HL Deb 11 January 1999 vol 596 cc20-33

3.43 p.m.

The Lord Chancellor (Lord Irvine of Lairg)

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

It gives me real pleasure to bring before your Lordships, so soon after your Lordships have considered the Trustee Delegation Bill, a second Bill to give effect to recommendations for law reform made by the Law Commission. This Bill implements the recommendations which were made in the Law Commission Report No. 242, Privity of Contract: Contracts for the Benefit of Third Parties, published in July 1996. I should like to thank the Law Commission for another excellent piece of work which continues its valuable contribution to law reform.

The common law doctrine of privity of contract means that, as a general rule, a contract cannot confer rights or impose obligations on any person except the parties to it. So third parties cannot acquire or enforce rights under contracts, even contracts which have been made for the express purpose of conferring benefits on them. The non-recognition of third party rights has been much criticised by the judiciary, academics and law reform bodies. The Law Commission thought that it had been the rule which senior judges have criticised more than any other rule of English contract law. Nearly 20 years ago it was described by Lord Diplock as, an anachronistic shortcoming that has for many years been regarded as a reproach to English private law". More recently, the noble and learned Lord, Lord Steyn, said that, the case for recognising a contract for the benefit of a third party is simple and straightforward. The autonomy of the will of the parties should be respected. The law of contract should give effect to the reasonable expectations of contracting parties … there is no doctrinal, logical or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties". The Bill will give effect to that simple and straightforward principle.

The Bill provides that a third party will have a right to enforce a term of the contract, both when the contract expressly provides that he should have that right and also where there is no such express provision but there is a contractual term which purports to confer a benefit on him. Once the third party has a right to enforce the term, there will be limitations on the extent to which the contracting parties may modify their contract without the third party's consent.

The contracting parties will not be obliged to give enforceable rights to the third party on whom the benefit is to be conferred. If it is apparent from the contract that they did not intend to do so, the third party will still be unable to enforce the term.

I emphasise that the Bill does not change that part of the rule under which a burden cannot be imposed on a third party without his consent. It is clearly right that the principle should remain. The Bill deals solely with benefits conferred on third parties.

The reform brings English law into line with the position in Scotland, most member states of the European Union and much of the common law world, including the United States of America. The harmonisation of commercial law in this way can only be beneficial to the interests of the business community.

As many of your Lordships will be aware, the Law Commission generally produces with its reports a draft Bill to give effect to its recommendations. The report on privity of contract was no exception. However, the Bill before your Lordships today is not identical to that draft Bill in every respect. Since the report was published we have been working closely with the Law Commission in considering comments which have been made, and we have included a number of improvements which have been suggested. As always, I am grateful to the Law Commission for the continuing assistance that it has given. None of the changes goes near the heart of the Bill, but it may be helpful to your Lordships if I mention briefly the main modifications which we have made before turning to the detailed provisions of the Bill.

The principal changes are additions to Clause 6, which excludes certain types of contract from the operation of the Bill. Other legislation already governs the question of third party rights under particular contracts, and it would be contradictory for this Bill to apply to them.

Clause 6 now prevents a third party from suing an employee for a breach of his contract of employment. Without this exception it could be thought that there was a risk of the rights of workers to take lawful industrial action being restricted in unexpected ways. It is not intended by a by-wind to upset the present balance on our labour laws.

Clause 6 now also prevents third party rights arising from the "deemed" contracts under Section 14(1) of the Companies Act 1985 under which the registered memorandum and articles of the company constitute a contract between the company and its members in respect of their rights as such. The peculiar nature of these deemed contracts makes them unsuitable for enforcement by a third party under a general reform aimed at giving effect to the parties' intentions.

I should also mention that the drafting of the present Bill has been modified to reflect the fact that a third party's interest may be limited to particular terms of the contract rather than the contract as a whole.

