would widen the scope of Clause 1(2) to clarify that a local authority may make such arrangements, not only directly with financiers but also with financiers' insurers or trustees. It is, of course, still necessary that the finance and the step-in rights should be provided or given in connection with the project.

Amendment No. 9 amends Clause 4 of the Bill to provide that a contract between a local authority and a financier's insurer or trustee may be a certified contract and thus may have the protection of Clause 2(1) of the Bill, the "safe-harbour" provisions. I beg to move.

On Question, amendment agreed to.

Clause 1, as amended, agreed to.

Clause 2 [Certified contracts assumed to be intra vires]:

Baroness Hayman moved Amendment No. 2:

Page 2, line 22, leave out from first ("a") to end of line 27 and insert ("local authority has entered into a contract which is a certified contract ("the existing contract") and the existing contract is replaced by a contract entered into by it with a person or persons not identical with the person or persons with whom it entered into the existing contract, the replacement contract is also a certified contract if—").

The noble Baroness said: Amendment No. 2 is another amendment that I hope will prove uncontentious. The Bill provides "safe-harbour" protection for certain sorts of contract entered into by a local authority; that is, contracts for the provision of services for a period exceeding five years, and contracts with financiers and their trustees or insurers. The effect of the safe harbour is that the provider of the assets or services and a person financing the transaction can be assured that their contracts with the authority will not be treated as being outside the authority's powers or improperly entered into by the authority. This will apply in any court proceedings except judicial review or proceedings initiated by the authority's auditor.

Clauses 2 to 4 make provision about the requirements and procedure for certifying a contract so that it can have the benefit of the safe harbour. The effect of Clause 2(4) is that where a certified contract is novated, that is, replaced by another identical contract because a new contractor or financier is substituted for the original one, the new contract will also be regarded as a certified contract.

The amendment makes it clear that Clause 2(4) of the Bill applies only in a case where there is a novation of a certified contract. A contract is novated where a person, typically a new contractor, takes over all the rights and liabilities of one of the parties to the contract. This requires the consent of the other party. If, for example, the novation was to change the identity of the contractor under a certified contract, the local authority would agree to accept the performance of the contract by the new contractor, and the original contractor would be released from his liabilities under the contract.

The effect of Clause 2(4) is that the new contract which comes into existence on a novation of a certified contract shall also be a certified contract. The amendment makes it absolutely clear that for these purposes a contract is replaced only if the parties to the contract are different. If a contract replaced a certified contract without any change in the identity of the parties, the replacement contract would not be a certified contract by virtue of Clause 2(4). This could arise, for example, where a certified contract was radically amended. I beg to move.

On Question, amendment agreed to.

3.30 p.m.

Baroness Hayman moved Amendment No. 3:

Page 2, line 37, at end insert— ("() The application of subsection (1) in relation to a contract entered into by a local authority does not affect any claim for damages made by a person who is not (and has never been) a party to the contract in respect of a breach by the local authority of any duty to do, or not to do, something before entering into the contract (including, in particular, any such duty imposed by a statutory provision for giving effect to any Community obligation relating to public procurement or by section 17(1) of the Local Government Act 1988).").

The noble Baroness said: Clause 2, together with Clauses 3 and 4, provides a procedure for a contract to be certified by an authority. Certification prevents the lawfulness of the contract being raised in private law proceedings, typically those between parties to the contract, on the grounds of a lack or misuse of powers. It means that the contract shall be deemed to have effect as if the authority had had power to enter into it and had exercised its power properly.

This amendment makes it clear that Clause 2(1), in providing that the authority is taken to have exercised properly its powers to enter into a certified contract, does not prevent a person other than the contractor from bringing an action against the authority seeking damages because proper procurement procedures have been disregarded. The clause, without the amendment, could be interpreted as having this effect. In particular, we have in mind a claim by an unsuccessful bidder for the contract who feels that proper procurement procedures have not been complied with. Such legal action, while no doubt unwelcome to the authority, could result only in the payment of damages by the authority, and not in the setting aside of the contract. It would not therefore affect the position of the appointed contractor or his financiers.

This amendment is a response to concerns made in another place and also reflects helpful comments received in the course of consultation. It clarifies that third parties can sue for damages if a local authority has conducted the tendering for a certified contract improperly or unfairly. The main circumstances under which this would be likely to arise are where the authority has failed to comply with the regulations which implement the EC rules on public procurement, or where it has failed to comply with the duty under Section 17 of the Local Government Act 1988 not to take account of non-commercial matters when it lets a public works or supply contract.

