HL Deb 11 May 1988 vol 496 cc1172-83

6.12 p.m.

Lord Lucas of Chilworth

My Lords, I beg to move that this Bill be now read a second time.

It is inevitable that from time to time disputes arise between members of the public and those who provide services to them by way of business. This Bill concerns arbitration between consumers and traders. When there is a dispute these days most consumers can seek justice through the small claims procedure in the county court in England and Wales and, in a somewhat modified form, in Northern Ireland. In Scotland a similar scheme starts later this year.

It is because the existing small claims procedures have worked so well that there has arisen the need to protect consumers from having their right to go to the small claims court, as many people have come to call it, taken away by the small print in the contract forms. The Bill which I put before your Lordships this evening is to protect consumers from such clauses, giving them the right to go to court if they so wish.

When this Bill was introduced by my honourable friend the Member for Rugby and Kenilworth it provided that this right to go to court rather than to arbitration should be absolute for consumers, irrespective of the amount in dispute. There were some differences of opinion and eventually the Department of Trade and Industry referred the matter to the Departmental Advisory Committee on Arbitration. That committee, under Lord Justice Mustill, conducted a very swift investigation into the merits of the Bill and made a report to the department within a matter of weeks.

I think it would be right for me to pay tribute to Lord Justice Mustill and his colleagues for the work that they did, particularly on the questions put to them, and for their courtesy and helpfulness generally in listening to what was said to them in support of the principle of the Bill, notably by the Consumers' Association.

Where the dispute between a consumer and a trader involves less than £500, the Bill provides that consumers should have the absolute right to have the matter resolved through the court procedure. In England and Wales that means through the small claims procedure, which automatically applies to county court cases which are below £500. I think it would be right if I remind your Lordships of the great success of the small claims procedure. Some more versed in its activities have described it as an ornament to the legal system.

As the passage of the Bill in another place has received all-party support, it may be necessary for me to mention quite briefly the principal clauses. Clause 1 is the main operative provision in the Bill. It provides that an arbitration clause in a contract with a consumer cannot be enforced against him except in any one of three specified cases. The three cases are: first, where the consumer agrees in writing to submit to arbitration once a dispute has arisen; secondly, where the consumer has submitted to arbitration—in other words where he has gone along with it and not objected to arbitration which has been initiated; and, thirdly, where the court decides, in a case where the dispute involves a sum between £500 and £5,000, that arbitration would involve no detriment to the consumer.

Clause 2 excludes from the operation of the Bill two kinds of case where arbitration clauses involving consumers may exist. They are, first, cases which operate wholly outside the United Kingdom; and, secondly, cases arising from types of business which were excluded from the operation of the Unfair Contract Terms Act 1977. These include such matters as insurance contracts, contracts relating to houses and other real property and contracts relating to companies and shares. Perhaps I may add here that on the whole the scope of this Bill before your Lordships this evening has followed that of the Unfair Contract Terms Act 1977.

Clause 3 defines "consumer" for the purposes of this Bill and Clause 4 spells out the detail of Clause 1(1)(c) which enables a court, in cases within the band of £500 to £5,000, to order that a dispute should go to arbitration and not to court.

Clause 5 provides the machinery for amending the levels of the application of the main provisions of the Bill and Clauses 6, 7 and 8 relate particularly to Scottish matters and make provision under Scottish law for substantially the same purposes. Clause 9 is self-explanatory.

The Bill has Government support and I sincerely hope that it will have the support of your Lordships. I commend the Bill to the House. I beg to move.

Moved, That the Bill be now read a second time.—(Lord Lucas of Chilworth.)

6.20 p.m.

Lord Donaldson of Lymington

My Lords, it is with some very real regret that I rise to support this Bill. My regret stems from the fact that as I see it it really should have been quite unnecessary. Disputes between citizens in any complex society are quite inevitable. In some ways an index of the advanced nature of that society is the extent to which it provides adequate systems for disputes settlement. By adequate I mean efficient and cheap.

