HL Deb 27 May 1999 vol 601 cc1046-61

11.33 a.m.

Report received.

Clause 1 [Right of third party to enforce contractual term]:

Lord Hacking moved Amendment No. 1: Page 1, line 17, leave out ("does not confer") and insert ("confers")

The noble Lord said: My Lords, with the leave of the House, I shall address the House on my four amendments in this grouping; namely, Amendments Nos. 1, 2, 3 and 6. I wish also to make a few preliminary points. First, I extend an apology to the noble and learned Lord the Lord Chancellor and to other Members of your Lordships' House for having been unable to participate either at Second Reading or in Committee and then coming forward with a number of amendments on Report. I have taken the opportunity to read carefully Hansard of both the Second Reading and the Committee stage.

Secondly, I thank the noble and learned Lord the Lord Chancellor and his officials for providing considerable assistance during the long gap since the Committee stage on 2nd February. Thanks to their great co-operation I believe we have made much progress. In so far as I am now proposing a number of amendments at a fairly late stage in the passage of the Bill I still counsel that we—when I use the term "we" I speak of Parliament in its larger sense—have plenty of time to get the Bill right because, of course, it has yet to proceed to the other place.

The main purpose of tabling all the amendments is to improve, or attempt to improve, what I believe to be a good Bill. This is a pure law reform Bill, and I urge upon your Lordships that the opportunity should not be missed to express the Bill in the best language possible. We should be able to pick up the Bill when it becomes an Act, whether we are lawyers or laymen, and read clearly from its terms what are the principles it seeks to establish, and how it seeks to achieve those principles. It has to be said that English parliamentary drafting has not been a model of clear exposition. There have been some notable exceptions which stand out like bright stars in a fairly cloudy heaven. For example I refer to the Sale of Goods Act of the latter part of the previous century and the Occupiers' Liability Act 1957.

I believe that there is now a new movement afoot—this was shown in the Arbitration Act 1996—to return to the clear exposition of those earlier statutes. My purpose therefore in proposing the amendments is to achieve clarity on the face of the Bill. In this endeavour we are lucky to have a Lord Chancellor who has had a long, distinguished and diverse practice at the English Bar and who has come immediately from practice to take his place on the Woolsack. I am confident that my noble and learned friend has not forgotten the headaches that he had—and which we all have as practising lawyers—in trying to explain to clients the meaning of Acts of Parliament where the language is obscure and complicated.

I turn specifically to Amendments Nos. 1, 2, 3 and 6. We need to identify the main thrust of the Law Commission's proposals. They can be encapsulated, I believe, in two proposals: first, that the Law Commission has advised that a third party should be able directly to enforce his rights and not be kept out by the old contract rule of privity of contract—he, of course, not being a party to the contract; and, secondly, that parties to a contract should not be entitled to impose burdens on a third party.

As the Law Commission recognised from the beginning of its deliberations, the situation is a little more complicated than that. When parties to a contract have set up conditions under which a third party is to receive the benefit, it is right that the third party should only receive that benefit under those conditions. This goes to the root of the freedom of contractual relations and to the freedom of the promisor and the promisee in agreeing the contractual terms. The Law Commission's recommendation to accommodate that concept is incorporated in Clause 1(4) of the Bill.

The Law Commission also recognised from the beginning of its deliberations that there are other complications. When parties agree in the terms of the contract that the liability of the promisee should be limited or excluded, then the third party should be able to receive the benefit of the contract plus the limitation on liability. Perhaps I may take a simple example. If in a construction project the employer agreed in a contract with the main contractor that the liability of the main contractor should be limited to putting right what went wrong in construction and that he should not be liable for consequential damage, it is clearly right that the third party—in this case the sub-contractor who was doing a particular piece of work on that contract—should also enjoy the same limitation of liability. Therefore the third party should be liable only to put right what he has got wrong and should not be liable for consequential damage, if that is the agreement between the employer and the contractor. That provision appears in Clause 1(6) of the Bill.

There is also the other side of the coin; that is, the position of the promisor in an action with the third party. In exactly the same way as the third party is not in a contractual relationship with either of the two parties to the contract, neither is the promisor in contractual relations with the third party. It is clear that if the promisor is involved in a dispute with the third party he should have similar protection; in other words, he should be entitled, as against the third party, to the same rights and remedies to which he would be contractually entitled in a dispute with the promisee. That is extensively covered in Clause 3 of the Bill.

