Official Report of the Grand Committee on the Late Payment of Commercial Debts (Interest) Bill [H.L.]

HL Deb 28 January 1998 vol 585 cc1-34GC

Wednesday, 28th January 1998.

The Committee met at half-past three of the clock.

[The Deputy Chairman of Committees (Lord Ampthill) in the Chair.]

The Deputy Chairman of Committees (Lord Ampthill)

Before I put the Question that the Title be postponed, it may be helpful to remind your Lordships of the procedure for today's Committee stage. Except in one important respect, our proceedings will be exactly as in a normal Committee of the Whole House. We shall go through the Bill clause by clause; noble Lords will speak standing: all noble Lords are free to attend and participate: and the proceedings will be recorded in Hansard.

The one difference is that the House has agreed that there shall be no Divisions in the Grand Committee. Any issue on which agreement cannot be reached should be considered again at the Report stage when, if necessary, a Division may be called. Unless, therefore, an amendment is likely to be agreed to, it should be withdrawn.

I should explain what will happen if there is a Division in the Chamber while we are sitting, an unlikely event this afternoon. This Committee will adjourn as soon as the Division bells are rung and will then resume after 10 minutes.

Title postponed.

Clause 1 [Statutory interest]:

The Earl of Home

moved Amendment No. 1: Page 1, line 9, at end insert— ("( ) Any liability to pay statutory interest shall give rise to a separate right of action which may be pursued irrespective of whether or not the qualifying debt to which it relates has been paid.").

The noble Earl said: In speaking to this first amendment I shall also speak to Amendments Nos. 21 and 22. Of all the clauses in this Bill this first clause is the one on which I find people feel most strongly. For most suppliers who are paid late it is vital to have the principal of the debt paid as quickly as possible, whereas any interest which may be forthcoming as a result of this Bill becoming law will, frankly, be regarded as a bonus.

Small suppliers will, I believe, be extremely reluctant to do anything to jeopardise the speedy receipt of the main debt, and will not take advantage of the right to statutory interest if they believe that, by claiming interest, the purchaser will be able to drag out the overall payment period while they argue over the amount of the interest. Many small companies will not have the resources, either human in terms of time and manpower or financial, to pursue claims themselves for statutory interest, and will therefore wish to assign or subcontract recovery of interest to others.

Learned lawyers may say that the current draft is unambiguous, but several bodies have made representations to me saying that it is not obvious. I do not believe that companies will necessarily interpret this phrase as giving them the right to assign, and I believe it is vital that this right is made crystal clear. I hope my proposed wording will clarify the point.

As far as Amendments Nos. 21 and 22 are concerned, they are further clarification of the earlier amendment. They make extra provision on the separation of the right of action on principal and interest. They are specifically addressed to ensuring that statutory interest is assignable, notwithstanding that the original qualifying debt no longer exists by virtue of having been paid. I beg to move.

Lord Meston

This amendment raises an important point, that of separating the right of action for the principal debt and for the interest. If there is any doubt about whether the Bill achieves that separation then this amendment, or something like it, should be accepted if only to remove that doubt completely. I believe I am right in saying that the original Law Commission report back in the 1980s felt that it was necessary to specify that there should be separate causes of action for the principal debt and for the interest. I have not had the opportunity to check that, or indeed whether it was reflected in the draft Bill attached to the Law Commission's report.

Be that as it may, it is important to have the matter beyond doubt, for a number of reasons: first, the question of assignment, to which the noble Earl, Lord Home, referred; secondly, the question of limitation periods and when they begin to run; and, thirdly, for the purposes of ascertaining whether a debt does or does not fall within a specific jurisdictional limit.

I am reinforced in my support for this amendment by the helpful paper produced by the Forum of Private Business, which makes the point that with any individual late paid debt the original debt will far outweigh any statutory interest due. Therefore, suppliers would be unlikely to place at risk the main debt to collect interest. The threat, however, of statutory interest being pursued at a later stage would, for a range of reasons, act as a powerful disincentive to late payment, without any action being taken to recover the interest. This would not be possible without clear separation of the two debts.

The Minister of State, Department of Trade and Industry Lord Clinton-Davis

First of all, I welcome the noble Earl, Lord Home, to what I think is his first Committee stage, certainly in this place—I am not sure about the noble Lord, Lord Meston—and thank him for bringing forward this amendment by way of clarification.

We share the concern of both noble Lords that the Bill should provide a separate right of action for the interest. Indeed, that is a matter to which we have alluded in discussions which have taken place elsewhere.

However, we have not sought to state this explicitly in the Bill as it is unnecessary to do so. The Bill creates a right to interest. Once that right has been created, then a supplier will be able to pursue an action in pursuit of the right. Such an action may be pursued regardless of whether the principal debt, from which the right a rose, remains outstanding.

The noble Earl, Lord Home, may be aware that, technically, principal and interest form part of the same debt. Further, the right to statutory interest is dependent on the contract giving a right to the principal, to the extent that the contract sets the amount of the principal, and may also set the date when the debt should have been paid. Thus, one cannot separate the two amounts entirely.

There are other principles of general law which are at issue here and are important. When a dispute arises and the parties seek to and eventually settle it, it would be thoroughly unsatisfactory if they later sought to unpick that settlement. The settlement may have compromised the claim for interest. Moreover, if a party seeks to make a claim for just the principal or interest, and that is decided by the court, further action on the other claim may be barred by the principle known as res judicata (that is to say that the matter has already been finally adjudicated upon). If a party accepts the principal and gives an effective waiver of interest, then that is binding. All these principles have arisen because of the need for certainty and finality in the law, without which commerce would not be able to operate properly.

However, I assure the noble Lords that the Bill has been framed in such a way as to allow the claim for interest to be assigned, for example to a factor who can then claim the interest alone. This is underlined by the effect of Clause 13, with which, of course, we must read the issues to which the noble Earl has alluded in this amendment. If the debtor tenders the principal alone, the creditor can accept it on account and then pursue the interest separately—there is no doubt about that. This right is an important addition to the current law. That is why I think the Law Commission's report, to which the noble Lord, Lord Meston, adverted—which I think was produced in 1980—is not up to date with the present situation. I hope, therefore, that the noble Lords will accept our view that this amendment is not necessary.

As far as the amendments to Clause 13 are concerned, I understand the point of policy that the noble Earl is seeking to make. He wants to ensure that the separated interest may be assigned to a third party. I am not sure that the amendments will have this effect. I make no complaint about the drafting; it is an issue of principle. The noble Earl does not have the drafting facilities that governments have. It is a point which I made frequently when I was in opposition when I put forward amendments that were not sufficiently elegantly drafted—a rare enough occasion.

Having said that, we will have a look at the whole clause to ensure that the concerns which he and the noble Lord, Lord Meston, have addressed are properly met. I would like to consider that element of the matter because, as far as the first point is concerned, I hope that I have persuaded the noble Earl that the amendment which he has put forward is in fact redundant.

The Earl of Home

First, I thank the noble Lord, Lord Clinton-Davis, for welcoming me. I am sure we will have much to talk about in the future.

Certainly I take comfort from the assurance of the Minister that interest and principal can be separated under the Bill as drafted. I do not pretend to have elegance of drafting, not having the legal training which he has at his command. Sometimes I think that the simpler things are kept the better. I am grateful to the noble Lord for saying that he will look at our concerns on this point, and for his assurance that the intention which I have attempted to put forward in this amendment is covered in the Bill. I therefore beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 agreed to.

Clause 2 [Contracts to which Act applies]:

The Earl of Home moved Amendment No. 2: Page 1, line 19, leave out ("sale. transfer, hire or service") and insert ("supply").

The noble Earl said: This amendment is simply an attempt to come up with a more concise provision. The words "sale, transfer, hire or service" which it is suggested should be removed are, I believe, unnecessary and do not add any additional meaning, while the word "supply" covers all four words in the Bill: indeed it covers others, such as, inter alia, leasing, which I intend to raise in relation to a later amendment. I beg to move.

Lord Clinton-Davis

In drafting this Bill we have tried to secure the greatest possible amount of transparency. I understand what the noble Earl is suggesting, but I think that the word "supply" instead of the five words that are used here would render the drafting less transparent. Of course, if the Committee feels I am wrong about that I will look at it again, but I really do not think this amendment adds to the comprehension of the Bill that is required. It is important that we ensure that small and medium-sized enterprises in particular understand what the Bill is about, and for that reason being more specific is more helpful. In those circumstances I hope the noble Earl will withdraw the amendment.

The Earl of Home

In trying to be clear, one makes it more difficult the more one tries to define what the Bill does and does not cover. I accept that the words in it are there for clarity but by specifically using those words we run the risk of having other types of supply or types of things which fall within the overall umbrella word "supply", such as leasing. I believe it would be clearer to leave this as an overall umbrella word. Nevertheless, I hear what the noble Lord has to say. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

3.45 p.m.

The Earl of Home moved Amendment No. 3: Page 1. line 21. leave out ("a conditional sale agreement or a hire-purchase agreement.).

The noble Earl said: This is something of a probing amendment. for it seems to me that some people will be unable to take advantage of the statutory right to interest while others in virtually the same line of business will he in a position so to do.

