Maria Miller, the culture secretary, has insisted that controversial draft legislation to allow courts to impose exemplary damages on newspapers who lose libel cases do not breach human rights laws, and marks an "improvement" in press regulation.

The proposal to introduce exemplary damages remains arguably the biggest stumbling block for the government in gaining the backing of the newspaper industry for its plan to introduce press reforms prompted by Lord Justice Leveson's report.

Labour MP Paul Farrelly, a member of the Commons culture, media and sport select committee that quizzed Miller on Tuesday, asked if she was sure the examplary damages proposal was "legally watertight".

Farrelly said the press industry called in lawyers to give a legal opinion which warned that the exemplary damages proposal breached Article 10 of the European convention on human rights, which protects freedom of expression.

Miller replied: "I believe absolutely this is going to be something that we will be happy to see not only put in place in terms of the approach that we want to take to press regulation in this country but that it is absolutely right in terms of European law as well.

"We are absolutely clear that what's been put forward here is not only good in terms of an improvement of the regulation available in Britain but it is also absolutely compliant with all legislation."

Farelly then asked Oliver Letwin, the cabinet office minister and one of the key architects of the government's press reform proposals, why he was smirking as Miller made her defence of the exemplary damages clause.

"I was only smiling at the thought that somehow we would have entered into this without seeking legal advice," he said. "We did, not only within government but from [outside] counsel, and we are very confident."

Conservative MP John Whittingdale, the culture select committee chairman, asked if the government's plans were doomed to failure given there had been a "wholly negative" reaction from the newspaper industry to signing up to the new royal charter-backed system.

"I believe the incentives to be part of the self-regulatory body are strong and compelling when you look at the opportunities afforded," Miller responded.

"The other side is the potential for exemplary damages if they aren't part of the system. I'm an optimist in this case. Lord Justice Leveson in his report made it clear it is important in the process we follow that we take both the public and press with us.

"We've made a great deal of progress with the proposals and we are now pursuing working with the press with, I think, quite legitimate issues they raised."

Miller and Letwin were repeatedly questioned about the viability of the government's plans, with Conservative MP Philip Davies accusing them of being "in denial" about the prospects of getting the newspaper industry on board.

Miller replied: "We haven't yet set this up, it is a little premature to say not signed up. It is important not to develop an approach in blessed isolation of the people who are actually going to be setting up the self regulation itself.

"I believe what we set out is a fair approach and something which given conversations we've had is something industry will want to carefully consider."

Letwin spent considerable time attempting to debunk what he viewed as a "glorious mythology" that has built up around the role that campaigning group Hacked Off played in the late-night talks between the Tories, Labour and Lib Dems that resulted in the political deal last month that allowed the press reform legislation to move forward.

Letwin claimed that the press reform pressure group's involvement in the cross party talks in the late night and early morning of the Sunday 17 and Monday 18 March came after the main elements had already been hammered out.

"The things that we put forward at an earlier hour were broadly accepted," he said. "There was no major negotiation that went on, I'm sorry to say, to disabuse you of this glorious mythology, in the course of the early hours [of Monday morning].

"What did happen was we documented a heads of terms that reflected what we had put forward at 3pm and 6pm [on Sunday, before Hacked Off became involved]. Negotiation was complete effectively by 6pm."

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