I hope that that clarifies the purpose of the amendment and that the Committee will be satisfied with the explanation. I beg to move.

On Question, amendment agreed to.

Clause 2, as amended, agreed to.

Clause 3 [The certification requirements]:

Baroness Hayman moved Amendment No. 4:

Page 2, line 41, at beginning insert ("The requirement specified in this subsection is that").

The noble Baroness said: In moving Amendment No. 4, it may be for the convenience of the Committee if I speak also to Amendments Nos. 5 to 7.

These amendments are for clarification. They clarify a point about the certification requirements referred to in Clause 3, and so ensure that the requirements for certifying contracts will operate as intended. They are designed to ensure that the validity of a certificate will not depend on whether the authority actually complies with certain regulations made under Clause 3.

Among the requirements for giving a valid certificate is the one in Clause 3(2)(e) that a certificate must state that it has been copied to any person to whom a copy is required to be given by regulations, and the one in Clause 3(2)(g) that a certificate must confirm that any requirements in regulations about the issue of certificates have been complied with. The amendments make it clear that a certificate is not invalidated where, although it makes such a statement or gives such confirmation, a local authority does not, in fact, copy a certificate to a prescribed person or comply with any requirement imposed by regulations.

As long as a certificate states that it has been copied to any persons prescribed in regulations and confirms that requirements imposed by regulations concerning the issue of the certificate have been complied with, the contractor can be satisfied that the certificate will not be invalidated if it becomes evident that the authority had not in fact done those things, or there was not evidence that they had. This was always the intended effect of Clause 3. The amendments merely make it clear that this is the position.

On Question, amendment agreed to.

Baroness Hayman moved Amendments Nos. 5 and 6:

Page 3, line 15, at beginning insert ("The requirement specified in this subsection is that").

Page 3, line 17, at beginning insert ("The requirement specified in this subsection is that").

On Question, amendments agreed to.

Clause 3, as amended, agreed to.

Clause 4 [Certification requirements: supplementary]:

Baroness Hayman moved Amendment No. 7:

Page 3, line 20, leave out from ("Where") to ("shall") in line 21 and insert ("the certification requirements have been satisfied in relation to a contract by a local authority, the certificate which has been issued").

On Question, amendment agreed to

Baroness Hayman moved Amendment No. 8:

Page 3, line 25, at end insert— ("() Where the certification requirements have been satisfied in relation to a contract by a local authority within section 1(3)(a) or (d), the local authority shall secure that throughout the period for which the contract operates—

  1. (a) a copy of the certificate which has been issued is open to inspection by members of the public at all reasonable times without payment, and
  2. (b) members of the public are afforded facilities for obtaining copies of that certificate on payment of a reasonable fee.")

The noble Baroness said: The amendment deals with an assurance given by my honourable friend Mr. Raynsford in another place.

The safe-harbour provision in Clause 2(1) of the Bill comes into play where a contract is certified in accordance with the requirements and procedures set out in Clauses 2 and 3. Because of the effect of certifying contracts, which will usually be for a long period and involve substantial payments by the authority, the certification of a contract would be a matter of public interest, and it is important that certificates should be available for public inspection.

In another place the Government gave an undertaking to ensure that certificates would be available for exactly that inspection. We undertook that existing legal provisions would be examined and, if necessary, an amendment to this Bill would be tabled which would secure a right for the public to inspect certificates issued in respect of contracts under Clause 3 of the Bill.

The amendment does precisely that. Having looked at the existing legal provisions, we thought it necessary to put on the face of this Bill the right to public access and public inspection. Therefore the amendment requires a local authority, other than the receiver for the Metropolitan Police District or a probation committee, which has issued a certificate to secure that a copy of the certificate should be freely available for inspection by members of the public at all reasonable times, and to provide facilities to allow a copy to be obtained for a reasonable fee. The authority remains under this duty for as long as the certified contract operates. I beg to move.

On Question, amendment agreed to.

Baroness Hayman moved Amendment No. 9:

Page 3, line 38, at end insert (", or

  1. (b) any insurer of or trustee for such a person.").

On Question, amendment agreed to.

Clause 4, as amended, agreed to.

Clause 5 [Special provision for judicial reviews and audit reviews]:

Baroness Hayman moved Amendment No. 10:

Page 4, line 5, after ("on") insert ("an application for judicial review or").

