Arbitration — Landlord and tenant agreeing statement of facts including assumptions as basis for valuation — Whether arbitrator entitled to depart from agreed assumption without further reference to the parties
By a lease
dated September 26 1991 the applicant holds a term of 25 years expiring in 2006
at an initial rent of £450,000 pa subject to review in 1991, 1996 and 2001. The
demised premises consist of a warehouse of 99,000 sq ft consisting of eight
bays, each of some 12,000 sq ft. The rent review clause provided for the
determination of the annual rent per sq ft to be multiplied by 99,032 and that
the relevant rent per sq ft should be the annual rent at which a self-contained
building in the immediate locality of the demised premises comprising approximately
11,000 sq ft of accommodation of similar standard of construction and of
similar age at the relevant review date might reasonably be expected to be let
in the open market. Following a reference to arbitration in relation to the
rent review in 1991, on March 26 1992 the arbitrator gave directions and a
timetable for the making of submissions and counter-submissions. The arbitrator
invited the parties to clarify the main assumption to be made in assessing the
rent at review. The parties’ surveyors agreed a statement of facts including an
assumption that: ‘The property to be valued is situated in the immediate
vicinity and is of a similar age, height, construction and layout to the
existing property with a gross internal floor area of 11,000 sq ft . . .’. In
his award dated July 16 1992 the arbitrator, in dealing with the agreed
assumption, noted that the lease was entirely silent as to ‘height,
construction and layout’, was non-specific as to such physical features
requiring only the characterisation of the hypothetical premises and buildings
not their slavish reconstruction to a gross internal area of 11,000 sq ft. The
arbitrator formed the view that the tenant’s surveyor had
further than the realities of the formula in the lease required. The arbitrator
awarded the relevant rent per sq ft at £7 pa. The applicant tenant contended
that the arbitrator had misconducted himself in discarding the assumption
agreed to by the parties’ surveyors, the conduct being either an excess of
jurisdiction or a breach of the principles of natural justice or procedural
fairness, alternatively there has been a procedural mishap or misunderstanding
which rendered it inequitable to allow the award to stand.
reconsideration as a whole by the arbitrator. The facts and assumptions agreed
by the parties’ surveyors were intended to be a legally binding contract, but
it was a contract of a special character. On principle and as a matter of
common sense the very nature of the contract requires as a special incident of
such contract that the arbitrator should be entitled either to enforce it or to
release the parties from it as the demands of justice require. If, for example,
the statement of facts proves ambiguous or unworkable or leads to problems or
consequences unforseen by the parties when entered into, or contains mistakes
which subsequently come to light, good cause may exist for an application to
the arbitrator to release the parties from it. The release, however, must be
(if both parties do not agree in effect to the deletion of one provision only)
a release from the agreement as a whole. The agreement is one which the
tribunal may refuse to enforce if it is inequitable to do so applying the
analogy of principles governing the enforcement of in- terlocutory consent
orders. Before exercising his discretion not to enforce the agreement the
arbitrator must give an opportunity to both parties to be heard on the issue.
The arbitrator was not entitled, without any notice to either party, to treat
one of the concessions as ineffective and to be ignored. The award was remitted
in its entirety to the arbitrator with the direction, that after giving the
parties an opportunity to adduce evidence or make submissions in respect
thereof, the arbitrator consider and determine whether to require the parties
to abide by the agreed statement of facts, and in particular the concession in
issue, and to receive such further or revised evidence or submissions as each
party to the arbitration may wish to present to him in the light of such
determination.
The following
cases are referred to in this report.
Bahamas
International Trust Co Ltd v Threadgold
[1974] 1 WLR 1514; [1974] 3 All ER 881; [1975] EGD 1; (1974) 233 EG 47, [1975]
1 EGLR 1, HL
Boots the
Chemists Ltd v Pinkland Ltd [1992] 2 EGLR
176; 28 EG 118
Clark (H)
(Doncaster) Ltd v Wilkinson [1965] Ch 694;
[1965] 2 WLR 751; [1965] 1 All ER 934, CA
Purcell v Trigell [1971] AC 358; [1970] 3 WLR 884
King v Thomas McKenna Ltd [1991] 2 QB 480; [1991] 2 WLR 1234;
[1991] 1 All ER 653, CA
This was an
application by the applicant, Techno Ltd, under sections 22 and 23 of the
Arbitration Act 1950 to set aside, alternatively remit, an award of an
arbitrator in rent review proceedings under a lease dated September 26 1991 the
reversion to which was owned by the respondents, Allied Dunbar Assurance plc
and others.