One obvious example of this is that, under this clause, hire purchase agreements are deemed to be accepted contracts whereas leasing agreements are not. I am aware that there are legal differences between a lease and a hire purchase agreement, but in many lease agreements the lessee has the ability to purchase the subject of a lease for a nominal sum, say £l. In both leasing and hire purchase agreements, the amount of the instalment or rental is a combination of principal and interest usually with a larger proportion being principal in the early days. In both cases, there are usually established formulae so that it is possible to calculate in relation to any one rental or instalment what the proportion of principal is to interest. Then the provisions of Clause 3(4) will come into force. To add to the confusion, it is now possible to have lease purchase agreements.

At Second Reading the Minister said that conditional sales in hire purchase agreements are accepted because, inter aliathey, usually provide !Or interest payments on default".

He went on to say: The supplier is normally more powerful than the customer and can insist on interesti—[Official Report, 12/1/98; col 884.]

By the use of the words "usually" and "normally", the noble Lord presumably accepts that, in the minority of cases, the situation is reversed. As the Government have been keen to promote the underdog in this Bill, by retaining this clause are they not discriminating against the smaller hire purchase companies or those who are forced to enter into a conditional sales agreement? The noble Lord's own words accept that sellers with clout will use their muscle to get interest, yet this clause seems to be preventing sellers without clout from using the Bill, which seems rather strange to me.

I shall not delay the Committee at this stage by quoting other examples of sales where there may be an element of interest, whether covert or overt, and there are the so-called ROMALPA contracts where conditional sales are the norm. However, I believe that there is an inconsistency in this clause and I ask the Government to look at it again. I beg to move.

Lord Borrie

I welcome the amendment proposed by the noble Earl, Lord Home. It was in fact a question that was not only in my mind but I raised it in my speech at Second Reading. It was to a query of mine on why these kinds of agreements were excluded that the Minister was responding when he used the words quoted by the noble Earl. I was going to quote them myself but I do not need to.

The word "normally" immediately makes one think about the cases where the supplier is not a big chap but is a smaller hire purchase company or smaller supplier—technically a "supplier" even if he is only financing the deal. Since the Government's overriding objective in the Bill is to encourage the prompt payment of commercial debts and, in particular, to encourage prompt payment to the small businessman, it seemed to me that the reply of the Minister was not entirely satisfactory. He may or may not be right—he has had good advice upon it—as to the way in which companies usually put in a clause requiring interest. but it did not seem that his answer, most carefully worded with the phrases "usually" and "normally", covered every situation. He accepted that, and I wonder whether he would think again about the reasons for leaving out these kinds of agreements for the supply of goods.

Lord Clinton-Davis

I am always grateful if any of your Lordships should quote me because that helps to ensure that my words will go down to posterity. Second Reading is not everything, after all. Repetition of that fact doubly ensures that purpose which I fully support.

All the amendments are probing amendments, even the Government's amendments, because we cannot divide. I am grateful to the noble Earl for putting the amendment down because I hope I may be able to clarify the position. What the noble Earl is seeking to do essentially is to bring into the scope of the Bill conditional sale and hire purchase agreements on the ground that they should be treated in the same way as leasing agreements.

We have excluded conditional sale and HP agreements because they are used to grant authorised credit. They usually provide for interest payments if the periodic payments are not made in a timely way. They do not fall within the mischief which this Bill seeks to address; that is, the use of one's suppliers as a source of unauthorised trade credit by the debtor. Therefore, I would ask both noble Lords to reconsider whether it is necessary to include such contracts in the Bill.

It is reasonable, where the supplier expects that he will be paid on a given date or within a given time, that he should be recompensed if that expectation is falsified by events. Lease agreements do not necessarily have a remedy for late payment. The lease term ends and money may still be owed. The Government believe that, generally, leases should fall within the legislation. If it proves that some forms of contracts should be exempt from the legislation, this can be provided by the power under subsection (4), to which I refer the two noble Lords who have spoken.

I do not believe that there is an inconsistency. I do not see the case where this represents any form of discrimination, as was asserted by the noble Earl, Lord Home, and by my noble friend Lord Borrie. I hope that I have answered his point as well. I therefore think that the omission of these words would produce the right result, and so I would ask the noble Lords to reconsider what they have said. They cannot push it any further, but they will have a right to come back to it. That is the Government's point of view.

The Earl of Home

I thank the Minister for that response. I have to say though that I do not entirely accept what he has said because in practice the difference between a hire purchase and a lease is extremely small. As I have said, one can even have lease purchase agreements. That is not an entirely satisfactory response. I will, however, read carefully what the noble Lord has said in Hansard but I reserve the right to come back to this at Report stage if the Government are not prepared to consider it further. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Haskel moved Amendment No. 4: Page 2, leave out lines 7 and 8.

The noble Lord said: I beg to move Amendment No. 4 and also to speak to Amendments Nos. 6, 12, 16, 28 and 29. The Government intend to provide that all orders under this Act, other than the commencement order, should be subject to the negative resolution procedure of the House. This set of amendments ensures that this effect is achieved and is tidied up in the drafting of the Bill.

This is for very practical reasons, and indeed it follows the guidance from the Delegated Powers and Deregulation Committee. The commencement orders cannot be subject to the negative resolution procedure. I am sure noble Lords will understand that the right to claim interest cannot be provided by order and then simply taken away after 40 sitting days of the House due to a negative resolution. It is important that phasing is understood and acceptable.

The Delegated Powers and Deregulation Committee has reviewed the powers sought under this Bill, and its report has been placed in the Library of the House for noble Lords to see. It was its recommendation that the powers in Clauses 2 and 3 to accept contracts and debts respectively, and in Clause 5 to set the rate of interest, should be subject to the negative resolution procedure. The Government's amendment will ensure that all orders made under the Act, other than commencement orders at Clause 15(2), are subject to this negative resolution procedure.

The power to set the rate of interest under Clause 5 is particularly unsuitable for the affirmative procedure because, if economic circumstances change suddenly, it may be necessary to make an order at very short notice. The powers in Clauses 2 and 3 to accept contracts and debts respectively will involve technical definitions of exceptions, and the regulations under Clause 15(3) will comprise temporary measures incidental to phasing. These powers are not the type generally subjected to affirmative procedure and that is probably why the Delegated Powers and Deregulation Committee did not recommend that they should be.

Lord Meston

The noble Lord, Lord Haskel, referred to new Clause 1, but he probably meant to refer to Amendment No. 23, which provides for a new clause after Clause 13. Could he confirm that?

Lord Haskel

Yes, I do confirm that.

On Question, amendment agreed to.

Clause 2, as amended, agreed to.

Clause 3 [Qualifying debts]:

4 p.m.

Lord Fraser of Carmyllie moved Amendment No. 5: Page 2, line 19, leave out from ("law") to end of line 20.

The noble and learned Lord said: The purpose of this amendment is to probe what appears to us at first sight to be rather unnecessarily elaborate drafting. Before the Minister says so, let me say that I recognise that, if I have a point, the amendment as it is is defective, to which I shall allude further in a moment. The purpose of our amendment would be that Clause 3(3) would read: Where— (a) a right to demand interest on a debt exists by virtue of any rule of law the debt is an excepted debt".

That would seem to be quite a simple proposition which we could all understand. But what is drafted here is not only that you must have a right to demand interest by virtue of any rule of law, but you must then have an exercise of that right to have it regarded as an accepted debt. The subsection then states, in line 21, (and shall he treated as always having been) an excepted debt".

I do not understand why we do not just delete paragraph (b). It would be sensible also to delete the words in the next sentence that are in brackets, (and shall he treated as always having been)".

It seems to me that there is an opportunity to provide a much simpler piece of drafting here. Doubtless there is some deeply skilled legal reason for requiring the provision to be drafted in this way, but I have to say that just for the moment it escapes me. I should be grateful for some explanation from the Minister.

Lord Haskel

There is indeed some deeply skilled legal reason, and it is all tied up with Scottish law. I should have thought that the noble and learned Lord would have been in a position to know this. It may be helpful if I set out why Clause 3 has been included in the Bill.

Subsection (3) covers a specific issue that arises in Scottish common law. In Scotland, a creditor may include on his invoice for payment, after the creation of the debt, a statement noting that unless payment is made by a specific date interest will run at such and such a rate. We have not sought to override this option in Scottish law. One may assume that the creditor making the claim for interest has set a rate which at least recompenses him for being kept out of his money. Where the rate is excessive it may be struck down by the courts. As the right to demand interest applies in this manner under Scottish law, it is necessary to retain subsection (3)(b). If we did not, the noble and learned Lord's amendment would have the effect of disapplying the legislation to Scotland, as the right to demand interest exists under the common law.

Lord Fraser of Carmyllie

I am very interested that it should be a point that applies exclusively to Scotland, but I certainly understood that to be the position with regard to Scotland. What I had not appreciated, and what has been helpful, although I am not sure that I approve of it in principle, is that, with this subsection, there will be two routes to the securing of interest. That surprises me as a policy decision. I should have thought that if there was a right to secure interest in the fashion that the noble Lord indicated as being possible in Scotland. that should be the only fashion in which one should be entitled to secure it. One should not have these options. But I shall certainly reflect on the matter. At this stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Haskel moved Amendment No. 6: Page 2, leave out lines 28 and 29.

The noble Lord said: I beg to move.

On Question, amendment agreed to.

Clause 3, as amended, agreed to.

Clause 4 [Period for which statutory interest runs]:

The Earl of Home moved Amendment No. 7: Page 2, line 37, after ("debt,") insert ("or where the provisions of section 14(2) apply.").

