Rent review — Arbitration — Applications to remit award on ground that arbitrator made finding on no evidence and for leave to appeal — Application to strike out — Whether arbitrator erred in law — Whether arbitrator applied correct test in holding that tenant complied with repairing covenants by patch repairing air conditioning plant in place of the plant’s complete replacement
Westminster City Hall contained an air conditioning plant said to have a maximum life of five years. In the course of a rent review arbitration of the building, the arbitrator made a comparison with Esso House, made a finding that the plant in that building was not worn out and made a deduction in the rent of City Hall to reflect the cost and time involved in carrying out works. He further held that on a proper construction of the repairing covenants City Hall would be in a proper state or repair if instead of replacing the air conditioning plant patch repairs, crisis repairs or ad hoc repairs were done to parts of the plant from time to time The applicant landlords applied: (1) to have the arbitrator’s award remitted to him under section 22 of the Arbitration Act 1950 on the ground that there had been no evidence before the arbitrator that there was a difference in the specifications of Esso House and City Hall; and (2) by way of an appeal under section 1 of the Arbitration Act 1979 (leave having been granted) contending that the arbitrator had erred in law in holding that a reasonably minded tenant would have regarded City Hall in repair by the carrying out by way of patch repairs, crisis repairs or ad hoc repairs The parties agreed that it must be assumed at review that the tenants had complied with their repairing covenants. It was the landlord’s case before the arbitrator that by the rent review date of March 25 1991 it must be assumed that the tenants had spent £1.35m on new replacement air conditioning plant to satisfy the repairing covenant. The arbitrator rejected that argument and deducted £200,000 from the yearly rent to reflect the actual state of repair which he found complied with the repairing covenant. The respondent tenants applied to strike out the landlord’s application to remit the arbitrator’s award, contending that where an arbitrator has made a finding of fact on no evidence, such an error cannot amount to misconduct justifying remission under section 22 of the Arbitration Act 1950.
Held: 1. The tenants’ application to strike out was dismissed. The authorities clearly establish that the discretion to remit under section 22 of the Arbitration Act 1950 is available where there has been a breach of the rules of natural justice, notwithstanding that the breach may have led the arbitrator to make an error of law in the shape of a finding of fact where there is no sufficient evidence to support it.
2. The application to remit was allowed. The issue as to the physical state of the services at Esso House was a highly material matter. The arbitrator was in breach of the rules of natural justice in failing to allow the landlords an opportunity to adduce evidence on that matter.
3. The appeal under section 1 of the Arbitration Act 1979 was dismissed. By concluding that the air conditioning plant had not been replaced, the arbitrator had accepted that the tenants were not obliged by the repairing covenant to carry out works of replacement, there being another way by which the tenants could comply short of replacement. There was nothing to suggest that the arbitrator did not properly apply the test in Proudfoot v Hart (1890) 25 QBD 42.
The following cases are referred to in this report.
Aquilina v Havering London Borough Council [1993] 1 EGLR 33; [1993] 05 EG 139
Exormisis Shipping SA v Oonsoo (The Aristides Xilas) [1975] 1 Lloyd’s Rep 402
Cocks v Thanet District Council [1983] 2 AC 286; [1982] 3 WLR 1121; [1982] 3 All ER 1135; (1982) 81 LGR 81, HL
Fairmount Investments Ltd v Secretary of State for the Environment [1976] 1 WLR 1255; [1976] 2 All ER 865; (1976) 75 LGR 33, HL
Fine Fare Ltd v Kenmore Investments Ltd [1989] 1 EGLR 143; [1989] 21 EG 81
Geogas SA v Trammo Gas Ltd unreported November 5 1992
Gillespie Bros & Co v Thompson Bros & Co (1922) 13 Lloyd’s Rep 519
GKN Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd’s Rep 555
Hungerford (Dame Margaret) Charity Trustees v Beazley [1993] 2 EGLR 143; [1993] 29 EG 100
King v Thomas McKenna Ltd [1991] 2 QB 480; [1991] 2 WLR 1234; [1991] 1 All ER 653, CA
Moran v Lloyd’s [1983] QB 542; [1983] 2 WLR 672; [1983] 2 All ER 200; [1983] 1 Lloyd’s Rep 472, CA
Murray v Birmingham City Council (1987) 20 HLR 39; [1987] 2 EGLR 53; 283 EG 962, CA
O’Reilly v Mackman [1983] 2 AC 237; [1982] 3 WLR 1096; [1982] 3 All ER 1124, HL
Oleificio Zucchi SpA v Northern Sales [1965] 2 Lloyd’s Rep 496
Proudfoot v Hart (1890) 25 QBD 42
Techno Ltd v Allied Dunbar Assurance plc [1993] 1 EGLR 29; [1993] 22 EG 109; [1993] NPC 42
Universal Petroleum Co Ltd v Handels und Transport GmbH [1987] 1 WLR 1178; [1987] 2 All ER 737, CA
Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14; (1985) 275 EG 1134
The landlord, Land Securities plc, applied by notices of motion: (1) to remit an arbitrator’s award, in an arbitration to determine the rent payable by the respondents, Westminster City Council, under section 22 of the Arbitration Act 1950; and (2) to hear an appeal against the same award under section 1 of the Arbitration Act 1979 following the granting of leave under section 1(3)(b) of the 1979 Act. The tenants applied to strike out the landlord’s application under section 22 of the 1950 Act.
Michael Barnes QC and John Male (instructed by Nabarro Nathanson) appeared for the applicant; Terence Cullen QC and John Burrett (instructed by the solicitor to Westminster City Council) represented the respondents.
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Giving the first of three judgments on July 21 1993, Jonathan Parker J said: By a notice of motion dated February 1 1993 Land Securities plc, ‘Land Securities’, seek an order under section 22 of the Arbitration Act 1950 that an interim reasoned award published on the January 11 1993 in an arbitration between Land Securities, on the one hand, and the Lord Mayor and Citizens of the City of Westminster, ‘Westminster’, on the other, the respondents to the notice of motion, be remitted to the arbitrator for reconsideration of certain matters specified in the notice of motion.
By notice of motion dated April 16 1993 Westminster applies to strike out Land Securities’ notice of motion under Ord 18 r19 of the Rules of the Supreme Court, alternatively under the inherent jurisdiction of the court, on the ground that it discloses no reasonable cause of action and further, or alternatively, on the ground that it is an abuse of the process.
It is Westminster’s application to strike out Land Securities’ notice of motion which is now before me and on which I now rule.
The award in question purported to determine the fair market rack-rent of Westminster City Hall in Victoria Street, ‘City Hall’, of which Land Securities are the landlords and Westminster the tenants, as at March 25 1991.
