Landlord and tenant — Arbitration in regard to lease of commercial premises — Application to set aside or remit award on ground of technical misconduct — No misconduct found by judge, but award remitted because of a ‘procedural mishap’ or error in procedure — The award, which related to a rent review clause in a lease, was challenged by tenants on three grounds, (1) alleged incorrect reception of evidence of ‘without prejudice’ discussions, (2) alleged incorrect admission of hearsay evidence from the landlords on the subject of comparables, and (3) wrongful failure by arbitrator to disclose to tenants a letter written on behalf of landlords to the arbitrator — On the first point there was a conflict of affidavit evidence, but, assuming that the discussions were ‘without prejudice’, the tenants took no steps to halt the arbitration proceedings or effectively to challenge the irregularity beyond making a protest and then allowing the matter to proceed — As regards the second and third points, the landlords had not produced verification of the facts relating to alleged comparables which they relied on (although the arbitrator in his initial directions to both parties had emphasised the need for verification) but they had written a letter to the arbitrator offering to produce such verification (which they had obtained) if he required it — The arbitrator did not ask for the verification details and a copy of this letter from the landlords was not given to the tenants — The probable reasons for the arbitrator’s failure to copy the letter to the tenants was that he found the alleged comparables of little help and that he relied on the statement in the letter that the facts had been verified — Judge decided that the arbitrator should not be stigmatised with even technical misconduct, but there had been a procedural irregularity in not supplying the tenants with a copy — Although the arbitrator had received only an offer of evidence, not any actual evidence, tenants in these circumstances might feel prejudiced — The award would be remitted to the arbitrator for reconsideration and any consequent action in the light of this judgment, but without any criticism of his fairness or personal conduct
In this notice
of motion the respondents to an arbitration, Anglo-Overseas Transport Co Ltd,
who were the tenants under an underlease of which the other party to the
arbitration proceedings, Shield Properties & Investments Ltd, were the
landlords, applied to set aside or remit the arbitrator’s award. The
arbitration arose out of the rent review clause in an underlease of Shield
House, New Street, London EC2.
John S Colyer
QC and David Neuberger (instructed by Masons) appeared on behalf of the
tenants; Ronald Bernstein QC and Jonathan Gaunt (instructed by D J Freeman
& Co) represented the landlords.
Giving
judgment, BINGHAM J said: By this notice of motion the respondents to an
arbitration, Anglo-Overseas Transport Co Ltd (whom I shall call ‘the tenants’),
applied to set aside or remit the award of a sole arbitrator, Mr Peter Brian
Giles MA FRICS, made on May 4 1983, under section 23 or 22 of the Arbitration
Act 1950 on the grounds of misconduct or procedural irregularity. There was
also an application for leave to appeal under section 1 of the Arbitration Act
1979, but that, in the event, is not pursued.
At the outset
I should make it clear, as Mr Collier for the tenants did, that the expression
‘misconduct’ is used by him and by me solely because it is the expression used
in section 23 of the 1950 Act and it involves no reflection of any kind on the
professional character or competence of the arbitrator. It is, as has been said
on many occasions, an unhappy expression the supersession of which is long
overdue.
The
arbitration arose out of an underlease of Shield House, New Street, EC2, in the
City of London, those premises being let by the landlords, Shield Properties
& Investments Ltd, to the tenants for 42 years from Christmas Day of 1968.
The premises are apparently an old East India Company warehouse comprising both
office and storage space. There was provision in the underlease for a rent
review after 14 and 28 years subject to compliance with a procedure set out in
clause 4(4) of the underlease. That is a long and complex clause the effect of
which, I hope for present purposes, I can sufficiently summarise. It gives the
landlords power after the 14th year to serve a notice on the tenants calling
for an increase in rent to an amount specified in the notice. The tenants may
react to that notice by doing nothing, in which case they will become
contractually obliged to pay the new rent. Alternatively, they may serve a
counternotice within a specified period calling upon the landlords to negotiate
the amount of a new rent. Where such a counternotice is served the landlords
and the tenants are thereupon to consult together and use their best endeavours
to reach agreement as to the amount of the rent to be paid as from the review
date. In the event that they fail to agree, then the question of whether any,
and if so what, increased rent is to be payable is to be referred under the
clause to the arbitration of a single arbitrator. In default of agreement as to
who the arbitrator shall be, it shall be an arbitrator nominated by the
president of the Royal Institution of Chartered Surveyors. There are additional
provisions, which I need not recite, governing the manner in which the
arbitration shall thereafter be conducted.
In the present
case, at the end of the 14th year, the landlords duly served their notice
calling for a new rent of £475,000. That compares with a rent of some £50,000
payable under the original underlease. There was disagreement as to the amount
of that new rent. The tenant served a counternotice and an arbitrator, Mr
Giles, was duly nominated and appointed by the president of the Royal
Institution of Chartered Surveyors.