I know that I am addressing your Lordships in some detail at this stage, but I am outlining the concepts which run through all my amendments. By addressing your Lordships at a little length at this stage I shall be able to shorten my argument on the further amendments.

Having established those concepts, the next question is: how does the Bill deal with them? So far as concerns the third party, that is dealt with in Clause 1(4); so far as concerns the promisor, it is dealt with in Clause 3(2)(a). Since Clause 3(2)(a) is very similar to Clause 1(4), I need refer in detail only to Clause 1(4). It states: This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract". The court or arbitrary tribunal—I shall be seeking to persuade your Lordships that arbitrary tribunals should be included—which adjudicates on the issue will have to undertake a fairly complex exercise of establishing what is the relevant term of the contract and how it fits into the relationship between the third party and the promisor or promisee. Inevitably there will be different results, different conclusions and conflicting decisions. I recognise that my amendments go further than the recommendations of the Law Commission, but Amendments Nos. 1 and 2, which relate to Clause 1(4), provide a simple and clear way of dealing with that problem; that is to say, the third party takes the benefit of the contract under the same conditions as exist between the promisor and the promisee unless otherwise expressly provided in the contract. A similar provision—I have not tabled an amendment—should be made in Clause 3. It seems to me that that would be a sensible way of dealing with the matter. It would also have the advantage of a clear exposition of the rights of the different parties, which can be clearly read, understood and applied from the face of the statute.

Of course, the result would be that the third party would become bound to terms in a contract to which he was not a party, but that is the whole nature of this much needed law reform. The third party, by the very nature of his position, is not a contractual party. As I have already illustrated, the third party, in any event, under the terms of the Bill will have a number of provisions placed upon him by a contract to which he was not a party.

So far as concerns Amendment No. 3, that makes absolutely plain on the face of the statute a proposition which is entirely in accordance with the terms of the Bill. It states: The contract may provide that the third party's right to enforce a term of it is subject to limitations and conditions which do not apply to the promisee". That fits neatly into Clause 2, which establishes the third party in the same position as the parties to the contract unless there is a different agreement within the terms of the contract.

I have spoken at some length. I have also had the opportunity to speak to the noble and learned Lord the Lord Chancellor prior to the Report stage. This is a difficult matter and I do not expect an immediate answer from the noble and learned Lord. However, I would ask him to consider the rationale of my argument and give the matter further thought. On that basis, I beg to move.

11.45 p.m.

Lord Meston

My Lords, the Bill is the result of a long overdue and long drawn-out process of law reform. Like the noble Lord, Lord Hacking, we all want the resulting statute to be workable and comprehensible. As to his first group of amendments, I understand them to be saying what the Bill says, albeit in a different way and more concisely. I am not entirely persuaded that his amendments add very much substance to the Bill.

Lord Renton

My Lords, I always admire lawyers who are zealous—sometimes even when they are over-zealous—in trying to improve the drafting of any Bill that comes before us which deals with the law.

I hope that the noble Lord will forgive me for having missed the first few minutes of his speech. Having considered his amendments, I think that they are contrary to the purpose of the Bill. Certainly, Amendment No. 1 is a complete contradiction of what is set out broadly in the clause. I do not see how the noble and learned Lord the Lord Chancellor could accept it.

Amendment No. 2 does not change things very much; it merely enlarges the concept of the clause.

Amendment No. 3 seems to me completely unnecessary, because if the contract already provides that the third party's right to enforce a term exists, we do not need to have that written into the Bill.

As for Amendment No. 6, I think that it would be regrettable to leave out subsection (6), which is what the noble Lord proposes.

The noble and learned Lord the Lord Chancellor may be more sympathetic than I have been, but I would be rather surprised if he were to accept the amendments.

The Lord Chancellor

My Lords, I am grateful to my noble friend Lord Hacking for the first of his contributions to today's debate. As he knows, and as your Lordships will shortly learn, he has persuaded me of the merits of some of his proposals which he has not yet reached, and I acknowledge his constructive assistance with the Bill. So it is in a way unfortunate that we begin with some of the noble Lord's amendments which I am not persuaded to accept.

I shall speak to Amendments Nos. 1 and 2 together, as it is their combined effect on subsection (4) which concerns us. The subsection currently provides that the right to enforce a contractual term, which is conferred on a third party by subsection (1), is subject to any other relevant terms of the contract. The amended subsection would provide that, unless otherwise provided in the contract, the conditions under which the third party had the right to enforce a contractual term were the same as those that would apply if the promisee sought to enforce a term.

