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The Deputy Chairman of Committees (Lord Ampthill): I remind the Committee that if Amendment No. 182 is agreed to it will not be possible to move Amendments Nos. 183 to 189.

Lord Williams of Elvel: My noble friend's Amendment No. 182 is grouped with Amendments Nos. 185 to 189. Referring to Amendment No. 185, my noble friend has rightly pointed out the problems of the insolvency provisions in Clause 110. I accept that it is an extremely difficult and complicated matter. As drafted, the difficulty with the Bill is that sub-contractors and sub-sub-contractors down the line may well suffer undeservedly if the contract between the main contractor and his client cannot be fulfilled. This was the purpose of the trust funds originally proposed by Sir Michael Latham in his report. I understand what has been said about trust funds, but there is a problem about insolvency. I agree that this matter is subject to the insolvency Act, but I believe that my noble friend has a serious point in arguing that the matter should be thought through more carefully. For instance, if there is a case of insolvency it may be sensible for the insolvency practitioner--the receiver or whoever winds up the company--to be required to allocate certain funds as a matter of prior credit, rather than unsecured low-ranking credit, to the sub-sub-sub-contractors down the line. This may require an amendment to the insolvency Act. I do not believe that the Bill has yet got it right. I do not have a ready-made solution to the problem, but I believe that it has to be thought about again.

As far as concerns Amendment No. 189, I have always believed that subordinate clauses should contain verbs. This particular subordinated clause has no verb and my amendment proposes to insert one.

Lord Lucas: I should like to speak to the amendment moved by the noble Lord, Lord Howie of Troon, and the amendment spoken to by the noble Lord, Lord Williams of Elvel. In so doing, I should like to speak also to Government Amendments Nos. 186 to 188. The most substantial of the amendments are Amendments Nos. 182 and 185. They stem from a desire to abolish completely the effectiveness of pay-when-paid and pay-if-paid clauses when they appear in contracts. I have much sympathy with this. We are already going a long way to rid the industry of the wholesale application of such measures.

Nevertheless, there appear to be limited circumstances where, if parties have agreed to a pay-when-paid clause in a contract, it should be effective. Such circumstances are, fortunately, not only limited but very rare. I refer to the situation where payment at the top of the chain is withheld by reason of a party's involvency. If parties have signed up to a contract where such an event is enough to defer payments lower down the chain, we believe that the relevant provisions should be honoured. Risk-sharing is

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not uncommon in the construction industry. Parties regularly make contracts where risk is a consideration; and risk is also a factor of business life. While it is likely that many smaller contractors may be persuaded to bear some risk in order to win a contract, that is not necessarily a bad thing. At least under the arrangements that we propose here it will be impossible to enforce pay-when-paid unless it is clearly part of the contract.

At the moment we believe that many larger contractors simply use the excuse that they have not yet been paid in quite unjustified situations and without any contractual basis. Such practices must cease. Perhaps I should also add that in agreeing that a pay-when-paid clause may operate in the event of insolvency, a party would not be signing away all rights to payment. It would merely mean that the insolvency rules operate in the normal way, and the parties would have to recover their money accordingly. I hope that I have said enough to persuade both noble Lords respectively to withdraw or not move their amendments.

Amendment No. 186 in the name of my noble friend Lord Ferrers is in a similar category. Part III of the Insolvency Act 1986 refers to a "receiver or manager" and it is right that Clause 110(2)(b) follows the same wording.

Amendments Nos. 187 and 188 are intended to clarify the criteria for insolvency used here. Chapter I of Part III of the Insolvency Act 1986, which applies to England and Wales, largely supplies the wording used in subsection (2)(b). Chapter II, which applies in Scotland, refers to the appointment of a "receiver". These amendments are required to leave no doubt that such an event would qualify as insolvency under the terms of Clause 110. I hope that Amendments Nos. 186, 187 and 188 will meet with the Committee's approval.