Each side, I am told, put forward a number of comparables for the consideration of the arbitrator and included in each side’s list of comparables was a property known as Esso House, which is also situated in Victoria Street, which was built at about the same time as City Hall and which had recently been relet.
The arbitrator in his award referred to Esso House as being far and away the outstanding comparable on this issue. In the course of his award the arbitrator said with reference to Esso House and City Hall:
At the hearing Mr Krendel
— and I interpolate to say that he was the surveyor called by the landlord —
said there is not much in the specification between the two buildings. In general terms I agree, but specifically and importantly not in respect of two items namely certain mechanical installations, including air conditioning and electrical services.
There is nothing in the evidence to assume that those items were worn out or substandard at Esso. Consequently in respect of those items the subject property stands alone from this or any other comparable and proper allowance has to be made.
Later in the award he said:
Due to the direct comparison with Esso and its condition on letting certain works need not be considered. However, direct comparison endorses the short-comings demonstrated in the evidence at the subject building concerning the mechanical and electrical installations due to the age and original specification of the building including the fact that the air conditioning is not deemed to have been replaced.
Then towards the conclusion of the award, having calculated what he described as the base office rent by reference to the direct comparable derived from Esso House, which gave a total rent for City Hall of £5,370,000 pa, the arbitrator proceeded to make an adjustment designed to reflect the need which he apparently saw for the mechanical and electrical services at City Hall to be brought up to the standard of those at Esso House, albeit (as he had expressly acknowledged earlier in the award) there was no evidence before him as to the standard of the services at Esso House. In making this adjustment the arbitrator calculated the cost of the works required to be carried out to the services at City Hall to bring them up to the standard of those at Esso House at a sum of £7,297,500, that figure reflecting, first, building costs and, second, loss of income during the period while the works were being carried out. He then calculated that this sum represented in annual terms the equivalent of a sum of £977,955. He accordingly deducted that latter sum from the valuation based upon the base office rent to produce a net valuation of £4,392,045. He then made a further adjustment (with the terms of which I am not concerned) to reflect the terms of the lease, which reduced the final figure to £4,260,000 which was the sum awarded and determined as the fair market rack-rent of City Hall as at the relevant date.
By their notice of motion Land Securities seek an order that the following two matters be remitted to the arbitrator for reconsideration, that is to say, and I read from the notice of motion:
1. A proper consideration of the differences in the specifications of Esso House and City Hall and
2. The effect of those differences upon the assessment of the fair market rack-rent of City Hall.
The grounds upon which remission is sought are then set out and I must read them in full.
1. In comparing the comparable known as Esso House with City Hall the arbitrator found as a fact that the specification of Esso House was specifically and importantly different to that of City Hall in respect of two items, namely, certain mechanical installations including air conditioning and electrical services. He further found that there was nothing in the evidence to assume those items were worn out or substandard at Esso House and that in respect of those items proper allowance had to be made.
2. As a result of his direct comparison between Esso House and City Hall and as a result of making proper allowance for those items just mentioned, the arbitrator deducted £977,955 pa from his valuation representing the cost and time involved in carrying out works in respect of those items.
3. If the arbitrator had not made allowance for those items the rent determined would have been £5,208,000 instead of £4,260,000 pa.
4. The evidence of the valuer for the applicant and the evidence of the valuer for the respondent was that there was no or no significant difference between the specifications of the two buildings. Neither the applicant nor the respondent called any expert evidence as to the condition of the mechanical installations and electrical services at Esso House with the condition of those at City Hall.
5. Accordingly it was common ground between the parties that there was no issue between them, that there was no or no significant difference between the specifications of the two buildings.
6. Notwithstanding the said common ground and the fact that there was no issue as aforesaid the arbitrator decided that there was specific and important differences between the specifications of the two buildings. The arbitrator did so without (1) putting this point to the two parties and in particular to the applicant, (2) giving the parties, and in particular the applicant, the opportunity to comment on this point, (3) giving the parties, and in particular the applicant, the opportunity to call expert evidence on the condition of the mechanical installations, including air conditioning and electrical services in Esso House and (4) giving the parties and in particular the applicant the opportunity to call expert evidence comparing the condition of the mechanical installations, including air conditioning, and electrical services in Esso House with the condition of those in City Hall.
7. As a result of the matters aforesaid the arbitrator based his decision on a matter which the parties had never had the chance to deal with and the applicant first learned of an adverse point against it in the award.
8. The arbitrator thereby acted in breach of the rules of natural justice and committed misconduct.
9. Accordingly, the award should be remitted to the arbitrator.
It is accepted by Mr Terence Cullen QC, who appears with Mr John Burrett for Westminster, that for the purposes of Westminster’s application to strike out Land Securities’ notice of motion all the averments of fact made in Land Securities’ notice of motion must be taken as true.
Before turning to the arguments of Mr Cullen for Westminster and of Mr Michael Barnes QC, who appears with Mr John Male for Land Securities, I must first refer to the statutory provisions relevant to the argument on the application to strike out. First of all, I refer to section 22(1) of the Arbitration Act 1950, the terms of which were not altered in any way by the Arbitration Act 1979. Section 22(1) of the 1950 Act reads as follows:
In all cases of reference to arbitration the High Court, or a Judge thereof, may from time to time remit the matters referred or any of them to the reconsideration of the arbitrator or umpire.
By their notice of motion Land Securities invite the court to exercise its discretion under that subsection in favour of directing that|page:247| the specified matters be remitted for the reconsideration of the arbitrator.
Second, I must refer to subsections (1) and (2) of section 23 of the Arbitration Act 1950, which were also referred to in argument. Those subsections read as follows:
(1) Where an arbitrator or umpire has misconducted himself or the proceedings the High Court may remove him.
(2) Where an arbitrator or umpire has misconducted himself or the proceedings or an arbitration or award has been improperly procured the High Court may set the award aside.
Third, I must refer to section 1 of the Arbitration Act 1979, the terms of which are relied upon strongly by Mr Cullen as in effect setting limits on the scope of the discretion conferred by section 22(1) of the 1950 Act in circumstances where the arbitrator is said to have made a finding on the basis of insufficient evidence.
Subsection (1) of section 1 does away with the pre-existing procedure for appeal by way of case stated and goes on to provide that:
Without prejudice to the right of appeal conferred by subsection (2) of the section the High Court shall not have jurisdiction to set aside or remit an arbitration agreement on the ground of errors of fact or law on the face of the award. )
Subsection (2) provides that subject to subsection (3) of the section an appeal shall lie on any question of law arising out of an arbitration award, but subsection (3) provides that (unless the other parties to the reference agree to the appeal being brought) leave to appeal is required.