As the noble Lord, Lord Renton, pointed out, that would be contrary to the policy behind the Bill, which is to give the third party his own right to enforce the contract, a right which is analogous to, but, subject to Clause 3 on defences and set-offs, independent from the promisee's right of enforcement. It may be that the intention behind the two amendments is not to change the policy of the Bill but to clarify which conditions should apply to the third party's right of enforcement. But I am not persuaded that any such clarification is necessary, and I think that on proper analysis the amendments run counter to the policy of the Bill.

Amendment No. 3 would if accepted insert a new subsection into the clause. The new subsection would explicitly state that contracting parties can provide for the third party's right of enforcement to be subject to limitations and conditions which do not apply to the promisee. As I have just explained, the Bill's intention is to give the third party his own right to enforce the contract in accordance with its terms, and at right is independent of the promisee's right. As a natural progression, the contracting parties should be able to limit or place conditions on the third party's right of enforcement, irrespective of the promisee's rights. It is just a straightforward question of construction of the contract. I believe that subsection (4) makes this absolutely clear as it stands. If I may say so, Amendment No. 3 makes a statement of the obvious—I think this was implicit in what the noble Lord, Lord Renton, said—and is therefore unnecessary.

Amendment No. 6 would delete subsection (6), which is intended to make it clear that the Bill is not just about conferring on third parties positive rights. It also gives them the right as potential defendants to rely on an exclusion or limitation clause which has been included in the contract. The problem of third parties being unable to take advantage of exclusion or limitation clauses is well known, particularly in relation to so-called "Himalaya clauses" in contracts for the carriage of goods by sea.

The policy behind subsection (6) is to make it clear that the Bill will remove this problem. The Bill would., for example, allow a term of a contract which excludes or limits the promisee's liability to the promisor for the tort of negligence and expressly provides that the exclusion or limitation is for the benefit of tile promisee's agents, servants or subcontractors and is to be enforceable by those groups. It is my understanding that this amendment is consequential on Amendments Nos. 1 and 2. As I have said, in my view, they are not consistent with the Bill's policy of giving third parties their own benefits and burdens independently of those of the contracting parties.

At rather greater length than the noble Lord, Lord Renton, expressed the matter, I entirely agree with the noble Lord: the critical point is that there is no principle or presumption of sameness. It is a question of construction of the contract in every case. I therefore cannot accept amendments to subsection (4), and so I am of the view that subsection (6) remains necessary as it stands.

Lord Hacking

My Lords, I am very grateful to all noble Lords who have participated in the debate on these amendments. I am disappointed that I received no support from any quarter. I am particularly disappointed that I did not receive support from the noble Lord, Lord Renton. I have been for years an apostle of his efforts since he was chairman of the committee on having our statutes written with greater clarity and with less obscurity. Failing even to get the support of the noble Lord, I think that the right thing for me to do is to beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 2 and 3 not moved.]

Lord Hacking moved Amendment No. 4: Page 1, line 21, after ("any") insert ("substantive")

The noble Lord said: My Lords, I promised that I would be able to take later amendments briefly. This amendment deals with a small but important point. We now come to subsection (5), dealing with remedies available to a third party. Clearly, the remedy should be a substantive remedy; that is, the right to recover damages. It should not be a procedural remedy. For that reason, it would improve the Bill to include "substantive" before "remedy". I beg to move.

Lord Renton

My Lords, before the noble Lord sits down, could he assist your Lordships by giving an example of a remedy which is not substantive?

Lord Hacking

My Lords, there are a number of procedural remedies available during the course of a case. The White Book might not be thrown out of the window, but the law is crammed with minor remedies that are available. It is clearly not intended that a third party should have a procedural remedy available to him. As to giving exact examples, I will write to the noble Lord, and I can fill my letter with pages of examples from the White Book.

The Lord Chancellor

My Lords, the purpose of subsection (5) is that the third party should have the right to pursue the same remedies as would have been available to him if he had been a party to the contract. My noble friend Lord Hacking argues that his amendment is intended to ensure that the third party would have the right to pursue a substantive remedy, such as a remedy in damages. I believe that as drafted the subsection would have exactly that effect and that the amendment is not necessary.

The proposed wording suggests—and I think that this is the matter as regards which the noble Lord, Lord Renton, was inviting further explanation—a categorisation of remedies into substantive remedies, to which the subsection would apply, and some unspecified category which would be excluded. That is not a recognised categorisation. So, far from enhancing clarity, the amendment would be likely to introduce an element of confusion. Subsection (5) of Clause 1 as it stands applies to all remedies available at law or in equity. To add the word "substantive" runs the risk that it would be confused as meaning that remedies which might be defined as "procedural"—for example, an injunction or a declaration—were not available whereas the intention is that all remedies should be available.

