§ Lords amendment: No. 8, in page 4, line 23, leave out "and (3)" and insert "to (3A)".
§ Mr. WardAlthough I understand that some hon. Members may have points to make on the amendment, it was made by the other place as a clarification of the original Clause 7, which it was felt was not sufficiently clearly drafted. I accept the wisdom of the noble and learned Lords, and recommend acceptance of the improvement that they have made.
§ Mr. Anthony GrantI rise because I do not believe that the amendment does what is necessary to rectify a serious defect in this part of the Bill. I shall cite as an example the effect that the Bill will have upon the alarm system industry, and declare an interest as chairman and director of a company that manufactures and installs intruder alarm systems.
I do not dissent from the principles of the Bill, which is designed to assist the consumed—although it does so largely at the expense of the manufacturer and the trader—but a number of things have happened, and such legislation is particularly difficult for small and medium-sized businesses. Therefore, it is imperative that we give the greatest possible scrutiny to the effect of the Bill on the business community, and particularly small businesses.
After all, small businesses have had a whole range of burdens placed upon them since the passing of the 1973 Act. There were the Employment Protection Act and the Price Commission Act, to name but two burdens. Therefore, we should not stampede through this Bill without looking closely at its effect on industry and if necessary giving the hon. 2182 Gentleman the opportunity to take it away and think this matter through.
The new subsection is designed purely to tidy up the wording of the clause, but in the other place an extremely important question was raised by Lord Lyell, supported by Lord Hailsham, on the effect of the clause would have on the intruder alarm system industry, and no doubt on other industries.
5.0 p.m.
It is relevant to point out that the Lord Chancellor—I believe that I am entitled to quote his words, although I cannot quote what the other noble Lords said—said on 20th June:
The noble Lord, Lord Lyell, said he had not given notice of the point he raised and therefore perhaps the best thing would be for me to read carefully what he said and return to the matter.He then gave a quick, off-the-cuff answer in which he said:The advice I have briefly received is that if a contract for hire of the alarm is made and there is a defect in the alarm which would bring the `fitness for purpose' question into issue, Clause 7 will strike down as between customer and firm exclusions relating to fitness for purpose…".He went on to promise to look at what was said in the debate and if there was need to return to the subject he would do so at a later stage. At the end of the debate, Lord Lyell said:The noble and learned Lord the Lord Chancellor has given a clear undertaking to look into the matter. Following the plethora of legal advice I have had from my noble and learned friend I look forward with growing expectation to receiving equally excellent advice from noble and learned Lords opposite in due course."—[Official Report, House of Lords,20th June 1977; Vol. 384, c. 461 and 464.]I have looked through the reports of the subsequent debates in the Lords and I can find nothing but total silence from the Lord Chancellor. The point raised in the debate was not dealt with. Therefore, it is necessary for me to explain the background to the problems affecting the industry.At the time of the passing of the 1973 Act, affecting goods, anxiety was expressed by the companies in the alarm business on account of the unpredictable nature of the liability that it might 2183 impose on alarm installing companies in the case of an alarm being provided for a private house. In contracts covering the installation of fire and intruder alarms it has long been the practice of the installing company to prescribe a limit upon its liability in the event of the alarm failing to function due to some defect in the equipment provided.
There is justification for this practice because, first, any liability assumed by the alarm installing company would require the prudent alarm installer to obtain indemnity through a third party insurance policy, and the cost of this would be a normal operating cost of the installer, which would be an element in the installing company's price to the customer. This would ultimately be payable by the customer anyway. Secondly, the installing company, by the very nature of things, can have no knowledge from day to day of the value of the property that the alarm is likely to be protecting from time to time. Third party insurance of this kind is more expensive than direct loss insurance, and very much more so, if obtainable at all, if one cannot predict accurately the level of cover required.
Thirdly, taking the broad view, it can be argued that it is not necessarily against the interest of the customer for the price to be kept down to a reasonable level by setting an upper limit on the alarm company's liability in the event of defect leaving the customer who knows accurately the value of any loss he is likely to suffer to obtain what additional cover he requires by direct loss insurance.
That was the justification for the policy adopted. One can therefore understand many of the arguments put forward by the hon. Member for Peterborough (Mr. Ward) in favour of barring exclusion clauses from consumer sales which relate to the general run of goods likely to be purchased for domestic purposes. But when one contemplates the private householder who seeks the services of an alarm company to install an intruder or fire alarm in his private house, it is likely to be occasioned by an abnormal risk of loss. A wealthy householder who has filled his house with valuable pictures or china may seek to protect himself from a loss of many hundreds of thousands of pounds. Likewise, in the case of a fire alarm, the total loss of a house of quality 2184 may well involve a sum of £100,000 or more.