A full explanation of the current law and the proposed changes can be found in the Law Commission report to which I have referred. As your Lordships will be aware, we have not produced notes on clauses as a separate departmental publication, as was the previous practice. Instead, the Bill is accompanied by Explanatory Notes which we have prepared to assist readers of the Bill and help to inform debate upon it.

Clause 1 is the core of the Bill. It sets out the circumstances in which a third party may have the right to enforce a term of a contract. He or she will have that right if the contract contains an express term to that effect. A third party may also have the right where there is a contractual term purporting to confer a benefit on him or her, unless it appears on a true construction of the contract that the contracting parties did not intend the third party to have a right to enforce it. In order to acquire that right, the third party must be expressly identified in the contract but need not be identified by name. It is sufficient if he or she is identified as a member of a class or answers a particular description. The remedies available to the third party will be the same as those available to a party to a contract bringing an action for its breach.

Clause 1 also contains the essential definitions of "the promisor" and "the promisee" as used throughout the Bill. "The promisor" is the party against whom the contractual term is enforceable by the third party and "the promisee" is the contracting party by whom the term is enforceable against the promisor.

Clause 2 restricts the way in which the contracting parties can alter the third party's entitlement under the contract without his or her consent once the third party has the right to enforce a term. They may not do so after the third party has accepted the term, or relied on it, when the promisor knows of, or can reasonably be expected to have foreseen, that reliance. The court may, however, dispense with the third party's consent in particular circumstances, such as where it cannot be obtained because his or her whereabouts are unknown. In keeping with the Bill's preservation of the contracting parties' freedom to agree their own terms, these rules will be displaced by an express term of the contract providing that the contract can be cancelled or varied without the third party's consent or that the third party's consent is to be required in specified circumstances different from those specified in Clause 2.

Clause 3 deals with the defences, set-offs and counterclaims available in proceedings by a third party to enforce a term of the contract. Broadly, the promisor can rely on defences or set-offs which arise in two different ways. He or she can rely on any defence, set-off or counterclaim which might arise in connection with the contract and which could have been relied on by the other party to the contract. For example, a defence that a contract is void or that it has been discharged is a good defence whether the action is brought by the promisee or the third party. The promisor may also rely, in an action by the third party, on a defence, set-off or counterclaim which related specifically to the third party and arises otherwise than in relation to the contract. It may be available, for example, under a separate contract between the promisor and the third party.

Clause 4 provides that the Bill does not affect the rights of the promisee to the contract to enforce a contract term which benefits a third party while Clause 5 makes provision to avoid the double liability of the promisor to both the promisee and the third party.

As I have explained, Clause 6 provides for types of contract to which the new rules in Clause 1 will not apply. I have already mentioned contracts of employment and deemed contracts under Section 14(1) of the Companies Act 1985. Also excluded are contracts for the carriage of goods by sea, as defined in the clause. It would have contradicted the policy behind the Carriage of Goods by Sea Act 1992 if third parties to contracts which are covered by that Act were also able to rely on the provisions of Clause 1 of this Bill. Nor will the provisions of Clause 1 apply to contracts for the international carriage of goods by road, rail or air which are covered by international conventions. It might undermine our commitment to those conventions if this was not the case. Nevertheless, this Bill will allow third parties to enforce exclusion or limitation of liability terms in these two types of contract.

For example, a contract between the charterer of a vessel and the owner of the goods to be carried may provide that the shipowner is not to be liable for damage caused by negligent stowage. The Bill will enable the shipowner, as third party, to rely on that exclusion in an action by the owner of the goods. Similarly, so-called "Himalaya clauses", under which the defences available to the carrier are extended to servants, agents and independent contractors engaged in loading and unloading, will be effective without having to resort to artificial reasoning based on concepts such as implied contract, as has been necessary in the past.

Another type of contract which is excluded from benefiting from the provisions of this Bill is one which is contained in a bill of exchange, promissory note or other negotiable instrument. As the Law Commission explained, other legislation may confer rights on third parties, subject to certain conditions, where they are "holders" of those instruments, and it would cause unacceptable uncertainty to open up the possibility of third parties, who were not holders, having rights to enforce those contracts under the provisions of this Bill.