Noon

Lord Hacking

My Lords, I have made my point. I think the answer is to beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hacking moved Amendment No. 5: Page 1, line 23, after second ("to") insert ("remoteness and mitigation of")

The noble Lord said: My Lords, Amendment No. 5 stands on its own. I look rather carefully towards the noble Lord, Lord Renton, because I really am trying to be his apostle and improve the drafting of the Bill. Indeed, I can pray in aid paragraph 33.33(iii) of the Law Commission's report. The paragraph makes it plain that if a third party is entitled to damages he cannot, recover loss that is too remote and he is under a duty to mitigate loss". My amendment seeks to express that plainly and squarely on the face of the statute. It is a clarifying amendment. I still hope that I might have a little support from the noble Lord, Lord Renton. I beg to move.

Lord Renton

My Lords, I was not proposing to intervene on the amendment, but the noble Lord, Lord Hacking, has provoked me. My view of the amendment is that it does no harm but that it is not necessary. The word "damages" would need to be construed by the courts in the ordinary way, which is very broad and includes any matter of remoteness or mitigation. I venture to suggest that it is a harmless amendment but an unnecessary one.

Lord Meston

My Lords, I venture to suggest that the noble Lord, Lord Renton, is right, but perhaps in fact there is some harm. As he said, surely the rules relating to damages, which is the expression used in the Bill, include the rules relating to remoteness and to mitigation. Therefore, I wonder whether the amendment may be unduly restrictive and whether later readers of the Act, if it is amended as the amendment suggests, may speculate why Parliament confined the reference to damages simply to the rules relating to mitigation and remoteness.

From reading the textbooks, it is also possible to argue that there is some debate about what is or ought to be covered by the concept of remoteness. To avoid that problem, I suggest that the Bill as presently drafted is preferable to what the noble Lord, Lord Hacking, suggests in his amendment.

Lord Wilberforce

My Lords, I endorse entirely what the noble Lord, Lord Meston, said, having been provoked, too, by the noble Lord, Lord Renton, who intimated that in his view the amendment does no harm. I believe it does some harm simply under the application of the rule expressio unius est exclusio alterius. Expressing two particular aspects of the law of damages must convey an implication that other aspects of the law of damages are not covered by the clause. There are all kinds of other rules of damages—nominal damages, economic loss, punitive damages and aggravated damages. Lord McGregor wrote a whole book on damages which dealt comprehensively with many other aspects. Therefore, I respectfully disagree with the noble Lord, Lord Renton. I think that the amendment may do damage and in any case it is not necessary in order to achieve the results which the noble Lord, Lord Hacking, wishes to achieve.

Lord Renton

My Lords, the noble and learned Lord, Lord Wilberforce, is absolutely right. I concede that this is subject to the rule expressio unius est exclusio alterius and could do some harm after all. He is quite right.

The Lord Chancellor

My Lords, I agree with what has just been said. I do not believe that the amendment is necessary and I also believe that it could do some harm. Plainly, damages cannot be awarded without the rule as to remoteness and mitigation being applicable. But I agree that if the clause were amended so as to mention those two rules it would be necessary to provide a comprehensive list of all the rules which might apply in any claim for damages. The noble and learned Lord, Lord Wilberforce, gave examples. I could add others. We could go through, as he said, the textbooks on damages. I could add the rules about possession, contributory negligence or mental distress. We could go on all day and we might forget one. A comprehensive listing is not necessary and it would be inconsistent with our aim which is for the Bill to set out the principles of fundamental change which it makes to the law but not to descend to this level of unnecessary detail.

Lord Hacking

My Lords, I shall be careful not to provoke any of your Lordships to speak at all. I exclude the noble and learned Lord the Lord Chancellor as he is bound to reply. I was anxious for us to focus on what remedy in damages the third party has. I am grateful therefore to all noble Lords, who seem quite happy that the Bill as drafted includes the two matters to which I drew your Lordships' attention—the rule of remoteness of damage and the rule to mitigate loss. On that basis, and as gracefully as I can, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 6 not moved.]

Lord Hacking moved Amendment No. 7: Page 1, line 27, at end insert— ("( ) The third party is bound, in the same manner as the parties to the contract, to any dispute resolution clause contained in it.")

