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Lord Rea: My Lords, will the Home Office continue to administer this scheme or will it be transferred to another department, perhaps the Department for Education and Employment? In either case, will the scope or length of the project be affected in any way? Does not my noble friend agree that this scheme is a useful way of encouraging and promoting a harmonious, multicultural society--a concept which certain prominent Members of the Benches opposite do not seem to worry about?

Lord Williams of Mostyn: My Lords, in a sense the noble Lord's question overlaps that which the noble Baroness asked a moment or two ago. The Home Secretary has the general responsibility for fostering healthy community relations and that is why to date the grant has been administered by the Home Office. We are reconsidering arrangements. Our consideration of future funding arrangements will doubtless lead us to revisit the topic which the noble Lord and the noble Baroness have raised.

Magistrates' Courts (Procedure) Bill [H.L.]

Report received.

Local Government Finance (Supplementary Credit Approvals) Bill

Report received.

21 Oct 1997 : Column 616

Local Government (Contracts) Bill

3.23 p.m.

The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Baroness Hayman): My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.--(Baroness Hayman.)

On Question, Motion agreed to.

House in Committee accordingly.

[The CHAIRMAN OF COMMITTEES (Lord Boston of Faversham) in the Chair.]

Clause 1 [Functions to include power to enter into contract]:

Baroness Hayman moved Amendment No. 1:

Page 1, line 19, after ("financier") insert (", or any insurer of or trustee for the financier,").

The noble Baroness said: In moving Amendment No. 1, I wish to speak also to Amendment No. 9 which deals with the same area of the Bill. Subsection (1) of Clause 1 makes it clear that a statutory provision which confers a function on a local authority also confers power to enter into certain sorts of contract with the private sector. These are contracts for the provision or making available of assets or services for the purposes of, or in connection with, the discharge of the function concerned.

Subsection (2) makes it clear that the authority has power to enter into a contract with a person providing finance in connection with a contract for the provision of assets or services. Typically, such a contract would allow the financier "step-in rights"; that is, rights to intervene where the contractor is unable to meet his obligations to the authority or the financier. The aim of this arrangement is to ensure that the financier's interests in the contract are protected.

In the course of further consultation on the Bill it has been brought to our attention that other parties involved in a public-private partnership scheme may be given step-in rights by the local authority. First, there may be an arrangement whereby the financier's insurer, who covers the risks undertaken by the financier in financing the project, is given a right to intervene in the contract when things start to go wrong. In this way, he looks after his interests as insurer and forestalls a claim by the financier.

Secondly, there may be an arrangement with a trustee appointed by a group of loan stockholders or other persons providing finance for a public-private partnership scheme. The step-in rights given by the authority to protect the interests of such investors are given to their trustee and not directly to them. Again, the purpose of the step-in rights is to protect the interests of investors when it seems that the contractor is getting into difficulty with the discharge of his obligations.

All these arrangements are sensibly designed to forestall the claims and financial problems that can arise when a contractor becomes insolvent or is for some

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other reason unable to carry on effectively with a project. Amendment No. 1 would widen the scope of Clause 1(2) to clarify that a local authority may make such arrangements, not only directly with financiers but also with financiers' insurers or trustees. It is, of course, still necessary that the finance and the step-in rights should be provided or given in connection with the project.

Amendment No. 9 amends Clause 4 of the Bill to provide that a contract between a local authority and a financier's insurer or trustee may be a certified contract and thus may have the protection of Clause 2(1) of the Bill, the "safe-harbour" provisions. I beg to move.

On Question, amendment agreed to.

Clause 1, as amended, agreed to.

Clause 2 [Certified contracts assumed to be intra vires]:

Baroness Hayman moved Amendment No. 2:

Page 2, line 22, leave out from first ("a") to end of line 27 and insert ("local authority has entered into a contract which is a certified contract ("the existing contract") and the existing contract is replaced by a contract entered into by it with a person or persons not identical with the person or persons with whom it entered into the existing contract, the replacement contract is also a certified contract if--").