Subsection (4) provides as follows:
The High Court shall not grant leave under subsection (3)(b) above unless it considers that having regard to all the circumstances the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement; and the court may make any leave which it gives conditional upon the applicant complying with such conditions as it considers appropriate.
Subsection (5) provides that a party may with leave, unless the other parties agree, apply for a direction that the arbitrator state reasons for his decision where the award does not sufficiently set out such reasons and the court in such circumstances has a discretion to make such a direction.
Subsection (6) provides that where no reasons are stated in the award no order is to be made under subsection (5) unless the court is satisfied either (a) that before the award was made one of the parties had notified the arbitrator that a reasoned award was required, or (b) that some special reason exists why no such notice was given.
Subsection 6(A), which was added by section 148(2) of the Supreme Act 1981, provides that unless the High Court gives leave no appeal lies from a decision of the High Court on an application for leave under subsection (3) or subsection (5) of the section, or from a decision to make or not to make an order under subsection (5).
Finally, for present purposes, subsection (7) provides:
No appeal shall lie to the Court of Appeal from a decision of the High Court on an appeal under the section unless
(a) the High Court or the Court of Appeal gives leave and
(b) it is certified by the High Court that the question of law to which its decision relates either is one of general public importance, or is one which for some other special reason should be considered by the Court of Appeal.
Subsection (8) is not material for present purposes and accordingly I do not read it.
Having set out the relevant statutory background I turn to the arguments of Mr Cullen, for Westminster, and of Mr Barnes, for Land Securities.
Mr Cullen submits that what has happened here assuming, as he must, that all the averments in Land Securities’ notice of motion are true, is that the arbitrator has made a finding of fact on the basis of no evidence, and that on the authority of Gillespie Bros & Co v Thompson Bros & Co (1922) 13 Lloyd’s Rep 519, such an error is an error of law which cannot amount to misconduct such as could justify a remission under section 22 of the 1950 Act. He has also referred me to the decision of McNair J in the case of Oleificio Zucchi SpA v Northern Sales [1965] 2 Lloyd’s Rep 496, where the judge at p521 of the report said:
The conclusions I have reached on these judgments and certain others I was referred to in the course of the argument may be summarised as follows;
(1) The question of whether there was evidence to support a particular finding can properly be raised in the form of a special case raising that as a question of law and in such cases it is sufficient and proper for the arbitrator to summarise the evidence upon which he relies and he need not set out the whole of the transcript, and
(2) it is never possible to set aside an award merely because there was no evidence supporting a particular finding unless it appears from the award itself that there was no evidence to support the finding; thirdly, subject thereto, the findings of the arbitrator are final and it is of no avail to state on the grounds for setting aside the award that the findings were erroneous. This is substantially the burden of many of the grounds in this motion.
Mr Cullen also relies in this context on the decision of Donaldson J (as he then was) in the case of the The Aristides Xilas [1975] 2 Lloyd’s Rep 402.
Mr Cullen accepts that a remission under section 22 may also be ordered where there has occurred, to use Lord Donaldson’s phrase in the case of King v Thomas McKenna Ltd [1991] 2 QB 480, an authority to which I must return in a moment, some procedural mishap or misunderstanding, but he submits that where, as here, the ultimate result is, or may be, a finding of fact being made on the basis of insufficient evidence, the discretion under section 22 is not available. He submits that to entertain an application for remission in such circumstances would operate as a back-door route to circumvent the requirement for leave to appeal on questions of law laid down by section 1 of the 1979 Act; a section which Kerr LJ described in Universal Petroleum Co Ltd v Handels und Transport GmbH [1987] 1 WLR 1178 at p1179B ‘as the new system of filtered appeals from reasoned awards’. Mr Cullen also prays in aid what Bridge LJ described in GKN Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd’s Rep 555 at p582, the clear rule, which (to use Bridge LJ’s words), ‘precludes the court from remitting or setting aside an award on the ground of the insufficiency of evidence to support any finding of fact’.
Turning to the specifics of the reference in this case Mr Cullen submits that in any event the whole issue was fairly and squarely before the arbitrator and the respective parties had a full opportunity to adduce what evidence they wished. The adjustment which the arbitrator made, and which formed the subject-matter of the notice of motion seeking remission was, submits Mr Cullen, but one element in a necessarily complex task of evaluation to determine the fair market rack-rent of City Hall at the relevant dates. In the circumstances, he submits, there was in any event no procedural mishap or misunderstanding in this case.
Mr Cullen seeks to draw an analogy with public law in referring me to the case of Cocks v Thanet District Council [1983] 2 AC 286 where the House of Lords held that as a general rule it was an abuse of the process to allow a person to proceed by way of ordinary action where there was available to him the right to seek judicial review in circumstances where, pursuant to Ord 53, leave to commence such proceedings is required.
In summary Mr Cullen submits that the arbitrator’s finding of fact are sacrosanct, whether or not the consequence of a finding made without sufficient evidence may give rise to manifest injustice. He submits the policy of the 1979 Act, as manifested by the provisions of section 1, support the view that that important principle is to be preserved.
For all those reasons, general and specific, Mr Cullen submits that it is not open to Land Securities to invoke the discretion to remit conferred by section 22 of the 1950 Act and that accordingly Land Securities’ notice of motion seeking remission under that section should be struck out.
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For Land Securities, Mr Barnes began by pointing out that in contrast to, for example, section 23 of the 1950 Act (to subsections (1) and (2) of which I referred earlier) there is no express statutory limitation upon the power to remit conferred by section 22. He relies very strongly upon the decision of the Court of Appeal in King v Thomas McKenna to which I referred briefly earlier in this judgment as laying down the circumstances in which the discretion to remit conferred by section 22 of the 1950 Act may be exercised. In that case Lord Donaldson MR having noted that as a matter of strict jurisdiction the discretion was unlimited, turned to consider the various categories of case in which the discretion might in practice be exercised. After quoting a passage from his own judgment in The Montan the Master of the Rolls continued as follows:
The philosophy underlying this statement of law as I saw it then, and as I still see it, is that the great distinguishing feature between litigation and arbitration is that parties voluntarily submit to the latter system of disputes resolution, save when it is imposed by statute, and as part of that choice can stipulate who shall be the judges and the procedures to be adopted. As a consequence it is not unreasonable, although the matter can be more politely expressed, to require them to accept those judges and those procedures ‘warts and all’. On the other hand, arbitration is not entirely a private matter. Because the State stands in the background as the ultimate enforcer of the resulting award, either by means of section 26 of the Act, or as a result of an action on the award. In exercising a discretion under section 22 the courts must never lose sight of this fundamental distinction, or of the ultimate involvement of the State.
