HC Deb 22 July 1977 vol 935 cc2204-14

Lords amendment: No. 12, in page 6, line 5, at end insert: (3A) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to—

  1. (a)the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
  2. (b)how far it was open to him to cover himself by insurance."

Mr. Robert Taylor (Croydon, North-West)

I beg to move, as an amendment to the Lords amendment, in paragraph (a), after 'which' insert: 'in the course of his business'.

Mr. Deputy Speaker

With this we shall also take the second amendment to the Lords amendment, in paragraph (b), after 'him' insert: 'in the course of his business', and Lords Amendment No. 42.

Mr. Taylor

My reasons for tabling the amendments are that, not being a lawyer and by no means an expert on the law of contract, I have considerable apprehensions about the possible consequences of the Lords amendment unless it is amended in accordance with my suggestions.

I appreciate the reasoning that promoted the passing of Amendment No. 12 in the Lords. It was thought that further protection should be given to professional and business men who cannot be protected by limited liability. I am sure that that motive gains the approval of all in the House. There is, however, a widely held belief, which has caused considerable alarm in many professional institutions, that the amendment could have a contrary effect.

The amendment seems to provide that where any person—which includes a company or a partnership—seeks to restrict his liability by contract to a specified sum, the court, in deciding whether the restriction is reasonable—and that is an important word—shall have particular regard, first, to the resources that he can expect to have available to him in the process of meeting that liability, and secondly, how far it was open to that person to cover himself by insurance.

I am not a lawyer, but, as I understand it, the test of reasonableness involves a question of all or nothing. If the exemption clause is reasonable the plaintiff gets away with nothing, whereas if it is unreasonable he recovers his losses. That means that if the defendant is a company, individual or partnership, or a member of a partnership, he is fully liable for all the plaintiff's losses, irrespective of his ability to obtain insurance cover.

In the new proposal the court must take into account the resources available to the person involved. How will the court assess the resources in a partnership where one member is considerably more affluent than the others? If the resources of the affluent partner are taken into account the other members of the partnership will be made bankrupt. If the court considers the resources of the weakest partner, with fewest assets, the wealthy partners will escape with a small liability. If the words of my amendment are accepted the original intention of Amendment No. 12 will be met.

My other argument is equally important. I understand that there can be no halfway decision about reasonableness. That is my understanding as a layman. Under this provision, therefore, if the courts have to examine the resources that individuals or companies have available and they do not meet the liability in full, the case must be thrown out, because of the provision of reasonableness

. I take an example that has been quoted elsewhere. If there is a liability for £100,000 and a company is faced with paying that sum when its assets are only £95,000, the case will be rejected because of the inadequacy of the assets. On the other hand, if the company has net assets of£105,000, it will be liable. Those are the facts as reported in the Press.

Finally, although the inclusion in the Bill of a reference to the availability of insurance cover has been welcomed very widely, the wording of paragraph (b) in the new subsection is not really satisfactory. It would have been much better if reference had been made to the respective abilities of the parties to insure, because there are instances where a party who controls the situation has access to information that will enable him to get insurance on favourable terms, whereas others without that information may be less favourably placed.

Mr. Deputy Speaker

Lords Amendment No. 12—in paragraph (a), after "which", insert in the course of his business". The Question is, That the amendment be made.

Mr. Ward

I should like to make a brief comment before my right hon. and learned Friend the Lord Advocate and my hon. Friend the Minister of State come in further on this point. The amendment came through the good offices of the Lord Hailsham. I listened very carefully to what the hon. Member for Croydon, North-West (Mr. Taylor) said. It seems that what he is proposing undermines completely the intention of the clause. A businessman could so arrange his affairs that he would divest himself of assets held for the purposes of his business and so escape the intention of the clause. I shall have to listen very carefully to what is said by my hon. Friend the Minister. At present, however, I feel inclined to resist the hon. Gentleman's proposal.

Mr. Moate

On a point of Order, Mr. Deputy Speaker. May we know whether the hon. Member for Peterborough (Mr. Ward) was speaking to the amendment?

Mr. Deputy Speaker

I understand that the hon. Member for Peterborough (Mr. Ward) was speaking to the first of the two amendments—paragraph (a). The amendment that I proposed was in paragraph (a), after the word "which" to insert the words in the course of his business".