Clause 7 preserves any rights or remedies which may be available to a third party at common law or by statute apart from the Bill, but ensures that the third party cannot invoke Section 2(2) of the Unfair Contract Terms Act 1977 to contest the validity of a term excluding or limiting the promisor's contractual liability to the third party, under the Bill, for negligently caused loss or damage. This again is consistent with the underlying policy of the Bill which is to enable contracting parties to confer rights on third parties but to allow them to retain control over the nature and extent of those newly conferred rights.

Finally, Clause 8 provides that the Bill is to come into effect six months after Royal Assent and will apply only to contracts entered into after it comes into force. Six months is a reasonable period to allow the professions and the public to become familiar with the legislation and to make any necessary modifications to standard form contracts.

This is a useful law reform measure which has been long awaited. I commend it to the House.

Moved, That the Bill be now read a second time.—(The Lord Chancellor.)

3.57 p.m.

Lord Borrie

My Lords, more than 60 years ago, the Law Revision Committee, which was a part-time predecessor of the present Law Commission, recommended that where a contract by its express terms seeks to confer a benefit on a third party, that third party should be entitled to enforce the provision in his own name.

Thirty years ago. I well remember as a member of the Law Commission's Advisory Panel on the Codification of the Law of Contract that the draft code provided for the creation of rights in third parties. Sadly, neither the 1937 report nor the abortive attempts of the Law Commission 30 years ago to create a codification of the law of contract came to anything and here we are in 1999.

The noble and learned Lord the Lord Chancellor quoted senior members of the judiciary, including the late Lord Diplock, as condemning the non-recognition of third party rights rule as anachronistic. Surely Lord Diplock was right in his criticism, as have been other members of the senior judiciary. Indeed, the story of our failure in England—notice that I do not say the United Kingdom—for so long to make the changes now to be made by this Bill is not a happy one. Other common law countries have got rid of the rule; Scotland and most European Union countries recognise and enforce the rights of third party beneficiaries under contracts.

The noble and learned Lord the Lord Chancellor is to be congratulated on promoting a Bill relatively soon (I say to the noble Lord, Lord Goodhart) after the comprehensive 1996 report of the Law Commission. One of the problems that many lawyers have experienced with this subject over the years is that the simple logic of the privity of contracts rule—that only a party to a contract may enforce it—has been widely regarded as a fundamental principle of the law of contract. There was no firm rule either way until the mid-19th century. Nor was the logic all one way. The noble and learned Lord, Lord Steyn (who unfortunately is not here today) put the matter very clearly in 1995 when sitting in the Court of Appeal. He said: there is no doctrinal, logical or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties". It is true that over the years a number of exceptions to the third party rule have been created by Parliament or the judges, but many of them are technical and artificial and give rise to anomalies. How much better therefore it is to do what we are beginning to do today and abolish the rule and give effect to the parties' intentions. The Married Women's Property Act 1882 provides that if a man takes out life assurance expressly for the benefit of his wife and/or children such dependants can enforce the contract, but that Act does not help a co-habitee or stepchildren, even though they may be expressly named as intended beneficiaries.

The rule in a whole number of fields causes problems and injustices. Suppose that an employer takes out medical expenses insurance for his employees. The employees have no right to enforce the contract. Building contracts are notorious, especially where sub-contractors are involved, for creating difficulties. An example given in the 1996 report of the Law Commission is where one contracts with a builder to do work on the home of one's daughter. The work is done defectively. As a contracting party one can sue the builder but one will get only nominal damages because one has suffered no direct financial loss. However, the daughter who is not a party to the contract cannot claim at all even though she may be expressly identified, named and specified in the contract.