Another distinction which has to be borne in mind is that in litigation there is a right of interlocutory appeal at every stage subject only to restrictions as to time and the need to obtain leave. By contrast in arbitrations subject to certain exceptions, such as the power to remove an arbitrator for bias, any intervention by the court can only occur after the award has been made. This is not accidental, but stems from the fact that the parties have chosen to adopt an extracurial system for the resolution of their disputes. If the courts are not intended to intervene at the time to correct what they might perceive to be errors in the conduct of the arbitration a fortiori they should not intervene retrospectively after the award has been published.
All this might suggest that as a matter of discretion there are no cases in which the section 22 power should be exercised. The parties having made their bed should be left to lie on it. To some extent this is true. If the arbitrator in the event is believed by one party, perhaps rightly, to have wrongly accepted the evidence of a particular witness, or found for the other party on an erroneous appreciation of the weight of the evidence generally, there is no reason for the courts to intervene. Similarly if the arbitrator misinterprets the law. The aggrieved party having voluntarily invested the arbitrator with authority to ascertain the law and apply it to the facts, subject to such rights of appeal on question of law as may be afforded by the Arbitration Act 1979, there is no reason why the courts acting on behalf of the State should hesitate in enforcing that award. However there are limits. Whilst it may be impossible or at least undesirable to seek to determine those limits, save on a case by case basis, I personally find it helpful to ask myself what in truth the parties accepted when they agreed to arbitrate, although I am far from saying that this is the exclusive touch-stone.
Then after referring to certain authorities the Master of the Rolls continued at p491C of the report as follows:
In my judgment the remission jurisdiction extends beyond the four traditional grounds to any cases where notwithstanding that the arbitrators have acted with complete priority due to mishap or misunderstanding some aspects of the dispute which has been the subject of the reference has not been considered and adjudicated upon as fully, or in a manner which the parties were entitled to expect, and it would be inequitable to allow any award to take effect without some further consideration by the arbitrator. In so expressing myself I am not seeking to define or limit the jurisdiction, or the way in which it should be exercised in particular cases, subject to the vital qualification that it is designed to remedy deviations from the route which the reference should have taken towards its destination (the award) and not to remedy a situation which, despite having followed an unimpeachable route, the arbitrators have made errors of fact or law and as a result have reached a destination which was not that which the court would have reached. This essential qualification is usually underlined by saying that the jurisdiction to remit is to be invoked, if at all, in relation to procedural mishaps or misunderstandings. This is, however, too narrow a view since the traditional grounds do not necessarily involve procedural errors. The qualification, however, is of fundamental importance. Parties to arbitration like parties to litigation are entitled to expect that the arbitration will be conducted without mishap or misunderstanding and that subject to the wide discretion enjoyed by the arbitrator, the procedure adopted will be fair and appropriate. What they are not entitled to expect of an arbitrator, any more than of a judge, is that he will necessary and in all circumstances arrive at the ‘right’ answer as a matter of fact or law. That is why there are rights of appeal in litigation and no doubt would be in arbitration were it not for the fact it is left to the parties if they so wish to build a system of appeal into their arbitration agreements, and few wish to do so, preferring ‘finality’ to ‘legality’ to adopt Lord Diplock’s terminology.
The Master of the Rolls found on the facts of that case that a procedural mishap had occurred in that one party had not received a fair trial as a matter of procedure (that finding appears at p497 of the report). He accordingly affirmed the decision of the court below to remit the award under section 22.
Ralph Gibson LJ agreed with the Master of the Rolls. He said at p498 of the report:
I agree that this appeal should be dismissed for the reasons given by Lord Donaldson of Lymington, Master of the Rolls. In summary, therefore, I agree that as a matter of procedure, but through no fault of the arbitrator, or the other party, the building owners on the facts of this case did not on the last issue of costs receive a fair trial; that that resulted from what can properly be described as a procedural mishap; and that it would be inequitable to allow the award as to costs to take effect without further consideration by the arbitrator.
Nicholls LJ agreed with the reasons given by the Master of Rolls for dismissing the appeal.
Mr Barnes submits that the award in the instant case was based on an issue not properly raised at the hearing, that is to say the issue as to the comparability of the services at Esso House, and that the making of the award on that basis amounts both to misconduct and to a procedural mishap or misunderstanding, within the terms of that expression as used by Lord Donaldson in the case I have cited, justifying on either basis, as Mr Barnes submits, the remission of the specified matters. He relies on a number of authorities in support of this proposition. First, he relies on the facts of King v McKenna to which I have just referred, the procedural mishap there arising out of a misunderstanding in relation to the making of submissions on costs. Second, he relies on the case of Moran v Lloyd’s [1983] 1 Lloyd’s Rep 472 where one party unsuccessfully alleged misconduct on the part of the arbitrator. At the conclusion of his judgment in that case Sir John Donaldson, as he then was, the Master of the Rolls, said:
Any failure to give a party a reasonable and proper opportunity to put forward his own case and to rebut that of the opposite party is undoubtedly capable of constituting misconduct of the proceedings justifying the court in setting the award aside pursuant to section 23 of the 1950 Act, or alternatively of constituting a circumstance which would justify the court in remitting the award to the arbitrator or umpire for further consideration pursuant to section 22.
He went on, however, to say that in the present case he could detect no arguable grounds for submitting that that had occurred.
Mr Barnes submits that Mr Cullen’s argument is inconsistent with the reasoning of the Court of Appeal in that case.
Third, Mr Barnes relied on the case of Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14, a decision of Bingham J, as he then was. In that case the arbitrator had made a deduction in respect of expenditure which the arbitrator considered required to be incurred in order to bring the subject premises up to a marketable standard, that being a matter which, as the judge found, had never been in the arena of argument at all, let alone been explored in argument; a state of facts which to my mind bears a very close resemblance to the facts averred in Land Securities’ notice of motion in this case. The arbitrator in that case had also adopted a basis of valuation which neither party had put forward and about which there had been no argument. In setting aside the award Bingham J said:
I fully accept and understand the difficulties in which an expert finds himself when acting as an arbitrator. There is an unavoidable inclination to rely on one’s own expertise and in respect of general matters that is not only not objectionable but is desirable and the very large part of the reason why an
arbitrator with expert qualifications is chosen. Nevertheless the rules of natural justice do require, even in an arbitration conducted by an expert, that matters which are likely to form the subject of decision, in so far as they are specific matters, should be exposed for the comments and submissions of the parties. If an arbitrator is impressed by a point that has never been raised by either side then it is his duty to put it to them so they have an opportunity to comment. If he feels that the proper approach is one that has not been explored or advanced in evidence or submission then again it is his duty to give the parties a chance to comment. If he is to any extent relying upon his own personal experience in a specific way then that again is something that he should mention so it can be explored. It is not right that a decision should be based on specific matters which the parties have never had the chance to deal with, nor is it right that a party should first learn of adverse points in the decision against him. That is contrary both to the substance of justice and to its appearance, and on the facts of this case I think the landlords case is made out.