Hazel
Williamson QC (instructed by Rabin Leacock & Lipman) appeared on behalf of
the applicant; Paul Morgan QC (instructed by Nabarro Nathanson) represented the
respondents.
Giving
judgment, MR GAVIN LIGHTMAN QC said: This is an application by Techno
Ltd (‘the tenant’) for an order: (1) that the interim award (‘the award’) made
by Mr John Phillips [FRICS, ACIArb] as arbitrator (‘the arbitrator’) in an
arbitration pursuant to a rent review clause in a lease dated September 26 1991
(‘the lease’) be set aside pursuant to section 23 of the Arbitration Act 1950;
and/or (2) that the matters referred to in the arbitration (namely the
determination of the relevant rent per sq ft of the demised premises) be
remitted for reconsideration to the arbitrator pursuant section 22 of the 1950
Act. The tenant is content with an order for remission to the same arbitrator
and, since any grounds entitling the tenant to an order to set aside the award
must equally entitle the tenant to an order for remission, the tenant is
content to limit the relief sought to the second head.
The lease is
for the term of 25 years expiring in 2006 at the initial rent of £450,000
subject to review in 1991, 1996 and 2001. It is the initial review which is in
progress — a review agreed to take place almost immediately after the lease was
granted for reasons unnecessary to explain. The demised premises consist of a
warehouse of some 99,000 sq ft consisting of some eight bays, each of some
12,000 sq ft. The relevant provisions of the rent review clause are contained
in clause 4 of the lease which (so far as material) reads as follows:
(A) . . . The annual rent payable from a review
date shall be the higher of
(i) a sum equal to the relevant rent per square
foot (as that term is hereinafter defined) at that review date (fixed by
agreement or by the surveyor as hereinafter mentioned) multiplied by 99032
being the floor area in square feet of the accommodation provided by the
buildings standing upon the demised premises and
(ii) the annual rent payable immediately before
that review date
(B) The relevant rent per square foot shall be
the annual rent per square foot at which a self-contained building in the
immediate locality of the demised premises comprising approximately 11,000
square feet floor area of accommodation . . . of similar standard of
construction to the buildings now situate on the demised premises . . . and of
similar age to such buildings but well maintained in all respects . . . at the
review date might at the relevant review date reasonably be expected to be let
in the open market between a willing tenant and a willing Landlord for a term
of years equivalent to the residue then remaining unexpired of the said term or
a term of Ten years (with upward only review at the expiration of every fifth
year) whichever is the greater with vacant possession under a lease containing
terms similar (mutatis mutandis) to the terms of this Lease.
Provision is
made for the appointment of an arbitrator in default of agreement of the
relevant rent per sq ft; and also for payment of interest on any difference
between the existing and reviewed rent between the review date and the date of
determination of the reviewed rent and its payment.
Mr Phillips
was duly appointed arbitrator. On March 26 1992 at a meeting with the parties’
surveyors he gave directions. As well as setting a time table for submissions
and counter-submissions, following a reading of the rent review provisions he
stated that it would assist him if the surveyors would clarify the main
assumptions to be made in assessing the rent at review, and thus eliminate as
many areas of dispute or uncertainty as possible and to clarify the basis of
the valuation to be adopted by the arbitrator.
The parties’
surveyors thereupon agreed a statement of facts and this statement of facts
included in section 5 the following:
5.0
ASSUMPTIONS TO BE MADE IN ASSESSING THE RENT AT REVIEW
. . . (iv)
The property to be valued is situated in the immediate vicinity and is of a
similar age, height, construction and layout to the existing property with a
gross internal floor area of 11,000 sq ft and with all necessary parking,
loading and unloading facilities.
