Arbitration — Directions of arbitrator related to comparables and arbitrator’s inspections — Whether misconduct of arbitrator in failing to abide by own directions — Whether extension of time for making application
On September 8
1993 an arbitrator, appointed to determine the rent of an hotel at review, gave
directions relating to the submission of evidence of comparables. He directed
that certain details should be provided of comparables and that, in relation to
transactions not within the first-hand knowledge of the parties’
representatives or their firms, such evidence would not be regarded as
admissible evidence unless full details were confirmed in writing by the third
party directly involved. He also stated that he would make an unaccompanied
inspection of the subject premises, but made no mention of the comparables. In
making his award the arbitrator stated that he had considered the written
representations of the parties’ surveyors and, in addition to a full inspection
of the subject hotel, had made brief inspections of other hotels in the area.
The award was available on May 2 1994. The applicant tenant applied on July 4
1994 for an extension of time under RSC 73 r5 and to make applications under
sections 22 or 23 of the Arbitration Act 1950 to set aside or remit the award
to the arbitrator because of his misconduct. The arbitrator had failed to
follow his own directions in considering written representations of the
landlord’s surveyor containing inadmissible details of comparables and had
inspected undisclosed hotels.
aside. An extension of time for making the application under sections 22 and 23
of the 1950 was granted; the delay in making the application was minor and
there was misconduct. It was misconduct of the arbitrator to consider
inadmissible evidence contrary to his directions and to inspect unidentified
hotels. In respect of certain of the hotels advanced as comparables in the
written representations of the landlord’s surveyor, and considered by the
arbitrator, the details were inadmissible under the arbitrator’s own directions
and this inadmissibility had been pointed out and had not been waived by the
tenant’s surveyor in his counter submissions.
The following
cases are referred to in this report.
Control
Securities plc v Spencer [1989] 1 ECLR 136;
[1989] 07 EG 82
Fox v (PG) Wellfair Ltd [1981] 2 Lloyd’s Rep 514; (1981) 263 EG
589, CA
Handley v Nationwide Anglia Building Society [1992] 2 EGLR 114;
[1992] 29 EG 123
Nature
Conservancy Council for England v Deller
[1992] 2 EGLR 11; [1992] 43 EG 137
Top Shop
Estates Ltd v Danino [1985] 1 EGLR 9; (1984)
273 EG 197
Zermalt
Holdings SA v Nu-Life Upholstery Repairs Ltd [1985]
2 EGLR 14; (1985) 275 EG 1134
This was an
application by the applicant tenant, Mount Charlotte Investments plc, by way of
an originating motion for an extension of time and under sections 22 and 23 of
the Arbitration Act 1950 in relation to the award of an arbitrator, Jeffery K
Marston frics, in a rent review
with the respondent landlord, Prudential Assurance.
David
Neuberger QC (instructed by Dibb Lupton, of Leeds) appeared for the applicant;
Joseph Harper QC (instructed by Berwin Leighton) represented the respondent.
Giving
judgment, ARDEN J said: I have before me an application under sections
22 and 23 of the Arbitration Act 1950 (as amended) and an application for an
extension of time under RSC Ord 73 r5. What is alleged is technical misconduct
on the part of the arbitrator in this case in respect of a rental valuation for
the Crown & Mitre Hotel, Carlisle. I should emphasise that no party has
made any attack upon the integrity of the arbitrator and this case is not to be
seen as any personal reflection upon him.
The appellant
has been represented by Mr David Neuberger QC and the respondent has been
represented by Mr Joseph Harper QC. The arbitrator was Mr Jeffery K Marston frics and the experts for the appellant
and the respondent were respectively Mr David B Lyons frics and Mr John H Nelson fnaea.
The arbitration proceeded by way of written submissions.
I will deal
first with the application for an extension of time. The arbitrator announced
that his decision was available for collection on May 2 1994. Accordingly, the
time for this application expired on about May 22 1994. The present application
was launched on July 4 1994. On May 4 1994 Mr Lyon received notification that
the award was ready, but he did not obtain it from the arbitrator until May 19
1994. He sent it to the appellant’s solicitors, who received it on May 23 1994.
They took instructions and they were instructed to advise on the possibility of
challenging the award. On June 2 1994 they instructed counsel and sought more
information. It is clear from the evidence that by June 7 1994 at the latest
the solicitors appreciated that the time for making this application had
already expired. None the less, the further information was not provided to
counsel until June 17 1994 and the present originating motion was not issued
until July 4 1994. However, part of the delay at this stage may have been
caused by the fact that the rules require that an affidavit on which the
appellant proposes to rely has to be served with the notice of motion.