As I have said, he proceeded to set aside the award.
As in the case of Moran v Lloyd’s Mr Barnes submits that if Mr Cullen’s argument based on the existence of a finding of fact on insufficient evidence were correct the decision in the Zermalt case must have gone the other way since in that case, as in this, the end result was that the arbitrator made findings on the basis of no evidence, yet that did not prevent the court from granting relief in respect of a breach of the rules of natural justice in the course of the reference.
In Fine Fare Ltd v Kenmore Investments Ltd [1989] 1 EGLR 143 Peter Gibson J was not satisfied on the facts that a procedural mishap had occurred and accordingly on that basis he refused to order a remission, but it seems clear to me from the terms of his judgment that had he been so satisfied he would have made such an order despite his expressed concern, voiced also by the Court of Appeal in the Moran v Lloyd’s case, that section 22 of the 1950 Act should not be used as, in effect, a back-door method of circumventing the restrictions created by the 1979 Act, upon the court’s power to intervene in arbitral proceedings.
Mr Barnes also relied upon the decision in the Aristides Xilas case to which I referred earlier, where the procedural mishap or misunderstanding consisted in one party electing in effect not to participate in the arbitration. A procedural mishap also occurred in the case of Techno Ltd v Allied Dunbar Assurance plc a decision of Mr Gavin Lightman QC, sitting as a deputy judge of this division, [1993] NPC 42*, and on the basis of such procedural mishap the award was duly remitted.
*Editor’s note: Also reported at [1993] 1 EGLR 29.
Mr Barnes also relied upon the case of Aquilina v Havering London Borough Council [1993] 1 EGLR 33; [1993] 05 EG 139, a Lands Tribunal case, where a case had been stated under section 3(4) of the Lands Tribunal Act 1949. The question before the court was whether the tribunal had acted in breach of natural justice by ‘making the award upon the basis of a valuation not relied on by the claimants and to deal with which the council had no proper opportunity’. The Court of Appeal held that the tribunal had indeed conducted itself in breach of natural justice in that respect and that it should have either raised the matter at the hearing, or called the parties back for further consideration.
Mr Barnes also referred me to the decision in Fairmount Investments Ltd v Secretary of State for Environment [1976] 1 WLR 1255 to which reference was made in the Aquilina case. In the Fairmount case there had once again been a procedural mishap in relation to a compulsory purchase order; the result was a breach of the rules of natural justice and the compulsory purchase order was quashed.
As to Mr Cullen’s argument that a complaint that the arbitrator has made a finding of fact on the basis of no or insufficient evidence can only be dealt with as an error of law under section 1 of the 1979 Act, Mr Barnes submits that that argument confuses the end result with the procedure, or the route, by which it is reached. He submits that the discretion to remit is available wherever there has been misconduct or procedural mishap or misunderstanding, notwithstanding that the consequence of that misconduct, mishap or misunderstanding, may be that the arbitrator makes a finding of fact on insufficient evidence. He points out that if that were not the case the courts would, on Mr Cullen’s argument, be powerless to remit in a case where the arbitrator has proceeded to choose his own comparable without warning the parties of his intention to do so and without giving them the chance to adduce evidence or make submissions about it. That, he submits, would be absurd.
As to Mr Cullen’s argument on the specifics of the arbitration to the effect that the whole issue was sufficiently before the arbitrator Mr Barnes refers to the facts in the Fairmount case as authority for the proposition that it is not enough that the general subject-matter of the reference is before the arbitrator.
Mr Barnes also referred to the possible difficulties of taking the route under section 1 of the 1979 Act and seeking leave to appeal against an error of law in the form of a finding on insufficient evidence and he illustrated the difficulties with which his clients might be faced in making an application for leave to appeal by reference to the terms of the judgments of the Court of Appeal and particularly that of Steyn LJ in the case of Geogas SA v Trammo Gas Ltd of which I have been furnished with a transcript, that being a decision given on November 5 1992. He submits that there is no warrant for compelling his clients to take what may prove to be a difficult route under section 1 of the 1979 Act rather than the route prescribed by section 22 of the 1950 Act, which on his submissions is open to his clients to take.
As to the analogy sought to be made by Mr Cullen with public law Mr Barnes referred me to the decision of the House of Lords in O’Reilly v Mackman [1983] 2 AC 237, which immediately preceded the decision in Cocks v Thanet District Council, and he submitted there is a distinction between those two cases and the instant case which is made clear by the reasoning of Lord Diplock in the O’Reilly case particularly at pp284 and 285, the difference being that the remedy of judicial review embodied in Ord 53 is a new remedy available to a litigant providing substantial advantages to him, whereas in this case the route under section 1 of the 1979 Act may, and on the basis of the Geogas case probably will, result in Land Securities being faced with substantially difficulties. In the circumstances he submits there is no genuine analogy with the public law cases.
In summary Mr Barnes submits that section 22 of the 1950 Act has been on the statute book since 1854 and has not been materially affected in relation to misconduct or procedural mishap by anything in the 1979 Act. Accordingly, he invites me to dismiss the application to strike out.
I can now state my own conclusion on this matter. In my judgment, the authorities relied upon by Mr Barnes clearly establish that the discretion to remit under section 22 of the 1950 Act is available where there has been a breach of the rules of natural justice, notwithstanding that the breach may have led the arbitrator to make an error of law in the shape of a finding of fact where there is no sufficient evidence to support it. As Lord Donaldson said in the passage in King v McKenna, which I quoted earlier in this judgment, remission is designed to remedy deviations from the route which the reference should have taken towards its destination, the award, and not to remedy a situation in which despite having followed an unimpeachable route the arbitrators have made errors of fact or law and as a result have reached a destination which was not that which the court would have reached. Where there has been a clear breach of the rules of natural justice in the course of the reference the route which the reference has taken is not an unimpeachable route. In my judgment, it is plainly an impeachable route. Whether one categorises the particular breach of the rules of natural justice as misconduct or as procedural mishap, or misunderstanding, does not seem to me to matter, at least for the purposes of section 22. While the mere fact that an arbitrator has made a finding of fact on insufficient evidence cannot on the authorities amount in itself to misconduct justifying remission or the setting aside of the award, nevertheless, in my judgment, where in the course of the reference there has been misconduct in the shape of a breach of the rules of natural justice that misconduct may be relied upon as a ground|page:249| for remitting or setting aside the award, notwithstanding that in the event it may have led the arbitrator to make a finding of fact on insufficient evidence.