In this country we have a mixed economy and it is not inappropriate that we have therefore tackled this problem of disputes settlement by a mixed economic approach. There is the private sector, the arbitration sector, and the public sector or nationalised industry to which I belong, the courts. That public sector co-operates with the private sector. There is no competition at all between the two branches. We do provide a slightly different service—one is more appropriate to some cases and the other to others. But going back to the private sector—the arbitration sector—the commodity trades based on the City of London have for years taken the line that if one is engaged in such a trade, one owes it to the trade to act as an arbitrator and to do so virtually free of charge.

In the retail trade the same result has been achieved by and large by a somewhat different route. There the trade associations have set up arbitration schemes. The claimant pays a small fee to register his claim and then submit it to arbitration. That is usually less than the fee payable under the courts' small claims fee. If he represents himself as he should do in small claims cases and loses, all that he will lose will be the small registration fee of perhaps £15 or thereabouts. If he wins, he gets the fee back and all that the other side, the losing party, has hazarded is the requirement that he compensates the claimant in the amount which he paid by way of a registration fee.

One may ask where the balance of the cost comes from. The answer is that it comes from the trade associations. It is regarded as being a legitimate expense to be borne by the trade as a whole. The Chartered Institute of Arbitrators (of which I was at one time president) runs some 40 such schemes. Most large retail companies I imagine spend considerable sums on consumer relations and consumer complaints departments. It would perhaps be idle to assume that that is entirely a philanthropic exercise; on the contrary, it is an example of enlightened self-interest.

I cannot for the life of me understand why having gone that far it should not be the universal practice to go just a little bit further and provide a system of low cost arbitration to resolve the few disputes which are not resolved by the ordinary process of investigation and negotiation between the customer and the retail trader. Of course that is very widely done and very successfully done. One might mention the insurance industry which does that on a large scale although part of that industry prefers the ombudsman approach.

The banking industry has someone called an ombudsman although he is probably an arbitrator. However, I shall not go into the technicalities of which function he fulfils. But at all events it is the same approach. It is the approach of investigating the customer's complaint as far as is possible; but when the crunch comes it is a matter of providing a low cost or a no cost system for a third party decision as to where the rights and wrongs lie.

I personally find it a very great pity that the furniture removal industry which seems to have been largely the cause of this Bill, and to a lesser extent the building industry, should have declined so far to follow suit. If they cannot be persuaded to do so, I would agree that this Bill is necessary in order to remove the evil of customers and consumers being priced out of justice—because that is what it amounts to. In another place figures were mentioned of a legally-qualified arbitrator being paid £200 to adjudicate in such disputes. Nobody who has a claim of under four figures or more could contemplate going to arbitration where he risked an order that he pay not only the arbitrator's fee which would be excessive in itself in relation to the claim but also possibly the legal costs of the other side. It is for that reason and in that way that people are being priced out of justice.

Of course it may be said—and I hope I am not straying too far from the Bill in this regard—that the mischief to which the Bill is directed is part of a larger problem which stems from the high cost of lawyers. I accept that the members of the legal profession are expensive, but they have had a long and costly training and many of them have high overhead expenses. They are worthy of their hire. But having said that, there is no reason in common sense why one should employ highly qualified people to do a job when it is just not cost effective to do so.

What we must do is to provide an alternative. Thinking about that, I realised that it is very odd that in this country criminal justice, or 98 per cent. of criminal justice cases, depend entirely upon the voluntary unpaid services of justices of the peace. They resolve disputes between the state and the citizen. They do not have legal training although they very quickly acquire a great deal of legal knowledge in the limited sphere in which they are operating. Without their services, the administration of justice in the criminal field would grind to an immediate halt.

Is there not a case for looking to see whether we could not have civil justices of the peace who unpaid would take on the very important duty of resolving small disputes between consumers and others and indeed between citizen and citizen? However, I stray from the Bill. I wish to raise two points about the Bill. The first concerns Clause 1(1)(b). I had thought from reading the debate in another place that the purpose of Clause 1(1)(b) was that where a consumer positively put forward his claim and said to the trade arbitral tribunal, "I have a claim, I wish to arbitrate it and put it forward" that in those circumstances the consumer should be bound by the arbitration clause but that is certainly not the way in which this particular clause would be interpreted.