The situation would be changed for the better if this Bill were enacted. In the words of Clause 1(1) a person who is not a party to a contract (a third party) may in his own right enforce the contract if it expressly provides that he may do so or it purports to confer a benefit on him. I leave aside the qualification in Clause 1(2) but I stress the qualification in Clause 1(3) that the third party must be expressly identified in the contract by name as a member of a class or as answering a particular description. My query is whether this may be over-restrictive. To take a slight variation of my previous example, instead of arranging for work to be done on your daughter's house you may buy a piece of antique furniture for her but you do not identify her to the retailer. It is delivered to your home for the good reason that you want to give it to her for Christmas and not in advance. Therefore, the retailer knows nothing of your daughter. Some time after Christmas the furniture is found to be infested with woodworm which causes damage to other furniture that is owned by your daughter. She could not sue now or, as I see it, under this Bill because she would not be expressly identified in the contract of sale. If you sued you would get only nominal damages.

Problems can arise when a retailer against whom a purchaser normally has Sale of Goods Act rights becomes insolvent. The purchaser could not instead claim against the manufacturer who had sold to the retailer unless the manufacturer-retailer contract expressly identified the ultimate consumer as having rights to claim direct against the manufacturer. That is not normally the situation in the case of a manufacturer-retailer contract. In its 1996 report at paragraph 7.54 the Law Commission admits that the Bill that they proposed, which this Bill largely follows, falls short of providing so-called consumer third parties with comprehensive remedies.

My final point relates to the Unfair Contract Terms Act 1977 which has been referred to by the noble and learned Lord the Lord Chancellor. Among other provisions the 1997 Act renders void any contractual clause that excludes liability for negligently caused death or personal injury. I am glad that under this Bill if a third party brings an action against a builder or seller of goods, for example, any clause in the contract that seeks to exclude such liability will no more be effective against a third party than it is against a contracting party. However, by virtue of Clause 7 of this Bill a contractual provision that seeks to exclude liability for other kinds of damage—not personal injury or death—will be effective against a third party although it is subject to a reasonableness test under the Unfair Contract Terms Act if the action is brought by a contracting party.

I believe that the policy of the law should be against unreasonable contract clauses whoever relies upon them and in whatever circumstances. The Law Commission seeks to justify this at considerable length in part 13 of its report but admits that there is an inherent contradiction in amending one subsection in one section (Section 2(2)) but not another (Section 2(1)). I know that the Government are keen to implement the proposals of the Law Commission more or less as they stand, but I ask the noble and learned Lord the Lord Chancellor whether they would be prepared to reconsider the matter of the Unfair Contract Terms Act.

Apart from those queries, I wish the Bill speedy success.

4.7 p.m.

Lord Wilberforce

My Lords, I should like to interpose a few words in the gap. I apologise for not having put down my name owing to uncertainties of movement. First, I thank the Government, and in particular the noble and learned Lord the Lord Chancellor, for so rapidly introducing the two reports of the Law Commission, thereby implementing an assurance that he gave in the debate on the Queen's Speech in relation to a question that I put to him. I am very grateful that these have been so promptly brought forward. I follow the noble Lord, Lord Goodhart, in expressing the very strong hope that this may be the first of many other Law Commission reports to be given similar treatment.

There is no doubt that this matter deserves legislation in spite of the efforts of the judges. For many years the judges have done their valiant best to get round in some way or another the rule against giving effect to contracts in favour of third parties. In this connection one thinks most of the noble and learned Lord, Lord Denning, who is very much in our thoughts at this time. I made an effort in relation to stevedores in the case of the "Eurymedon" in 1975. However, my reasoning in that case has been stigmatised as artificial. That adjective was taken up not only by the noble and learned Lord but also by the noble Lord, Lord Borrie. Artificial or not, it is good that the efforts of the judges should be generalised and carried forward in the form of legislation. One can only express the hope, as voiced by the Law Commission, that room will be left and encouraged for judicial creativity even after this Bill has been passed.

