Orders of the Day — Local Government (Contracts) Bill

Part of the debate – in the House of Commons at 4:07 pm on 23rd June 1997.

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Photo of Professor Ross Cranston Professor Ross Cranston Labour, Dudley North 4:07 pm, 23rd June 1997

I welcome the Bill. Unfortunately, the hon. Member for Christchurch (Mr. Chope) drifted substantially from the subject matter, and I am afraid that some of his points were tendentious to say the least. It is a technical Bill, but it has very important practical implications. Perhaps I could sketch some of the commercial background.

There is always a difficulty in commercial transactions when a party deals with an entity. It may be a problem of the authority of those purporting to contract on behalf of the counter-party, but there is also a question of capacity. That problem arises with companies, trusts and co-operative bodies. I hope that the House will at some point revisit the problem that arises when bodies contract with trusts. Trusts are big business, and have an important role in the financial world.

A number of years ago, the problem with company contracts was dealt with: statute abrogated the ultra vires rule, and the doctrine of constructive notice was modified in relation to corporate contracts. All this was to be welcomed, but, unfortunately, there was and is a problem with the local authorities, and the problem is that of ultra vires.

My hon. Friend the Minister mentioned several high-profile cases that have occurred since 1991, as did the hon. Member for Christchurch. Those cases concerned transactions involving derivatives and guarantees. The decisions led to a reluctance on the part of financial institutions to deal with local authorities.

The leading case was that involving Hammersmith and Fulham council. Many were critical of that decision of the House of Lords, sitting in its judicial capacity, believing that it was commercially unrealistic and that the Court of Appeal had adopted a more commercially realistic approach, distinguishing between debt management and speculative transactions.

The decision had a chilling effect on the transactions entered into by local authorities and the extent to which financial institutions dealt with them. Unfortunately, it led to a fall in the reputation of the City of London. Many European banks became disinclined to deal with local authorities. They could not understand why English law, which is generally conducive to commercial transactions, was unfavourable in this case. It was no consolation when, as a result of a series of cases following that decision, the courts decided that money paid over was recoverable on restitutionary principles, and when local authorities gave guarantees to banks.

The effects of the decision had to be dealt with. Fortunately, that led to the establishment of the Financial Law Panel. I commend the work of that body, established and supported by major financial institutions in the City of London and by major law firms. I have had a small association with its activities. It has done sterling work on clarifying English law to give greater certainty to commercial transactions, thereby enhancing the reputation of the City of London.

The Financial Law Panel prepared a short report on the problem, as a result of which the Bill emerged. I shall not go through the details of the Bill. As my hon. Friend the Minister explained, it creates a safe harbour, and there is a self-certification process. The Bill does not exclude the possibility of judicial review, permitting the courts to review contracts that have gone through the self-certification procedure.

It is generally accepted that the Bill will be conducive to financial transactions. The consequences of the swaps decision of 1991, which deterred foreign banks from dealing with local authorities, will be reversed. The idea behind the Bill is good, and has been welcomed by the markets. The Bill will work, and when it is explained to financial institutions, it will provide a boost to their willingness to participate in private finance initiatives and other transactions. I support the Bill.