There is a very real difference, as a matter of technicality, between submitting to arbitration and submitting a claim to arbitration. I fear greatly that with the Bill as drafted the customer who is faced with a claim by a furniture remover, for instance, for the fees or the balance of fees for removal which has been put to arbitration by the contractor, will write in, when he is told about the claim, and say, "I do not owe it because …". The moment he says that, I believe that the courts will be in a position in which they must say that he has submitted to arbitration when in fact there was probably nothing that was further from his mind. I hope that those who are in charge of the Bill will look at the wording and make certain that that is what they intend.

The other point that troubles me concerns Clause 4. Under Clause 4, it will be open to the contractor (as will probably be the case) to apply to the High Court or the county court for an order disapplying Section 1; in other words, an order that the consumer is bound by Section 1. There is nothing in the Bill about costs. The costs of the application may be considerable. It might be worthwhile for a trade association to turn up, represented by leading and junior council instructed by solicitors. The trade association would not be so concerned with that particular case as with getting a ruling that arbitration is in the interests of the contractor. What is the customer to do when he is suddenly faced with an application such as that? If I were the customer and faced with an application by a contractor, backed by his trade association, to disapply Section 1, I would run a mile rather than risk getting involved in an argument and perhaps losing it and having an almost unlimited order for costs made against me.

Those are detailed points which will be more suitably discussed on another occasion. However, I wish to put down a marker on those potential problems; and, the evil existing, I welcome the Bill as a solution.

6.33 p.m.

Lord Campbell of Croy

My Lords, I should like to add a few words in support of the Bill which has been so admirably and clearly introduced by my noble friend Lord Lucas of Chilworth. My honourable friend Mr. James Pawsey was fortunate in attaining a high place in the annual ballot for Private Members' Bills in another place. That is a happy situation. I once had similar good fortune when I was in another place. My honourable friend has therefore won time for discussion of the Bill in the other place, and it comes to us in its present form with the blessing of the Government. It is also strongly supported by the Consumers' Association.

The purpose of the Bill is not opposition to arbitration. Arbitration is relevant and helpful as a recourse in many situations. The noble and learned Lord, Lord Donaldson, has just described such situations; there are few noble Lords who are more qualified to speak on that subject. The Bill ensures that customers will have the option of going to court when there is a dispute about damages, claims or services. With the small claims procedure operating satisfactorily and a similar scheme about to start in Scotland, it will usually be cheaper and more convenient for members of the public to choose the courts rather than arbitration. The option should be kept open for them. Access to the courts for all is a basic right in this country and it should not be lightly given up or removed.

I am fortified in that belief by the views expressed by the Director-General of the Office of Fair Trading, Sir Gordon Borrie, who wrote to Mr. Pawsey to the effect that the arbitration schemes operating under the codes of practice which he had endorsed were intended to be an available option and not a replacement for other forms of redress, including access to the courts. I hope that, with any amendments which may be necessary for clarity which may be suggested by the noble and learned Lord, the Bill will be accepted in principle by your Lordships' House.

6.38 p.m.

Baroness Ewart-Biggs

My Lords, perhaps I may also thank the noble Lord, Lord Lucas, for his clear presentation of the Bill and say that I, in common with previous speakers, believe that it is a useful and helpful piece of legislation. We on these Benches may be even more pleased to welcome it than anyone else. The only slightly sour note that I might adopt would be to point out that the measure was due to come before the House 11 years ago. As the noble Lord, Lord Lucas, implied, the provisions of the Bill fill the gap which was left when the Unfair Contract Terms Act was introduced by a Labour Government in 1977. That Act in large measure safeguarded consumers from the mischief of small print and the result has been that, for the past 11 years, consumers cannot be unfairly deprived of the basic legal rights which Parliament intended them to have.

The only flaw in the Act was that it did not extend to compulsory arbitration clauses. When your Lordships' House sought to put that right, the government of the day, being in rather a delicate position with a very small majority, had too much on their hands to overturn the Conservative opposition in another place when the amendment proposed by your Lordships' House returned there. In my view, the Bill completes the work of those days.

The Consumers' Association has sent us examples of specific cases where a customer wished to claim compensation from a trader after he had signed a compulsory arbitration clause. Such examples make us realise how much the provisions of the Bill will help. A dissatisfied customer, who may be elderly and unused to small print (and how many of us have been caught by the small print on the back of a contract?), may discover too late that he is tied to arbitration as the only means to settling the dispute. On the other hand, he may be faced with the fact that his claim is less than the £200 a day cost of arbitration and therefore be forced to settle for whatever the trader offers him, which would probably be a smaller amount. The Bill gives the consumer the invaluable option of taking his claim through the small claims procedure in court, which will certainly bring him greater justice.