The Question is, That the amendment be made.

Mr. John Fraser

Perhaps I may deal with the example given by my parliamentary neighbour, the hon. Member for Croydon, North-West (Mr. Taylor), about the company. I think he said this: possible claim of £100,000, if they had assets of only £95,000—exemption reasonable; if they had assets of £105,000—exemption unreasonable. That is the Micawberesque example of how the hon. Gentleman thought it would work. I would not contemplate an examination of resources resulting in that kind of judgment. I think it is far too easy an example. It is far too brash a conclusion that the courts would work like that.

Perhaps I may give a rather more practical example. If a dry cleaner with fairly limited assets, both personal and in his business, wanted to impose a limitation of liability for the damage resulting from the cleaning of a fur coat, that, for the small business, might well be reasonable. Indeed, it might be reasonable for a large business as well. One would have to take into consideration all the facts. The example that the hon. Member gave is too easy an example.

The second point is that if one takes into account only the resources that the person has in the business, that could lead to keeping assets out of the business simply to avoid liability. Again, I turn to the example of the solicitor. At present, solicitors are entirely liable for their negligence without any limit of liability at all. Of course, they wisely insure for it. If, however, they were found liable for negligence, the partners would jointly and severally be liable not only for their business assets but for their entire personal fortunes as a consequence of their failure to advise properly, even if it were the fault of only one of the partners. That is a fairly hard rule, but it has existed for a long time for the benefit of the public.

If, however, one erodes the idea that the personal assets of the business man are not to be taken into account, it immediately invites a situation in which a person puts as few of his assets as he can into the business and milks it as much as possible and keeps all that he can in his personal account. That raises a real difficulty.

It is for that reason that I think that the very big concession to business men put forward by Lord Hailsham in the other place gets the matter about right. It deals with both insurance and assets. It goes a long way to help those who are worried about incurring large liabilities and who, quite properly, think that it would be reasonable to introduce a limitation. The Lords amendment is a considerable concession, and I very much welcome it. If one goes further, one provides an incentive for evasion of proper liability. For that reason, I hope that the hon. Member's proposal will not be accepted.

6.15 p.m.

Mr. Robert Taylor

Let us consider the situation as it affects architects. If there is a fire in a building which has recently been constructed and lives are lost, the damages could be enormous and amount to considerably more than the liability of a solicitor. The Bill as framed would be a great disincentive to many professional practices to undertake the risks without making sure that the liability of any individual partner was not substantially more than the liability of the other partners.

Mr. Fraser

I have to tell the hon. Gentleman that in that case his amendment would not help, because that would be a liability for death or personal injuries, and in no circumstances can liability be avoided under the Bill. The hon. Gentleman's amendment would not deal with that. In practice, architects would insure.

Mr. Deputy Speaker

I think I should inform the House that with the two amendments to the Lords amendment it is in order to discuss the main Lords amendment.

Mr. Anthony Grant

I think that my hon. Friend the Member for Croydon, North-West (Mr. Taylor) has made the case very fully, but I am sure he would be the first to acknowledge that much of his lucid speech was derived from a remarkable letter writen by Mr Tony Samuelson to the Financial Times after following this legisaltion closely both here and in the Lords. He is a business man running a successful business. One of his partners is a constituent of mine, and they are profoundly concerned about the effect that the Bill will have upon their business. What my hon. Friend said echoes precisely the point made by Mr. Samuelson in his letter.

I shall not go over the points that both my hon. Friend and Mr. Samuelson have made, but I recall that one point made by Mr. Samuelson was that rather than be fettered with the wording which the Lord Chancellor has sought to introduce, with the best will in the world and with the intention of helping industry, the courts would prefer the original wording whereby they could consider all the circumstances. I should like the Minister to comment on whether the courts have not an even wider remit and are able to consider the matter more fully without this wording being inserted.

If we are to have the Lords amendment, I think that it is reasonable, as my hon. Friend said, that it should be confined to operating in the course of his business". I know the difference between companies and professional men, but the whole effect of the Bill will be that, because of the burden imposed upon industry and commerce, many devices will be introduced to get round this provision. I can envisage people in a particularly vulnerable industry seeking to operate through separate companies which have small assets.