An intruder alarm may be installed in a private house for about the same, or, indeed, rather less than the cost of a colour television set. If a colour television set breaks down it is not unreasonable to expect the manufacturer to compensate the householder for the loss involved, but in the case of an alarm company the loss is likely to be out of all proportion to the cost of the product.
The industry has coped with the situation since 1973 by renting rather than selling equipment. It was not a direct consequence of the Act, but it stemmed from the requirements of the National Supervisory Council for Intruder Alarms which requires all installers to ensure compliance with the relevant British standards. It was thought that the only way in which alarm installers could ensure that certain standards were maintained was by their retaining ownership. Therefore, the vast majority of alarm installers operate on a rental rather than sale basis.
The 1973 Act did not prevent the incorporation of limitation clauses in rental contracts. I refer to paragraph 26 of the Law Commission's Second Report, which states clearly that the Commissioners were thinking in terms of the sale and hiring of items such as television sets and not of the broader issue of subrogation and the question of liability by the alarm company.
I am arguing that subsection (1), which the amendment seeks to alter, places a quasi-insurance obligation on alarm companies in the event of an unlimited limitation on his liability. That cannot have been in the minds of the Law Commission at the time. Lord Hailsham stressed the case vividly when on 20th June he cited the example of someone seeking to protect his house from burglary when he had in it a valuable Rembrandt worth £750,000. The company that has installed the alarm cannot possibly know, or be expected to know, what is in the house or how valuable are its contents. The owner of the house could install another Rembrandt, two or three Rubens and a Velasquez. It is not reasonable that the company should be expected to anticipate that.
2185 An insurance company would anticipate the situation by charging the necessary premium. It is unreasonable to expect alarm companies either to anticipate or to take out insurance to cover such an event.
As Lord Hailsham said, once an alarm system is installed the prudent householder should take out insurance. If a claim is made for £750,000 from the insurance company and it is met, everybody is happy at that stage. But under the Bill the insurance company would be entitled to say that it has a right of subrogation to the alarm company and should be able to sue that company, which might be small, for the full value of the Rembrandt. As Lord Hailsham said, those who propose the Bill did not intend that it should protect insurance companies in that way, but by this clause it is unwittingly giving protection to insurance companies.
Here I draw attention to a rather curious feature of the Bill. As far as I can gather. insurance companies are totally outside it. I find that very strange. All other suppliers of services—architects, alarm companies, and so on—fall within the terms of the Bill, but not insurance companies. I understand that the reason for that is that the British Insurance Association said to the Department "If we give you a letter promising to do this, that and the other and to maintain certain standards, will you please excuse us from the Bill?" I understand that the Minister accepted that. If that is so, I find it strange that one section of the business world should be excluded, merely on an exchange of letters or something like that between one organisation dealing with insurance companies and the Minister. It is most unsatisfactory.
In any event, there is no reason whatever why insurance companies should he put in a more favourable position and be able to subrogate and take over and impose a most intolerable liability upon the alarm system companies.
I know the answer that the Minister or the lion. Member for Peterborough may give. The hon. Member said that in this clause we are talking about the test of reasonableness. However, as my noble Friend, Lord Hailsham, brought out, no one knows what the test of reasonableness is. We shall be coming to that later. 2186 What is certainly not made clear is what are reasonable damages. Is there any test of what the courts might impose upon an alarm company that was sued by an insurance company for an enormous loss of which it knew nothing and could not possibly anticipate? Will the court be able to say, under the test of reasonableness, that it would be reasonable to make the alarm company pay the full amount to the insurance company? Perhaps the Lord Advocate will be able to make a judgment on this matter.
This point was raised very clearly in the House of Lords, but it has never received an answer from the Lord Chancellor. There has been no indication, in any of the reports of debates that I can find, of the way in which this major problem can be dealt with.
Therefore, I find the amendment, which is a kind of drafting amendment, wholly unsatisfactory to deal with something that could have profound effects on an industry that is of great importance in these days of increasing crime. At best, it could substantially add to the costs imposed upon the customer, and at worst, it could lower the whole standard of security in this country. I hope, therefore, that I shall get a reply from the hon. Member or the Minister, although I appreciate that these are rather difficult legal concepts. None the less, they are very valid.
§ Mr. John FraserThe hon. Member for Harrow, Central (Mr. Grant) began by suggesting that the Bill was a burden on business men and an advantage to consumers. I hope that on reflection he will agree that it is as great an advantage to small business men as it is to consumers, because the small business man is just as much subject to exemption clauses and to pressures, and the inability to negotiate at arm's length on equal terms with a large company, as is the consumer. Indeed, a good many complaints that come to my Department are from small business men concerning, say, their dealings with petrol companies, unfair discounting, and discounting in the grocery trade. I need not give a catalogue of examples.