That leads me to a point which I should like to put to the Minister. It concerns the limit of £500 at which the small claims jurisdiction stands at present. That has stood at the same level since 1981. When it was first introduced in 1973, the level was £75. After a year or so, as the scheme took hold and became a considerable success, the level was raised to £100 and it was later raised to £200. Now that it has stood at the present level of £500 for seven years, perhaps the time is right for it to be raised again.

The Lord Chancellor's Department issued a consultation paper in September 1986 floating the idea of raising the limit to perhaps £1,000. That idea has been on the table for over a year. Perhaps it is appropriate to ask whether anything is to be done and, if so, when. Unlike other possible reforms which have emerged from the civil justice review, this reform is not controversial. No one has spoken against the proposal to raise the small claims limit. If the Government decide to do that, the level of application of the provision in the Bill would be automatically self-adjusting.

This Bill gives consumers the absolute right to go to court to defy the compulsory arbitration clause in cases where the dispute falls within the limits of the county court's small claims jurisdiction. Surely a speedy and efficient way of extending the application of the provisions of this Bill to the area which ought really to be covered would be for the Lord Chancellor to raise the limit for the small claims jurisdiction to £1,000 as soon as possible. I may say that this proposition is strongly supported by the Consumers' Association.

Secondly, may I address one other point to the noble Lord, Lord Lucas? This concerns the codes of conduct. As I am sure your Lordships will know, the Office of Fair Trading has for several years promoted the system of codes of conduct to raise trading standards and to protect consumers. These codes have been drawn up on a different basis for various trades by trade associations, but they mostly have in common a system of arbitration for the resolution of disputes between customers and traders which cannot be settled in any other way. The Office of Fair Trading would not approve a code which did not make provision for this kind of arbitration as a final stage.

If the Bill became law and extensive use were to be made of its provision to go to the courts instead of using arbitration procedures, what effect does the noble Lord, Lord Lucas, think that would have on existing codes of conduct, as well as on the establishment of new ones?

These codes contain much which at earlier stages in their procedures are helpful to consumers as well as raising trading standards generally. On balance, it will disadvantage consumers if the codes fall into disuse and eventually cease to exist. Consumers will then need to rely on general legal provisions, and while these are a useful long stop they do not easily accommodate all disputes in every trade as effectively as codes of conduct. Also, the absence of a code may mean deteriorating trading standards as traders cease to be specifically regulated by their trade associations. I should be very grateful if the noble Lord, Lord Lucas, would give his views on that point.

Finally, perhaps I may say that this Bill certainly has a great deal of support: the support of the Institute of Trading Standards Administration, the Office of Fair Trading and the Department of Trade and Industry. As the noble Lord said, the Consumers' Association has had a great deal to do with presenting it. The only voice of dissent that I have noticed has come from the British Association of Removers. Again, I should be very grateful if the noble Lord, Lord Lucas, would comment on the fact that it believes that a satisfactory self-regulatory code could be introduced for removal claims handling and that the association could sponsor a small claims arbitration service in conjunction with the Chartered Institute of Arbitrators. I believe that the noble and learned Lord, Lord Donaldson, was thinking rather along those lines. The British Association of Removers adds that it hopes realistic proposals will be ready by the autumn. Again, I should be grateful if the noble Lord, Lord Lucas, would comment on the suggestion made by the association to clear up this problem.

In conclusion, I believe the Bill is an important advance in respect of consumer rights and completes the work begun 10 years ago with the Unfair Contract Terms Act. We on these Benches certainly give it our full support.

6.44 p.m.

Lord Beaverbrook

My Lords, may I first congratulate my noble friend Lord Lucas on the lucid way in which he has introduced the Bill. Let me say at the outset that the Government do not oppose the Bill and indeed have provided drafting assistance. Your Lordships may have noticed from the precise language of the Bill that the hands of the parliamentary draftsman and his Scottish colleague have been at work. There is of course a coherent policy underlying the Bill as it is now drafted and I should like to explain to your Lordships how it has come about.