Then noble Lord said: My Lords, I have not quite reached the comfort of an oasis—the water that the noble and learned Lord is going to offer me—in this rather long and arid journey through the desert. This is an important provision. I would ask your Lordships and the noble and learned Lord to focus on what are the consequences of the Bill as drafted.

As your Lordships know, it is the duty of the court when considering the right of a third party to enforce a term of a contract to look at all other relevant terms of the contract. But, in bringing in any relevant terms of the contract, can the court apply its mind to the dispute resolution clause? That can take a variety of forms. It can be an arbitration clause; it can be a mediation clause; it can be a conciliation clause; and so on. If the court is empowered under subsection (4) of Clause 1 to bring in a dispute resolution clause on the basis that it is a relevant term of the contract, all well and good. But if it does not—for example, if there is an arbitration clause or a mediation clause as between the promisor and the promisee and a dispute arises between all three parties—the promisor and promisee would be bound by the arbitration clause which has precedence over any right to litigation. On the other hand, in a dispute between the third party and the two parties to the contract this could only be adjudicated upon by the courts. That would be highly unsatisfactory. For that reason I hope to find some support, somewhere, from your Lordships. I beg to move.

The Lord Chancellor

My Lords, the effect of this amendment would be to make the third party's rights subject to any dispute resolution clause in the contract. We would have no objection, of course, to a third party having to make use of alternative dispute resolution procedures where that is consistent with the contracting parties' intentions. However, the amendment, as drafted, would not allow contracting parties to provide expressly for certain dispute resolution clauses to apply only to either themselves or to the third party. This would be contrary to our intention that the third party's rights should be independent of the promisee's rights. It would also contradict the policy of allowing the contracting parties to determine the shape and ambit of the third party's rights.

If the amendment is simply intended to state explicitly that a third party's right to enforce a term may he made conditional on his doing so by way of arbitration or some specified alternative dispute resolution procedure, it is not necessary. Clause 1(4) enables the parties to make the third party's rights subject to other terms of the contract, and these would include, of course, clauses on dispute resolution, if the parties so chose.

Therefore, I cannot offer my noble friend Lord Hacking the much looked-for comfort that he seeks, but he should be encouraged when we come to Amendment No. 7a.

Lord Hacking

My Lords, I am grateful to my noble and learned friend for his comments. He has encapsulated an important point. If I heard him correctly, he said that if, under the terms of the contract, the third party was given a benefit under the contract, subject to any disputes being resolved by arbitration or some other means, the third party would be bound by that. He could therefore only bring his proceedings within the ambit of the dispute resolution procedures agreed in the contract. On the other hand, if the contract was silent on that point, and just dealt with dispute resolution between the promisor and the promisee, we would have, as I have described, unnecessary complexity of proceedings. However, as I feel that I am getting close to the oasis which I hope will contain fresh water, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 [Variation and cancellation of contract]:

The Deputy Speaker (Baroness Serota)

My Lords, in calling this amendment I should point out that if it is agreed to, I cannot call Amendment No. 9.

The Lord Chancellor moved Amendment No. 7A: Page 2, line 9, leave out from ("not") to ("if") in line 10 and insert (", by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent")

The noble and learned Lord said: My Lords, I have considered Amendment No. 9 tabled by my noble friend Lord Hacking, and I am convinced by the argument that lies behind it. The Bill currently uses the term "cancel". "Cancel", however, is not a legal term of art. It could be construed to cover one party's acceptance of the other's repudiation, because the effect of such an acceptance is to terminate the contract. We would not want a contracting party to be prevented from accepting a repudiation because of the interests of the third party.

The wording of Amendment No. 7A makes it clear that recision in this context is recision by agreement of the parties, and also that variation is by agreement as well. Amendment No. 9 did not make the latter point. However, I am grateful to my noble friend Lord Hacking for intimating to me that he will not move it. I can therefore commend Amendment 7A to your Lordships.

I also urge your Lordships to accept Amendment No. 10A, which is consequential upon Amendment No. 7A, in place of Amendment No. 11 tabled by my noble friend Lord Hacking, which was consequential upon his Amendment No. 9. Amendment No. 10A puts it beyond doubt that recision or variation is by agreement. I commend the amendment to the House. I beg to move.

12:15 p.m.

Lord Hacking

My Lords, I am grateful to my noble and learned friend the Lord Chancellor for his remarks, I have now reached the oasis with fresh water, and I am pleased that my noble and learned friend has accepted the principle behind my amendment. I am happy with his drafting. He, like me, has been well-educated in English law, and in the concepts of repudiation, recision and so forth. He therefore knows and recognises that "cancel" is not a term established in English law. On that basis, I am more than happy not to move Amendments Nos. 9 and 11 and to support and thank my noble and learned friend for his Amendments Nos. 7A and 10A.