The first point that I should like to make on the Bill relates to Scotland. The Bill applies only to England and Wales, the reason being that Scotland itself recognises the jus quaesitum tertio, and it was thought it was unnecessary to interfere with that. It is curious that Scottish law, having recognised this over many years and given effect to it, should hardly be mentioned in the report of the Law Commission. In the very valuable report No. 242, which is a mine of learning and jurisprudence, there is only one tiny reference to Scottish law, in parenthesis on page 42. One would have thought that some use would have been made of the experience of the Scottish judges and jurisconsultus over the years in framing the English legislation.

The McGregor contract code, which has a valuable section on this subject of rights of third parties, examines the law of Scotland in some detail and referred to the institutional writers, particularly the noble Earl, Lord Stair, and a number of distinguished judgments not only in the Scottish courts but in this House on appeal in which this matter was carefully considered. One would have thought that they would have contained something which could have been drawn on for the benefit of our legislation.

Are we to be satisfied at the point we have reached that there is now no divergence between Scottish and English law? The McGregor Code was very emphatic on that point, and its provisions were designed to promote unanimity between the laws of the two countries. It is obviously desirable that that should be so; otherwise, in every case of a contract crossing the Borders one would have to decide whether the law of Scotland applied or the law of England.

Can the noble and learned Lord give an assurance that examination has been made of this matter and whether the two laws are harmonious, identical or nearly the same? If any divergence exists, can he assure noble Lords that the law of Scotland will be adjusted, as necessary, to bring the two laws together?

My second point relates to arbitration clauses. There are a number of contracts to which the Bill may have relevance which contain arbitration clauses. Building contracts are conspicuous in that regard. The question then arises where third party rights may be involved, whether the third party may take advantage of the arbitration clause.

This matter was examined by the members of the Law Commission at considerable length and they expressed the view that this was the most difficult question that they have had to consider. Ultimately they came to the conclusion that it would not be right to include arbitration clauses among those of which a third party could take advantage for the reason that if the third party were to be able to take advantage of an arbitration clause it would have to follow that an arbitration clause could he voted against the third party. That would contravene the principle to which the noble and learned Lord has drawn attention; namely, it is not the purpose of the Bill to impose any burdens on third parties.

For that reason the Law Commission decided not to allow arbitration clauses to be taken advantage of by third parties, and their draft Bill contains, in Clauses 6(2)(d) and (e), provisions excepting arbitration clauses and jurisdiction clauses from the operational clause, Clause 1: in other words, saying that a third party cannot take advantage of an arbitration or jurisdiction clause.

Those two provisions do not appear in the Bill in Clause 6. It may be that the matter is dealt with in some other way which I have not been able to discern, but I should be very grateful if the noble and learned Lord could give the philosophy underlying the elimination of those clauses or tell the House that the matter is disposed of in some other way.

Subject to those points, I give the Bill a very hearty welcome.

4.14 p.m.

Lord Meston

My Lords, those who believe that the process of law reform is sometimes painfully slow will find support in the time that it has taken to achieve what the Bill proposes. As the noble Lord, Lord Borne, reminded us, the changes in the Bill are largely based on the recommendations of the Law Revision Committee in 1937. It has long been realised and taught that the principle of privity of contract when it frustrated the legitimate expectations of third parties was out of touch with reality and fairness. In the classic case of Beswick v. Beswick in 1967, Lord Reid said: If one had to contemplate a further period of parliamentary procrastination this House might find it necessary to deal with this matter". He was referring to this House in its judicial capacity. More than 30 years on, Parliament is now able, through the Bill, to deal with the problem.

Perhaps there are two fortunate features of this delay. First, the Bill derives from the Law Commission. The report of the Law Commission provides a penetrating and compelling analysis and, because other jurisdictions have moved faster, it has been possible to learn how statutory reforms have been framed and operated elsewhere, particularly in the United States and in the Commonwealth. That said, I wish to support the observations made by my noble friend Lord Goodhart, and his suggestion that there might be an annual target set for processing a number of Law Commission Bills. Furthermore, the noble Lord, Lord Renton, reminded noble Lords that there is the admirable procedure of the Jellicoe Committee.