The noble Baroness said: Amendment No. 2 is another amendment that I hope will prove uncontentious. The Bill provides "safe-harbour" protection for certain sorts of contract entered into by a local authority; that is, contracts for the provision of services for a period exceeding five years, and contracts with financiers and their trustees or insurers. The effect of the safe harbour is that the provider of the assets or services and a person financing the transaction can be assured that their contracts with the authority will not be treated as being outside the authority's powers or improperly entered into by the authority. This will apply in any court proceedings except judicial review or proceedings initiated by the authority's auditor.

Clauses 2 to 4 make provision about the requirements and procedure for certifying a contract so that it can have the benefit of the safe harbour. The effect of Clause 2(4) is that where a certified contract is novated, that is, replaced by another identical contract because a new contractor or financier is substituted for the original one, the new contract will also be regarded as a certified contract.

The amendment makes it clear that Clause 2(4) of the Bill applies only in a case where there is a novation of a certified contract. A contract is novated where a person, typically a new contractor, takes over all the rights and liabilities of one of the parties to the contract. This requires the consent of the other party. If, for example, the novation was to change the identity of the contractor under a certified contract, the local authority would agree to accept the performance of the contract by the new contractor, and the original contractor would be released from his liabilities under the contract.

The effect of Clause 2(4) is that the new contract which comes into existence on a novation of a certified contract shall also be a certified contract. The amendment makes it absolutely clear that for these

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purposes a contract is replaced only if the parties to the contract are different. If a contract replaced a certified contract without any change in the identity of the parties, the replacement contract would not be a certified contract by virtue of Clause 2(4). This could arise, for example, where a certified contract was radically amended. I beg to move.

On Question, amendment agreed to.

3.30 p.m.

Baroness Hayman moved Amendment No. 3:

Page 2, line 37, at end insert--
("( ) The application of subsection (1) in relation to a contract entered into by a local authority does not affect any claim for damages made by a person who is not (and has never been) a party to the contract in respect of a breach by the local authority of any duty to do, or not to do, something before entering into the contract (including, in particular, any such duty imposed by a statutory provision for giving effect to any Community obligation relating to public procurement or by section 17(1) of the Local Government Act 1988).").

The noble Baroness said: Clause 2, together with Clauses 3 and 4, provides a procedure for a contract to be certified by an authority. Certification prevents the lawfulness of the contract being raised in private law proceedings, typically those between parties to the contract, on the grounds of a lack or misuse of powers. It means that the contract shall be deemed to have effect as if the authority had had power to enter into it and had exercised its power properly.

This amendment makes it clear that Clause 2(1), in providing that the authority is taken to have exercised properly its powers to enter into a certified contract, does not prevent a person other than the contractor from bringing an action against the authority seeking damages because proper procurement procedures have been disregarded. The clause, without the amendment, could be interpreted as having this effect. In particular, we have in mind a claim by an unsuccessful bidder for the contract who feels that proper procurement procedures have not been complied with. Such legal action, while no doubt unwelcome to the authority, could result only in the payment of damages by the authority, and not in the setting aside of the contract. It would not therefore affect the position of the appointed contractor or his financiers.

This amendment is a response to concerns made in another place and also reflects helpful comments received in the course of consultation. It clarifies that third parties can sue for damages if a local authority has conducted the tendering for a certified contract improperly or unfairly. The main circumstances under which this would be likely to arise are where the authority has failed to comply with the regulations which implement the EC rules on public procurement, or where it has failed to comply with the duty under Section 17 of the Local Government Act 1988 not to take account of non-commercial matters when it lets a public works or supply contract.

I hope that that clarifies the purpose of the amendment and that the Committee will be satisfied with the explanation. I beg to move.

On Question, amendment agreed to.

21 Oct 1997 : Column 619

Clause 2, as amended, agreed to.

Clause 3 [The certification requirements]:

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