The noble Baroness said: This amendment, together with Amendments Nos. 11 and 12, applies equally as a response to matters raised in another place, and by many of the interested parties who gave evidence during consultation on the Bill.

The effect of the safe-harbour protection provided for a contract certified under the Bill is that the person entering into the contract with the authority can be assured that his contract will not be treated as being outside the authority's powers or improperly entered into by the authority. By virtue of Clause 5(1), this will apply in any court proceedings except judicial review or proceedings initiated by the authority's auditor.

The Government do not intend to deprive anyone who has a genuine interest in the decision of a local authority to enter into a certified contract of his right to ask the court to review the lawfulness of the decision and to set it aside. Nor do the Government intend to remove from anyone the protection afforded by the statutory audit controls to which a local authority is subject. Accordingly, these public law remedies are excepted from the scope of the safe harbour.

However, it is important that, where a certified contract is challenged in judicial review or by the auditor, the court should have a clear discretion to allow the contract to continue if, after weighing up all conflicting interests and taking account of all relevant circumstances, it feels that on balance that would be the correct thing to do.

Accordingly, the Bill preserves the right of a person with sufficient interest in a decision of a local authority to enter into a certified contract to challenge that decision by applying for judicial review. The Bill also preserves the powers of the auditor and of the court to look into the lawfulness of a local authority's decision to enter into a certified contract—that is, where the authority is one whose accounts are subject to the statutory audit requirements.

The effect of these amendments is twofold: the amendments would expressly give a court a discretion in judicial review, as well as audit review, to determine that a certified contract shall have effect as if the local authority had had power to enter into it and had exercised that power properly; and they would require the court, in considering how to exercise this discretion, to have regard to two particular matters. The court would have to consider the likely consequences of a decision to set the contract aside, first, for the authority's financial position, and secondly, for the provision of services to the public.

It is important that these matters, in particular, should be looked at by a court in deciding the outcome of a judicial review or audit review. A certified contract is likely to operate for a long period of time and to involve heavy investment by the parties to the contract. Furthermore, an order setting such a contract aside would be likely to disrupt the provision of public services and generally be against the wider interests, financial and otherwise, of the local community. The objective is to ensure that the court is clearly empowered to decide that a certified contract found to be ultra vires shall nevertheless continue to have effect, and to require the court, in deciding on this, to give full weight to these factors.

Where the court determined that a contract should continue to have effect, the rights and liabilities of the parties would, of course, be unaffected by the proceedings which resulted in that determination. Also, there would be no reason for the Government to change the treatment of the contract under the local authority revenue support system. I beg to move.

On Question, amendment agreed to.

Baroness Hayman moved Amendments Nos. 11 and 12: Page 4, line 10, leave out from beginning to ("considers") in line 11 and insert ("(having regard in particular to the likely consequences for the financial position of the local authority, and for the provision of services to the public, of a decision that the contract should not have effect)"). Page 4, line 16, leave out ("subsections (1) and (2)") and insert ("this section").

The noble Baroness said: I have spoken to these amendments. I beg to move them en bloc.

On Question, amendments agreed to.

Lord Bowness moved Amendment No. 13:

Page 4, line 18, at end insert— ("(5) Where the court makes a finding pursuant to subsection (3)—

  1. (a) the local authority shall be prevented from attempting to repudiate the contract on the grounds that it did not have the power to enter into the contract, and
  2. (b) no power of surcharge shall apply to any member or officer of the local authority in respect of the contract.").

The noble Lord said: We are all agreed, on both sides of the Committee, that the purpose of the Bill is to facilitate the ability of local authorities to enter into PFI deals and to remove the uncertainty over the powers of local authorities so as to give greater confidence to those on the other side of such transactions. I hope that the Minister will accept that the amendment is brought forward in that spirit; namely, to try to find a way forward.

On a straight reading, Clause 5 as it stands, even as amended by the Government this afternoon, is silent in relation to the position of a local authority which might for its own purposes seek to repudiate a contract on the grounds that a court had found that it was ultra vires.

At this stage, that may not be likely. However, there is always a danger, as time moves on after a contract is entered into, that it may in the future be seen by an authority as having become commercially inconvenient. I therefore ask the Minister to examine the matter. The contract would be a certified contract; and a court would have decided that the contract, although ultra vires, should continue. Therefore, following that thinking through, should the statute not provide that the local authority should be prevented from taking action of its own account to repudiate the contract? The second leg of the amendment seeks to ensure that, in the case of a contract certified but subsequently found to be ultra vires but within the category of a contract that should continue, members and officers should be protected from penalty in such circumstances.