The Bill skilfully gives effect to what the Law Commission report at paragraph 3.28 describes as its basic philosophy for reform:

That it should be straightforwardly possible for contracting parties to confer on third parties the right to enforce the contract". Through the provisions of the Bill that proposition can now be applied from sophisticated commercial contracts to ordinary domestic and consumer contractions, when it can often be almost a matter of chance which member of the family is formally the contracting party. I happily adopt the example given by the noble Lord, Lord Borrie.

The Bill, sensibly and satisfactorily, deals with the problem of the incidental beneficiary by the mandatory terms of Clause 1(3). Again as the noble Lord, Lord Borne, pointed out, that may be at some cost to the intended beneficiary, who is unknown to the seller.

The Bill also deals with the other real problem of defining the circumstances in which such contracts can and cannot be varied and cancelled. In that respect, Clause 2 prevents variation or cancellation of a term where there has been reliance by the third party. The concept of reliance is familiar to lawyers, but it can create evidential problems, and there is no definition of it in the Bill. However, paragraph 9.14 of the Law Commission report should help in guiding the courts. There it is stated:

Reliance on a promise, in our view, means 'conduct induced by the belief (or expectation) that the promise will be performed, or at least, that one is legally entitled to performance of the promise'. The reliance need not be detrimental: that is, the conduct need not make the plaintiff worse off than before the promise was made". I do not wish to take further time in questions of limited interest to non-lawyers. As the Law Commission suggests in paragraph 12.27, the question of non-party rights under insurance contracts should be kept under review. All practitioners will need to consider the implications of the Bill for their own areas of specialisation. I was glad to see that it preserves the principle to which the noble and learned Lord the Lord Chancellor referred, that an employer cannot unilaterally assign the right to his employee's work to another.

On family law, there does not seem to be much scope for use of this law reform, although if the Government decide to give some statutory force to pre-nuptial contracts—about which it was thought that the Government were enthusiastic last year—I wonder whether the Bill will enable a particularly battle-scarred and pessimistic husband to make future provision for several prospective ex-wives in one agreement! I hasten to say that that is not a serious suggestion.

Finally, I said that there were two fortunate features of the delay in the change to the law. The second is this. As has already been noted by the noble and learned Lord, Lord Wilberforce, and as every lawyer will recognise, in the Bill we reach fulfilment of something tenaciously advocated for many years by the noble and learned Lord, Lord Denning, whose 100th birthday will be reached in just 12 days. I hope that the noble and learned Lord will accept the Bill as an early present.

4.20 p.m.

Lord Kingsland

My Lords, although there will probably be a few voices against it, I wish to give my warm and unqualified congratulations to the noble and learned Lord the Lord Chancellor on bringing forward the Bill. As the noble Lord, Lord Borrie, said, the strict application of privity of contract is relatively recent deriving, I think, from the early 1860s. On many occasions before that, the common law enforced contractual promises for the benefit of third parties.

Indeed, as many noble Lords have said, throughout the late 1940s and 1950s the noble and learned Lord, Lord Denning, strove to establish the situation that prevailed before the middle of the 19th century. He finally failed in his task in a case called Midland Silicones Limited v. Scruttons Limited, where the late Lord Chancellor, Lord Simonds, said quite uncompromisingly, that if any change were to be made to the law it would have to be made in your Lordships' House by legislation.

Since that time, many ingenious efforts have been made by the Judicial Committee of your Lordships' House to get round the rule. A number of those have been mentioned in the debate. The noble Lord, Lord Meston, referred to the case of Beswick v. Beswick; and there have been many adjustments of the rules of agency and assignment to remedy injustice that flowed from the strict rule. There have also been circumstances where the promisee sought to enforce the contract for the benefit of the third party.