In the instant case, on the averments in Land Securities’ notice of motion (which, I repeat, I have to take as true for the purposes of Westminster’s application to strike out) there appears to have been the clearest breach of the rules of natural justice in that no proper opportunity was afforded to the parties to deal with the matter in issue, and in this respect Mr Barnes’ analogy with the Fairmount case seems to me to be a proper and helpful one.
In that respect, in my judgment, the instant case is on all fours with the Zermalt case to which I made reference earlier. In my judgment, there is no reason why Land Securities should be compelled to follow the possibly difficult route of obtaining leave to appeal when, as I have held, there is a route open to them under section 22 of the 1950 Act.
I end therefore by paraphrasing what Lord Donaldson said in King v McKenna at p491C. In this case on the face of the notice of motion and taking the averments in it to be true it appears that due to mishap or misunderstanding a material aspect of the dispute has not been considered and adjudicated upon as fully or in a manner which the parties were entitled to expect. On that footing, therefore, I must dismiss Westminster’s application to strike out Land Securities’ notice of motion.
Giving judgment on July 22 1993, Jonathan Parker J said: Having yesterday dismissed Westminster’s application to strike out Land Securities’ notice of motion seeking remission I now rule on the substance of Land Securities’ application. For the general background to the matter I refer to the judgment which I delivered yesterday on the application to strike out, in the course of which I read in full the grounds set out in Land Securities’ notice of motion for their application for remission.
I must begin by considering in somewhat greater detail than was necessary in the judgment which I delivered yesterday the proceedings in the reference in question. As I indicated, Esso House was put forward as a relevant comparable in the initial written submissions of both Mr Krendel, Land Securities’ valuer, and of Mr Jones, Westminster’s valuer. In his initial submissions Mr Krendel said in relation to Esso House:
Clearly this is a very important comparable being so close to City Hall and location and only finalised a few months before our valuation date. There are however two factors which I consider would produce a lower value than the subject building (a) the entrance hall is less spacious and prominent and is in fact rather inconspicuous because of the shops which are situated at ground floor level. There are no shops ground floor of City Hall (b) the ODA — that is a reference to the Overseas Development Administration — pay a service charge for Esso House being only a tenant occupying part of the building; they do not have full control of the services as compared to the tenant of City Hall who has full operation and control of the services being one tenant in a self-contained building.
In his initial written submissions Mr Jones, for Westminster, said in relation to Esso House:
The property was let for a term of five years from December 25 1990, subject to a further five year reversionary lease with a rent review at the end of the first five year term. The lease is on an effective full repairing and insuring terms and the headline rent agreed on the letting for the office element was £36.29 per square foot. It would seem that terms were negotiated between Land Securities and Esso for surrender of part of Esso House which was in turn let to the ODA. Although I have been provided with legal documentation I have been unable to establish the precise details relating to the background to these apparently connected transactions. In addition Land Securities agreed to carry out works to Esso House prior to the ODA taking occupation of the premises. These works included the formation of a new entrance and staircase together with the upgrading of the air conditioning system, the replacement of which is excluded under the tenants repairing liabilities, if not economically viable, having regard to the remaining term of the lease. Although comparable in terms of size the review dates relating to these buildings occur some time before the relevant review date in a recognised declining market.
He then considered the need to make a reduction to reflect the declining nature of the market and proposed a reduction of 2% per month. He then continued:
If the rents referred to above in respect of the comparable premises are adjusted in the manner described from June 1990 to March 1991 the comparative effective rents are as set out in the following table.
There then follows a table in which each of five comparables is considered; the table showing the date of the transaction and the effective rent per square foot as at March 1991. Mr Jones then continued:
It can be seen from the above in respect of the comparable premises are adjusted in the manner described from June 1990 to March 1991 the comparative effective rents are as set out in the following table.
There then follows a table in which each of the five comparables including Esso House is considered; the table showing the date of the transaction and the effective rent per square foot as at March 1991. Mr Jones then continued:
It can be seen from the above table that the effective rents range from £26.60 per square foot to £31.29 per square foot. Although BP House and Ashdown House are slightly older than Cleland House and Abell House
— I interpolate to say that those are the other four comparables apart from Esso House which were included in the table —
their better location and more imposing appearance would justify a higher rent. This might suggest therefore that the rents for Cleland House and Abell House may have been settled too high. Both buildings, however, were assumed to be fit for immediate occupation and use unlike the Victoria Street buildings. Having regard to the lower specification of Esso House the rent agreed adjusted back to March 1991 values also appears high compared to the other four buildings.
The effective rent in relation to Esso House is shown in the table to which I have referred at £30.48. Returning to the text:
I have however already referred to the circumstances relating to the tenants position in the negotiations. If Westminster City Hall is placed in the above table the appropriate base rent for the building in its existing condition should be below all the comparables referred to above. A rent of £25 per square foot would not seem to be unreasonable.
Mr Krendel and Mr Jones then subsequently exchanged written counter-submissions and in his counter-submission Mr Krendel said in relation to Esso House:
The specification is virtually identical to City Hall with the exception of old carpets being available to the incoming tenant. should add however that Esso House was built slightly before City Hall in 1963 and only benefits from secondary glazing.
As to the upgrading referred to by Mr Jones in relation to the premises at Esso House occupied by the Overseas Development Administration Mr Krendel said this in his counter-submission.
The works carried out by the landlord are fully set out in the documentation and related mainly to the separation of services enabling the ODA to have a self-contained part of this building. I would not describe the works carried out to the air conditioning as upgrading; repair or modification would be more accurate.
In response to Mr Jones’ figure of £25 per sq ft Mr Krendel said:
The circumstances of the Esso House letting do not indicate to me that the tenant paid above market value due to a weak bargaining position. The figure would appear perfectly in line with the evidence. It seems most odd that a valuer was only able to produce and rely on three transactions in the 21 months prior to the review date is then forced to plead that for undisclosed reasons the rents agreed in all three were unduly high and are thus not a true reflection of the market. If this is correct Mr Jones does not appear to rely on a single comparable which he says reflects the market at or near the review date. This staggers me. £25 per square foot is totally unrealistic as is demonstrated by the evidence. I can best corroborate this by referring again to 11 Belgrave Road, a poorly located building, of modest specification which was agreed on
review in September 1990 at £31.50 per square foot. My adjusted rent for City Hall shown on p101 of my proof of evidence is approximately £35.50 per square foot.
Mr Jones’ written counter-submission took this aspect of the matter no further.