The noble Earl said: In moving this amendment I wish to speak also to Amendment No. 24. The Bill specifies that, when no credit period is agreed. the relevant day is in effect 30 days from the date of invoice. While this period is appropriate for most sectors, in some industries, especially in the manufacturing industry, accepted practice is 30 days from the month end following the date of invoice. Indeed the July Green Paper in paragraph 6.4.1 seemed to acknowledge this by suggesting that the default period be 30 days from invoice date unless a debtor can, and I quote, demonstrate entitlement to a longer credit period in accordance with trade custom and practice".

I hope the Government will agree that it is desirable not to cause a great upheaval and change existing accepted and well tried methods of trade and will consider the wording I have suggested. I beg to move.

Lord Clinton-Davis

We are aware that the Confederation of British Industry has expressed concern about this. Its desire is to ensure that trade custom and practice are recognised in the Bill and that where they exist there is no requirement for an express contract term for deferment of the day that the debt is created.

We believe that the Bill deals with this matter, though I understand the point which the noble Earl seeks to make, and in fact there is no difference of view between us about the desirability of this. Clause 14(2) purports to deal with that problem, so I have not been persuaded that the amendments are necessary at this stage. As regards contract terms, the word "terms" clearly includes the date or dates for payment, but if the Bill is not sufficiently clear on this point, I will want to consider the matter before we come back at Report.

The Earl of Home

I thank the noble Lord for that. Again, I have no pride in the authorship of the wording that I have suggested, and I am grateful to the noble Lord for saying that he will consider whether the existing wording is clear enough. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Mestonmoved Amendment No. 8: Page 2, line 37, at end insert ("provided that the agreed date shall not be more than 90 days after—

1. (a) the day on which the obligation of the supplier to which the debt relates is performed; or
2. (b) the day on which the purchaser has notice of the amount of the debt,

whichever is the later.").

The noble Lord said: Clause 4(2) seems to allow for unlimited extension of the date for payment by agreement. That would allow the dominant party to negotiate away any risk of statutory interest. The Minister at Second Reading referred to the possibility of Part II of the Bill being available to remedy the imposition of excessive credit periods, but it is not clear how the freedom of contract given by Clause 4(2) would interact with the powers of the court to hold under Clause 8 that a contractual extension or variation of the right to interest is void in circumstances where there is no substantial remedy for late payment. It is in order to probe how these two provisions interact that I move the amendment.

I am most grateful to the Minister for writing to me after Second Reading indicating that consideration was being given to the point when I raised it at that stage. However, I suggest that an extension of more than 90 days is undesirable and that the upper limit for the relevant day should be 90 days. I beg to move.

Lord Clinton-Davis

I propose to speak a little longer on this issue because it is pertinent to the whole question of the effect of the Bill on excessive credit periods, which, after all, is a very important aspect. I am grateful also to the noble Lord, Lord Meston, for proposing the amendment to enable this discussion to take place.

I want at the outset to observe that the setting of a precise number of days to cap credit periods could well have an effect the very opposite of that which is intended. The 90-day term might well be viewed as an industry standard of something that is legitimate practice and consequently result in a lengthening generally of credit periods to 90 days, which would not be desirable.

The Government's policy in framing this legislation has been to minimise as far as possible the extent to which we interfere with the principle of freedom of contract. However, we are very much aware of the potential abuses that could be perpetrated, particularly where the creditor business is small and the debtor business is large and powerful. That is a point which was made frequently during the course of the Second Reading debate. Excessive credit terms imposed on the supplier by the dominant purchaser to avoid or contract out of the terms of the legislation will simply not be permitted. The Bill has the effect of allowing the courts to strike down contractual terms which confer excessive credit periods.

Perhaps I might now set out the issue of excessive credit periods in rather more detail because, as I say, it is a very important issue not only for Members of this Committee but for others outside who may seek to take advantage of the Bill. One of the main objections to the proposed late payment legislation that we have heard in the extensive consultations that we have undertaken is that it will lead dominant customers to insist on contractual terms which effectively extend unreasonably the credit period available to them so as to avoid having to pay interest. Whereas at present small suppliers may be paid late (say within 45 days instead of the agreed 30 days), the Bill could lead to credit periods of 120 days. This would leave small businesses in a very much worse position than at present.

Credit periods can be contractually extended in two ways: first, the date on which the debt is created (that is, when it legally falls due) may be deferred; and, secondly, a period of grace may be introduced following the date on which the debt is created, during which the creditor agrees not to sue for payment, charge interest and so on. In practice, there is very little distinction between the two, but they are legally distinct and are handled in different ways in the Bill as a result.

I turn now to the way in which excessive credit periods are handled in the Bill as it has been introduced. First of all, there is deferring the date on which the debt is created. The Unfair Contract Terms Act 1977 prevents parties agreeing contractual terms which unreasonably postpone the obligation to pay the contract price. As it stands at present, the 1977 Act applies only where the term is a standard written term of one of the parties. We will consider whether to amend its effect with regard to oral payment provisions. That is something we can consider between now and the next stage of the Bill.

The second element is introducing an excessive period of grace. Clause 4(2) says that the date on which the debt is created is "the relevant day". The effect of agreeing a period of grace is to vary the right to statutory interest. Instead of statutory interest accruing on the day after the debt is created, it will not accrue until the day after the period of grace has expired. Clause 8 provides that variations of the right to interest are valid only if the right, as varied, or the overall remedy for late payment is substantial. Clause 10(2), in addressing terms imposing conditions or limitations on the exercise of the remedy, includes terms conferring a period of grace.

To return to the specific amendment, the courts, in judging whether excessive terms have been used to attempt to contract out of the provisions of the Bill, must be free to view the terms of a contract in the context of the industry to which it relates, and so take into account trade custom and practice when they reach their decision. The imposition of a 90-day term as a measure of what is, or is not, an excessive credit period would fetter the discretion of the judge to reach a decision based on a range of relevant factors. For example, in the greetings card industry, because of the seasonal nature of the business, with cards being printed and packaged long before they are sold, the credit period is longer than 90 days.

I hope what I have said helps with the consideration of these amendments. This is an extremely important part of the Bill. I, like the noble Lord, want to ensure that dominant purchasers are not allowed to escape their responsibilities by insisting upon excessive credit periods. Consequently, I will look again at the text to see whether there is any way to make the Bill clearer on the point, although I am not convinced that that is required. However, I undertake to look again at that point in the light of what has been said in support of these amendments.

4.15 p.m.

Lord Meston

I am, of course, grateful to the Minister for that undertaking to look again and, indeed, for the consideration he has clearly already given the matter in view of his detailed response to my amendment. It is evident that he and his department recognise the importance of the point raised by this amendment.

It certainly was not my intention in any way. directly or indirectly, to extend periods for payment, as was suggested might result from an amendment along the lines I proposed. Indeed, I would question whether an amendment of this sort would have that effect. Be that as it may, the Government have indicated that they are aware of the problem. They have also indicated (as I understand from the response of the noble Lord, Lord Clinton-Davis, which will of course repay further study in Hansard), that the intention is that Clause 4(2) is without prejudice to the wider powers of the court to strike down unfair terms under Clause 8 or otherwise under statute. With that indication. I am very happy to beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 4 agreed to.

Clause 5 [Rate of statutory' interest]:

Lord Fraser of Carmyllie

moved Amendment No. 9: Page 3, line 15, after ("State") insert (", other than in Scotland.").

The noble and learned Lord said: This is a point I have already raised on the Competition Bill and the National Lottery Bill, and I make no apology for indicating to your Lordships that on almost every other Bill which comes through the House I shall be returning broadly to the same point. I do so for this reason. When the Government introduced proposals for constitutional change in Scotland in the Queen's Speech. they repeatedly described those changes as the most important constitutional changes of this century. That contrasted sharply with the introduction of the Scottish parliament Bill in the Commons just a fortnight ago.

I am sure that the noble Lord, Lord Clinton-Davis, well recalls that when the Scotland Bill was introduced during the Labour Party's last period of government, at the time it was introduced at Second Reading not only was the Prime Minister in his seat virtually for the duration but so was every other Cabinet Minister. On this occasion, apart from a brief visit from the Leader of the House of Commons, no other Minister or Cabinet Minister was present as this most important constitutional change this century was introduced into the House of Commons. My concern, therefore, is that, although Mr. Donald Dewar may regard this as the most important constitutional matter, it would appear that other departments in Whitehall have not appreciated or understood that fact or, possibly more worryingly, they have understood it all too well. Realising how poorly thought out some of the detail has been, they have little option but to close their minds to some of the absurdities likely to result from the artificial line of devolving some matters and reserving others.

My purpose in putting down this amendment is to explore exactly what the Government intend here and also to ask a broader policy question. First, may I ask the noble Lord, Lord Clinton-Davis, whether, as far as he is aware, the matter of the late payment of commercial debts interest is a matter that would fall within the legislative competence of the Scottish parliament? It would certainly appear to me that it does, because in looking to Schedule 5 to the Scotland Bill, it states at the foot of page 60: In spite of section 28(4), interest on sums due in respect of taxes or excise duties and refunds of such taxes or duties is not within the legislative competence of the Parliament".