I have been
referred to three cases on the question of delay: Zermalt Holdings SA v Nu-Life
Upholstery Repairs Ltd [1985] 2 EGLR 14; Handley v Nationwide
Anglia Building Society [1992] 2 EGLR 114; and Nature Conservancy
Council for England v Deller [1992] 2 EGLR 11. Mr Neuberger submits
that the time-limit is imposed by the RSC and not by statute as in the case of
leave to appeal. On the other hand, as Mr Harper points out, there is a
particular public interest in the finality of arbitration and Mr Harper opposes
any extension of time. As the Zermalt case sets out, what
extension, that the respondent has suffered no prejudice and that the delay is
minor. So far as prejudice is concerned, the appellant offers to pay interest
which the respondent accepts would obviate any question of prejudice. So far as
good cause is concerned, the evidence shows that it was Mr Lyons who received
notice that the award was available for collection, as I have explained, and,
further, that he was mistaken as to the existence of a strict time-limit for
this application and as to the date from which it ran. I agree with Mr Harper
that it is incumbent upon an expert to know the position in this regard if he
is going to receive notice of the award. The position is exacerbated because,
as I have said, the solicitors for the appellant appreciated the position from
June 7 1994, at the latest, yet nearly one month thereafter passes. It is
difficult to see why much of that time was required. I agree with Mr Harper
that the conduct of the appellant and his advisers would probably not justify
an extension. Accordingly, it seems to me that good cause has to be found in
the ground of the attack on the award, if at all. What has to be shown is that
there is a strong prima facie case of misconduct. In fact, as this was a
short matter, the question of misconduct was fully argued and so I will subsume
my views on this point in my judgment on the substantial issue.
So far as the
length of the delay is concerned, I am satisfied that in absolute terms it was
minor in all the circumstances of this case.
I now turn to
the alleged grounds of misconduct. On September 8 1993 the arbitrator gave the
following directions:
Any evidence
contained in the submissions relating to comparable properties should include
details of the floor area of the respective parts of the property, the current
rent with the effective date of the review or letting, and relevant lease
details. With reference to any comparable evidence, where the parties’
representative or firm was not directly involved in the transaction it will not
be regarded as admissible evidence unless full details are confirmed in writing
by the third party directly involved.
He also
directed as follows:
I confirm
that I will make arrangements with the lessee to inspect the premises after the
submissions have been received and I will not require to be accompanied.
There was no
reference to any inspection of any other property.
The parties
proceeded to exchange written submissions. Mr Lyons based his rental valuation
on turnover and profits obtained by the appellant at the subject premises. Mr
Nelson described his method of valuation as follows:
16.1. In
arriving at my valuation I have had regard to the provisions of the lease and
the nature of the subject premises, the location and improving trade levels in
the hotel industry and what I consider to be a fair maintainable trade level
for a good class hotel.
I need not
read further from para 16.1, but para 16.2 says:
I have
considered comparable evidence and made adjustments where considered
appropriate.
Mr Nelson, for
the landlord, put in information concerning the following hotels: The Blossoms
Hotel (Chester); the County Hotel (Carlisle); the Friendly Hotel
(Newcastle-under-Lyme); the Royal Hotel (Cambridge); the Three Ways Hotel
(Mickleton); the Gatwick Sky Lodge Hotel; the County Thistle Hotel (Newcastle
upon Tyne). Mr Neuberger submits that the information given by Mr Nelson regarding
these hotels did not comply with the directions given by the arbitrator. Mr
Lyons filed a further submission with the arbitrator, which contained the
following passages:
14.0. I have
no idea what Mr Nelson seeks to achieve from his so-called comparables because
there is neither a consistency of approach with regard to the type of hotel or
whether he seeks to rely on profit, turnover or rent per room. Given the strict
burden of proof which is required in an arbitration I would ask you to
disregard as inadmissible all of the evidence which Mr Nelson incorporates at
14.1, 15.1, 15.2, 15.3, 15.4, 15.5 and 15.6. It is wholly inadmissible as none
of it is proved in any way. There is no attempt to incorporate copies of leases
or any trading accounts. There is no attempt to demonstrate that the parties to
these transactions are not associated. I can, from experience, of the Blossoms
Hotel (Chester) where I have had a personal involvement and full access to the
accounts advise that the information given on trade is not correct.