The tenant’s
surveyor, Mr Andrew J Ilsley [ARICS], in his affidavit dated February 10 1993
deposes to the circumstances and manner in which the statement of facts come
into being:
4. The
Statement of Facts was agreed between Mr Waud [the landlord’s surveyor] and me
and Section 5 was agreed on the basis of what was appropriate: for example Mr
Waud wished to include in Section 5 a reference to the height of the building
which he considered to be a positive factor in favour of the [landlord]. Thus
the Statement of Facts as signed by Mr Waud and me was a reasoned and
considered document acceptable to both of us.
Both parties’
surveyors on April 23 1992 sent their submissions to the arbitrator and on May
6 and 7 1992 their counter-submissions. In Mr Ilsley’s submissions on behalf of
the tenant, he placed assumption (iv) in section 5 of the statement of facts in
the forefront of his case and in particular laid weight on the assumption
regarding layout, which (on his construction of it) required the arbitrator to
assume that the notional 11,000 sq ft building was a shrunken version of the
demised premises. Mr Christopher Waud [ARICS], in his submissions, made no reference
to this assumption and he merely invited the arbitrator to proceed on the basis
that the notional building had a good clear working area, a characteristic of
the demised premises. In his counter-submissions Mr Ilsley pointed out the
failure of Mr Waud to refer to the assumption and reaffirmed its importance. In
his counter-submissions, Mr Waud contented himself with saying that it was
wrong to make this assumption as to layout. He did not expressly say the
statement of facts or assumption
on this basis. Indeed it is possible to read his submissions as expressing his
construction of the term ‘layout’ in the concession and accordingly as adopting
and giving effect to the concession.
After
counter-submissions had been exchanged, the parties had the opportunity by
letter to correct matters of fact, and this opportunity was taken advantage of,
but no references made in their letters to this difference as to assumption as
to layout, and neither the arbitrator nor either party raised this question or
sought to resolve it at an oral hearing or by any other means.
In his award
dated July 16 1992, the arbitrator dealt with this question as follows:
12
Description
I fear that a
good deal of eloquence has been wasted under this heading, in some of the
submissions put forward having regard to the need to restrict all argument and
opinion to the constraint of the Rent Review Clause and it may therefore be
helpful if I dissect it hereunder, with my comments thereon in the light of the
evidence . . . (f) ‘. . . of similar standard of construction to the Buildings
now situate on the demised Premises . . .’
Surprisingly, the evidence which has been submitted to me in the
Statement of Agreed Facts, signed by both parties’ Surveyors on the 23 April
this year, attempts to vary the Rent Review Clause in Paragraph 5(iv) on page 4
thereof, in the following way — ‘The Property . . . is of a similar age,
height, construction and layout to the existing Property . . .’ The Lease is quite clear as to similar standard
of construction and to similar age . . . but is entirely silent as to
‘height, construction and layout’ and non-specific as to such physical
features, requiring only the characterisation of the hypothetical Premises and
Buildings, not their slavish reconstruction to a gross internal area of 11,000
square feet. I have therefore formed the view that any argument or opinion
evidence suggesting otherwise is not well founded and that the hypothetical
Premises are required to be in context with their size and the other criteria
of the Rent Review Clause.
In para 16 of
his award the arbitrator stated that he had formed the view that Mr Ilsley had
misdirected himself in limiting the characteristics of the hypothetical
premises further than the realities of the formula in the lease required and
had thereby persuaded himself towards a level of value below anything capable
of evidential substantiation.
He then went
on in section 17 to award the relevant rent per sq ft as defined as at the rent
review date of September 29 1991 at £7 pa.
The tenant’s
complaint against the award is that the arbitrator has misconducted himself in
discarding the assumption agreed to in the statement of facts. It is said that
this conduct either constitutes an excess of jurisdiction, his jurisdiction
being restricted by the statement of facts, or a breach of the principles of
natural justice or procedural fairness, in so far as the tenant was at no time
given notice by the arbitrator that he had in mind discarding that assumption.
Alternatively, it is contended that the course of events in the arbitration
regarding the assumption constituted a procedural mishap or misunderstanding
which rendered it inequitable to allow the award to stand and such a state of
affairs (irrespective of any misconduct on the part of the arbitrator) was
grounds for ordering a remission: see King v Thomas McKenna Ltd
[1991] 2 QB 480.