If the interest payable on taxes or excise duties is quite specifically reserved to this Parliament, it follows that matters of interest fall within the devolved matters to be given to the Scottish parliament. If that is correct, I have a serious question to which I hope that someone from the Department of Trade and Industry will at long last give me an answer. If the Bill proceeds through the House and another place with no difficulty—and I see no reason why it should not—it is likely to get a commencement date some time towards the end of this year. We are told that the progress of the Scotland Bill is such that the parliament will be up and running in the year 2000. There is a very real issue here as to whether this Parliament should be legislating in respect of matters to be devolved to the Scottish parliament so close to the point of that parliament being established.

I would suggest to the Government that the correct approach would be that they should not so legislate unless they can put forward to this Parliament a clear and compelling case for the desirability of legislating immediately. It troubles me that if we legislate so close to the establishment of that parliament, first, it will be seen by it as condescending and interfering. Secondly, while I was not particularly keen that such a parliament should be established, if it is to be established I would prefer there to be as few points for conflict between the parliaments as possible.

What rather surprises me about the inclusion of Scotland within the Bill is that, as I understand it, it is the Government's view that they should not be legislating in respect of Scotland in respect of reserve matters. In his speech at Second Reading of the Scotland Bill, Mr. Donald Dewar said in the most ringing terms that the first act of the Scottish parliament would be to introduce legislation to do away with the last remnants of feudal tenure in Scotland. Whether others selected that as the most important piece of legislation for Scotland is another matter.

If that is truly a compelling serious major issue for Scotland, why on earth has it not been introduced in this Parliament? There are two Scottish Standing Committees in the House of Commons which have remained totally under-utilised—indeed, not utilised at all—since 1st May.

From what Mr. Donald Dewar was saying, I took as an indication of policy the fact that if there was something within the reserve matter they would leave it aside. However, as we go through the National Lottery Bill and the Competition Bill, and as we now come to this Bill, we find that there are reserve matters on which there is to be legislation in this Parliament. I regard that as undesirable and 1 hope that the Minister can offer some explanation about why it is considered important to legislate now for Scotland.

I can in a sense see a powerful argument for him wishing to have legislation for Scotland in this Parliament, for the simple reason that there must be countless contracts that are concluded every day, week, month and year, between those in Scotland and their suppliers in England. I can understand that, and it might be considered desirable that there should be a single law applying to contracts, whether they take place exclusively in Scotland, exclusively in England, or are cross-Border. If that is the Government's position it would seem to be desirable to exclude the right to legislate on such contracts from the powers of the Scottish parliament. What troubles me about what is proposed at the present time is that there is a very real prospect of confusion and, far from there being a smooth transition to the system of devolution, we shall find, on the contrary, that there are opportunities for conflict.

My final question to the Minister is, if I am correct in my understanding that this is a matter which would fall within the devolved powers, why is that the case? It would seem to be more desirable to leave it wholly within the reserved powers of this Parliament. I beg to move.

Lord Haskel

The noble and learned Lord, Lord Fraser, is absolutely right: we are legislating so that business can go on in Scotland. The effect of the noble and learned Lord's amendment is that there would be no rate of interest operable in Scotland until a Scottish parliament was in existence. It seems a hit rich, coming from the noble and learned Lord, who played a leading part in the "No, no" campaign, to suggest that everything should wait for the very parliament that he wanted to stop.

Lord Fraser of Carmyllie

Could I interrupt the noble Lord? I hope he will take a rather more serious approach to this issue than his opening remarks would indicate. I hope he will address this matter, because it is very important. Even if we start from a position of not particularly caring for the establishment of this Scottish parliament, clearly, if such a parliament is to be established, we should examine what is being done to ensure not that the parliament does not work or that it is unduly constrained in what it can do, but that there should be a minimum number of points of conflict between the two parliaments. That is the issue I have been addressing in my arguments to the noble Lord, and I hope he will answer me on that basis.

Lord Haskel

Just to continue the argument about the facts, if we accept the noble and learned Lord's amendment, as there would be no power to prescribe a rate of interest for Scotland there would be no power of a Minister of the Crown which could transfer to Scottish Ministers by virtue of Clause 49 of the Scotland Act when enacted. Thus, not even the Scottish Ministers, when there was a Scottish parliament, would be able to prescribe a rate of statutory interest under this legislation.

Turning to the question of the competence of the Scottish parliament, the rate of statutory interest applicable in cases of late payment of commercial debt will be set by the Secretary of State until that power is devolved to Scotland on the enactment of the Scotland Bill. The setting of a rate of interest for late payment in Scotland and the rest of the UK will then be underpinned by consultation between the Scottish administration and their Whitehall counterparts.

The noble and learned Lord raised the question of interest on taxes and excise duties. The Bill does not cover this as these are matters of private law.

The noble and learned Lord commented that the matter should be the preserve of the Scottish parliament, but this is not a matter which I can debate with the noble and learned Lord in Committee at this stage. We will have to lay out our arguments and write to the noble and learned Lord.

4.30 p.m.

Lord Fraser of Carmyllie

I am sad to say I find that an unsatisfactory answer. I appreciate perfectly well that, under Clause 49 of the Scotland Bill, where legislation is passed in this Parliament certain functions would pass to the First Minister, or whatever he is called, in the Scottish parliament. However, that is not true of the issue that I am concerned about. I have not received an answer yet as to why it is regarded as compelling that we should be legislating for Scotland at this stage. I must say that the Minister's answer has certainly provoked me to ask some further questions and put down some further amendments to deal with that interesting circumstance where a contract is indeed between parties on different sides of the Border. If I understand what he said about Clause 49, it is at least potentially the case that the statutory rate of interest in Scotland could be different from that established in England. That seems to me to be a rather extraordinary state of affairs, and it is a matter to which I shall return with some interest at a later stage. In the meantime, I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Lord Ezra

moved Amendment No. 10: Page 3, line 15, leave out ("may") and insert ("shall").

The noble Lord said: Amendment No. 10 is grouped with Amendment No. 11 in the name of the noble Earl, Lord Home, and no doubt he will speak to that amendment. Amendment No. 10 is a very small but nonetheless important amendment in which the word "may" is replaced by "shall". I realise that parliamentary draftsmen are always very careful to give Ministers a maximum degree of flexibility in making orders under legislation. However, in this case I believe they have gone a little too far because, if the flexibility is left in the Minister's hands either to fix a rate of interest or not to do so, then it is in his hands to negate the whole purpose of the Bill. I beg to move.

Lord Haskel

The Government have placed in the Library of the House a draft order under Clause 5(1) which I hope noble Lords will have had a chance to look at.

I understand that the legislation would not work if no rate of interest or its formulation was announced. As the Government are bringing forward the Bill, clearly it would be our intention to announce an interest rate. That is why we have published a draft order which sets a rate of the Bank of England's official dealing rate plus 8 per cent. However, we will certainly consider further the noble Lord's amendment because I believe he has made rather a good point.

The Earl of Home

In speaking to Amendment No. 11, I hope noble Lords will forgive me if, in order to make myself clear, I stray slightly into Amendment No. 13 as I believe we might consider these together, although I am happy to repeat myself at a later stage.

I believe it is important that industry should know at any one moment on what basis the rate of interest is calculated. The Minister said at Second Reading that he needed flexibility in the legislation so that it could stand the test of time. I entirely accept the Minister's sincerity when he said he was not trying to pull the wool over anybody's eyes in this respect. I further accept that a formula related to the Bank of England base rate may not at some time in the future stand that test.

However, it seems to me that purchasers, and particularly purchasers overseas, would find it hard to understand and accept a rate of interest which is not fixed in accordance with an explicable formula. I would be perfectly happy for a formula to be set in consultation with that part of government most involved with money, namely the Treasury. I believe that that formula could then be explained clearly and openly to any purchaser, even a foreign purchaser who may not be conversant with our systems.

Without any disrespect to any past, present or future Secretary of State—who I am sure would consult the Treasury as a matter of course before changing the rate—it would make life very much more difficult for an exporter to explain why he has to change a rate of interest apparently set at the whim of an individual. While it may be necessary to change the formula from time to time—and indeed I have already accepted that it may have to change from a Bank of England base rate—at least if there is a formula sellers will know the system. If the Secretary of State is to be able to act individually to any interest rate volatility I believe that it will he very hard to explain that to a purchaser, particularly a foreign one.

Lord Meston

I was simply going to follow what the noble Earl has said by posing a question as to the reason for the reference to a formula in Clause 5. Am I right in understanding that it is not enough to say that the Secretary of State may—or, if the amendment of my noble friend Lord Ezra is agreed, "shall" set the rate of statutory interest by prescribing … the rate of statutory interest". but that the Bill also has to provide for the alternative to a formula simply in order to cover the formulation of the interest by reference to base rate? If that is all that is intended by the reference to a formula then I am happy.

I did raise this matter at Second Reading. I have a horror of formulae, and it looks as though the reference to a formula might allow for something far too sophisticated in the calculation of interest for the purposes of the people who have to use this Bill, if it is enacted, in practice.

Lord Haskel

Perhaps I may respond to Amendment No. 11. First, I say to the noble Lord, Lord Meston, that he is correct; there has to be a formula.

Perhaps I may assure the noble Earl, Lord Home, that in setting a rate of interest the Government will wish to consult parties both within and outside government. This is how we arrived at the rate that has been set in the draft order, and I can assure the Committee that if any change is made it will not be made by the Secretary of State acting on a whim. However, on a theoretical level, I understand the concern of the noble Earl, and the Government will be willing to consider his amendment.