Having been
appointed, he issued written directions for the conduct of the arbitration
following a meeting with the surveyors for the two parties on February 24 1983.
In the course of those directions, in accordance with the parties’ wish, he
directed that the matter should be dealt with by way of written submissions
rather than an oral hearing although he reserved the right to call for a
hearing if he considered it necessary. He requested the parties by a specified
date to agree facts relating to the premises and to list matters on which they
were unable to agree. He undertook to make a preliminary inspection of the
premises having received the agreed statement of facts. Then, in para 4, he
directed as follows:
I request the
parties to deliver to me at 4.00 pm on March 31 1983 their
would remind both parties that any ‘without prejudice’ negotiations or offers,
whether oral or written, should not be referred to in any way in the
submissions. Details of any comparable transactions should whenever possible be
agreed by the parties. Those in which the parties were not personally involved
should be supported by written confirmation from agents who were concerned.
That was para
4. He then made provision for cross-representations to be delivered by each
party, if they wished, for further inspection and for the giving of a reasoned
award which the parties had requested.
Following
those directions both parties submitted their representations. The tenants
submitted a case, which runs from p76 to p116 of the bundle of documents
helpfully prepared for this hearing, and in the upshot the tenants contended
for a total rental of £97,500. It is to be noted that they submitted a list of
comparable transactions on which they relied to support their assessment and
they enclosed confirmatory letters from the agents who had direct knowledge of
those transactions. That was clearly in accordance with the arbitrator’s
direction in para 4. Furthermore, it is to be noted that the tenants said
nothing at all of anything that had passed between them and the landlords in
the course of any negotiations or discussion. The landlords also submitted
representations, which appear at p24 of the bundle before me, and they, more
modestly in this document, contended for a total net rental of £320,000, that
figure appearing on p35.
There are two
matters to be noted in the course of this submission. The first is that the landlords
do refer to discussions with the tenants. On p25, in the course of para 2.1,
they say:
Messrs D J
Freeman & Co, Solicitors to Shield Properties Investments Ltd, served
notice on the undertenant on May 28 1982 quoting a new rent of £400,000 per annum,
with effect from December 25 1982.
This is
slightly inaccurate in that the notice was not by D J Freeman & Co and was
in the sum of £475,000 and not £400,000. Para 2.1 continues:
In response,
Mr Richards has indicated that he would only be prepared to settle at a figure
equating to about half of the quoted rent and, consequently, the differences
were too great to reach agreement and the matter is to be determined by
arbitration.
It is also
apparent from the submissions that the landlord enclosed a list of comparables
but did not enclose any substantiation of those comparable transactions from
the agents who had personally dealt with them, in accordance with the
directions of the arbitrator. Instead the landlords did send a covering letter
to the arbitrator, dated March 30 1983, in which, in the third paragraph, they
said:
I, therefore,
now attach our proof of evidence
referring to
the case
together with
our valuation and would confirm that with regard to all comparables, we have
obtained written confirmation from representatives of the parties involved and
most of the information has been provided on a confidential basis for the
purpose only of this arbitration. We will, of course, let you have copies of
this correspondence should you so require.
When the
tenants saw the reference to the negotiations with the landlords, they
complained, in para 2.1 of their counter-submission which appears on p171 of
the bundle. Mr Richards there said, on behalf of the tenants:
I am
surprised, especially in the light of your specific written instructions of
February 25 1983, para 4, that Mr Toye has referred to our previous
discussions. These discussions with Mr Toye prior to arbitration were on a strictly
without prejudice basis and in order to correct any impression created in Mr
Toye’s submission, I indicated that I would only be able to recommend my
clients to consider a figure substantially less than half the quoted rent. I
stated that all discussions were strictly without prejudice, because given the
rent quoted in the rent notice of £475,000, it was evident from the outset that
arbitration was probable.
It is to be
noted that, although the counter-submission contained that paragraph, the
tenants did not seek to halt the proceedings; they did not seek any
investigation or decision by the arbitrator as to whether the discussions had
been without prejudice; they did not seek any undertaking that the matter would
be entirely disregarded, and that that reference would be ignored; and they did
not make any move whatever to challenge the continuance of the arbitration or
to change the arbitrator. Subject to that protest they allowed the matter to
proceed. The tenants also protested about the landlords’ conduct in respect of
the comparable transactions on which they relied. In para 12 of their
counter-submission, on p194, Mr Richards, on behalf of the tenants, said this:
I refer to
your written directions to the parties of February 25 1983, and particularly to
direction 4. From the copy of Mr Toye’s submission passed to me and subsequent
enquiries regarding his comparables, it would appear that Mr Toye was neither
personally involved in the transactions to which he refers, nor has he provided
supporting written confirmation from the agents who were concerned. Strictly
without prejudice to the above and despite inadequate information being
provided in order to respond fully to Mr Toye’s comparables, I wish to make the
following observations:
He then details
in turn the comments which he makes on each of the comparable transactions on
which the landlords had relied.