On Question, amendment agreed to.

[Amendment No. 8 had been withdrawn from the Marshalled List.]

[Amendment No. 9 not moved.]

Lord Hacking moved Amendment No. 10: Page 2, line 16, at end insert— ("but nothing in this subsection affects any other variation in the performance of a contract")

The noble Lord said: My Lords, the amendment goes to paragraph 3.17, page 46, of the Law Commission report. I am anxious to establish that the contracting parties are entitled to vary the execution of a contract, and in doing so, do not have to fall within the provisions of Clause 2.

Variations are often made to construction contracts with agreement between the employer, the contractor and other parties, for example, when there is a change in design or in the use of machinery. Clearly, it would not take any rights away from the third party, if the employer and contractor, the promisor and promisee, were entitled to vary terms which go to the performance of the contract rather than to the contract itself. I beg to move.

The Lord Chancellor

My Lords, Amendment No. 10 proposes a further change to Clause 2(1). This clause is also concerned with the circumstances in which the contracting parties can, by agreement, vary the terms of the contract that the third party has the right to enforce. Put at its shortest, the contracting parties may not vary the contract so as to prejudice the third party's right without his assent once he has communicated his assent to the promisor or has relied on the term.

I understand that my noble friend Lord Hacking tabled his amendment because of concerns in the construction industry. Those concerns are that the clause will affect provisions in construction contracts which allow the work to be varied as the construction proceeds, so as to accommodate changing circumstances. These are not variations in the sense of the word "variation" used in the Bill. The Bill uses the expression "variation" in its strict and correct legal meaning—a variation of the terms of an agreement by further agreement between the parties to the original agreement. Contracts conferring powers unilaterally exercisable by one party to require changes are of a wholly different character.

I assure your Lordships that it is not our intention that the Bill should impact on such provisions. We do not believe that it does or that further clarification is necessary. The construction industry's confusion, if I may put it in that way, arises because the Bill uses "variation" to mean a variation agreed by both parties but when the construction industry uses the term "variation" it often refers to alterations to what is being built which the contract allows one of the parties to require unilaterally.

The Law Commission was aware of the way in which the construction industry uses the term when it produced its report and made it clear that such variations would not be covered by the restrictions in Clause 2. That is dealt with at paragraph 9.37 of its report, with which I agree. As Clause 2 does not apply to such variations, the third party's rights will be subject to any provisions in the contract which allow what has been built to be varied unilaterally.

As I explained earlier in today's debate, Clause 1(4) makes it clear that the contracting parties can limit or place such conditions on the third party's right of enforcement. Therefore, I do not believe that it is necessary, but in the light of the concerns that have been expressed, I shall give thought as to whether an alteration to the Explanatory Notes may give comfort to the construction industry.

Lord Hacking

My Lords, I am grateful to my noble and learned friend. It was in the last sentence of his reply that he really gave the comfort for which the construction industry would be most grateful.

Perhaps I may enlarge slightly on that. Concerns have been expressed in all debates during the passage of the Bill as well as the concerns expressed today. Before the Bill goes to another place, I should be grateful if my noble and learned friend and his officials will look at the Explanatory Notes, possibly in discussion with myself or members of the industry, so that the Bill reaches another place in a form in which your Lordships are satisfied with it and also with revised Explanatory Notes. That will provide enormous comfort to those in the industry. Although the Explanatory Notes do not have any statutory force, they must be of assistance to courts and other persons construing the provisions of the Bill. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Lord Chancellor moved Amendment No. 10A:

Page 2. line 23, leave out from beginning to ("without") and insert— ("(a) the parties to the contract may by agreement rescind or vary the contract")

On Question, amendment agreed to.

[Amendment No. 11 not moved.]

Lord Hacking moved Amendment No. 12:

Page 1 line 28, after ("court") insert ("or arbitral tribunal")

The noble Lord said: My Lords, this is a large group of amendments. In order to try to finish this Report stage by 12.30, I agreed that the amendments should be grouped together. However, I should deal with them separately.

Amendments Nos. 12, 13 and 14 deal with circumstances in which a party to the contract can dispense with the consent of the third party as provided under Clause 2(1). I do not feel very strongly about that. It may be that most of those applications would be made outside the dispute forum; that is, that they would be made before the matter became the subject of litigation or before an arbitral tribunal. If my noble and learned friend does not regard with favour Amendments Nos. 12, 13 and 14, then I should not wish to press them.