Lord Ezra

In the light of what the Minister has said about Amendment No. 10, I beg leave to withdraw it.

Amendment, by leave, withdrawn.

[Amendment No. 11 not moved.]

Lord Haskel moved Amendment No. 12: Page 3, line 15, leave out ("made by statutory instrument").

On Question, amendment agreed to.

The Earl of Home moved Amendment No. 13: Page 3, line 17. leave out from ("interest") to end of line 18.

The noble Earl said: As drafted, this amendment gives the Secretary of State the ability to set the rate of interest without reference to anybody. I am grateful to the noble Lord for what he has said, and the assurances that he has given that the Government will always consult both within and outside government. However, we cannot entirely be certain who will be future Secretaries of State and whether they will always be quite as responsible as no doubt the current and former incumbents have been. If the Secretary of State can act on his or her own, how will that rate be publicised? Will the Secretary of State take out paid space in the press every day so that companies will have to look through newspapers to see what that rate is? Small and medium-sized enterprises do not have time to look through newspapers to see which side of the bed the Secretary of State has got out of on that morning. I beg to move.

Lord Clinton-Davis

I suspect—and this appears to be confirmed by what the noble Earl has just said—that this is another way of trying to secure his aim of reducing the power of the Secretary of State solely to set the interest rate. I think the noble Earl conceded that it will not always be possible to state on the face of the Bill the rate of statutory interest. It is our desire to link the rate to the official dealing rate of the Bank of England as announced by the Monetary Policy Committee. But, as the noble Earl rightly said, it may not be incumbent on the Bank to announce the rate in the future if the committee decides to use a macroeconomic tool other than interest rates to give effect to monetary policy.

For that reason the Bill provides a power exercisable by the Secretary of State to prescribe the rate of statutory interest instead of a particular formula. From what he said previously, I have a feeling that the noble Earl is sympathetic to that argument. But it is of course for him to determine whether he will want to push the amendment at a later stage.

The Earl of Home

I thank the Minister for that response. I remain rather concerned that sole powers could lie with one individual as I believe it is hard to explain to overseas purchasers in particular how a rate can he set by an individual who may have nothing to do with finance at all. In many countries around the world the opposite number to the Secretary of State is not at all a financial person. I shall further consider our position on this point. However, in the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Meston

moved Amendment No. 14: Page 3, line 19, leave out ("may") and insert ("shall").

The noble Lord said: Clause 5(2) provides: The Secretary of State may set the rate of statutory interest with a view to—

1. (a) protecting suppliers whose financial position makes them particularly vulnerable if they are paid late;
2. (b) deterring the late payment of qualifying debts".

Surely those are the primary objectives of the Bill. If the Secretary of State does not have to have regard to those objectives, or if there is any doubt about his obligation to do so, it would seriously weaken the Bill. Accordingly, the amendment proposes that those be mandatory considerations for the Secretary of State when setting the statutory interest rate. I of course accept that those two objectives may not be the only considerations for the Secretary of State and would in that respect be happy to accept the modification suggested in Amendment No. 15 in the name of the noble Earl, Lord Home, or something like it, to make clear that the two matters referred to in the Bill are not the only relevant considerations to which the Secretary of State shall have regard. Nevertheless, I do suggest that this is an important amendment to reinforce the purposes of the Bill. I beg to move.

The Earl of Home

I have some sympathy for the amendment of the noble Lord, Lord Meston. It is certainly essential that the interests of the less powerful suppliers should be safeguarded. I also accept, however, that there may be occasions where other factors have to be taken into account as well. Nevertheless, I believe the noble Lord's point is well taken, and I agree with him that at all times the Secretary of State should take paragraphs (a) and (b) in the clause into account. My suggestion that the words "inter alia" be inserted will, I hope, meet the point.

4.45 p.m.

Lord Borrie

I have found this subsection a little difficult and will continue to do so, whether it has "may" or "shall" in it, for two reasons. First, I do not know whether primacy is given to paragraph (a) or (b), or is intended to be given to paragraph (a) or (b). I wonder what the Minister will have to say. Secondly, partially to repeat something I said at Second Reading, I am not sure whether the words, deterring the late payment of qualifying debts", suggest the possibility of a penal rate, which I thought the Government had set their face against in the course of the consultation paper of last year. In intervening in this debate I am not sure that I agree with the proposers of the amendment, but I would be obliged to my noble friend the Minister if he could clarify the purposes of Clause 5(2), either as it stands or as amended.

Lord Clinton-Davis

As to the point which has just been raised by my noble friend, I do not think a question of primacy arises. I shall certainly consider what he said, but I do not see the logic in that observation, although I have always respected my noble friend's logic, going back for some years. On the question of the penal rate, I do not think that what has been stated gives any reason to suggest that, and we do not intend it to have that effect.

On the amendment of the noble Lord, Lord Meston, I am very much aware of his concern regarding the need to protect the most vulnerable in the business community. The Bill is about protecting creditors and deterring late payment. I am sorry about the use of that word; I do not intend it to be misleading in any sense. The fact is that in dealing with those matters the Secretary of State should be obliged to have regard to them.

The noble Lord went on to argue that the aim of protection may better be achieved by replacing the word "may" with the word "shall". Our case is that it is important that we ensure in the legislation that the Secretary of State may have regard to the need to protect the vulnerable and to deter late payment. As the noble Lord said, they need not be the only considerations in determining what is to be the interest rate. Whether that is done by including the Treasury in the way that he has suggested is another matter, but they need not be the only considerations which have to be applied.

Perhaps I may give an example of the steps the Government are taking to gather information as this may help the Committee to appreciate the way in which we go about this matter. In gathering information we take account of the existence of the Better Practice Payment Group. It is an integral part of the way in which we are working in partnership with the business community in order to try and promote the whole culture among British business. This group sponsors the work of the University of Bradford's Payment Observatory, to which I paid attention in the speech I made on Second Reading, and I sense that the House at that stage accorded that proposal some sympathy. Part of the remit of the group will be to review the findings of the University of Bradford's Payment Observatory, which, among other things, will monitor and report on payment trends. Work of the Better Payment Practice Group in examining the results of the University of Bradford's Payment Observatory will give the Secretary of State important information to aid informed decision-making concerning interest rates and the efficacy of legislation and other measures generally. I suspect noble Lords would not wish me to prolong the matter by doing so, but I am prepared to set out the membership of the Better Payment Group, or I could write to anyone interested about that.

The Secretary of State, under the Bill as it is drafted, may consider the position of vulnerable suppliers and the need to deter late payment. These need not be her only considerations. The noble Earl, Lord Home, has sought to interpose the words inter alia. They are deeply offensive, I understand, to British parliamentary draftsmen; they are foreign words. Having used them in my legal practice on innumerable occasions I did not find them very offensive and I am sure the same would be true of the noble and learned Lord, Lord Fraser, and the galaxy of other Silks at this Committee stage. I am told it might perhaps be less offensive to use the time honoured English phrase "among other things". I rather prefer inter alia but, if it is deeply offensive to the government draftsmen, I will of course withdraw that remark instantly and I hope it will not go further.

Having said that, I will look at the way in which that particular phrase, as I have suggested it might be amended, could be incorporated. I give no undertaking about that at this stage on this deeply serious issue, but we may be able to come back to it. I hope that reassures the noble Earl.

Lord Meston

I am grateful to the Minister for forcing himself to lapse into the English language when he would much rather discuss this matter in Latin.

The position, more seriously, is that I accept that the two matters in Clause 5(2) need not be the only considerations for the Secretary of State. However, as drafted, the Bill actually allows the Secretary of State to disregard those two matters entirely or to give them negligible weight. This is a Bill which does not have a purpose clause, but surely, if one is looking to define the purpose of the Bill, it is to achieve the two things referred to in Clause 5(2). It detracts from the purpose, in my submission, to have the word "may" instead of "shall". Accordingly, this is a matter to which I would wish to reserve the right to return, albeit with improved wording, at Report stage.

Let me briefly mention the difficulty raised by the noble Lord, Lord Borrie. It seems to me, as a matter of construction, that where one has a statute which lists a number of considerations, normally no one of those considerations is to be given any particular priority over the other, unless the Bill or the statute so provides.

So far as the reference to deterring is concerned, there is a distinction between the word "deterrent" and the word "penal" which was referred to in debate at Second Reading. I have always understood that the word "penal" has a peculiar meaning of arbitrariness in English Law and that the use of the word "deterring" in the Bill does not leave the Bill vulnerable to the suggestion that a penal rate is being imposed.

There may be a further complication in that regard when we have to consider the provisions of the European directive, as and when we have them or a draft of them to consider. For the moment, however, I do not share the difficulty which the noble Lord, Lord Borrie, has with the word "deterring". To return to the substance of the amendment, this is a matter which I certainly feel needs further thought, and for the moment I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 15 not moved.]

Lord Haskel

moved Amendment No. 16: Page 3. line 24, leave out subsection (3).

On Question, amendment agreed to.

On Question, Whether Clause 5, as amended, shall stand part of the Bill?

Lord Ezra

Having given notice about Clause 5 standing part of the Bill, my noble friend and I wish to give the noble Lord, Lord Clinton-Davis, the opportunity to say how this clause in particular on interest rates and how the Bill in general would link up with the long-awaited European directive. This was an issue which was referred to in a number of speeches at Second Reading. This directive seems to have been delayed much longer than anybody expected. No doubt the noble Lord himself and his colleagues have had discussions in Brussels about this, and I think we need to be a little reassured that, having gone through this Bill so carefully, it is not likely to be upset in a major way when the directive appears.