Mr Richards,
on behalf of the tenants, did not make reference to Mr Toye’s letter of March
30 1983, for the very good reason that he had not had a copy of that letter and
did not know of its existence. He says, in his third affidavit filed in support
of this application, in para 2, that had he seen the letter he would have asked
for production of the written evidence which Mr Toye told the arbitrator that
he had.
He continues:
Had I seen
that evidence, it may well be — in the circumstances, it would not be proper
for me to put it higher than that — that I would have wished to make points in
respect of the copies of the correspondence Mr Toye had, in my evidence in
reply.
It seems to me
that there is no reason whatever to doubt what he says there and that had he
known that such documents existed and were being proffered to the arbitrator he
would almost certainly have asked for the information to be produced to him. He
did not do so, as I say, because he did not know of the letter. It is fair also
to point out that the arbitrator himself did not ask the landlords for their
supporting correspondence.
On March 4
1983 the arbitrator made his award and gave reasons for the conclusion to which
he had come. He fixed the rent at a total figure of £251,000 and reached that
figure by treating the office and storage space separately and taking, for the
office space, a basic rent per sq ft to which he added a percentage uplift to
reflect the tenant’s limited repairing liability and a further uplift to
reflect the value of the long period without a rent review. So far as the
non-office space was concerned he took two rates and added an addition to
reflect the limited repairing liability. So far as the comparable transactions
are concerned he said, in 2(i) of his reasons:
I did not
find the comparables of much help as the transactions cited related mostly to
small areas of space or to properties too remote from New Street.
Counsel now
applies that the award should be set aside and the arbitrator removed,
alternatively that the award should be remitted on the grounds of misconduct on
three grounds. First, that there was a wrongful reception by the arbitrator of
evidence of without prejudice discussions. Second, on the grounds that there
was improper admission of hearsay evidence from the landlords on the subject of
comparables and, third, on the basis that there was a wrongful failure by the
arbitrator to disclose to the tenants the letter of March 30 1983.
So far as the
without prejudice point is concerned, there is a challenge on the affidavit
evidence before me as to whether the discussions which took place between the
landlords and the tenants were conducted on a without prejudice basis or not.
That is an issue which I quite clearly cannot resolve on a conflict of
affidavit evidence and I approach the question on the basis that, whether or
not anything was expressly said, these discussions may very well have been on a
without prejudice basis. I have no doubt that Mr Richards genuinely believes
that they were and I have no reason whatever to doubt that Mr Toye genuinely
believed that they were not. But I think it only right and fair to proceed on
the basis that Mr Richards may be right and Mr Toye wrong.
That being so,
as it seems to me, the tenants had a clear option as to how they proceeded.
They could, as I have indicated, have sought a ruling from the arbitrator as to
whether the material was covered by privilege or not. They could have sought to
halt the proceedings. They could have sought a change of arbitrator. They could
have sought a clear understanding on the record that all that evidence would be
entirely ignored. In fact, as I have indicated, they adopted none of those
courses. Mr Richards made the protest which I have read but, subject to that,
proceeded with the arbitration.
It seems to me
that the situation was clearly one in which the tenants had an election. Either
they made a bold and unequivocal protest and raised the matter, either seeking
a determination or seeking to halt the proceedings entirely on the basis that
the arbitrator could no longer fairly dispose of the matter or they could allow
the matter to continue. It seems to me plain on the information before me
that they adopted that latter course and I bear in mind that even if the
material was brought to his attention, and should not have been, he had a
discretion to continue if satisfied that no injustice would be done by doing
so. Had the matter been explored I have no doubt that he would have indicated
that he paid no attention to that evidence at all and I very strongly suspect
that the matter would have proceeded on that understanding. But, be that as it
may, it was, I think, up to the tenants to make their position plain, to make a
stand if they wished to insist on this point and not to allow the arbiration to
proceed, reserving their right to challenge the result on this ground if it
proved to be unattractive to them. Accordingly, as it seems to me, this ground
of challenge fails.
When I turn to
the question of the comparables it seems plain that there was, as indeed Mr
Bernstein for the landlords has been constrained to acknowledge, an
irregularity in the way that this matter was handled. The arbitrator’s
direction was that any transaction relied upon should be vouched in effect by
some person having first-hand knowledge. The landlords did not adopt that
procedure, at any rate to the extent that they did not submit the verification
by the agents. But the tenants were not entirely disabled from dealing with
these transactions and in fact to some extent did so. It is argued by Mr
Collier that the two transactions to which it appears that the arbitrator may
have paid some attention are nos 7 and 11, one relating to Cutlers Gardens and
the other relating to another property in New Street. The tenants did make
submissions on those properties. They made representations on the Cutlers
Gardens development, although making the point, quite clearly and strongly,
that certain of the factual material relevant to the letting was not available
and could not be considered in the absence of direct evidence. The same point
is made in respect of the New Street property, although, again, Mr Richards did
make a comment on various aspects relating to it.