I hope that the noble Lord, Lord Williams, will feel able to move Amendment No. 189 when we reach it, not least because my noble friend Lord Ferrers has some particular comments that he would like to make on it.

9.45 p.m.

Lord Berkeley: I should like to make a few comments in support of the suggestion made by my noble friend Lord Howie that the pay-when-paid clause should be separated from the pay-when-paid insolvency clause. Even with the amendment to line 25 which changes "void" into "ineffective", to me it reads that pay-when-paid clauses are ineffective unless the third party has gone into liquidation. The insertion of a full-stop there and a new paragraph might help. I believe that the intention is that the pay-when-paid clauses should be ineffective, "full-stop". We should then go on to talk about what happens when the third party becomes insolvent.

Lord Howie of Troon: I confess to being somewhat reassured by the comments of the noble Lord, Lord Lucas. He seems to be apprised of the dangers of pay-when-paid and all such things. I strongly welcome the remarks of my noble friend Lord Berkeley who supported my belief that the issue of payment as a whole should be considered separately from payment in conditions of insolvency. However, we have reached

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that point in the Bill when what I shall do is look carefully in Hansard at what the noble Lord, Lord Lucas, said, and see what happens when we come to the Report stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Earl Ferrers moved Amendment No. 183:

Page 62, line 25, leave out ("void") and insert ("ineffective").

The noble Earl said: I shall speak also to Amendments Nos. 184 and 190. Amendments Nos. 183 and 190, and Amendment No. 184 tabled by the noble Lord, Lord Williams--I beg the noble Lord's pardon for suggesting that I will move it, because that is for him to do--are all concerned with the word "void" as it appears in Clause 110.

I understand that the clause is a problem in Scotland. I have no doubt that the noble Lord, Lord Williams, has been told that by--who else but the Law Society of Scotland. I gather it causes a problem where a contractual clause cannot become void. It is either void from the start or it is not. The meaning that we intended to convey here is ineffective. My Amendments Nos. 183 and 190 would make that substitution and so rectify the position.

The noble Lord wishes to put in the word "unenforceable". I dare say that there is not much to choose between the two words. One might say that it was six of one and half a dozen of the other; but in this case I believe that it is seven of one and five of the other because we have our amendment down in two places and the noble Lord has his amendment down in only one place. I beg to move.

Lord Williams of Elvel: Just because the amendment is down twice does not mean to say that it is right. It is twice wrong.

The noble Earl is right. I have been advised by the Law Society of Scotland. But it is generally true, not only in Scotland but in England and Wales and probably Northern Ireland too (though I do not know about Northern Ireland), that a statutory provision cannot make a contractual provision void but at the same time impart efficacy to those conditions in certain circumstances.

A void term or condition is void ab initio and is merely an apparent condition; but in fact once it is declared void it has no legal existence or effect. Using the word "ineffective" does not seem to me to solve the problem entirely. I am advised that the word "unenforceable" is the right word, not only in Scotland but elsewhere.

I leave the matter at that. It is for the noble Earl to reconsider whether the Law Society of Scotland is right, the Scottish Office is right or I am right.

Baroness Hamwee: Is the Minister suggesting that if Members of the Committee put every amendment down three or four times, they would win the point?

Earl Ferrers: I was merely trying to point out that the noble Lord, Lord Williams, for once was lacking his normal perspicacity because he had not realised that it

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was necessary to put the amendment down twice and had put it down only once. If the argument against using the word "void" once is wrong and holds water, then the argument for putting the amendment down twice equally holds water. I believe that the noble Lord made an error in putting down his amendment once. That is why I thought that we had scored some Brownie points by putting it down twice.

Of course, I shall consider the words of the noble Lord, put forward as they were with the authority of the Law Society of Scotland. I do not suppose there is a great deal of water between the two words, if one can put such a thing between two words, but we all know what we intend. I shall certainly look again at the matter.

On Question, amendment agreed to.

[Amendments Nos. 184 and 185 not moved.]

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