I am far from certain, although I am happy to be convinced by the Minister, that the Bill makes that aspect clear. We ought to go as far as is reasonably possible to ensure that there are no grounds to dissuade authorities, through the medium of either their members or their officers, from entering into such private finance initiatives. I beg to move.

Lord Mishcon

I wonder whether the noble Lord would like to re-examine his amendment in case what I now say happens, rather extraordinarily, to be accurate. This amendment is governed by subsection (3), which reads as follows: Where, on an audit review relating to a certified contract entered into by a local authority, a court … (a) is of the opinion that the local authority did not have power to enter into the contract"— and these are the vital words: or exercised any power improperly in entering into it". The noble Lord's amendment takes in the whole of what I have just read and states that, in those circumstances—even presumably where the contract was entered into improperly in purported exercise of a power—there should be no power of surcharge to any member or officer. Is that what the noble Lord intended? If it is not, is his amendment not inclusive of that provision?

3.45 p.m.

Lord Bowness

I hesitate to disagree with the noble Lord, Lord Mishcon, given the great experience and knowledge that he brings to these matters. If challenged on the precise wording of the amendment, I should have to bow to advice; however, I stand by the main thrust and principle. I do not wish the situation to arise whereby a court has found in the terms of the section as amended and the local authority then nevertheless seeks to repudiate the contract. If the Minister can tell me that the clause prevents that, and if the noble Lord, Lord Mishcon, can tell me that the law prevents that, I will read their remarks with great interest. The point I seek to make is the one that I have made, however imperfectly, and I plead guilty to the imperfections of the amendment as drafted.

Lord Mishcon

The noble Lord speaks with his usual courtesy, for which I am grateful. However, will he concede at least that he would not wish to exempt a member or officer of a local authority where that member or officer concurred in acting improperly in regard to the exercise of a power to enter into a contract?

Lord Bowness

The noble Lord poses a difficult question. That suggests that I seek to excuse those who willingly, knowingly and wilfully entered into an improper contract. The point that I seek to make is that they should not, post the event of a court having found in accordance with this section, then seek to repudiate their contract.

Lord Campbell of Alloway

I do not wish to take up the time of the Committee on this point. However, there is a point of substance that warrants further consideration. I listened with great care to the remarks of the noble Lord, Lord Mishcon. I respectfully ask that the Minister, without commitment, might reconsider the matter with her advisers.

Lord Donaldson of Lymington

The experience of local authorities repudiating their obligations on the basis that they had no power to enter into them is always a distasteful one. It has occurred in the past. The reason has largely been that there has been some whisper from district auditors that they were acting outside their powers, and they have therefore repudiated the contract—I am bound to say willingly in some cases. That is thoroughly distasteful. The Bill would prevent it happening.

Under Clause 5(3), once the matter has gone before the court and it is determined that the contract either was properly entered into or, alternatively, was not properly entered into but in the public interest ought to be allowed to continue, we find, according to the clause, that the contract is to be treated as if it has and always has had effect as if the local authority had power to enter into it. That would wholly prevent the local authority claiming that it had no power. It could only arise on a parallel contract if the local authority tried to do it again.

The other objection to the amendment is that when contractors repudiate their contracts, whether or not they are local authorities, they do not repudiate on any particular grounds. They may try to justify their repudiation at a later stage on a number of grounds because by that time they may have been advised by counsel that the grounds might enable them to get away with it. But one will never find a local authority tying itself to any particular form of repudiation.

If the second part of the amendment were agreed to, the officers would make certain that they did not repudiate on that ground; they would simply repudiate, full stop. So, with the greatest respect, I doubt whether the amendment advances the matter much further. Indeed, I doubt whether it is necessary at all.

Baroness Hamwee

The noble and learned Lord made, with much more elegance and authority than I could, exactly the point that I intended to make. It seems to me that the first part of the amendment is simply unnecessary. The words towards the end of Clause 5(3) seem clear.

On the broader political point, I do not suggest that the noble Lord, Lord Bowness, is attempting to give protection to members and officers of local authorities if they do not justify that protection. However, I join those who take the line that the power of surcharge has various criteria attached to it. It will come under consideration in any event following the comments of the Committee chaired by the noble and learned Lord, Lord Nolan. I should be unhappy if a particular Bill applied particular criteria to the application of the surcharge power.