Lord Clinton-Davis

This is a matter which gave rise to concern during the Second Reading debate, as the noble Lord, Lord Ezra, has stated, on the part of a number of your Lordships, and clearly it is helpful to enable me to reflect further with your Lordships on the current state of play as far as that proposed directive is concerned.

It is true that at the present time the European Commission is working on a draft directive on late payments, but it will be rather wide in the sense that it will, as we understand it from our discussions with the Commission officials, cover measures beyond a statutory right to interest. It may be that it will include, for example, VAT cash accounting and fast-track court procedures, and obviously we will have to look carefully at those ideas if they are forthcoming.

As far as discussions with the Commission are concerned, I can tell your Lordships that officials of the DTI and my colleague, Barbara Roche, the Minister for Small Firms, have indeed had meetings with the Commission on the legislation which we are currently considering. In July, she briefed Commissioner Papoutsis, the Commissioner with this responsibility, on the proposals we were advancing. We understand very well the point that has been made by a number of your Lordships that it would be unfortunate if we were required by the directive to amend the Bill or the Act after it had gone on to the statute book.

The present state of play is far removed from that. We have not seen the draft directive because it is not yet before the Commission. It is, I understand, hoped by the Commission that it will have a draft before it next month for consideration. We think, from the discussions that have taken place with the Commission, the directive will set a minimum rate of statutory interest less than that which we are proposing under the Bill.

I also understand that in setting the rate the Commission have taken a view, such as we have, of protecting the most vulnerable suppliers and deterring late payment. The fact is that the directive is unlikely to be in force at the earliest for another four years, and there is a great deal of terrain to be covered before that. And even if the draft directive is approved by the Commission, it then has to be considered by the Council of Permanent Representatives, the European Parliament and the Council of Ministers, and it is by no means certain that the directive will be supported by all the member states. We simply do not know at this stage, and I do not want to have a debate based on conjecture.

We take the view that it is important that we should proceed with our consideration of the Bill at this stage. It does not seem to me that we are doing anything which will confound the purposes, as we currently understand them to be, of the draft directive. Therefore, rather than to wait and see—and nothing may emerge from it anyway—we would do better to proceed with our own legislation and ensure that we play a positive part in the Commission's thinking. The important thing is whether our legislation would be in contradiction to that proposed by the Commission. I see no evidence of that situation being a possibility, and certainly not a probability.

5 p.m.

The Earl of Home

I am most interested by what the Minister told us. I am also very pleased that the noble Lord, Lord Ezra, agrees with me that the proposal might be delayed because on Second Reading I made the very point that the Bill was premature.

We are still talking about a fairly short timescale before it is proposed that the directive comes into force. If the Bill continues its course through this House and another place with customary speed, it may well be more or less over just as the directive comes into force. There is already a rumoured difference as regards the rate of interest. The noble Lord, Lord Meston, at Second Reading objected to my use of the word "penal". That was not my word as such but it was a word which the Commission is using. Some noble Lords may think that base rate plus 8 per cent. is indeed penal. I do not want to initiate a long debate on that topic now, but this is a possible example of a difference between the Government and Brussels and no doubt there will be others. It would therefore be interesting to know when the Minister proposes that the Report stage should be.

There is another reason why I said that the Bill was premature. At no stage does the Bill deal with the tax treatment of the receipt of interest or the right to receipt of interest. I would be grateful if the Minister could tell us whether received interest is taxable. Is the accrued debt, even if not collected, taxable? What is anticipated as regards VAT on interest? If the Minister does not have the answers today, I would be most grateful if he would clarify them before the Report stage.

Nor is there any mention of legal costs in the Bill. Unless there is certainty in the supplier's mind that he will, if successful, always receive costs he will be loath to bring an action because legal costs could easily exceed by a long way the interest which he receives. Perhaps the Government have not had time to think these points through, in which case a further period of reflection may be desirable. That might also coincide with the publishing of the directive.

Lord Clinton-Davis

I thank the noble Earl for his additional observations from the bottom of my heart and I will try to deal with them.

First, as regards the prematurity of the Bill, I did not believe that that was the view of the noble Lord, Lord Ezra. I understood that he shared the same thinking. The noble Lord appeared to be more concerned about obtaining information about the current state of the discussions between the DTI and my colleague, Mrs. Roche, and the Commission. I detected no sign that the noble Lord was of the opinion that the Bill was premature, neither in this debate nor in the one that we had at Second Reading.

The noble Earl speaks of the short timescale of the Bill. That is a matter of conjecture. At best there will be a short timescale; at worst there might be no directive at all. That is a factor that has to be seriously taken into account when we consider the need at this stage for pushing ahead with this legislation.

If I were to be wrong about that, I do not believe that harm would have been done in any event. We might have wasted the time of some of your Lordships, but I think we all enjoyed Second Reading and are enjoying the Committee stage; we are rejoicing in the fact that this afternoon we can be here in the Moses Room. I do not seriously believe that harm will have been done, and the purposes we are pursuing are wholly consistent with the directive, if in fact we can be sure that it does not cause a sense to be present that the Commission has gone beyond its competence, which is a possibility on the two issues that I have raised. I am not making a judgment about that; I am just saying that it is a possibility. There is always the question that is foremost in the minds of noble Lords on the other side of the Committee about that sort of issue.

On the question of the date of the Report stage, I take instructions on this sort of thing and I am told that it is likely to be in the week beginning 16th February.

On the question of VAT, the full price including VAT will bear interest. The interest will be paid wholly to the creditor, who will have paid the VAT up front to the Customs and Excise. I hope that deals with the point which the noble Earl has raised.

On the question of tax treatment of interest, that should be treated in the same way as interest charged under a contractual provision for interest; in effect, it would be a non-tax item and its treatment would be tax neutral. I do not know whether I was asked about how this would be dealt with in the company's accounts; that is a matter for the auditor, of course.

On the question of legal costs, the rule in this country is that costs follow the event; that is to say, that the successful party is entitled to the costs. We have paid attention to one particular matter to which I adverted in the Second Reading debate. It concerns the use of small claims court procedures to ensure that through this fast-track procedure the legal impediments to swift action through a major court action would not arise. We would bypass many of those obstacles.

As to whether a creditor would feel that it was not worth even going through the small claims court, that is a matter about which that individual will have to make a judgment. It is perfectly possible. There are many people who would not wish to use any form of litigation if there was a risk of costs being substantially against them. However, the reality is that it is necessary to ensure that small enterprises are informed about their rights so that they can, on a rational basis, exercise their judgment in that matter as to whether it is worth while going to court to recover the interest element, for example, which is the level which was mentioned, or whether it would be just as well to abandon the matter. This is why there is nothing mandatory about the provisions we are inserting. It is a permissive right. They can take action if they deem it appropriate, and they need not if they deem it inappropriate.

Rather different considerations might arise, although not wholly different ones, about the principal debt as distinct from the interest. Then the interest could be a substantial sum if the principal debt was a very large one. All I can say is that I think it is right that people should have given to them the right information about the remedies that can be sought and the fora in which those remedies might be obtained so they can make up their own minds about the value of these. I hope the noble Earl will feel that I have addressed the points that he raised and that we can now move on.

Clause 5, as amended, agreed to.

Clause 6 agreed to.

Clause 7 [Purpose of Part II]:

The Earl of Home

moved Amendment No. 17: Page 4, line 7, leave out subsection (2).

The noble Earl said: Subsection (2) precludes a supplier from taking advantage of the Bill after a debt is created, saying that the parties are free to agree terms. Later the Bill goes on to say that parties may agree a remedy that is substantial. Obviously, if that happens, there is no problem. But what does "substantial" mean in this context, and what will happen if the parties do not agree? Would it not be easier to omit this subsection altogether so that the Bill can be used by anyone at any time?

As the amendment is also grouped with Amendment No. 18, perhaps I may speak to that as well. Although I prefer the amendment to which I have just spoken, because I believe it is simpler, if the Government insist on the first part of the subsection I should like the noble Lord the Minister to consider removing the second part. As drafted this provision would result in the dominant party to a contract being able to adjust the terms of that contract to its own advantage. Indeed the very fact that it is included at all might encourage an unscrupulous party so to do. Equally the removal of this line will prevent parties from creating and then rearranging the terms of the contract. I beg to move.

The Deputy Chairman of Committees (Lord Brougham and Vaux)

I have to advise the Committee that if this amendment is agreed to I cannot call Amendment No. 18.

Lord Haskel

I can understand the concerns raised by the noble Earl, Lord Home, but perhaps I can persuade him that the Bill should stand as it is on this point. If, after the creation of a debt, the parties had an argument and could not agree terms on dealing with the debt, then they would lose a valuable means of resolving disputes without the need to go to court; that is if they came to any agreement over the interest. Clause 7(2) means that parties will be able to agree to waive all or part of the interest due where, for example, the creditor chooses to do so as part of a package of measures to resolve the dispute.

I would ask the noble Earl to consider the amendment in that light. Otherwise, if this amendment were to stand we might find ourselves in the absurd position of parties having to go to court for the remission of interest which both parties accepted should not be paid as part of the settlement of the dispute.