There then
follows a passage that I need not read, but at para 16.2 Mr Lyons said:
Mr Nelson has
singularly failed to identify any relevant or reliable comparable evidence and
he certainly produces no guidance as to where he has made his adjustments.
I need not
read para 16.6, but para 16.7 says:
As none of Mr
Nelson’s evidence is admissible it is impossible to establish from where he
derives his estimate of 11%.
17.1. Mr
Nelson clearly misunderstands the nature of the business of the Crown and
Mitre, its difficult trading position and the problems of the hotel industry
generally. His estimated turnover is a gross exaggeration and lacking any
evidence and no support in fact.
Conclusion:
Mr Nelson’s case is based entirely on hearsay and inadmissible evidence and
must be disregarded. He makes a broad criticism that the management accounts of
the Crown & Mitre Hotel are not audited as indeed they are not, but I have
given a proper explanation if he seeks to have the actual detailed financial
performance of the hotel set aside in favour of unsubstantiated, uncorroborated
and inadmissible submissions.
At 14.0. Mr
Lyons referred to certain numbered paragraphs of Mr Nelson’s submissions, which
are the ones which refer to his comparables.
The arbitrator’s
award describes the subject property and then the terms of the lease and
continues as follows:
I confirm
that I have carefully perused the contents of the lease, in particular
paragraphs 2.1 to 2.7. I have also given full consideration to the written representations
which have been submitted to me by the respective surveyors. On 11th January
1994 I carried out a full inspection of the subject premises and also brief
inspections of other hotels in the area. Most of the other hotels referred to
in the written representations were already known to me. I now conclude that
the rent to be paid for the premises for a period of five years from 1st June
1993 shall be the sum of £80,000 per annum, excluding rates. On the subject of
costs the lessees are to be responsible for 75% of the lessor’s prudent costs
and for 75% of my fees.
Then the
arbitrator says that he has carried out ‘brief inspections of other hotels in
the area’. It is apparent that he must be referring both to the hotels
mentioned by Mr Nelson in his submissions and to hotels which have not been
mentioned by either party since the County Hotel (Carlisle) is the only one
which could be said to be in the same area as the subject property.
Mr Neuberger
submits that the evidence provided by Mr Nelson regarding other hotels was in
breach of the arbitrator’s direction. In no case was the ‘floor area of the
respective parts of the properties’ given and the details which were provided
were not full details. The terms of the relative leases were omitted. Mr Nelson
had not been involved personally in relation to the fixing of rent for any of
the other hotels that he mentioned. He had, however, obtained letters from
fellow surveyors and, in one case, from the owner of the hotel itself. In
several of the letters it is not clear for whom the surveyors were acting. Mr
Neuberger takes no point on this. The information provided which he submits is
inadmissible is as follows:
Blossoms
Hotel: agreed turnover at review £1,781.500. Rent agreed at £125,000 per annum.
County Hotel: it is understood projected turnover for the year ended October
1992 was £1.45 million, but unconfirmed. Friendly Hotel: agreed turnover at
review £701,000 (1988). Number of rooms not stated in the summary. The Three
Ways Hotel: turnover was not verified by a party directly involved. Gatwick Sky
Lodge Hotel: turnover was stated to be unconfirmed. County Thistle Hotel: there
was no evidence of the number of rooms.
So far as
these points are concerned, I agree with Mr Neuberger that there is either no
evidence, or no admissible evidence, of turnover in relation to the County
Hotel, the Friendly Hotel, the Three Ways Hotel, the Gatwick Sky Lodge Hotel
and the County Thistle Hotel. So far as the Blossoms Hotel, however, is
concerned, while the figure of £1,781,500 is not confirmed by the information
provided by the
which they had provided stating that:
The turnover
figure was agreed and estimated to be in the region of £1.7 to £1.8 million.
Management accounts according to THF were actually well below this figure, but
changes in ownership over the last few years, and the fact that THF have not
really got to grips with the property, would account for this.
In my
judgment, the arbitrator could not be faulted for admitting the statement that
agreed turnover at review was of the Blossoms Hotel £1,781,500.
So far as the
statement that the rent had been agreed at £125,000 pa is concerned, this was
not in terms confirmed, but the surveyors who were providing the information
made it clear that they had ceased to act for the landlord in circumstances in
which the arbitrator could fairly assume that the figure was agreed, even
though they did not confirm it directly.