Baroness Hayman

This has been a short but useful debate on the amendment put forward by the noble Lord, Lord Bowness. I accept the spirit in which he proposed it and I hope that my assurances will be added to those of other Members of the Committee that the issues with which he is concerned are covered by the Bill. On the first issue, the amendment does not advance the case. On the second issue of surcharge, it would in principle be wrong to pass the amendment as it is.

Perhaps I may explain the two paragraphs separately. In proposing the amendments to Clause 5—Amendments Nos. 10, 11 and 12, which the Committee has just accepted—we ensure that in judicial review as well as in audit review a court may determine that a certified contract shall have effect as if the local authority had had power to enter into it and had exercised that power properly. Secondly, the amendments require the court, in exercising that discretion, to have regard to the financial and social consequences of a decision to set the contract aside.

Subsection (5)(a) of Amendment No. 13 deals with a situation in which a court in public law proceedings has made such a decision to allow an ultra vires contract to continue. The amendment seeks to prevent the local authority in subsequent civil proceedings from repudiating the contract on grounds of lack of vires.

The Government fully share the concern that such an action by the authority should not be successful. As the noble and learned Lord, Lord Donaldson, said, there are distasteful cases where that is brought into play. But we are satisfied that the Bill, as amended by the Government, already achieves that effect.

In such civil proceedings, the court would be considering the effect of the safe-harbour clause, Clause 2(1). In so doing, we believe that the civil court would be bound to take account of the determination by the earlier court in public law proceedings that the contract has and always has had effect. We are satisfied, therefore, that the authority could not in those circumstances successfully repudiate the contract in civil proceedings.

The amendment is, therefore, unnecessary. But more than that, it could harm the structure and effectiveness of the Bill by raising an implication that the safe harbour in Clause 2(1) would not be equally effective after a court has said that an ultra vires contract could continue as it would have been before the court's determination.

Perhaps I may turn to the issue of the surcharge. Again, subsection (5)(b) takes as its starting point a determination by a court that an ultra vires contract is to continue. The amendment provides that no power of surcharge is to apply to a member or officer in respect of such a contract. The intention appears to be to remove the powers of the court and the auditor under Sections 19 and 20 of the Local Government Finance Act 1982. In the case of the court, the power is to order a person responsible for unlawful expenditure to repay it. In the case of the auditor, the power is to certify a sum as due from a person who had failed to bring it into account or whose wilful misconduct had led to a loss or deficiency.

The Government's view is that these are matters which can best be left to the court or the auditor in the context of the particular contract. Where there has been unlawfulness, it is right that the court or the auditor should be able to consider whether there has been a loss to the authority which should be made good.

I should make clear that, once the court has determined that the contract is to continue, there is no continuing unlawfulness or loss, so that any such action would relate only to the past. There could not be a surcharge continuing into the future in respect of such a contract.

But action relating to the past is very improbable. Where the court determines that the contract should continue, it is first of all unlikely that any error made by the officer or member would be of sufficient magnitude as to justify the use of Sections 19 or 20. It is also unlikely that there would be a loss to the authority. Only in the most extreme case would there be any question of action by the court or the auditor to require a repayment or impose surcharge. In such an extreme case, I believe that the court and the auditor should retain their individual freedom to act.

Nothing in the Bill increases the potential liability of local authority officers, whether involved in the decision to enter into the contract or to give the certificate. An officer is unlikely to incur any liability relating to a contract if he acts reasonably and to the best of his knowledge in accordance with the powers of the authority. As always, only wilful misconduct puts the officer or member at risk, and it is right that it should do so. In this respect, it is right that a contract certified under the Bill should be treated in the same way as any other contract or decision made by a local authority.

I wish to reassure the noble Lord, Lord Bowness, that we do not see this as in any way dealing with technical issues or extending the potential liability of councillors or officers in those circumstances. But, equally, we do not think it would be right to remove from the courts or the auditor the ability, where there has been wilful misconduct—and I believe that was the view expressed by the noble Baroness, Lady Hamwee—to impose a surcharge if in the specific circumstances that seems right. That is a point on which we understand the Audit Commission will issue guidance to auditors to help clarify the situation. In those circumstances, I hope that the noble Lord, Lord Bowness, will be reassured and willing to withdraw the amendment.