Mr Heskett, a director of Land Securities, gave oral evidence before the arbitrator on Land Securities’ behalf, producing a written proof of evidence in which he dealt in some detail with the transactions relating to Esso House. With reference to those transactions he said:
The agreement of August 17 1990 (I interpolate to say that that was the letting agreement in relation to Esso House) provided for the execution by the claimants of the lessors works as defined in clause 1a on pages four, five and six, which included certain occupational services works required by the Secretary of State for the Environment (see clause 3 on pages 14–21 of the agreement). In broad terms the claimants were to bear the costs of the works set out in the outline schedule of works attached to the agreement, which were essentially works to create self-contained accommodation within Esso House for the ODA, and the Secretary of State for the Environment was to bear the cost of the occupational services works.
Mr Heskett was cross-examined on that paragraph in his proof of evidence and was asked about improvements to the air conditioning system at Esso House. Taking up Mr Cullen’s question it reads as follows:
So far as your works are concerned they did substantially involve the creation of self-contained accommodation. It also contained provision for you to improve the air conditioning did it not?
(A) No, not really. The only work we did to the air conditioning was by way of cleaning out and making sure it worked off the perimeter induction unit system already in the building. We cleaned out and serviced the cooling system and made sure it worked properly. There were no works of enhancement.
(Q) How old was the air conditioning prior to this stage?
(A) There were parts of it that went back to the original building. Esso had replaced parts of it under their repairing obligations during the lease to the date of this transaction, but quite a lot of it, pipework etc, that was the original installation.
(Q) That was put in when?
(A) The mid 60s I suppose.
(Q) This is …
(A) 1990
(Q) So 30 years old but not replaced by you?
(A) 25 years old. The pipework such as drainage and such like does not necessarily need replacement. Also remember that we had in contemplation a ten year term.
Mr Krendel also gave oral evidence on behalf of Land Securities. In examination of chief he was asked how the specification of Esso House compared with that of City Hall. He replied in these terms:
As I said in the text it is similar. There are one or two small points however that can be pointed out where it is not identical. It was built four years before City Hall, around 1961, while City Hall was completed around 1965, to my understanding. It has a two pipe perimeter induction unit air conditioning system, a system which is called a change-over system whereas this building (the reference to ‘this building’ is City Hall where the arbitration was in fact taking place) is a non-change-over system and I am told by my superiors in terms of knowledge on air conditioning that change-over systems are not as good as non-change over systems. I would not attach great significance to that, but in being asked the question that is a difference I know about it and it has caused some problems to the ODA and their occupation of it, but it is not a major factor.
Mr Krendel was cross-examined on, among other things, the question whether an allowance should be made to reflect a rent-free period. In this context he said:
If we are valuing these buildings, take the Home Office as an unimproved building first let in 1976, I am saying a notional period of three months would be for basic fitting out works, not for improving it to a better standard than it was valued for. Esso House has carpets and partitions the same air conditioning and the same basic specifications as previously.
Later in his cross-examination, referring to the five comparables put forward by Mr Jones, and set out in the table to which I referred earlier, Mr Cullen said:
If one is considering comparables then one has to see what would be required to bring the subject premises up to the standard of comparables?
(A) Yes.
(Q) What is wrong in that case in taking rent for those comparables and then allowing the sum to fill the gap?
(A) What is wrong is that is not what Mr Jones has done. He has not adjusted the comparables to make them into an improved condition; take Esso House as an example. All he has done is take the time adjusted rent (I am not arguing about that at the moment) and produce £30.48 per square foot. He has said that City Hall would be worth £30 per square foot and then all the works he suggested, and it would still be worth £30 a square foot, same as Esso House which has not had any works done.
(Q) Certainly you can attack Mr Jones if you answer on Esso House, but so far as the others are concerned where they are in a higher condition I think you accept that if one is going to use them as comparables some adjustment has to be made?
(A) Also right.
In re-examination Mr Barnes put to Mr Krendel the valuation approach which Mr Jones, on behalf of Westminster had adopted. Before referring to that passage I should explain that Mr Jones’ approach in this respect involved three stages. First, at stage one, a calculation of what Mr Jones described as ‘an improved rental value of City Hall’ on the footing that substantial works had been carried out to City Hall not limited to improving the services. Second, at stage two, a deduction to reflect the cost of carrying out those works, thereby reaching what Mr Jones described as an ‘unimproved rental value’ of City Hall. Last, at stage three, the making of appropriate adjustments to reflect differences in the terms of the respective leases. Stage three of this approach is not material for present purposes.
Mr Barnes (as I have said) put Mr Jones’ approach to Mr Krendel in re-examination and he did so in the following terms. He said:
Can we look please at Mr Jones’ initial proof of evidence, the table we have looked at before at page 33 and at Esso House in this context. I understand and I think it is plainly so that Mr Jones’ methodology is broadly speaking at stage one, you can see it at appendix five of his valuation, we find an improved rental value?
(A) Yes.
(Q) And at stage two to take away the cost of upgrading so as to find an unimproved rental value?
(A) Yes.
(Q) Then at stage three you make some adjustments to it?
(A) Yes.
(Q) I would like you to look at stage one of his methodology in this context at page 33 with Esso (that is Esso House) in mind. If one is trying to find the appropriate rental value for an improved building as at stage one, that is to say £30 per square foot?
(A) Yes.
(Q) And if one does so in the traditional fashion by looking at comparable transactions and if one looks at Esso as he plainly has, one of his comparables, in what state do we find physically Esso House as shown on page 33?
(A) Unimproved.
That, in my judgment, is an important answer establishing that it was the case of Land Securities that Esso House was a comparable with City Hall on the unimproved basis and Mr Krendel’s evidence was that that was its physical state.
Mr Jones also gave oral evidence and was cross-examined by Mr Barnes in relation to Esso House. Mr Barnes asked him:
In terms of location is there any difference between Esso House and the subject property?
(A) No.
(Q) In terms of size the letting of Esso started about 140,000 and ended up at about 120,000 sq ft did it not, a large letting within the range which you think it appropriate to look at as comparables?
(A) Yes.
(Q) Is the specification of Esso House any better than City Hall in its existing state?
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(A) I think it is basically the same, but of course the landlord had carried out certain refurbishment works and he also exempted the tenant from certain repairing liabilities in respect of the air conditioning and this notional willing lessee and/or his advisers would also see that in fact Esso was left on a different lease term.
As I read that passage Mr Jones is giving evidence to broadly the same effect as Mr Krendel when he says that the specifications of the two buildings were basically the same. In re-examination Mr Jones was referred by Mr Cullen to his figure of £25 per sq ft in the following terms. Having referred to Mr Jones’ statement in his initial submission that a rent of £25 per sq ft would not seem to be unreasonable, Mr Cullen continued:
Mr Barnes put that to you and said that was £25 in existing condition and you said you would need to do a check. What was the reason for this check?
