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The Attorney-General (Lord Goldsmith): I start by acknowledging that I entirely understand why the noble Baroness, Lady Noakes, introduced the amendment with the words that she did. This small group of sections is of immense importance to auditors, and I am well aware of the long debate there has been about auditors' liability, whether there should be ways of limiting that liability and, if so, what they should be. I am told that, if these provisions pass, this will not in fact be the first time that auditors will be able to limit their liability, but apparently you have to go back a long way to find when that freedom existed. It will create an exception to what is an existing ban on a company's auditors limiting their liability to the company, with important protection for shareholders whose approval is needed. We will come on to the other provisions and safeguards.
It is also part of the policy that there should be protection for those who might lose out if the limitation were unreasonably low, as the court will be able to replace the limitation in the contract with some other limitation the court considers to be fair and reasonable. So far so good, and so far we are in agreement. What these proposals intend to doand I say this a little bit generally, because this is the first time we have touched on these provisions in Committeeis to try and strike the right balance between the interests of the company and its shareholders and the interests of auditors.
So the policy is agreed. What is that policy? That company and auditor should have the option of agreeing a limitation on the auditor's liability; that it will be effective only if approved by shareholders; and, when damages are incurred following fault by the auditor, the agreement will limit the amount the auditor must bear, except if the court decides if that is unreasonable.
What about the detail, though? I understand there to be two specific points that encompass all the amendments that stand in this grouping. The first concern is that the words we have used may be too restrictive; in particular, in limiting the limitation to a monetary amount, or a monetary amount derived by the use of a formula such as a number of multiples of an audit fee. I have had the benefit of seeing some of the opinions of learned counsel to which the noble Lord, Lord Sharman, referred, and I am grateful to those who provided them to us. There is a difference of view on this point. It is a perfectly respectable argument that the wording as it stands is not as restrictive as people think it may be. Having said that,
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I accept that this is something we need to look at carefully in the light of the concerns that have been expressed about the precise words that are used. I shall come back to that.
The second concern may be more difficult to deal with. The other amendments that were put down seek to limit the consideration of what is fair and reasonable to things that either were in existence or might have been contemplated to be in existence at the time the agreement was entered into.
In the course of this short debate, I have heard only one reason forward for why the limitation should be at that point. That reason, and I understand it, is that, if you look at it at the time when the judge is doling out the judgment, the auditor may be the only man or woman standing. The concern is that the alternative to taking reasonableness at the time of the agreement is that you take it at the time of judgment, and the judge may be concerned to see shareholders in the company properly compensated. That is not the only time one could take, however. There are moments in betweenfor example, the position at the time of breachwhich may take account of the extent of the fault compared with the extent of the fault of others. This is not a criticism, but at the moment I have not heard sufficient explanation of why in the view of those who have moved these amendments the liability ought to be restricted only to those events that take place at the time of the agreement. That certainly is not the way the Government have seen this working.
We need to take this part away as well. Even if we have not yet agreed among ourselves what the policy ought to be, I am not personally convinced that it is clear enough on the face of the Bill what that policy is. We need to make that clear. I wanted to indicate, in saying that we will take this away and consider it, that it is important to understand that I am not sure we are yet agreed what that policy should be, in the sense of agreement between noble Lords who have taken part in this debate and the Government.
That is probably enough for me to say at this stage. We did not intend the Bill to limit liability to a fixed monetary amount by way of limitation. We see benefit in there being some process, for example, by which an amount might be met, and we can see merit in there being contractual freedom to agree other forms of limitation. We will take that away and look at the wording, even though the wording was thought to be apt to do what I have just said.
It is also right that we take away the question of the time at which the test of fair and reasonable will be applied to the circumstances, but I would not want noble Lords in any way to think that it follows from that that the Government accept the logic of limiting it to those matters that were in existence at the time the agreement was entered into. I am not at all persuaded that this would be the right approach. I hope that is sufficient for the moment to indicate that
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consideration will be given to those important clauses, but I cannot go any further at the moment in agreeing to any of the amendments.
Baroness Noakes: On behalf of all those who have taken part in this debate today, we have to say how encouraged we are by the noble and learned Lord's response. He said he will take away the issue of the clause permitting proportionate liability. I think we understand that the Government do not wish to confine the clause to proportionate liability, but to allow other forms of agreement, and I am sure that is entirely reasonable. I am also grateful to him for agreeing to take away the issue of the timing at which the judgment will be made. I understand the Minister's reservations, and I can see there could be arguments made for either case. It is fairly clear that it would not be right to have it at the time that the judgment is madebut at what earlier point? I accept there may well be issues to be debated about the proper timing of that. I can do no more than say how pleased we are that the Government are firmly in receive mode on this, and are prepared, I hope, to consider amendments that can be made between now and Report so we can have a proper opportunity to consider them. With that, I beg leave to withdraw the amendment.
The noble and learned Lord said: This is a technical amendment. On this occasion the subsections of the Unfair Contract Terms Act 1977 that appear in the Bill are simply wrong. This amendment replaces them with the right ones, also bringing in the appropriate Scottish references. The purpose is to disapply the reasonableness test in two pairs of places in the Unfair Contract Terms Act, because Clause 520 is to apply an equivalent freestanding fair and reasonable test. We do not want to find an agreement that passes the test in this Act to be struck down by some general test in the other. That is all I need to say about this amendment. I beg to move.
Lord Lyell: Could I take one or two minutes of the Committee's time? Looking at some of the other amendments, such as Amendments Nos. 336 and 338 and others in that group, I have to say, with deference to the noble and learned Lord, I had a look at Amendment No. 337A, which he has presented so well. He says it is a mere "technical amendment". I am sure his technical brain, if he looks back, will discover that I was heavily involved with the Unfair Contract Terms Bill in your Lordships' House. I hope he can
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confirm to me in writing, though perhaps not today, that sub-paragraph (i) of his amendment deals with Sections 2(2) and 3(2)(a) of that Act. I am delighted to see that sub-paragraph (ii) of his amendment deals with Scotland; specifically with Sections 16(1)(b) and 17(1)(a) of the Act, which I have with me. But the noble and learned Lord will know that in these sections there is great talk of "reasonableness", which he mentioned. That concerns me, and concerned me even then, 29 years ago, though not necessarily in relation to this. "Reasonableness" was intentionally discussed, but, in my mind, it was far more to do with retail trade and fitness for purpose.
If the noble and learned Lord looks at cols. 1126-27 of Hansard for 23 May 1977, covering the Second Reading of the Unfair Contract Terms Bill, he will see the words spoken by the late Lord Hailsham about reasonableness, which were directed very much at the legal profession. Every word Lord Hailsham spoke is relevant to the auditing and accounting profession, and I hope the noble and learned Lord will reassure me that Amendment No. 337A covers reasonableness, particularly the aspects we covered in the last grouping. He gave assurances to my noble friend Lady Noakes, and indeed to the noble Lord, Lord Sharman. It seemed to me that there was a risk there would be two categories of reasonableness: one for the big four, and one for what the noble Lord, Lord Sharman, called the "middle-ranking firms". Will the noble and learned Lord confirm that he will look carefully at reasonableness as it was set out in 1977? Perhaps, en passant, he might see the interesting remarks of Lord Hailsham?
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