Just as I felt daunted by the presence of the noble Lord, Lord Goodhart, in the earlier debates, I now feel daunted by the presence of the noble and learned Lord, Lord Wilberforce, in this debate. In the case of the "Eurymedon" he used the—I shall not use the word "artificial" but perhaps the expression "jurisprudentially ingenious"—technique of the unilateral contract to gain for the benefit of third parties the protection of exclusion clauses which had been negotiated between the main contracting parties.

There are, of course, those who say that when further cases of injustice arise, further ingenuities will come forward from the courts to meet them. There are also those who say that the present proposals do not comprise a comprehensive change in the law. Many statutory exceptions to the rule of privity will remain untouched by the proposals.

However, in my submission the arguments advanced by the noble and learned Lord the Lord Chancellor for change are overwhelming. First, the Judicial Committee of your Lordships' House has been calling for change for a long time. The noble Lord, Lord Meston, mentioned Lord Reid in 1967. More recently, the noble and learned Lord, Lord Goff, in a case in the Judicial Committee in 1996, again called for legislation change. The fact of the matter is that most Commonwealth countries and nearly all of our European Community partners provide enforceable remedies for third parties. It is very much in the interests of the United Kingdom that we have a uniform commercial law for the benefit of international traders. All those factors conspire to make the changes desirable.

As regards the Bill, as the noble and learned Lord the Lord Chancellor explained, there are a number of areas where there is a legitimate difference of view about the right approach. For example, to what extent should consumers benefit from the Bill? To what extent should overlapping claims be adjudicated upon by legislative rules? What should be the proper extent of the Unfair Contract Terms Act 1977 in relation to exclusion clauses? How should exclusion clauses and set-offs apply to the relationship between third parties and the promisor?

The Bill has sought solutions to all these problems. Not everyone will agree with everything that has been decided. For my part, I cannot find anything in the Bill which is so unreasonable that a reasonable legislator would conclude that it would not be a sensible way of approaching the problem. So the Opposition give their full support, through the the noble and learned Lord the Lord Chancellor, in promoting the Bill.

4.25 p.m.

The Lord Chancellor

My Lords, I am grateful for the warm welcome which the Bill has received and for the contributions of the noble Lords who have spoken in support of it. I am sure that the House would wish to join me in acknowledging the Law Commission's greatly valued contribution to the cause of law reform; and, if I may respond to the noble and learned Lord, Lord Wilberforce, in acknowledging the creativity of the judges over the years which certainly ameliorated the position but which did not prove to be quite sufficient to remove the need for this Law Commission-inspired Bill.

I am also happy to take this opportunity to acknowledge our debt in this area of the law, as in so many other areas of the law, to the noble and learned Lord, Lord Denning, whose 100th birthday looms and whose appointment to the Order of Merit by Her Majesty a little time ago gave so much pleasure to so many across the whole of the common law world.

The one question which, has been asked I think rightly, about the Bill is not why it has been introduced, but why it has not been introduced before. It is a good question—but this Government have introduced it.

The noble Lord, Lord Borne, had some questions of detail. While it is unsurprising that there has been unanimous support for the reversal of the rule which prevents third parties from enforcing contractual terms intended to benefit them, it is inevitable in a complex area such as this that there may be some divergence of view about the extent and the consequential effects of that reversal. However, one of the special merits of Law Commission Bills is that they are the result of the widest possible consultation on points of detail as well as broad principle.

I listened with care to the noble Lord, Lord Borrie. I wondered about the illustration he gave under Clause 1(3). I shall reflect on it, but I should have thought that in practice the purchaser could have ensured that the contract could have been enforced by his daughter, for I do not doubt that the seller would have written such a provision into the contract of sale in order to secure the sale.