Towards the end of last year the issues raised by the Bill were referred to the Department of Trade and Industry's Advisory Committee on Arbitration Law. This committee is chaired by Lord Justice Mustill, and includes representatives from Scotland and Northern Ireland. The Committee took oral evidence from the promoters of the Bill as well as from the Office of Fair Trading, the Chartered Institute of Arbitrators, the British Association of Removers and the Federation of Master Builders. A copy of the committee's report is available in the Library.

The committee concluded that the Bill did address a problem, albeit not a great one—the problem being essentially one of cost and its deterrent effect. My noble friend Lord Lucas has explained what the problem is and I do not think I need to spell it out again in detail. Suffice it to say that the Government recognise two situations where arbitration clauses can discourage consumers with a genuine grievance from pursuing their claims. The first concerns cases involving small sums of up to £500, which would automatically be heard under the small claims procedure in the county court. The maximum cost of preceedings under the small claims procedure is £43, while the cost of arbitration depends on the scheme specified in the contract. There are low-cost arbitration schemes, but others can cost the loser between £200 and £300. Clearly a consumer with a disputed claim for, say, £250 is going to think twice before risking the same amount again at an arbitration hearing. He is much less likely to be deterred by the cost of proceedings in the small claims court.

The second situation where an arbitration clause can work to the disadvantage of a consumer is in cases above the small claims limit, where the consumer would be eligible for legal aid in court proceedings. Legal aid, of course, is not available for arbitration. The proponents of the Bill argue that the consumer should always be entitled to pursue a dispute in court and that this right should never be taken away from him by the small print in the contract. Access to justice, they argue, should be the overriding principle.

I certainly see the force of this argument. However, there are other important principles at stake. One is that the parties to a contract, while being free to agree the terms of the contract, should be bound by those terms once they have been agreed. There must be very good grounds for allowing one of the parties unilaterally to say, "I know I signed the contract but I don't like this or that particular term, so let's ignore it."

The Unfair Contract Terms Act 1979 erodes the principle of sanctity of contract to some extent by making void or voidable the type of clause under which one of the parties seeks to exclude his liability for negligence or breach of contract. However, any further erosions of the principle must be firmly justified.

Another important aspect is the impact of this Bill on arbitration law. It is a principle of arbitration law that when parties agree to resolve future differences by arbitration that agreement should be binding. Section 4 of the Arbitration Act 1950 gives the court discretion to allow court proceedings to continue, notwithstanding an arbitration clause, but the grounds for exercising the discretion are very restrictively applied. The Government have no quarrel with arbitration as a means of resolving disputes. We regard it as an excellent alternative to the courts and it has the very great merit in our eyes that it relieves the burden on the court system.

The Department of Trade and Industry's advisory committee drew attention to these arguments and recommended that, if the Bill was to be enacted, its scope should be narrowed so that it addressed the identified problem but minimised interference with freedom of contract and with arbitration law. It suggested some ways in which this might be done. The Government subsequently discussed them with the promoters of the Bill and the result is the present draft.

I do not want to detain your Lordships with a detailed commentary on the Bill's provisions, but I should like to make just one point. The Bill refers throughout to jurisdictional limits rather than to specific monetary amounts. Thus, Clause 1 limits the scope of the Bill to proceedings within the jurisdiction of a county court. Clause 4 qualifies Clause 1 by enabling a court to enforce an arbitration clause in the case of disputes falling within the jurisdiction of a county court, provided that arbitration would not be detrimental to the interests of the consumer, and provided that the dispute is above the small claims limit. The latter part of the Bill applies similar but not identical provisions to Scotland.

The technique of referring to jurisdictional limits has the obvious advantage that if new limits come into force they will apply automatically to this Bill and there will be no need for secondary legislation to bring it up to date. As a precaution, however, the Bill gives the Secretary of State the power, with the concurrence of the Lord Chancellor or Lord Advocate as appropriate, to specify higher limits by order. The Government hope that it will be possible to avoid specifying particular monetary limits by order, but if in the light of experience it becomes clear that different limits would be preferable, in Scotland or elsewhere, the order-making power exists.