So far as the
point taken concerning the County Thistle Hotel is concerned, the number of
rooms was, as I see it, ascertainable from information provided by the
surveyors and thus this is not a good point.
In my
judgment, the parties could have agreed to waive any objection to hearsay
evidence concerning the comparables being placed before the arbitrator.
However, it is also clear from Mr Lyons’ final submission that the appellant
was not prepared to do this. Accordingly, I reject Mr Harper’s submission that
the arbitrator was entitled to assume that no point on his directions was being
taken. Nor, in my judgment, contrary to Mr Harper’s submission, was the
arbitrator entitled in law to take the view that the lack of particularity went
only to the weight to be attached to the comparables and not to their
admissibility. In my judgment, it was not necessary for the parties to say that
they required the directions to be strictly observed in terms.
Mr Neuberger
also makes the point that none of the comparables referred to floor area as
required by the arbitrator’s original direction. However, this is not a point
which Mr Lyons makes in his final submission and, in my judgment, it is too
late to take it now. The dispute was really about profitability, not floor
area.
I ask, first,
how the arbitrator has used the comparables. In my judgment, in the award, he
has set out his procedures. Inspection of the lease, followed by consideration
of the parties’ submissions, followed by inspection of the subject and other
properties. However, he would not, in my judgment, have referred to a procedure
which was immaterial to the result. He clearly either inspected properties to
which Mr Nelson referred, or had regard to what he knew about them, and
inspected other hotels. It is not clear what features he used, for example,
whether it was profitability or location that he employed, but he certainly
appears to have used them in some way. It is not, in my judgment, merely a case
of getting a feel of the area, or a feel of other similar hotels, as Mr Harper
submitted.
It is not
wholly clear whether the arbitrator has actually applied his own direction.
But, if he did, then, even if he admitted the comparables, making an error as a
matter of law — which is not justiciable on this application — he still went on
to inspect, or to have regard to features within his own knowledge, which
related to hotels other than the subject property and which were not put in
evidence by either party in the form of admissible evidence. As Lord Denning MR
said in Fox v P G Wellfair Ltd [1981] 2 Lloyd’s Rep 514* [at
p522] the arbitrator:
*Editor’s
note: Also reported at (1982) 263 EG 589.
He can and
should use his special knowledge so as to understand the evidence that is given
— the letters that have passed — the usage of the trade — the dealings in the
market — and to appreciate the worth of all that he sees upon a view. But he
cannot use his special knowledge — or at any rate he should not use it — so as
to provide evidence on behalf of the defendants which they have not chosen to
provide for themselves. For then he would be discarding the role of an
impartial arbitrator and assuming the role of advocate to the defaulting side.
In the same
case Dunn LJ said:
It is well
established that where an arbitrator hears evidence in the absence of either or
both parties, his award will be set aside on the ground of misconduct, unless
perhaps it can be shown that that evidence would not have affected the award.
This passage
was cited by Leggatt J in Top Shop Estates Ltd v Danino [1985] 1
EGLR 9, to which I was referred.
If the
arbitrator abided by his own direction, or rightly declined to admit the
comparables, it was none the less a procedural irregularity amounting, in the
circumstances of the award of the present case, to technical misconduct for him
to have regard to specific matters relating to hotels whose details were not in
evidence: compare Control Securities plc v Spencer [1989] 1 EGLR
136. As I have said, the arbitrator does not state how he has arrived at his
valuation. I must read the award as it stands: see per Bingham J in Zermalt
v New Life Upholstery. In my judgment, he must have regarded the
inspections that he carried out of properties, other than the subject
properties, as providing relevant evidence. Accordingly, in my judgment, it
cannot be said that the inspections would not have affected his award, per Dunn
LJ in Fox v Wellfair.
The award does
not, in my judgment, bear out Mr Harper’s submission that what the arbitrator
was saying was that he had not seen anything from his inspection of the other
hotels which caused him to revise his view, already formed, about the subject
property or that he merely inspected other properties to see if they confirmed
his view.
Accordingly, I
consider that there was technical misconduct here. Given the difficulty that
the arbitrator may possibly have in excluding his own prior valuation, the
fairest course, as it seems to me, is to set the award aside and Mr Harper has
not seriously argued to the contrary in the event that I should find
misconduct.
Turning to the
question of delay, I consider that there is good cause to allow the extension
of time. It has not been suggested that I should attach any special terms to
this.