The noble Lord then turned to the broader issue of consumer protection. The Law Commission considered that issue in its report at paragraphs 7.54 to 7.56. Plainly, the Bill will have a significant effect in adding to consumer protection where the third party who acquires rights in accordance with the intentions of the parties to the contract is also a consumer—for example, where a contract between a manufacturer and a retailer confers rights on a purchaser. But to provide that contractual rights are automatically conferred on consumers regardless of the intentions of the parties to the contract would go far beyond the purpose of the Bill. On this point the Government are of the view that the Law Commission got the matter right.

The noble Lord, Lord Borne, then called attention to what I accept is a very difficult question; that is, the Unfair Contract Terms Act and in particular Clause 7 of the Bill. This difficult question is whether legislation in place to protect consumers should apply to the rights which will be enjoyed by third parties if the Bill becomes law. Why should the legislation not protect third-party rights, just as it already protects the rights of contracting parties? There are persuasive arguments both ways. It was a question which caused the Law Commission difficulty. In its report it went as far as to say that it had agonised about it. I am persuaded, as the Law Commission was, that the balance lies in favour of preserving the rights of the parties who have chosen to bind themselves by the terms of their contract rather than enlarging the rights which they have chosen to confer on third parties.

It is important to remember that the Bill will confer rights which could not exist before. Under the previous law, third parties could have no enforceable rights under the contract. They might have acquired rights outside the contract—for instance, under the law of negligence—and those rights will not be taken away or diminished in any way by the Bill; Clause 7(1) ensures that. The Bill cannot take away any rights which third parties would have had before. But the Bill gives the contracting parties the absolute right to control the rights which may be enjoyed and enforced under the contract by those who were not parties to it. For example, they have the freedom to specify that no third party shall have any enforceable rights at all under the contract. Equally, they should have the freedom to limit such rights as they choose to confer. One possible way of looking at the matter would be to regard the right conferred on the third party as a donation and to say that it is right that the donors should be able to limit the extent of the gift as they choose.

The noble and learned Lord, Lord Wilberforce, spoke in the gap. I take his question about Scotland and am familiar with the McGregor commercial code and the Scots doctrine of jus quaesitum tertio. The Law Commission consultation paper of 1991 contained 20 pages about the law in other jurisdictions, including two pages on Scotland. However, the noble and learned Lord's question goes to whether we are satisfied that there is no material divergence between Scots law and English law as it will become when the Bill is passed. That is a matter on which I am happy to undertake to write to the noble and learned Lord.

The noble and learned Lord also raised a question about arbitration and exclusive jurisdiction clauses. This was another of the more difficult issues which the Law Commission recognised that it faced in this project. One apparent difficulty was that, while arbitration and exclusive jurisdiction clauses should be enforceable by third parties, those clauses cannot operate satisfactorily unless the entitlement to enforce also carries a duty on the third party to submit to arbitration or to comply with the jurisdiction agreement, as the case may be. But, as I said, the reform deals solely with conferring benefits on third parties, not with imposing duties or burdens on them. It would be unsatisfactory, however, if the third party could take the benefit of a clause such as this, without being bound by it. That was the state of thinking then by the Law Commission to which the noble and learned Lord called attention. However, the noble and learned Lord should know that, on further reflection, the Law Commission concluded that in practice the third party would not be able to do so. The Law Commission concluded that, although in theory the third party might seek to rely on an arbitration clause to stay court proceedings without being bound to arbitrate, in practice no stay would be granted by the court unless he had shown willingness to go to arbitration. On that basis, the conclusion was that there was no good reason to exclude these clauses from the operation of the reform. I give that rather full explanation to the noble and learned Lord. If he wishes to write to me on the subject, I shall, of course, respond.

I am grateful for the general statements of support made by noble Lords who have contributed to the debate, which reinforce my confidence in commending the Bill to the House.

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

Lord Hunt of Kings Heath

Before we move to the Statement on the National Health Service, I should like to take this opportunity to remind the House that the Companion indicates that discussion on a Statement should be confined to brief comments and questions for clarification. Peers who speak at length do so at the expense of other noble Lords.