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Lord Brightman: I have in my hand the Notes on Clauses. Paragraph 14 reads:

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I ask why subsection (6) cannot simply read in this way, using the admirable wording of the Notes on Clauses:

    "The validity of an agreement which meets the conditions set out in subsection (3) cannot be challenged merely because it has not been issued with a certificate under this clause".

Baroness Jay of Paddington: The noble and learned Lord raises an interesting and sensible point. I agree that anything which adds clarity in that way and simplifies the drafting is entirely to be welcomed. I am advised that the way in which it has been phrased is part of the legal understanding. Of course, I defer to the noble and learned Lord on a matter of such detail, but since the amendment seeks to ensure that the validity of all trust contracts should be included when the proposal is only dealing with the externally financed development agreement, it may unnecessarily over-complicate the issue.

However, if the noble and learned Lord would like me to take away his wording and refer it back to my officials, I shall do so. I believe that their response will be that the way in which the amendment is drawn up does not add to the clarity of the Bill as the wording is now expressed.

Lord Brightman: I am grateful to the noble Baroness and will take up her kind offer. Perhaps she would be good enough to refer this amendment back to the officials to see whether we have the best form of words. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 6 not moved.]

Clause 1 agreed to.

4.45 p.m.

Lord Brightman moved Amendment No. 7:

After Clause 1, insert the following new clause--

Absence of relevant discharge terms

(" .--(1) Subsection (2) applies where--
(a) the result of a determination or order made by a court on an application for judicial review or an audit review is that an externally financed development agreement does not have effect, and
(b) there are no relevant discharge terms having effect between the National Health Service trust and a person with whom the trust has entered into the contract.
(2) That person shall be entitled to be paid by the trust such sums (if any) as he would have been entitled to be paid by the trust if the contract--
(a) had had effect until the time when the determination or order was made, but
(b) had been terminated at that time by acceptance by him of a repudiatory breach by the trust.").

The noble and learned Lord said: The ultra vires question is central to the purpose of the Bill, as the Committee will know. Although the Bill is welcomed by the financial markets for what it does, there are two aspects of the ultra vires risk which are not covered: first, the risk that a certificate of the Secretary of State might be quashed; secondly, the risk that a contract might be upset on the grounds that the NHS trust exercised the power given by the Bill for an improper purpose.

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The point raised in my amendment was highlighted in a paper published by the Financial Law Panel in May 1996 entitled Transactions with Local Authorities. I am not certain whether the Committee is aware of the existence or background of the Financial Law Panel but it is a prestigious body chaired by a former Master of the Rolls, with a High Court judge among its membership and a representative of the Treasury as a "participating observer". Its purpose is to identify areas of uncertainty in the law affecting financial markets and to seek to remove them or limit their scope.

In connection with a proposed certification procedure affecting public authorities which the paper was discussing in 1996, the panel said that a third party,

    "should be protected absolutely against the consequences of a transaction, which has been certified, subsequently being held to be ultra vires. The simplest approach would seem to be that, on the grant of a certificate, the transaction is conclusively deemed to be intra vires, so far as concerns third parties acting in good faith".
I have been assured within the past few days that this approach is strongly supported by the British Bankers' Association, notwithstanding their satisfaction with the Bill as a whole. The amendment which I am advocating is lifted straight from Clause 7 of the Local Government (Contracts) Bill which the Government have just introduced in the other place. There is a close connection between the two Bills. They have common objectives. The Long Title of the NHS trust Bill which we are considering reads:

    "An Act to make provision about the powers of NHS trusts to enter into agreements".
The local authorities Bill is described as:

    "A Bill to make provision about the powers of local authorities ... to enter into contracts".
There is the same wording in each Bill.

The local authorities Bill has the same kind of regime for certification of contracts as the NHS trust Bill. Clause 2(1) of the local authorities Bill reads:

    "Where a local authority has entered into a contract, it shall be assumed that the local authority had power to enter into the contract if the contract is a certified contract".
So there are the two situations, one dealing with NHS trusts and the other with local authorities, with the same background and the same problems.

If a safeguard clause for third parties acting bona fides is contained in the local authorities Bill, why should not a similar safeguard be contained in the NHS trust Bill? I shall not bore the Committee by reading my amendment; it is in rather technical legal language. It is enough for me to say that it protects innocent third parties from loss if the certificate of the Secretary of State is set aside in precisely the same form, mutatis mutandis, as the protection set out in the local authorities Bill.