I turn to Amendment No. 18. I should like to note that the Government have tried to make the Bill as transparent as possible to avoid both legal and commercial uncertainty. The subsection may appear tautologous but it has been drafted to aid clarity and to avoid legal confusion. That is especially important where any confusion may result in small businesses having to go to court to resolve uncertainties. The noble Earl's amendment may lead to some legal uncertainty about the position of terms agreed after the debt has been created. For that reason, I hope the noble Earl will agree to the current wording.

5.15 p.m.

Lord Borrie

Before the Minister sits down, will he just confirm that, after the debt is created, the parties are free to agree terms dealing with the debt, even though the terms involve no "substantial remedy" for the supplier?

Lord Haskel

I am advised that they would be dealing with the terms that had already been agreed.

The Earl of Home

This is a complicated topic and I am not sure that I followed totally the logic of the noble Lord, Lord Haskel. I shall look very carefully in Hansard at what he has said and return to the matter at Report stage. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 18 not moved.]

Clause 7 agreed to. Clause 8 agreed to.

Clause 9 [Meaning of "substantial remedy"]:

The Earl of Home

moved Amendment No. 19: Page 5, line 5, at end insert? ("(The onus of proving that it was fair and reasonable to incorporate a term in a contract shall lie on the party so contending.").

The noble Earl said: I am aware that the Government are already considering how best to link the Bill in with the provisions of the Unfair Contract Terms Act 1977. I believe that this amendment does precisely that. I beg to move.

Lord Clinton-Davis

The noble Earl's amendment would in fact move the burden of proof on to the debtor to show that a contractual term should be upheld. I fail to see why this reversal of the burden of proof is desirable, although I shall come in a moment to the question of the effect of the Unfair Contract Terms Act.

I should like to start by referring to the reasoning behind our position on this matter. Both parties have in fact agreed a contract. That is evidence that they both felt it to be a reasonable and fair contract. The test which we seek to apply in the Bill is whether the remedy for late payment is inadequate for the purpose of compensating the supplier for late payment or for deterring late payment and that it would not be fair and reasonable to allow the remedy to be relied upon to oust or vary the right to statutory interest. In effect, therefore, it would be for the plaintiff to argue that the contract agreed—it is important to emphasise the word "agreed" in this context—failed to meet the test set by the Bill. That is a logical position, because only the plaintiff would be able to demonstrate that the contract term was unreasonable or unfair to the plaintiff. It would be extremely difficult for a defendant to be able to demonstrate that the contract was fair and reasonable for the plaintiff. How on earth would the defendant go about discharging that burden?

The noble Earl, Lord Home, alluded to the Unfair Contract Terms Act 1977 where the burden of proof is, as the noble Earl has sought to interpose in this Bill. But there really are substantial differences between this Bill and the 1977 Act. That Act deals with exclusion clauses in contracts, and Part II of this Bill deals with contractual terms to provide a remedy for late payment. These remedies may not satisfy the definition of "substantial remedy", but they do not provide an exclusion to a remedy. That is the substantive difference between the approaches in this Bill and the Unfair Contract Terms Act. I simply do not see how the defendant could discharge the burden of proof that the remedy in the Bill was fair and reasonable to the plaintiff—clearly, it is the other way round when it comes to the plaintiff being able to show that the remedy was unfair or not reasonable. With great respect, the amendment does not really stand up, and I hope that the noble Lord will not, in due course, persist with it.

The Earl of Home

I have to confess that this amendment did not originally carry my name and therefore I may be accused of introducing a proposal when I am not totally aware of all its arguments. My intention in agreeing to it, however, was that it is important to create a link between this Bill and the Unfair Contract Terms Act in order to ensure that they dovetail together. This amendment is an attempt so to do. If it has failed to do so, then I will withdraw it and look forward to the Government's proposals as to how they might link this in. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 agreed to.

Clauses 10 and 11 agreed to.

Clause 12 [Conflict of laws]:

[Amendment No. 20 not moved.]

Clause 12 agreed to.

Clause 13 [Assignments, etc.]:

[Amendments Nos. 21 and 22 not moved.]

Clause 13 agreed to.

Lord Haskel

moved Amendment No. 23: After Clause 13. insert the following new clause— ORDERS AND REGULATIONS

1. (" .—(1) Any power to make an order or regulations under this Act is exercisable by statutory instrument.
2. (2) Any statutory instrument containing an order or regulations under this Act, other than an order under section 15(2), shall be subject to annulment in pursuance of a resolution of either House of Parliament:).

The noble Lord said: I have already spoken to this. I beg to move.

On Question, amendment agreed to.

Clause 14 [Interpretation]:

[Amendment No. 24 not moved.]

Clause 14 agreed to.

Clause 15 [Short title, commencement and extent]:

Lord Ezra

moved Amendment No. 25: Page 7, line 24, after ("force") insert ("not later than two years after the day on which it is passed").

The noble Lord said: I beg to move Amendment No. 25, which is grouped with Amendments Nos. 26, 27 and 28 in the name of the noble Earl, Lord Home. The purpose of the amendment is to raise the whole question of phasing. The Government's proposal, as it emerged at Second Reading. was to have two preliminary phases of two years each before the Act came into force as a whole. The concern which my noble friend and I have about this is that it is not only too long a period but that it could lead small firms which alone would have the right in the first phase to claim interest to be too worried to do so. There could be very little use of that facility during the period for reasons which were well pointed out at Second Reading. The whole purpose of the Bill might fall into disrepute as a result. We therefore feel that either there should be a preliminary phase of only two years, or that during the first phase large firms should be able to make claims against other large firms. A wider use could then be made of the facility and the legislation could gain greater credibility.

Lord Meston

I support this amendment. I believe it is important that the risk of the timetable drifting is taken into account. I accept, of course, that the Government have been good enough to provide us with drafts of the commencement orders. That gives some comfort to those who are anxious about the date when the Bill will come into operation, at least its first phase.

There is a need for certainty; there is a need for the period to be as tight as possible; and there is a need to avoid distortion between large firms and small firms as to the terms on which they can contract. A further reason, I suggest, for making the period as tight as possible is that the phasing depends upon definitions to be contained in the order, a draft of which has been provided to us. Definitions of a small business, a public sector body and a large business are no doubt necessary, but are extremely detailed and in marginal cases can be hideously complex. Unless a simpler way can be found to define in particular a small business, the shorter the period this regime has to exist the better.

The Earl of Home

The phasing-in process of the Bill has led to much debate in industry and was raised by several noble Lords at Second Reading. I am aware that there was a certain amount of support for phasing during the consultation process, but I doubt whether any of those consulted realised what an extremely complicated procedure this would turn out to be.

In the context of phasing, the draft order makes a genuine effort to explain what is a large company and what is a small one, but I agree with the noble Lord, Lord Meston, that this has resulted in an incredibly difficult formula. For instance, if a supplier wants to claim interest from a purchaser employing about 50 people, how is he to know whether that purchaser is big or small? Does the purchaser have to say whether he is big or small? If he is obliged to do so by law, when does he have to do so? Does he have to inform the supplier immediately? If he does not do so until a court hearing the supplier may have wasted a good deal of time and money putting his claim together.

In the case of an expanding company, I understand, a supplier may not be able to make a claim on 31st March but can make a claim in relation to the same debt on 2nd April. A new company may not be able to be sued on 30th June but can be sued on 1st July for the same debt. How will the supplier know when that company breaks through the barrier? Presumably, the same problem applies in reverse as regards a purchasing company which is laying off staff; the supplier may be able to claim interest on 31st March but cannot do so on 2nd April.

Then there is the question of small subsidiaries. These may be offenders as the result of parent company policy. Surely they should not be allowed to get away with it? I hope that the Government will agree with me on that one. If the Government do agree, when is a subsidiary not a subsidiary? Is it when it is less than 51 per cent. owned or when it is not equity accounted? I do not believe that this problem is addressed in the draft order.

I believe that other difficulties are associated with the phasing proposal which I will not go into now. None of these problems needs arise if the Government simply give all companies sufficient time to adjust their minds to this legislation and prepare themselves accordingly. I have suggested a period of four months in my amendment as various bodies representing small and medium-sized enterprises have advised me that that would give small companies time to adjust, but there is no particular science in my four month proposal, and it may be that six months or even longer might be better.

It is, however, arguably better that SMEs should address this issue while it is still fresh in everybody's mind rather than put it into the bottom of an in-tray and forget about it, and suddenly find that the phasing period is over for them and they are not ready. A great amount of complicated, time-consuming and possibly expensive work could be avoided by bringing this Act in its entirety into operation on the same day.

As an alternative, although I hope the Minister will consider what I have raised seriously, as I understand it, it is proposed that after a three-month period from the passing of the Act, small businesses will be able to take action against each other, against the public sector and against big business. However, big businesses cannot go against each other or the public sector on day one. I cannot believe that the Government want the public sector to be able to shelter from big business by using this clause, and I do not see why big businesses should be immune from each other. I believe my proposed wording takes care of these points.

5.30 p.m.

Lord Clinton-Davis

I hope noble Lords will feel that it was helpful that we placed in the Library of the House the draft order under Clause 15(2), which I believe all noble Lords will have received. The reason for doing so was that, not only should we give noble Lords advance notice of what we had in mind, but that this debate should stimulate the possibility of our thinking further about the draft order itself. I am grateful for the comments which have been made, which have been very helpful and which I can assure noble Lords I and my colleagues will consider with great care.