Miss Hazel
Williamson QC, for the tenant, has argued that the statement of facts
constitutes a package of terms agreed between the parties and constitutes a
contract binding on them (and the arbitrator) like any other contract. She says
that the arbitrator was not free to depart from them, still less without
affording the parties an opportunity to address on this question; and that even
if this procedure had been followed, after making a determination (in effect)
to override the assumption, the arbitrator should have given both parties the
opportunity to present their cases in the light of this ruling, since the
existence of the concession certainly underlay the presentation of the tenant’s
case. Mr Paul Morgan QC, for the landlord, submitted that the statement of
facts was no more than a series of concessions which it was open to either
party to withdraw, and that Mr Waud’s submissions made clear that he did not
regard the concession as operative. In any event Mr Morgan says that this is
all a storm in a teacup and relief should be refused since in any event the
arbitrator would have reached the same result.
Since
underlying the tenant’s complaint lies the disregard by the arbitrator of the
assumption in the statement of facts and its status is in issue, I think that I
am obliged to examine the legal nature and effect of such statement of facts. I
am further encouraged to do by the knowledge that, if I direct remission, the
arbitrator will be faced with the same question and that (for the saving of
costs and perhaps a further application to the High Court) I ought to assist as
best I can.
The parties
have been unable to find any authority or text book affording guidance on this
question, and I am left to approach it on the basis of principle, analogy and
common sense.
The statement
of facts on the evidence before me was a package deal: both parties negotiated
and agreed its terms in an endeavour to secure the more expeditious, economic
and (no doubt as each party saw it) advantageous determination of the
arbitration. Each party agreed the facts and assumptions in consideration of the
like agreement by the other party and, as I see it (for I see nothing to
indicate to the contrary), intended it to be legally binding. The agreement
accordingly does constitute a binding contract. But since it is a contract
intended to be only a tool in the conduct and determination of the existing
arbitration, it is a contract of a special character. It is a contract which
can be enforced or given effect to only in the arbitration, and it seems to me
on principle and as a matter of common sense that the very nature of the
contract requires as a special incident of such contract that the arbitrator
should be entitled either to enforce it or to release the parties from it as
the demands of justice require. If, for example, the statement of facts proves
ambiguous or unworkable or leads to problems or consequences unforeseen by the
parties when entered into, or contains mistakes which subsequently come to
light, good cause may exist for an application to the arbitrator to release the
parties from it. So in this case if the arbitrator concludes that a concession
agreed as part of a statement of facts intended to ease the task of the
arbitrator has the opposite effect and creates unnecessary and unintended
complications and difficulties, he may direct that the arbitration proceeds
untrammelled by it. Principles and common sense further require that in
exercising his discretion the arbitrator must have regard to the reasons relied
on by the party seeking its exercise: good reason must be required if effect is
not to be given to a bargain deliberately made. Likewise attention must be
given to the stage which the proceedings have reached: the later the stage, the
greater the potential injustice to one party of allowing the other to be freed
from the fetters in the litigation which he has voluntarily assumed. The
release, however, must be (if both parties do not agree in effect to deletion
of one provision only from the agreed statement of facts) a release from the
agreement as a whole: otherwise the arbitrator would be asserting jurisdiction
to substitute a new package deal for the old and to rewrite the parties’
contract.
There are two
possible sources of the special incident. The first is to imply a term into the
agreement that the obligations assumed are to continue in force only until the
arbitrator determines otherwise.
The analogy
which appears closest to this is the approach adopted by the Rules of the
Supreme Court to the amendment or withdrawal of formal admissions (see Ord 27,
r 2(2)) and to the withdrawal of concessions made in course of proceedings: see
eg H Clark (Doncaster) Ltd v Wilkinson [1965] Ch 694 at p702. The
leave of the court is required, the criterion is what is just, and what is just
may depend on the extent to which the other party has proceeded to his
prejudice in reliance on the concession or admission: see Boots the Chemist
Ltd v Pinkland Ltd [1992] 28 EG 118, [1992] 2 EGLR 98. Leave will
more readily be given if the concession is one of law, and in particular if it
is a question of construction of a document: see Bahamas International Trust
Co Ltd v Threadgold [1974] 1 WLR 1514; but even as a question of
construction for the purposes of pending litigation can be the subject of a
binding agreement or compromise (eg in consideration of one of the parties not
claiming rectification), so a concession on, or related to, an issue of
construction can be the subject of a legally binding agreement.