Perhaps I should add that Amendments Nos. 8 and 10 which are grouped with Amendment No. 7 are purely consequential. I beg to move.

Baroness Anelay of St Johns: The amendment deals with the absence of relevant discharge terms in contracts. As a layman, I approached it from the point

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of view of what it would mean to me if I were a contractor wishing to enter into a PFI agreement. As a contractor, I should expect that in signing the contract I would find that it would normally contain details about what would happen when it came to an unexpected end: that is, of course, unexpected to one of the parties. As a contractor, I should normally expect that those discharge terms would be written into contracts to detail what recompense I or the other party would have, depending on which one is considered to be the loser.

I then thought: what difference would the amendment make to the Bill? Perhaps as a contractor I started work in good faith, as the noble and learned Lord suggested. I started work for a trust thinking that it was a PFI contract. Then the contract turned out not to have been such a contract because a court decided thus upon a judicial review or upon an audit review. As I understand an audit review, it could be decided by an NHS trust that it had entered into a contract without having the appropriate resources to keep to the terms of the contract.

Let us say that the court made that decision. Then, under Amendment No. 7 proposed by the noble and learned Lord, the contractor still gets paid as the contract provides, even though there were no discharge terms within that contract. I assume that it makes the situation as though the National Health Service trust had repudiated the contract. To me it is a belt and braces amendment giving security to contractors and, as such, it would seem to be the sensible move. On that basis we would not oppose it.

Baroness Jay of Paddington: I am grateful again to the noble and learned Lord for his interest in trying to improve the Bill in this way. Ever since the idea of PFI was conceived and developed in detail what has been called a "safe harbour" clause in the contracts has been discussed at great length. I am also aware that there are considerable similarities between the wording of the amendment and the present Local Government (Contracts) Bill.

However, the provision would mean that the contractor would not be prejudiced if the contract turned out to be ultra vires--a point made by the noble Baroness, Lady Anelay. He could recover all the moneys due to him as though he could sue on the contract. In effect, the contract would be validated by the Secretary of State against the possibility of it being ultra vires of the trust. I understand that that approach was initially favoured by some members of the banking community because a similar provision exists in local government legislation and because of the "belt and braces" approach described by the noble Baroness.

However, we believe that the circumstances of the PFI contracts in the NHS are different from the circumstances with which the local government provision was intended to deal. In that instance there was usually a straightforward contractual relationship between two parties, whereas most PFI agreements are considerably more complex, as we discussed when the noble and learned Lord introduced his first amendment this afternoon.

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The Bill before the Committee works on an entirely different principle; it underpins the vires of the trust making clear beyond doubt that a trust has the power to enter into externally financed development agreements--EFDAs as we have learnt to call them. To attempt to amend it at this stage in order to introduce an element of "safe harbour"--though I acknowledge what the noble Baroness said about belt and braces--would be a mistake, if for no other reason than that it would create uncertainty and doubt where at present there is clarity and certainty. Moreover, it would be unfortunate. It would suggest that a Bill whose only purpose is to put beyond doubt the validity of PFI agreements, also contained a provision which contemplated their invalidity.

The banks who are ready to lend into the PFI schemes and their legal advisers, as I said, have seen and agreed the wording of the Bill as drafted. They have said that it provides sufficient reassurance for them to lend once the Bill is enacted. That is the sole purpose of the Bill. Since the objective to be achieved by the Bill before us is the one we have described so often in terms of its accelerating the much needed hospital building programme, I hope that the Committee will not accept the amendment.

Perhaps I can make a general point. We do not have a blank sheet of paper on this issue. We do not have a great deal of time to revisit endlessly what might be described as the intellectual arguments for what it is probably not unfair to describe as a Holy Grail of a safe harbour. I have already described this afternoon the numbers of hours spent and wet towels which have been used in trying to get some of the definitions right on this Bill. This issue has taken on a significance which may be out of proportion with its real importance. It will no doubt remain a topic of conversation, when PFI lawyers are gathered together. But I must emphasise that the simple fact is that the Bill before us today will enable real hospitals to be built under PFI. The bankers have agreed and understood the terms; that much is certain. I therefore ask the Committee not to accept the amendment and I hope that the noble and learned Lord will not press it.

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