Mr. John Fraser

It was the hon. Gentleman who piloted through the House the 1973 Bill, which, quite rightly, did not provide exemption in the case of the sale of goods. It covered damage to property and damages for death or personal injury. That measure has been received with equanimity by industry. Why does the hon. Gentleman think that it will have a calamitous effect when it is applied to services?

Mr. Grant

I thought I had made clear in an earlier speech that it was a concern of one industry in particular, the alarm industry. That industry avoided the full rigours of the 1973 Act by going in for the rental system and was, therefore, without the 1973 Act. Because it is particularly vulnerable in this respect, that industry is particularly concerned about this legislation. We may find that, unless we restrict liability in some way on these lines, other devices may have to be found to evade liability. Several industries such as the alarm industry will find themselves so heavily oppressed that the only consequence will be less competition, less service and, eventually, higher prices. That is only one example of which I know, and there may be others.

We shall try to get ourselves insured before 20th November or whatever the date is, but I have my doubts. I have no doubt that the considerable costs will eventually be passed to the consumer. I hope that the Minister will accept the amendment, which would ease the position of one industry that I know.

Mr. Moate

The amendment moved by my hon. Friend the Member for Croydon, North-West (Mr. Taylor) has some merit, although I do not think that it goes very far towards making a bad Lords amendment much better. If we are trying to relieve the problem of those exposed to unlimited liability as members of a partnership it is easy to argue, as the Minister has done, that if we allowed this it would enable partners to ensure that their funds were separated from any possibility of being in the business, and to shift money, and so on.

That temptation exists to a far greater degree in other activities. If a partner has accepted the unlimited liability of being in a partnership or an unlimited company in any form it seems most illogical that he should try to hive off his assets or conceal his resources to ensure that certain exclusion clauses in a contract that he issues might be conducted by him in a beneficial way. I think it reasonable to allow a partner in a firm to gain the extra protection suggested in the amendment and I shall support the amendment if the House decides to agree with the Lords amendment.

The Lords amendment itself leaves me rather bemused. It is another amendment with good intentions, but the more one studies it the more one becomes alarmed at the situation that has produced it. It seeks to vary the conditions of reasonableness of the exclusion clause, and so on, that will apply to different contracts. It emphasises the fact that we are undermining a large range of commercial and professional contracts. This worries me immensely. It calls into question the value of the conditions in certain areas of business or the professions in openly negotiated contracts.

Architects have been referred to by my hon. Friend. I am no lawyer. I do not know the impact of this Bill on the conditions of contract of the Royal Institute of British Architects, but presumably it has some relevance. Are we saying that this provision does or could vary the reasonableness of the conditions imposed in the RIBA conditions of contract? This is called into question.

We then say that we should try to protect the partner in a small firm of architects by saying that he need only remove the unreasonable exclusion clauses if he cannot get insurance because it is not available to him, or if he does not have the resources, or if he has such enormous personal assets that he does not need insurance, because he can stand up well himself.

Again, we have to bring in the question of reasonableness and the availability of insurance cover. I speak as someone with an interest in insurance business. I am not sure that that interest is affected one way or the other by the Bill, but I declare it for what it is worth. Perhaps I have a greater interest as a consumer, in which case I am not particularly entranced by the Bill.

The wording is how far it was open to him to cover himself by insurance". What does that mean in legal terms? I hesitate to challenge the legal expert who drafted this amendment.

Mr. John Fraser

It was Lord Hailsham.

Mr. Moate

That is why I hesitate to challenge it. I should hesitate before putting in a phrase such as how far it was open to him to cover himself by insurance". What does it mean? Is it referring to the availability of insurance on the market technically and theoretically, or is it referring to his financial resources being sufficient to enable him to buy enough insurance cover?

My hon. Friend the Member for Harrow, Central (Mr. Grant) referred to the possibility of an architect being involved in a fire with subsequent loss of life. The Minister said that the loss of life factor was not relevant, because the architect would be fully liable anyway if negligence were proved in those circumstances.

Let us assume a massive consequential loss of £1 million in the fire. In those circumstances, should the architect be covered for £100,000, £1 million, £5 million or £10 million? It is open to an architect to secure cover up to £10 million. He would have to pay a lot of money for it, but it is possible in theory, No doubt some of the largest practices will insure to that extent. The smallest practices will not. However, the possibility exists of small practices being exposed to massive claims.