I turn now to two points raised by the noble and learned Lord, Lord Donaldson, who referred to Clause 1(1)(b). It is not the intention that the consumer should be regarded as having submitted to arbitration unless he has evinced a clear intention to accept the arbitration process. However, we shall look at the point again and take it up with the sponsors of the Bill if it appears that his point is a valid one.

Turning to the noble and learned Lord's second point concerning Clause 4(1), our advice has been that the costs of an application are unlikely to be substantial. However, again we shall look at the point afresh and if necessary take up the point with the sponsors of the Bill.

The noble Baroness, Lady Ewart-Biggs, asked about the likely limits of small claims. My noble and learned friend the Lord Chancellor has recently received the report, The Civil Justice Review. The report is being printed and will be laid before Parliament as soon as possible, probably early in June. It would be improper for me to anticipate what is contained in the report. No doubt as soon as the report is published it will be brought to the notice of the noble Baroness. I hope that it will be possible to look at the point further at that stage.

In conclusion, the Government have worked closely with the promoters of the Bill and as a result it has been substantially amended in another place. The Government's attentions have not been designed to draw the teeth from the Bill. In a positive spirit the Government have sought to ensure that the Bill continues to tackle the identified problem but at the same time avoids unnecessary interference with arbitration and with contractual freedom. The result, I believe, is a sensible measure and its progress towards the statute book is not opposed by the Government.

6.52 p.m.

Lord Lucas of Chilworth

My Lords, I am most grateful to all noble Lords who have taken part in this short debate tonight. Perhaps I may comment on one or two of the questions which have been asked in the order in which they were raised.

I thank the noble and learned Lord, Lord Donaldson of Lymington, for his support, reluctant though it is. Had it not been for the outstanding omission of the voluntary option from contracts, the Bill may never have been necessary. Since the option has not proved to be all-embracing we who sponsor the Bill have felt it necessary to go this route. I had intended to explain to the noble and learned Lord that I do not have legal qualifications and would have wished to take his two points away to seek further advice. However, my noble friend the Minister has said that he will be talking with the sponsors and I hope therefore that we can communicate with the noble and learned Lord very quickly about that point.

It is important, and I am very grateful to the noble and learned Lord, that he should have been here tonight. We recognise the great value of his work earlier in the 1980s as president of the Chartered Institute of Arbitrators. It is one of the great values of your Lordships' House that we have the benefit of noble Lords' experience covering such a wide field.

My noble friend Lord Campbell of Croy gave general support. I am grateful to him for having spelt out our intentions, which are to provide an option for the disaffected to choose and not have any particular scheme forced upon them.

That point takes me to the remarks of the noble Baroness, Lady Ewart-Biggs. She asked me to comment on the BAR scheme. The British Association of Removers has come along rather late in the day and suggested setting up a low-cost arbitration scheme as an alternative to that which we propose in the Bill. We hope that BAR adopts such a scheme, but the basis of its scheme remains—as at present written into its members' contracts—that arbitration is compulsory. That is our objection to it.

The noble Baroness also asked me to comment on the effect of the Bill on existing codes of conduct. I draw her attention to the report of the departmental Advisory Committee on Arbitration, which my noble friend the Minister has said is available in the Library. The report states that: It is the practice of the Director-General [of Fair Trading] not to endorse any codes of practice which include an arbitration clause which does not give the consumer the option for going to Court. In a letter to the Committee, the Director-General [Sir Gordon Borrie] stated that 'the Bill, if enacted, would go some considerable way towards assisting my policy goal'". Therefore one can see that the passing of the Bill, if your Lordships so agree, will do nothing other than support the director-general in his efforts to encourage codes of conduct which embrace that alternative.

I turn now to the remark of my noble friend the Minister. I should like to thank him for the support which we have received from the department and, further, for offering additional support. He raised the question of legal aid not being available for arbitration cases. I see the noble Lord, Lord Mishcon, sitting in his place this evening; it was of course he who raised the question quite recently in the discussions on the Legal Aid Bill in February. I do not propose to re-open that subject because the noble Lord, Lord Mishcon, and your Lordships received an answer then and the Minister is unlikely to go further. I thank noble Lords for their support.

On Question, Bill read a second time, and committed to a Committee of the Whole House.