However, I take the point that one has as much a duty to defend the small business man against abuse of power as one has to defend the consumer against it. 2187 That is what the Bill does, as did the legislation that the hon. Member introduced as a Minister at the Department of Trade and Industry in 1973. It gives the business man contracting on standard terms the chance to contest the reasonability. I hope that the hon. Gentleman, on reflection, will not regard that as being a criticism of the Bill.
The second point that the hon. Gentleman made was about intruder alarm systems. I think that he accepts that as a result of the legislation that he introduced, if an intruder alarm were sold outright to a consumer it would not be possible to contract out of liability for fitness for purpose of that alarm. What the Bill does is to say that whether the intruder alarm company sells the object outright or hires it out the legal relationship between the parties should be the same. What the hon. Gentleman seeks to do is to provide an additional benefit to the supplying company if a hiring takes place. That is part of his argument.
5.15 p.m.
I think that as a matter of principle one should not draw that distinction. There are many other areas in which the 1973 Act is being extended. For instance, if somebody buys a motor car outright and as a result of the negligent construction of the car, or its failure to be fit for a purpose, he suffers death or serious injury, damages can be recovered against the person who sold the goods, apart from any rights that there might be against the manufacturer.
If the same consumer, in dealing with the same garage, chooses to hire the car for a fortnight—the same car in the same condition—and is killed or injured, it would seem wrong in principle and in logic that one should draw a distinction and say that in one case damages can be recovered for death or personal injuries but not in the other. I cannot see any logic in that situation, and I hope that the hon. Gentleman will not press the matter against that logic.
Another point made by the hon. Gentleman is that intruder alarm companies hire out equipment. It is not that these companies want a captive audience, although sometimes that is alleged, as the hon. Gentleman knows. The hon. Gentleman said that alarms are hired because 2188 what happens is that although the possession of the instrument is transferred, the customer is assured of a continuous maintenance service.
The problem that arises is whether the maintenance was carried out correctly. If an intruder alarm system is hired without any contract for maintenance, one cannot expect the hiring company to be continuously liable for maintaining that instrument in the condition in which it was when it was first installed, just as one does not expect the seller of a car to give a guarantee that the car will always be of first-class quality and fitness. The sense of the situation is that the car will deteriorate unless one maintains it.
The point at issue is whether there has been a breach of the duty in the intruder alarm company to maintain the instrument carefully. The question is whether there has been negligence. I cannot see that it is right to say that if the maintenance contract has been negligently carried out by the supplying company that company should be able to exempt itself from all liability. That is what the argument comes down to.
I hope that I can say one or two things that may prove to be reassuring. I cannot give a final opinion. This is a matter for a court. All questions of damages are for the courts, but there are two things that I can say. First, it is surely not right to say that the supplier of the intruder alarm should be liable without limit for all losses suffered as a result of the failure of the alarm system. That cannot always be so, because it may be that the damage is not proximate to the failure that occurred.
The argument that often arises is whether other precautions ought to have been taken or that the consumer was replying too much on one installation to protect, for example, a valuable Rembrandt. One might come to the conclusion that if one had a Rembrandt that was that valuable it would not be enough to rely solely on an intruder alarm system, but that the painting should have been kept in a safe.
There is difficulty here. It does not follow that the damage suffered by the consumer would necessarily be laid at the door of the intruder alarm company. Some back-up insurance could be obtained by the hirer or the provider of the maintenance service. Other people 2189 providing maintenance already have to be liable without limit. For instance, solicitors—here I declare an interest—are always liable without limit and cannot contract out of liability for negligence in any situation, and they seek insurance for that purpose.
I understand that companies in the position of the hon. Gentleman's company might find it difficult to get adequate insurance cover if the Bill came into effect rapidly. We need to defer the time when the Bill comes into effect until next year to give a long lead-in period, so that arrangements can be entered into to provide extra insurance where it does not exist in the sort of situations that the hon. Gentleman predicates.
In the example given by the hon. Gentleman, if the recipient of the hire and maintenance service was a business man, it would be in order to introduce an exemption clause to provide exemption of liability. I know that that does not go the whole way to meet the hon. Gentleman's point but it goes some way, and I hope that he will accept that there is some logic in aligning the law on supply of goods with the law on the sale of goods.
§ Mr. MoateWill the Minister explain what he means when he says that if the other party were a business an exemption clause would be acceptable or in order? The definition of "consumer" in the Bill does not make that point. The definition implies that it includes a business man in that context. Is the Minister right in saying that a business man would not be a consumer in the sense that the Bill means?
§ Mr. FraserWhen I find chapter and verse on the definition of "consumer" I shall return to the hon. Member for Faversham (Mr. Moate).