How does one interpret the phraseology

how far it was open to him to cover himself by insurance"? I do not know. It is a dubious phrase. Why introduce a means test? Why should the consumer not know, as between one supplier and another, whether an exclusion clause is reasonable or unreasonable? Surely the consumer is entitled to fairly standard terms from all suppliers.

The Minister referred to a dry-cleaning shop. Is he suggesting that a rich dry-cleaning shop has one set of conditions and a poor dry-cleaning shop has another set of conditions? It is an odd proposition. It will not help the consumer. The Minister has not made the strongest case for this amendment.

I do not want to take up too much of the time of the House. However, I should like to take the example of the man who takes his car to a garage. The availability of insurance cover to the garage owner is of considerable relevance to the Bill. It is a long time since I dealt with garage insurance. In the past it was difficult for most garage owners to secure insurance for vehicles left in the open. Many of them could not get such cover without paying astronomical premiums.

The relevant exclusion clause for garages is "No liability for theft of your vehicle". There have been disputes about that. Many garages have therefore taken a limited form of policy to cover legal liability for theft of vehicles. Of course, negligence has to be proved. It can seldom be proved, so the motorist will not be able to register a claim for loss of his vehicle.

Let us assume that the Bill goes through and that the onus is completely transferred to the garage owner. Hereafter, it will not be necessary to prove negligence. He will simply have to accept full liability for the vehicle parked on his forecourt.

Mr. John Fraser

The Bill does not interfere with the law of negligence. It does not impose any strict liability where strict liability does not now exist. Therefore, the hon. Gentleman's example would be wrong. The claim by the customer against the garage proprietor would be based on negligence. The Bill does not alter the law of negligence. To give an extreme example, if A is negligent and there is no doubt that his negligence caused B's death, A cannot exempt himself from causing B's demise by his own negligence. The Bill does not deal with the primary creation of the liability.

6.30 p.m.

Mr. Moate

I had moved on from the point about negligence. In the past a garage could rely on the exclusion clause to protect it against the theft of the vehicle, but there was always an overriding common law duty with regard to negligence. I am sure that the Minister would agree that the motorist could always sustain a claim if gross negligence could be proved, and that there was insurance against that. However, the garage owner could no longer rely on that exemption clause and presumably the motorist would have a strong case without proving negligence because there would, in effect, be a contract between him and the garage for the garage to look after his vehicle. If the Bill does not mean that I do not see why it is being introduced at all. Once direct liability has been transferred to the garage owner it will be even harder for him to obtain insurance.

Mr. John Fraser

It is not a transfer of liabilities. At the moment, if a garage proprietor having care of a vehicle leaves it on the frontage of the garage overnight and the car is stolen the proprietor is able to exempt himself from liability and there is no test of reasonableness. In future the proprietor would not be able unreasonably to exempt himself. That is the point.

Mr. Moate

In those circumstances I agree that the situation has not altered, by and large. However, we are discussing the situation in which the garage owner will be less able to protect himself, by the use of the exclusion clause, against claims from motorists. My point is that we should be applying the test of reasonableness as to the availability of insurance. It should become much easier and cheaper for the motorist to get insurance against such a loss than for the garage owner, who will be increasingly exposed to claims. As a result, insurance for the garage owner will be more expensive and less available.

If the availability of insurance is to be applied as a test between the claimant and the person who has caused the loss it will be fair to apply that test both ways. If it is easier for the motorist to obtain insurance and he does not, that is also a test of negligence. If the courts say that the garage should be properly insured, the garage owners can say that the motorist should also be properly insured. I do not think that the matter has been fully thought out. There are many areas of doubt.

Another example arises with contractors. There are so many insurances that they can and should obtain and that might be extremely costly. Will the court take all those insurances into account and say that because they are available the contractors should have been insured. I do not think that the courts are competent to make such judgments. The amendment makes a bad situation distinctly worse. It should be further examined in depth. This is a bad way of dealing with legal matters that have considerable implications. The amendment is riddled with holes and should be voted down.

Amendment to the Lords amendment agreed to.

Amendment made to the Lords amendment: In paragraph (b), after him' insert 'in the course of his business'.—[Mr. Robert Taylor.]

Lords Amendment No. 12,as amended, agreed to.

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