Lord Bowness

I have, on other occasions and in similar debates, envied those who have been able to stand at the Dispatch Box on one side or the other and say: "Well, of course, I'm not a lawyer". I am not allowed that excuse. Therefore, the best thing I can do is to thank the Minister for her explanation and say that I shall read carefully what she and other Members of the Committee have said. Having read it, I hope that I shall be as satisfied and certain as the Minister is that such circumstances cannot arise.

In justification of having brought the amendment to the Committee to be discussed, I have to say that, as the noble and learned Lord, Lord Donaldson, said, there have been a number of cases where local authorities have sought to do precisely what I feared this clause might allow them to do. However, I will take the amendment away and read the Official Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 5, as amended, agreed to.

Clause 6 agreed to.

4 p.m.

Clause 7 [Absence of relevant discharge terms):

Baroness Hayman moved Amendment No. 14: Page 5, line 16, leave out from ("section") to ("do") in line 21 and insert ("the circumstances in which there are no relevant discharge terms having effect between the local authority and a person who is a party to the contract include (as well as circumstances in which no such terms have been agreed) circumstances in which the result of a determination or order of a court, made (despite section 6(4)) on an application for judicial review or an audit review, is that such terms").

The noble Baroness said: This amendment responds to a point raised by the noble Lord, Lord Bowness, during the Second Reading debate about the relationship between Clauses 6(4) and 7(3) of the Bill, a matter which I agreed at the time to consider further.

I have explained how, where a certified contract is challenged in judicial review or audit review, the court will have a discretion to determine that the contract may continue notwithstanding that it was outside the authority's powers or was improperly entered into, that is, ultra vires—the point with which we have been dealing. Where the court determines that a contract should be set aside, it is important that there should be some enforceable provision in place to which the parties can appeal to determine the consequences of the court's decision.

Accordingly, Clause 6 of the Bill safeguards any provisions which the parties to a certified contract may agree to regulate the consequences of a court order setting the contract aside. The court order will not affect the enforceability of such provisions if they provide solely for the payment of compensation to the contractor or financier or the ownership or possession of any assets provided under the contract, or both of these things.

Where such "discharge terms" have been agreed, it is important that they should themselves be protected by a safe-harbour provision so that the contractor or financier can be assured that they will not be treated as being outside the authority's powers or improperly entered into. That is achieved by Clause 6(4) of the Bill, which, like Clause 2(1) for the main contract, provides that the authority shall be taken to have had power to enter into the discharge terms and to have exercised that power properly.

Of course, it may be that no discharge terms are agreed for a certified contract. To meet that contingency, Clause 7 provides as an ultimate fall-back that the contractor or financier should receive damages as if the contract had been repudiated by the authority. That is, the contract is treated as if it were brought to an end by the authority's repudiation of its obligations under it, and the contractor is then entitled to be paid damages designed to put him into the position in which he would have been if the contract had been properly fulfilled. He would, for example, be entitled to something for actual and anticipated loss of profit.

It is possible that the court could be persuaded to consider the lawfulness of discharge terms notwithstanding the safe harbour and might conclude that they were not proper discharge terms at all. The court might conclude, for example, that they made some outrageous provision (for example, that the authority should pay a penalty) or were agreed by the authority with an improper motive, or even that there was reasonable suspicion of some collusion or fraud. Unlikely though that may be, the Government are determined that the Bill should provide authorities, contractors and financiers with the certainty of knowing what consequences would flow from it. Accordingly, the amendment to Clause 7(3) makes clear that that too would be a situation in which there were no discharge terms, so that the contractor or financier would be entitled to repudiatory damages.

Amendment No. 14 clarifies the circumstances under which there are no discharge terms having effect. Clearly, there will be no discharge terms where none has been agreed by the parties to the certified contract. But it is also possible that, despite Clause 6(4) of the Bill, a court might conclude in an extreme case in public law proceedings that terms agreed as discharge terms are not to have effect. The amendment would deal with that very unusual but possible circumstance. I beg to move.

Lord Bowness

I thank the Minister for bringing forward the amendment in response to the requests that were made at Second Reading. I shall reserve my remarks as to how I believe that the provision ought to be extended until I move the amendment standing in my name.

On Question, amendment agreed to.