It is right to say that this is another of the most important areas of debate that were covered at Second Reading. Further to that debate I have had discussions with the noble Earl, Lord Home, and with the noble Lord, Lord Ezra, on, inter alia, this issue, and it is right that that should have been the case. Our concern is to ensure that, when we have concluded our deliberations on the Bill, it will be the best Bill that we could have produced through the debates in this House because all of us are ad idem—if I may use that term and defy my own previous logic—on the objective of ensuring that small enterprises should be protected initially.

One of the points I made in the debate at Second Reading was that we recognise that one of the most important matters is for small firms to be able to establish their credit management systems so that they are able to meet all their payments on time. I rehearsed on that occasion the measures that were being introduced to help them in that respect. After all, they have limited management resources and it takes time to develop the necessary systems to deal with that particular matter.

We, of course, as I also said at Second Reading, went out to wide consultation on the Bill, particularly on the question of the phasing proposals. Rightly or wrongly, 87 per cent. of business respondents supported phasing and 85 per cent of business respondents supported the timetable that we were proposing. I say again that I will certainly read very carefully what has been said, and I am always prepared to consult further with noble Lords who have raised this point, and others, but unless there is a very good reason for changing our position on this matter we would be reluctant to do so. It would he inconsistent of the Government to recognise that small businesses need credit management help if we were not to allow them sufficient time for the measures to take effect before requiring them to pay interest themselves on overdue debts.

Phasing will put businesses on notice that they should take action if their systems are inadequate. That is an important part of this debate. We simply cannot expect small businesses to develop these systems in just four months, as the noble Earl, Lord Home, has suggested. These are technical matters. There are training matters that need to be addressed, and, in addition, those with IT systems are already under pressure to ensure their systems are compatible with the year 2000. So they need time, and the Government feel that, despite the arguments we have heard so far and as I stressed, before this Committee stage, we should give that time to them so that they can prepare themselves more effectively for the legislation coming into effect.

The noble Lords, Lord Meston and Lord Ezra, suggested that two years would be an appropriate period. We feel that it is not only a question of developing systems, but also allowing businesses sufficient time to make sure that those systems are viable. That is why we have suggested two phases before commencement of the Act.

The noble Earl, Lord Home, suggested giving large businesses the right from commencement. This legislation is, of course, essentially designed to help small firms. That is how it was announced: that is how we reacted to some of the consultations that took place: and that was the message that we sought to get over. The fact is that large businesses are very well able to look after their contractual relationships, and therefore I am not sure that the amendment proposed by the noble Earl is necessary.

I ask the noble Lords to reconsider their amendments, though of course we will deal with them if they feel that is necessary.

On the question of large against large, which is another part of the noble Earl's case, I assume that his amendment would also extend to the public sector; he may have overlooked that, but I do not blame him for that—that happens. I see that the noble Earl is nodding affirmatively that that was his intention. I will look again at that, because it is an important matter.

Notwithstanding what I have said about the primary purpose of the Bill being to support the interests of small enterprises in the first instance, I will look again at what the noble Earl said about large businesses being able to utilise the provisions of the Bill against other large businesses. We can come back to that at a later stage. However, I want to make it very clear that I give no undertaking that I will come round to that view. Certainly, I can give the undertaking that we will reflect on the matter before the Report stage--which is at least a couple of weeks ahead—but I can give no undertaking as to the result of those reflections.

Lord Ezra

I thank the noble Lord for the full reply he has given. It is clearly a most important issue, and I am glad that we shall be able to come back to it at Report stage, because the Minister has indicated that he would look seriously at the proposal, for example, that large businesses might be able to claim against large businesses in the first phase. I think there are a number of arguments in favour of that view, which I hope we will be able to deploy in more detail later.

I understand that in the case of other European countries which have already introduced these measures, there was in fact no preliminary period; they went straight in and they do not seem to have suffered as a result. I hope that the noble Lord will consider their experience as well when we come back to look at this again, as I am sure we will, and report at the next stage. In the meantime, I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

The Earl of Home

had given notice of his intention to move Amendment No. 26: Page 7, line 24, after ("force") insert?—

• ("( ) as respects contracts where both the purchaser and the supplier employ more than 50 persons, at the end of the period of three months beginning with the day on which this Act is passed:
• ( ) as respects any other contract,").

The noble Earl said: In respect of my amendments I thank the Minister for undertaking to cogitate on some of these topics—

Lord Clinton-Davis:

I would not put it as high as that.

The Earl of Home

Perhaps "reflect on" would be a more appropriate phrase. I am afraid I do not know the Latin for "reflect".

The effect of this phrasing and the problems of defining a small company is that until there is a free-for-all and anyone can sue anyone, I do not think that small firms will go through the rigmarole and expense of going against someone who is roughly of the size between small and big. I believe that people will not take advantage of this Act for some considerable time, which is a pity.

However, as the noble Lord has kindly agreed to reflect, I shall not move the amendment.

[Amendment No. 26 not moved.]

[Amendments Nos. 27 and 28 not moved.]

Lord Haskel

moved Amendment No. 29: Page 7, line 25, leave out ("made by statutory instrument").

The noble Lord said: I have already spoken to this amendment. I beg to move.

On Question, amendment agreed to.

Lord Haskel

moved Amendment No. 30: Page 7, line 30, leave out ("made by statutory instrument").

On Question, amendment agreed to.

The Earl of Home

moved Amendment No. 31: Page 7, line 35, leave out (-contracts") and insert ("debts").

The noble Earl said: In relation to this amendment I have no particular worries when the supply comprises a genuine package of obligations and prices are agreed before the Act comes into law. However, with an existing contract which is in effect an umbrella contract that covers only the general terms of supply and does not specify the obligations and prices, each new supply is in effect a new supply and should be catered for in this Bill.

A good example of this was given to me—that of a developer having a general agreement with a supplier to provide bricks for a housing development. The requirement for bricks may be over a considerable period of time, depending on the demand for housing in the area. The period could be months or it could be years. It does not seem fair to exclude the brick supplier who has entered into this umbrella agreement, securing what he hopes will be for him a valuable long-term contract, although obviously by considering this Bill we are anticipating that there may be hiccups at some stage during the supply of his bricks. I beg to move.

Lord Meston

I support this amendment in so far as it raises an important point. I wonder what consideration has been given to the effect of the Bill, as it is presently drafted, on running account arrangements.

Lord Clinton-Davis

I am surprised in some way by this amendment, although we are talking about discussion at this stage and there is no reason why what I think must be a probing amendment should not be put down. All amendments, as I have said before, are probing amendments at this stage in this place. It would be wrong to apply this Act retrospectively. It would amount to the Government providing the way for goal posts to be moved by making the parties to a contract subject to a sanction which they had not foreseen when they had agreed the contract. I do not believe that that would be appropriate. The whole purpose here is to ensure that the parties have some knowledge and certainty in the contractual relationships which would be enhanced by the provisions of the Bill. We do not want to detract from that position, which I believe would he the essence of the situation if these amendments were to be included.

It is critical that the parties to a contract should know what the legal position is and what their obligations are contractually. That is important before the terms are agreed. I therefore feel that what is proposed here would lead to a good deal of commercial uncertainty for parties currently agreeing contracts. That is the rationale of the objection that I have taken to the amendments.

I thank the noble Earl for raising the issue because it is pertinent to our discussions today that all those angles should be properly considered. However, I hope that the Committee will appreciate the points that I have raised. We are not in favour of retrospection as far as the provisions of the Bill are concerned.

Perhaps I may say also that I notice that the noble Earl, Lord Home, has raised umbrellas now on two occasions in our deliberations today. I have detected no sign of a storm, let alone a tempest.

5.45 p.m.

The Earl of Home

The very essence of the thinking behind the Bill is that we may get some rather nasty hailstones coming if some of the contracts go wrong, or late payment goes wrong, which leads to suppliers taking advantage of the Bill. We hope that the economy will continue to prosper as it did in the past so that this becomes less and less necessary as time goes on.

This was indeed something of a probing amendment. I shall continue to use the term "umbrella" rather than "parasol" because I believe that this is for rain, not for sun. There are quite a lot of examples where such umbrella agreements discriminate particularly against small suppliers such as in the example that I gave who have no idea what the situation might be as a development goes along: they are a long way from agreeing any price or other conditions in relation to a particular supply of bricks.

The noble Lord has kindly said that he will consider this along with the other amendments that I have put forward today, and I look forward to seeing what will come out on Report. In the meantime, I thank the noble Lord for his courtesy in not tearing me to bits in my debut on this side of the House—

Lord Clinton-Davis

Before the noble Earl sits down, I should say that I gave no undertaking on this amendment that I saw cause for reconsideration in the light of the argument that I sought to adduce in reply to the noble Earl. He is right in saying that we will study carefully everything that has been said in this debate. but I can certainly give no undertaking that there will be an amendment proposed in this regard.

The Earl of Home

I apologise to the noble Lord for my lax use of wording. I am grateful to him for at least considering the points that we have raised, if only to reject them. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 32 and 33 not moved.]

Clause 15, as amended, agreed to.

Title agreed to.

Bill reported with amendments.

The Deputy Chairman of Committees

This concludes the Committee proceedings on the Bill. I thank your Lordships for your indulgence.

The Committee adjourned at ten minutes before six o'clock.