The
alternative route is to hold that the agreement is a subject to no such
implication, but none the less is one which the tribunal may refuse to enforce
if it is inequitable to do so. This would involve applying as an analogy the
principles governing the enforcement of interlocutory consent orders: see Thwaite
v Thwaite [1982] Fam 1 and Purcell v Trigell [1971] AC
358.
I favour the
latter approach and I have no doubt that the tribunal has a discretion whether
to enforce the agreement on analogy with the like discretion whether to enforce
interlocutory consent orders. In these circumstances it is unnecessary to decide
whether there is to be implied a term in the agreement to the effect that it
will continue in force only until the arbitrator decides otherwise. Indeed in
view of the existence of the discretion vested in the arbitrator whether to
enforce the agreement, it must be doubtful whether any such term need or can be
implied in the agreement.
It therefore
seems to me that the agreement is a binding contract, but that the arbitrator
has a discretion not to enforce it. Before
parties to be heard on the issue and, after exercising his discretion (and in
particular after exercising his discretion not to enforce it), must ensure that
in the light of his decision both parties are given the opportunity to present
their cases fully. In exercising this discretion, he must have regard to the
fact that, unless both parties agree, he can refuse only to enforce the
agreement in whole: he cannot select not to enforce only part, ie assumption
(iv) or still less omit the word ‘layout’. He should have regard to the
prejudice to be occasioned to the tenants by a decision to jettison the
assumption and perhaps statement of facts, but in this regard he may conclude
that any prejudice can sufficiently be cured by allowing the tenant to
represent its case fully on the new basis, ie in the light of the ruling and by
appropriate orders as to costs.
In the present
case the arbitrator, while generally treating the statement of facts as
operative and effective, without any notice to either party treated assumption
(iv) alone as ineffective and to be ignored. In my view, this he was not
permitted to do. He was entitled to form the prima facie view that the
concession involved and led to an untenable view as to the scope and effect of
the rent review clauses; he was entitled to invite them to address him whether
he should ignore that provision and, indeed, if objection was then taken to his
overriding that provision alone, the statement of facts as a whole; and, in the
light of the parties’ submissions, he should have ruled on the question and
given notice of his ruling; and then invited the parties to address him on what
further opportunities should be given to adduce evidence and argument on the
substantive issue in the arbitration in the light of his ruling. I have no
doubt that in exercising his discretion he was entitled to have regard to any
problems, whether in form of ambiguity or unintended results or otherwise,
occasioned by the language of the concession. In the light of the evident
weight and reliance given and placed by the tenant on the concession by the
tenant’s surveyor, natural justice required that Mr Ilsley be given the
opportunity: (1) to make submissions to the arbitrator as to the course to be
taken by him in respect of the concession and statement of facts as a whole;
and (2) after any ruling precluding reliance on the concession to supplement
his case to meet this critical change of circumstance.
Since the
arbitrator did not follow this course, as it seems to me, the arbitrator was
guilty of misconduct, and since I cannot be certain whether further evidence or
submissions occasioned by the change in the ground rules might not have
impacted on the award, I must remit the award to the arbitrator with appropriate
directions.
It will be
seen that I have decided this case on the basis of procedural irregularity by
the arbitrator. In the case of a breach of the ground rules in the form of an
agreed statement of facts, I prefer this analysis to that of an excess of
jurisdiction involved in failing to give effect to a substantive provision in
the arbitration agreement itself: cf Couvela v Volkart (1888) 4
TLR 209. It is implicit in my decision that in any event there was at the least
a procedural mishap requiring a remission.
I shall order
that the interim award be remitted in its entirety to the arbitrator and direct
that, after giving the parties the opportunity to adduce evidence or make
submissions in respect thereof, he consider and determine whether to require
the parties to abide by the statement of facts and in particular section 5
assumption (iv); and to receive such further or revised evidence or submissions
as each party to the arbitration may wish to present to him in the light of
such determination; and that in making his award upon the ‘relevant rent per sq
ft’ he take account of such further or revised evidence or submissions. I shall
further direct pursuant to section 13(2) of the Arbitration Act 1950 that the
arbitrator may make his award later than three months after the date of this
judgment.
Orders
accordingly.