Lord Bownessmoved Amendment No. 15:

Page 5, line 21, at end insert— ("(4) A court shall only make a determination or order under subsection (3)(b) if the discharge terms—

  1. (a) contain some provision which is grossly unreasonable or which discloses some improper purpose; or
  2. (b) provide for some unlawful consequence.")

The noble Lord said: At Second Reading I asked whether there was a conflict between Clauses 6 and 7 of the Bill. Clause 6 and its various subsections seem to me very clear. There is reference to: No determination or order made in relation to a certified contract on … judicial review or … audit review, shall affect the enforceability of any relevant discharge terms relating to the contract". Later, there is reference to, the relevant discharge terms shall have effect (and be deemed always to have had effect) as if the local authority had had power to agree them (and had exercised that power properly". That appears to envisage no circumstances in which, in regard to a certified contract, the discharge terms can be challenged. However, as I submitted at Second Reading and do so again, that is contrary to Clause 7, which contemplates: a determination or order made by a court…that … such terms … agreed do not have effect".

The Government's amendment and the Minister's explanation seem to accept that there are particular circumstances in which the discharge terms can be challenged. Therefore, it seems to me that it would be helpful if we could be rather more precise as to the circumstances in which that finding was to be made. For that reason, I have suggested that the court should only make such a determination, if the discharge terms contain some provision which is grossly unreasonable or which discloses some improper purpose; or provide for some unlawful consequence".

I am not absolutely happy about the words "grossly unreasonable" but my advice was that the word "outrageous", which was my choice, would cause other problems. Members of the Committee may give me some advice on the appropriate word to use. I hope that the Minister will he able to say that there is some merit in being able to narrow the circumstances in which such a determination can be made, even if she has to take the matter away and seek from government advisers substitute wording for "grossly unreasonable". I beg to move.

Lord Donaldson of Lymington

When I spoke earlier I should perhaps have declared an interest in that I am chairman of the Financial Law Panel which has played quite a part in the preparation of the Bill.

The amendment produces an interesting point, which it does not really address but raises by a side wind; namely, whether the court could set aside the discharge terms without setting aside the contract. Quite clearly, if it set aside the contract, it would set aside the discharge terms and the whole lot would go. The contractor would be left with his fall-back position, his damages or compensation on the basis of a deemed repudiation.

I just do not know whether a court could set aside discharge terms. I say "I do not know" because I venture to think that no one knows. I had considerable experience as Master of the Rolls in dealing with judicial review cases and at no time regarded myself in that field as bound by precedent. I and my colleagues looked at the situation as it was developing in a public law context and decided on the right course to take. Perhaps the most outstanding example was the Datafin case, which people will know about. It was a classic example, if I may say so, of what could be described as "judicial engineering". I do not doubt that a court would consider setting aside discharge terms if they were sufficiently obnoxious, notwithstanding the fact that it might want the contract to continue.

Let me say one general word about the special discharge terms. The secretariat of the Financial Law Panel and I have looked carefully at that matter. For what it may be worth, our view is that neither local authorities nor contractors should spend much time on special terms. Local authorities can hardly be heard to say that the basis of repudiation is unreasonable and dangerous since they may well have had no power to enter into the contract. Nor can the contractor say, "I want something better than the standard fall-back repudiation", which provides full compensation for any loss that he suffered.

It may well make more sense economically therefore, certainly in terms of managerial time, to forget about special terms and either simply provide in the contract that the discharge terms shall be on the statutory basis—which I could look up and quote but I will not—or leave it with no discharge terms, in which case the statutory discharge terms will apply. They survive everything, judicially engineered or not. They are the sheet anchor of the contractor's protection.

Baroness Hayman

Amendment No. 15 deals with the same area as the government amendment which the Committee recently accepted. In discussing Amendment No. 14, I explained that it clarifies the circumstances under which no discharge terms have effect. That may be because none had been agreed by the parties to the contract and, indeed, as the noble and learned Lord, Lord Donaldson, said, it may well be that in many circumstances parties to the contract decide that that is the most sensible course to take. But in other circumstances discharge terms that come within the safe-harbour provisions will be written into the contract. It is important therefore that we envisage the circumstances in the potential clash at which the noble Lord, Lord Bowness, was looking when those discharge terms may be examined in public law proceedings and viewed not to have any effect.

Amendment No. 15 deals with the latter possibility. It seeks to specify the circumstances in which a court may set aside agreed discharge terms. It is when we come to being specific that the difficulties arise. The noble Lord, Lord Bowness, accepted that "grossly unreasonable" may not be the best formulation and that "outrageous" did not seem to meet the Bill. The noble and learned Lord, Lord Donaldson, used the word "obnoxious" in those terms. It is when we start trying to specify that the difficulty arises.

