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Lord Bowness moved Amendment No. 13:

Page 4, line 18, at end insert--
("(5) Where the court makes a finding pursuant to subsection (3)--
(a) the local authority shall be prevented from attempting to repudiate the contract on the grounds that it did not have the power to enter into the contract, and
(b) no power of surcharge shall apply to any member or officer of the local authority in respect of the contract.").

The noble Lord said: We are all agreed, on both sides of the Committee, that the purpose of the Bill is to facilitate the ability of local authorities to enter into PFI deals and to remove the uncertainty over the powers of local authorities so as to give greater confidence to those on the other side of such transactions. I hope that the Minister will accept that the amendment is brought forward in that spirit; namely, to try to find a way forward.

On a straight reading, Clause 5 as it stands, even as amended by the Government this afternoon, is silent in relation to the position of a local authority which might for its own purposes seek to repudiate a contract on the grounds that a court had found that it was ultra vires.

At this stage, that may not be likely. However, there is always a danger, as time moves on after a contract is entered into, that it may in the future be seen by an authority as having become commercially inconvenient. I therefore ask the Minister to examine the matter. The contract would be a certified contract; and a court would have decided that the contract, although ultra vires, should continue. Therefore, following that thinking through, should the statute not provide that the local authority should be prevented from taking action of its own account to repudiate the contract? The second leg of the amendment seeks to ensure that, in the case of a contract certified but subsequently found to be ultra vires but within the category of a contract that should continue, members and officers should be protected from penalty in such circumstances.

I am far from certain, although I am happy to be convinced by the Minister, that the Bill makes that aspect clear. We ought to go as far as is reasonably possible to ensure that there are no grounds to dissuade authorities,

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through the medium of either their members or their officers, from entering into such private finance initiatives. I beg to move.

Lord Mishcon: I wonder whether the noble Lord would like to re-examine his amendment in case what I now say happens, rather extraordinarily, to be accurate. This amendment is governed by subsection (3), which reads as follows:

    "Where, on an audit review relating to a certified contract entered into by a local authority, a court ... (a) is of the opinion that the local authority did not have power to enter into the contract"--
and these are the vital words:

    "or exercised any power improperly in entering into it".
The noble Lord's amendment takes in the whole of what I have just read and states that, in those circumstances--even presumably where the contract was entered into improperly in purported exercise of a power--there should be no power of surcharge to any member or officer. Is that what the noble Lord intended? If it is not, is his amendment not inclusive of that provision?

3.45 p.m.

Lord Bowness: I hesitate to disagree with the noble Lord, Lord Mishcon, given the great experience and knowledge that he brings to these matters. If challenged on the precise wording of the amendment, I should have to bow to advice; however, I stand by the main thrust and principle. I do not wish the situation to arise whereby a court has found in the terms of the section as amended and the local authority then nevertheless seeks to repudiate the contract. If the Minister can tell me that the clause prevents that, and if the noble Lord, Lord Mishcon, can tell me that the law prevents that, I will read their remarks with great interest. The point I seek to make is the one that I have made, however imperfectly, and I plead guilty to the imperfections of the amendment as drafted.

Lord Mishcon: The noble Lord speaks with his usual courtesy, for which I am grateful. However, will he concede at least that he would not wish to exempt a member or officer of a local authority where that member or officer concurred in acting improperly in regard to the exercise of a power to enter into a contract?

Lord Bowness: The noble Lord poses a difficult question. That suggests that I seek to excuse those who willingly, knowingly and wilfully entered into an improper contract. The point that I seek to make is that they should not, post the event of a court having found in accordance with this section, then seek to repudiate their contract.

Lord Campbell of Alloway: I do not wish to take up the time of the Committee on this point. However, there is a point of substance that warrants further consideration. I listened with great care to the remarks of the noble Lord, Lord Mishcon. I respectfully ask that the Minister, without commitment, might reconsider the matter with her advisers.

Lord Donaldson of Lymington: The experience of local authorities repudiating their obligations on the basis

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that they had no power to enter into them is always a distasteful one. It has occurred in the past. The reason has largely been that there has been some whisper from district auditors that they were acting outside their powers, and they have therefore repudiated the contract--I am bound to say willingly in some cases. That is thoroughly distasteful. The Bill would prevent it happening.

Under Clause 5(3), once the matter has gone before the court and it is determined that the contract either was properly entered into or, alternatively, was not properly entered into but in the public interest ought to be allowed to continue, we find, according to the clause, that the contract is to be treated as if it has and always has had effect as if the local authority had power to enter into it. That would wholly prevent the local authority claiming that it had no power. It could only arise on a parallel contract if the local authority tried to do it again.

The other objection to the amendment is that when contractors repudiate their contracts, whether or not they are local authorities, they do not repudiate on any particular grounds. They may try to justify their repudiation at a later stage on a number of grounds because by that time they may have been advised by counsel that the grounds might enable them to get away with it. But one will never find a local authority tying itself to any particular form of repudiation.