What then, in
the upshot, is the proper approach to these irregular features of this hearing?
Mr Collier submits that the procedure was irregular both because the agreed
procedure for handling the evidence was not adhered to and also because the
letter written by the landlords to the arbitrator was not copied by him. In the
event, as I have indicated, the arbitrator did not pursue the offer made to him
by the landlords and did not call for that correspondence. In theory there may
be two reasons for his failing to do so. One, which I have no doubt the
landlords infer was the true reason, was that he regarded the comparable
transactions as giving him so little assistance as to make further inquiry
unnecessary and unhelpful. There is, however, another possible reason, which is
no doubt the one which the tenants would incline to, that the arbitrator felt
that if a respected surveyor such as Mr Toye said that he had confirmation of
what he was saying in his submission then that could be relied upon.
The question
which I have immediately to consider is whether this failure by the arbitrator
both to follow the agreed procedure and to copy the letter to the tenants is
one that can, within the limits of previous authority as to its meaning, be
characterised as misconduct. There is, of course, no doubt about the rule that
natural justice must be observed in the conduct of arbitrations and I say, in
parenthesis, that that rule is no less cardinal in a case where lawyers are not
involved, in a rather more informal arbitration run between surveyors; indeed
it may very well be that the need for strict adherence to the customary
safeguards is more necessary where the eagle eye of lawyers on each side is
absent. It is further, of course, quite clear that arbitrators must not
communicate with one party unknown to the other, must not receive evidence from
one party unknown to the other and must not pay attention to evidence from one
party which the other party has not had the opportunity to meet.
However, in my
judgment, the facts of the present case fall into a slightly different
category. The arbitrator did not in any real sense receive evidence, he merely
received an offer from one party of evidence which, in the event, he did not
take up and did not communicate to the other party. Even allowing for the fact
that misconduct denotes no more than procedural irregularity, none the less it
seems to me that it would be stretching even the watered down interpretation of
that language to describe what happened here as misconduct because, of course,
it is an inescapable fact that misconduct, however technical, does reflect on
the way in which an arbitrator has conducted an arbitration. None the less,
that does not on current authority conclude the matter and it is necessary to
consider whether, even in the absence of misconduct, there has been any mishap
or misunderstanding or error in procedure in the course of this arbitration
which could lead, or might have led, to an unjust result. By an unjust result,
of course, one must include the possibility that the same result has been
achieved as would have been achieved but none the less in circumstances in
which one party has a justified sense that he may have been prejudiced by the
procedural course which the arbitration took.
This seems to
me such a case. As I have indicated I do not think that it would be in any way
appropriate to stigmatise the conduct of this arbitrator as misconduct. I have
no doubt that he acted throughout with a scrupulous regard for the interests of
each party and his award strongly suggests to me that he set out to do the very
best he could to achieve the correct rental for these premises. It also seems
likely to me that he paid very little attention to any of the comparable
transactions to which the landlords drew his attention. None the less, the fact
is that a letter was sent which the tenants never saw and one can very well
understand the tenants’ feeling that it may have been read by the arbitrator as
giving some confirmation to the comparables which they had advanced and may
even perhaps subconsciously have affected the arbitrator’s mind. I have no
doubt that when the matter is drawn to his attention he will be able to
approach the matter on an entirely scrupulous basis, putting out of his mind
anything which should properly not be within it. Whether he orders that the
material proffered by Mr Toye be produced to him and copied by the other party
or whether he approaches the matter on the basis of ignoring completely the
comparable transactions for which no adequate verification has been produced
is, I think, a matter very much for his judgment in the light of any
representations made by one party or the other. His overall obligation is to be
scrupulously fair in dealing with this matter and no suggestion has been made
that anything in his conduct disables him from acting in that way.
Accordingly,
and bearing in mind the principles laid down in a number of cases, most notably
perhaps The Aros [1978] 1 Lloyd’s Rep 456, this seems to me a case in
which there has been a procedural mishap and in which, in all the
circumstances, it would be right that the matter should be remitted to the
arbitrator for his further consideration having regard to the terms in which I
have given judgment.
I make it
clear, although I hope it is entirely clear already, that I am not making a
finding of misconduct against him and I am certainly not, as indeed the tenants
themselves are not, criticising in any way his fairness or objectivity or
personal conduct in this matter.
The award was
remitted to the arbitrator for reconsideration and such further action as he
considered appropriate in the light of the judgment. The tenants (respondents)
were awarded half the costs of this hearing.