It is only in the most extreme cases that a court would even need to consider a matter of this kind. As I explained, Clause 6 (4) establishes that discharge terms are themselves protected by a safe harbour. Only in exceptional circumstances would a court decide to set aside the discharge terms. Those circumstances include those described in Amendment No. 15, but there may be others.

The Government do not feel that it is right or appropriate to prescribe or limit the circumstances under which a court could conclude that Clause 6(4) did not apply. The circumstances would be so individual and specific that it is a matter of law and discretion best left to the courts. It is important to ensure that contractors and banks entering into certified contracts should have the certainty of knowing what would happen in the highly unlikely event that both their contract and agreed discharge terms were set aside in public law proceedings.

The government amendment to Clause 7 ensures that where, despite Clause 6(4), agreed discharge terms are not to have effect, the ultimate fall-back entitlement to repudiatory damages will come into play. All that Clause 7(3)(b) seeks to do is to ensure that all contingencies are covered. I hope that that provides some reassurance to the noble Lord, Lord Bowness, that the issues with which he was concerned in the specific circumstances are covered by the legislation as it now stands.

4.15 p.m.

Lord Harmar-Nicholls

Perhaps I may interrupt the noble Baroness and ask whether she is able to say that she will take the amendment back so that it can be looked at again. The Government are satisfied that the worries expressed by my noble friend and by the noble and learned Lord, Lord Donaldson, will be covered: that it is a rare and unusual situation.

However, a case has been made that there is uncertainty about this. When my noble friend expressed objection to a certain phrase there was general acceptance in various parts of the Chamber, indicated by Members of the Committee nodding their heads. When a case has been sufficiently made for the Minister to accept that there is a case—it may be the noble Baroness will go on to say that she will look at the matter again and I may be being presumptuous—if the Minister then sits down and does not say that the Government will look at it again in the light of the examination by both the Opposition and the Cross-Benchers, we should not be carrying out our duty correctly.

Lord Donaldson of Lymington

Perhaps the Committee will forgive me for speaking twice. I clearly did not express myself properly. I was merely intrigued about the possibility of the courts setting aside discharge terms without setting aside the contract as a whole. But being intrigued is one thing; having problems with it is quite another.

For my part, I have no doubt whatever that the right thing to do is to leave the courts to deal with these matters on a case-by-case basis. That is what they are being asked and required to do by the statutory nature of the contract as a whole. Why should there be anything different about the discharge terms? I hope that nothing I have said will be taken to cast any doubt upon my support for the Bill as drafted, subject to the Government's amendment. I am convinced that there is no need for any further amendment or further need to examine the matter.

Baroness Hayman

I am extremely grateful to the noble and learned Lord, Lord Donaldson, for that intervention. The noble Lord, Lord Bowness, may be reassured. Were it the case that the Government were proposing the narrower definition and there was concern that circumstances raised by the Committee were not covered, I would be happy to take the matter away and look at it again. In fact we are in the opposite situation where the Government are giving a broader definition in order to allow the courts to have exactly the sort of discretion that the noble and learned Lord described.

If we were to accept the amendment before us, we would be narrowing down the circumstances in such a way that we may not have envisaged a case in which the court properly ought to be able to set aside the discharge terms. For that reason perhaps the noble Lord, Lord Bowness, will withdraw the amendment. The circumstances are covered and it is better to have the wider power for the court than to restrict it as Amendment No. 15 would do.

Lord Bowness

At one stage I thought I was going to be reassured. I am sure that the noble and learned Lord, Lord Donaldson, did not intend to shatter my reassurance. However, when he tells the Committee that he does not know whether or not courts can set aside discharge terms from a reading of this Bill and when I hear that we ought to leave things on a case-by-case basis, I remain somewhat concerned.

Local government litigation and the parties to it have shown themselves over the years to be extraordinarily inventive. It seems to me that to pass a Bill which on the record will show that we do not know whether or not the courts can do that would be a mistake. Nevertheless, I shall again read what the noble Baroness said, consider it and decide whether or not we wish to return to this matter at a later stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7, as amended, agreed to.

Clause 8 agreed to.

Baroness Hayman moved Amendment No. 16:

After Clause 8, insert the following new clause—