If the second part of the amendment were agreed to, the officers would make certain that they did not repudiate on that ground; they would simply repudiate, full stop. So, with the greatest respect, I doubt whether the amendment advances the matter much further. Indeed, I doubt whether it is necessary at all.

Baroness Hamwee: The noble and learned Lord made, with much more elegance and authority than I could, exactly the point that I intended to make. It seems to me that the first part of the amendment is simply unnecessary. The words towards the end of Clause 5(3) seem clear.

On the broader political point, I do not suggest that the noble Lord, Lord Bowness, is attempting to give protection to members and officers of local authorities if they do not justify that protection. However, I join those who take the line that the power of surcharge has various criteria attached to it. It will come under consideration in any event following the comments of the Committee chaired by the noble and learned Lord, Lord Nolan. I should be unhappy if a particular Bill applied particular criteria to the application of the surcharge power.

Baroness Hayman: This has been a short but useful debate on the amendment put forward by the noble Lord, Lord Bowness. I accept the spirit in which he proposed it and I hope that my assurances will be added to those of other Members of the Committee that the issues with which he is concerned are covered by the Bill. On the first issue, the amendment does not advance the case. On the second issue of surcharge, it would in principle be wrong to pass the amendment as it is.

Perhaps I may explain the two paragraphs separately. In proposing the amendments to Clause 5--Amendments Nos. 10, 11 and 12, which the Committee has just

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accepted--we ensure that in judicial review as well as in audit review a court may determine that a certified contract shall have effect as if the local authority had had power to enter into it and had exercised that power properly. Secondly, the amendments require the court, in exercising that discretion, to have regard to the financial and social consequences of a decision to set the contract aside.

Subsection (5)(a) of Amendment No. 13 deals with a situation in which a court in public law proceedings has made such a decision to allow an ultra vires contract to continue. The amendment seeks to prevent the local authority in subsequent civil proceedings from repudiating the contract on grounds of lack of vires.

The Government fully share the concern that such an action by the authority should not be successful. As the noble and learned Lord, Lord Donaldson, said, there are distasteful cases where that is brought into play. But we are satisfied that the Bill, as amended by the Government, already achieves that effect.

In such civil proceedings, the court would be considering the effect of the safe-harbour clause, Clause 2(1). In so doing, we believe that the civil court would be bound to take account of the determination by the earlier court in public law proceedings that the contract has and always has had effect. We are satisfied, therefore, that the authority could not in those circumstances successfully repudiate the contract in civil proceedings.

The amendment is, therefore, unnecessary. But more than that, it could harm the structure and effectiveness of the Bill by raising an implication that the safe harbour in Clause 2(1) would not be equally effective after a court has said that an ultra vires contract could continue as it would have been before the court's determination.

Perhaps I may turn to the issue of the surcharge. Again, subsection (5)(b) takes as its starting point a determination by a court that an ultra vires contract is to continue. The amendment provides that no power of surcharge is to apply to a member or officer in respect of such a contract. The intention appears to be to remove the powers of the court and the auditor under Sections 19 and 20 of the Local Government Finance Act 1982. In the case of the court, the power is to order a person responsible for unlawful expenditure to repay it. In the case of the auditor, the power is to certify a sum as due from a person who had failed to bring it into account or whose wilful misconduct had led to a loss or deficiency.

The Government's view is that these are matters which can best be left to the court or the auditor in the context of the particular contract. Where there has been unlawfulness, it is right that the court or the auditor should be able to consider whether there has been a loss to the authority which should be made good.

I should make clear that, once the court has determined that the contract is to continue, there is no continuing unlawfulness or loss, so that any such action would relate only to the past. There could not be a surcharge continuing into the future in respect of such a contract.

But action relating to the past is very improbable. Where the court determines that the contract should continue, it is first of all unlikely that any error made by the officer or member would be of sufficient magnitude

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as to justify the use of Sections 19 or 20. It is also unlikely that there would be a loss to the authority. Only in the most extreme case would there be any question of action by the court or the auditor to require a repayment or impose surcharge. In such an extreme case, I believe that the court and the auditor should retain their individual freedom to act.

Nothing in the Bill increases the potential liability of local authority officers, whether involved in the decision to enter into the contract or to give the certificate. An officer is unlikely to incur any liability relating to a contract if he acts reasonably and to the best of his knowledge in accordance with the powers of the authority. As always, only wilful misconduct puts the officer or member at risk, and it is right that it should do so. In this respect, it is right that a contract certified under the Bill should be treated in the same way as any other contract or decision made by a local authority.

I wish to reassure the noble Lord, Lord Bowness, that we do not see this as in any way dealing with technical issues or extending the potential liability of councillors or officers in those circumstances. But, equally, we do not think it would be right to remove from the courts or the auditor the ability, where there has been wilful misconduct--and I believe that was the view expressed by the noble Baroness, Lady Hamwee--to impose a surcharge if in the specific circumstances that seems right. That is a point on which we understand the Audit Commission will issue guidance to auditors to help clarify the situation. In those circumstances, I hope that the noble Lord, Lord Bowness, will be reassured and willing to withdraw the amendment.

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