Previous Section Back to Table of Contents Lords Hansard Home Page

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,

27 May 1999 : Column 1057

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 2, 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

27 May 1999 : Column 1058

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. I 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.

27 May 1999 : Column 1059

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

27 May 1999 : Column 1060

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.

Next Section Back to Table of Contents Lords Hansard Home Page