However, Amendment No. 16 is more important because it goes to the conduct of the dispute. Therefore if my noble and learned friend is going to accept my proposal that disputes can be taken by arbitration between the third party and the promisor or promisee, then it would seem to be essential that my noble and learned friend agrees to Amendment No. 16 or a version of that amendment. Clearly if a court is under a duty to reduce the award in the circumstances set out in Clause 15—that is, when the promisee has recovered moneys already from the promisor, the arbitral tribunal should be able to do the same. Whether before a court or arbitral tribunal, the promisee should not be able to recover the same moneys from the third party. On that basis, I hope that my noble and learned friend will have no difficulty in accepting Amendment No. 16.

I do not address your Lordships on Amendment No. 15 which covers an entirely separate matter and was only put into this group to speed the collection of amendments on Report through your Lordships' House.

I turn now to the arbitration clause and to Amendments Nos. 17 and 18. I am extremely grateful to my noble and learned friend for responding to my Amendment No. 18 which was tabled originally in March by bringing forward his amendment. The limitation in his amendment is that the right to arbitration is exercisable only when the third party seeks to enforce a term of the contract or, more precisely, seeks to enforce the arbitration clause between the promisor and the promisee.

If the third party chooses not to seek to enforce that arbitration clause, then there is a multiplicity of proceedings because the promisor and the promisee will be bound by the arbitration clause in the agreement and the third party can stand outside and run his own litigation outside the arbitration proceedings. That is highly undesirable and for the same reason as I advanced on the earlier amendment about the dispute resolution clause, I strongly urge upon your Lordships that if a third party is receiving a benefit under the contract, he should take the terms of that contract, including the arbitration clause. He has a choice. He can either say, "I do not want to take the benefit" or, "I do want to take the benefit". If he does want to take the benefit, he should abide by the terms of that contract.

For that reason, I prefer your Lordships to accept Amendment No. 18, but I am grateful to my noble and learned friend for Amendment No. 17. 1 beg to move.

The Lord Chancellor

My Lords, in the circumstances, it may be for the convenience of your Lordships if I speak to all the amendments within the group; that is, Amendments Nos. 12 to 18.

Perhaps I may start with Amendments Nos. 17 and 18. I hope that my noble friend Lord Hacking will agree to accept Amendment No. 17 in place of Amendment No. 18. As your Lordships may recall, I explained on Second Reading, in answer to a question from the noble and learned Lord, Lord Wilberforce, that the Law Commission changed its mind after its report was published and accepted that arbitration agreements should not be excluded from the effects of the Bill. I was then, and remain, as I believe the noble and learned Lord is and remains, in full agreement with the commission's revised approach.

It was then necessary to decide whether any amendment to the Bill was needed to enable a third party to refer a dispute to arbitration. I have explained already to your Lordships that the Bill allows the contracting parties to limit or place conditions on the third party's rights of enforcement. That includes making the third party's rights conditional on referral to arbitration.

However, without Amendment No. 17, a third party who has been given the right to refer a dispute with the promisor to arbitration could not properly do so. This is because the provisions in Part I of the Arbitration Act 1996—for example, the duty to do, all things necessary for the proper expeditious conduct of the arbitral proceedings", or the binding effect of an arbitral award—applies only to parties to the arbitration agreement within Part I of the Arbitration Act. The third party is not a party to the arbitration agreement. The new subsection would provide that where a third party has the right under Clause 1 to refer a dispute to arbitration and chooses to do so, there shall be deemed to be an arbitration agreement between himself and the promisor, so triggering Part I of the Arbitration Act.

Noble Lords should note that there is no question of the third party being bound to refer a dispute to arbitration. The proposed amendment applies only in relation to a matter which the third party himself requires to be referred to arbitration. That is consistent with the Bill's purpose of conferring rights and benefits on third parties (albeit that a benefit may be conditional) and not duties and burdens.

The major difference between this amendment and Amendment No. 18 from the noble Lord, Lord Hacking, is that this amendment applies only where the third party refers the dispute to arbitration. The noble Lord's amendment would impose a duty on the third party to be involved in any arbitration, including arbitration arising from a dispute between the promisor and the promisee with which the third party had no connection at all.

The noble Lord, Lord Hacking, and I agree that the Bill needs to bring in the application of the Arbitration Act. But his amendment as drafted goes further than is necessary or appropriate.