I turn now to the point raised by the hon. Member for Harrow, Central about subrogation. The hon. Gentleman said that Lord Lyell raised this matter in Committee in the other place and that nothing further seemed to have happened, and that the Lord Chancellor did not seem to have done anything about it. I hope that he will acquit the Lord Chancellor of any discourtesy to Lord Lyell. The Lord Chancellor wrote to Lord Lyell about this matter on 27th June and Lord Lyell did not raise the matter on Report. Of course there is no objection to the hon. Gentleman's raising it now.
2190 The letter from the Lord Chancellor is fairly short, so perhaps it would be as well if I read part of it and summarised the rest. The Lord Chancellor said that he had looked at the matter raised at Committee stage, which deals with the example of a householder who hires a burglar alarm and suffers loss as a result of a fault. The letter then stated:
You asked whether the insurers of the householder would be entitled, on indemnifying him and exercising their right of subrogation to him, to the same rights against the alarm company as he had.The letter then deals with the doctrine of subrogation. The effect would be that the insurance company would be subrogated to the rights of the householder. The insurance company is subrogated to the rights of the householder, where the alarm was sold outright, if there was a provable breach of obligation under the Sale of Goods Act. The same point would arise in relation to the supply of goods by way of hire. The letter comes to that conclusion.The Lord Chancellor stated:
You will appreciate that your point on the law of subrogation is one of general application".I am sure that the hon. Gentleman will agree that that is not the only place where it arises. Wherever one alters liabilities in relation to tort or contract—instance, if one passes a statute debarring a defendant from a certain defence in the law of tort—or alters the law on exemption clauses or imposes an implicit obligation, as under Section 32 of the Housing Act 1969, from which one cannot contract out, one imposes a subrogation that cannot be contracted out of. Whenever we change the law of contract by a side wind we affect the rights of subrogation. That must be so.The Lord Chancellor wrote:
You will appreciate that your point on the law of subrogation is one of general application, since the doctrine is an integral feature of the law of insurance. I do not think that it would be appropriate to deal expressly with subrogation in this Bill, and, indeed, the insurance industry might well raise objections of principle if we were to attempt to do so".I do not think that the veto of the insurance industry is relevant. It would be difficult in this Bill, which deals with exemption clauses, to deal with subrogation. I hope that I have given a fair 2191 account of the reply given in correspondence to Lord Lyell.
§ Mr. Anthony GrantI appreciate that, and I hope that I can study the letter in more detail. The conclusion that I reach is what I and the industry fear is only too true. The Minister said that we could not deal with the law of subrogation in the Bill. Can he indicate when it might be dealt with in future? I am sure that he understands that this is an appalling dilemma for some people. I do not think that many other people are in this position. It is fundamentally the alarm system industry that must face it. Why are the insurance companies excluded from the Bill?
§ Mr. FraserSubrogation is largely an insurance matter. I do not know whether anybody contested the subrogation point when the hon. Gentleman introduced his Bill. It is not moving a long way.
I undertake to ask the Lord Chancellor and, indeed, the Department of Trade, which deals with insurance matters—not my Department—to look further at the point made by the hon. Gentleman.
Why are insurance companies excluded? It was not the recommendation of the Law Commissions that they should be included. That is the first reason.
The second reason is that insurance companies, like others who are exempted from the provisions of the Bill, deal largely with international trade. Just as we imported the Athens Convention, so we have left out contracts for the international sale of goods. Insurance tends largely to be a matter of international trade, and it has been exempted for that reason. Inclusion could do a lot of damage to the competitive aspects of our insurance industry.
I do not know why the hon. Member for Faversham should pull a face. He is in the industry. Therefore, he must know that if we put British insurance companies at a disadvantage compared with their foreign competitors, we shall do no good to the British industry or the economy.
§ Mr. MoateI was thinking that the Minister was putting forward an extraordinarily thin argument. He might have an argument, but to suggest that we do 2192 not include protection for the British consumer simply because insurance companies engage in a wide range of international contracts is very feeble. We are concerned with millions of insurance policies issued by British insurance companies to British people. If he had wanted to include them he could have done so.
§ Mr. FraserThat is the second reason. I said that I would give a number of reasons.
The third reason is that exemption clauses in insurance contracts tend on the whole to be not exemption clauses as we understand them but clauses that define the risks. When one examines an insurance policy one often finds that what reads as the exemption clause is a way of defining the risk. For example, the house is insured, except for damage by nuclear explosion. That is not an exemption; it is a definition of the risk.
To give reassurance to consumers over what might be thought to be undue reliance on clauses that are not exemption clauses, a statement of insurance practice was issued by the British Insurance Association and by Lloyds, which I hope the House will welcome.
§ Question put and agreed to.
§ Lords Amendment No. 9 agreed to.