I also speak to Amendment No. 16 tabled by the noble Lord, Lord Hacking. This amends Clause 5, which seeks to protect the primisor from double liability to the third party and the promisee. I agree that such protection should also apply when arbitration is used to settle a dispute. I would therefore encourage your Lordships to agree to this amendment.

Perhaps I may now speak to Amendments Nos. 12, 13 and 14 tabled by the noble Lords, Lord Hacking and Lord Howie of Troon. These amendment have the substantive effect of extending a particular jurisdiction which subsections (4), (5) and (6) of Clause 2 confer on the courts to arbitral tribunals as well. This special jurisdiction allows the courts to dispense with the need for the contracting parties to obtain the third party's consent before rescinding or varying the contract. The noble Lord, Lord Hacking, has proposed that arbitral tribunals should be able to exercise that jurisdiction too. He is concerned that these provisions might diminish the benefits of arbitration by requiring contracting parties, who may be using an arbitral tribunal for the resolution of all other disputes, to go to the court for this dispensation. I do not believe that the need to use this jurisdiction will arise very often but, when it does, I see no reason why an arbitral tribunal should not exercise it. If the parties are already taking a dispute to arbitration, I agree that they should not have to suffer the costs and delay of going to court to obtain a dispensation from obtaining consent where they have agreed to vary the contract. I therefore commend these amendments to the House. I also urge the House to accept Amendment No. 15, which is consequential upon Amendments Nos. 12, 13 and 14. I commend the amendments standing in my name.

12.30 p.m

Lord Hacking

My Lords, I am grateful to the noble and learned Lord. I thank him for agreeing to more of the amendments than I had expected. The oasis has more water.

On Question, amendment agreed to.

Lord Hacking moved Amendments Nos. 13 and 14:

Page 2, line 33, after ("court") insert ("or arbitral tribunal")

Page 2, line 37, after ("court") insert ("or arbitral tribunal")

On Question, amendments agreed to.

The Lord Chancellor moved Amendment No. 15:

Page 2, line 40, after ("conferred") insert ("on the court")

On Question, amendment agreed to.

Clause 5 [Protection of promisor from double liability]:

Lord Hacking moved Amendment No. 16:

Page 3, line 36, after ("court") insert ("or arbitral tribunal")

On Question, amendment agreed to.

Clause 7 [Supplementary provisions relating to third party]:

The Lord Chancellor moved Amendment No. 17:

Page 5, line 17, at end insert— ("( ) Where—

  1. (a) a third party has a right under section I to enforce a term that disputes between himself and the promisor are to be submitted to arbitration, and
  2. (b) the term is an agreement in writing for the purposes of Part I of the Arbitration Act 1996,
then, as regards any matter which the third party requires to he referred to arbitration in exercise of the right, Part I of the Arbitration Act 1996 has effect as if the right were under an arbitration agreement in writing (within the meaning of that Part of that Act) between the third party and the promisor.")

On Question, amendment agreed to.

[Amendment No. 18 not moved.]

Clause 8 [Short title, commencement and extent]

The Lord Chancellor moved Amendment No. 19:

Page 5, line 23, leave out subsection (2) and insert— ("(2) This Act comes into force on the day on which it is passed but, subject to subsection (2A), does not apply in relation to a contract entered into before the end of the period of six months beginning with that day. (2A) The restriction in subsection (2) does not apply in relation to a contract which—

  1. (a) is entered into on or after the day on which this Act is passed, and
  2. (b) expressly provides for the application of this Act.")

The noble and learned Lord said: My Lords, this amendment to the commencement provision in Clause 8 will allow contracting parties to provide expressly that the Bill's provisions can be applied from Royal Assent.

We have made this amendment following an approach from the London Investment Banking Association, which was concerned that, when the Data Protection Act 1998 comes into force later this year, it will allow transfers of data to third countries which do not have an adequate level of data protection only if alternative safeguards are provided.

One way of providing those alternative safeguards will be for contracts for data transmission to contain enforceable third party rights. The amendment will allow such contracts to be entered into from Royal Assent, and will therefore save the need for those contracts that are entered into during the six months after Royal Assent to be redrafted on commencement.

The requirement for the contracting parties expressly to opt out of the familiarisation period has two advantages. It will ensure that the six months' familiarisation period will still apply where the contracting parties want it to do so, and that there will be no risk of affecting any unwary parties who have assumed that the Act can have no application to contracts entered into during that familiarisation period. I beg to move.

On Question, amendment agreed to.