(A) Because the comparables that I have referred to with the exception of Esso are of younger age, sir, and therefore the condition of the plant and machinery and the general specification would be better and therefore one needs to make an adjustment, and I have explained how I have done that by taking account of refurbishing the building; you need to do that as a second check. The reason I exempted Esso, sir, is because of course that building is even just a little older but of course the rent that was paid for it was on an entirely different basis than the subject review because not only was the lease shorter but the landlord undertook to do certain works to the plant and machinery serving the air conditioning and indeed to exempt the tenant from certain liabilities under the service charge for the state of part.
There again, as I read it, Mr Jones is repeating his view that there is a distinction to be drawn in relation to his five comparables between Esso House, on the one hand, and the remainder, on the other.
Then in the course of his closing speech to the arbitrator Mr Cullen said:
So far as Esso is concerned what one has there is plant at the end of its life like this plant in this building, but the tenant there is only taking a ten year lease and is relieved of the cost of replacement unless such replacement is the only way of effecting the repairs. You will recall the clause. It is in fact in regard to the service charge, there shall not be a service charge for replacement unless the plant is incapable of repair. Those are Mr Jones’ main points on the comparables.
In the course of his submissions before me on this application Mr Cullen has told me that in indicating an equivalence between the plant in Esso House and that in City Hall he was in fact wrong. None the less as a matter of record that is how the matter was presented to the arbitrator.
In the course of his closing speech Mr Barnes also referred to Esso House and he did so in the following terms, saying:
It is a building in an identical location to City Hall just along the road and it is a building which in terms of its specification is by a small amount less good than City Hall. It is a lease for a period of ten years, or a lease in possession, or reversionary lease, which in total comes to that, but which excluded the protection of the Landlord and Tenant Act 1954, something which one would have thought would depress the rent. It is not a self-contained letting in a sense that a building is let to a tenant and he has control of the provision and paying for his own services. There is a service charge provision because of the continued occupation of the balance of the building by Esso Petroleum.
I turn then to the terms of the award itself. In the course of the award, which is (as one would expect) a lengthy document, the arbitrator set out Westminster’s case in the following terms, so far as material. He said:
The Respondent (that is to say Westminster) through Mr P W Jones basis his valuation on the RICS/ISVA areas and contends for the fair market rack-rent of £2,900,000. Mr Jones agrees that the subject (that is a reference to the subject property, City Hall) will let in its existing condition and on the terms of lease to be assumed including its length. However, in order to let and thus to arrive at his rental value he contends that substantial works of improvement would be needed to the premises both in building costs and time and the annualised costs are deducted from his opinion of the rental value of the subject property in an improved condition.
He supports his contention with five comparables, the first two of which are in April and June 1989 and the remaining three
— and that includes Esso House I interpolate to say —
are common with the claimants comparables. He has made adjustments for the differences in time and other matters he considers appropriate in his analysis of the comparables.
Then the arbitrator turns to the evidential value of the comparables and (summarising) he finds little assistance to be gained from any of the comparables except Esso House. In relation to Esso House he says:
I consider this far and away the outstanding comparable in this issue. A great deal of evidence and debate has surrounded it and that is no coincidence. The building was originally constructed in the 1960s just before the subject building. An open market letting took place on August 17 1990 by Land Securities plc to the Overseas Development Administration representing by the Property Services Agency, the lease is actually taken in the name of the Secretary of State for the Environment. Previously the entire accommodation had been occupied by Esso but Land Securities took a surrender of a substantial part of the building which Esso vacated and the majority of the vacated space was let to the ODA. An agreement for lease was signed on the 17th August for a six year term plus a further four year reversionary lease effectively making the term ten years from the December 25 1990.
He then refers to the terms of the lease and continues:
The landlords specification is similar to the subject property and has a two pipe induction air conditioning system, three passenger lifts, double glazing, fluorescent lights, but no suspended ceilings, perimeter and limited underfloor trunking, plus what Mr Krendel calls ‘old carpets’.
He then sets out the floor areas and continues:
The claimant confirms that this analysis is at £36.29 for the principle offices, £12.50 for the basement storage, £2,250 per car spaces and £20 per sq ft for the garage block/offices.
He then deals with an issue before him as to the tenants’ position when the terms of those arrangements were negotiated and continues:
The respondent contends that the true rent agreed should be regarded as £35.
I have not read that accurately because there appears to be some grammatical error in the sentence in question, but that is the sense of it as I read it.
Turning to Mr Krendel’s evidence the arbitrator said:
In his submission Mr Krendel contends that the subject property is better particularly because (a) the ODA pay a service charge rather than controlling the whole building. I can make nothing of that contention. (b) That Esso House actually has shops at the ground floor. The subject property looks as though it has shops (general description of shops includes banks and catering premises); therefore I can making nothing of that. (c) The entrance hall is less spacious. That is true but Esso has an inferior lift service even allowing for the difference in size.
At the hearing Mr Krendel said there is not much in the specification between the two buildings. In general terms I agree but specifically and importantly not in respect of two items, namely, certain mechanical installations including air conditioning and electrical services.
There is nothing in the evidence to assume those items were worn out or substandard at Esso. Consequently in respect of those items the subject property stands alone from this or any other comparable and proper allowance has to be made.
As I indicated in the judgment yesterday, in due course a very substantial adjustment was made by the arbitrator reflecting the allowance which he considered ought to be made in this respect.
Later in the award under a heading ‘Works that would be considered reasonable by both hypothetical parties’, the arbitrator said:
Due to the direct comparison with Esso and its condition of letting certain works need not be considered. However, direct comparison endorses the shortcomings demonstrated in the evidence at the subject building concerning the mechanical and electrical installations due to the age and original specification of the building, including the fact that the air conditioning is not deemed to have been replaced.
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That last reference is, I understand, a reference to an argument which was advanced in the course of the reference as to the parties’ respective repairing obligations. The arbitrator goes on:
Those works that I consider relevant to include are itemised in Mr Desmond’s submission under appendix 2A. This includes effectively replacing the air conditioning with a further two pipe induction system.
Later under the heading ‘Valuation’ the arbitrator said:
This building stands to be valued on the basis as stated in the lease and not in a substantially improved condition as contended by Mr Jones. If there is not a comparable which can be used direct as to the matter of valuation then his approach can be appropriate. However, to determine the base rent there is the compelling comparable of the open market letting of Esso House which neither party finds flawed in respect of location, size, age and date of transaction. This stands to be adjusted for rent free and reduced due to the declining rental market.
Now as I read that paragraph the arbitrator is saying that Mr Jones’ valuation approach, being the approach which I attempted to describe earlier in this judgment, was not appropriate in this case given what he described as the compelling comparable of the open market letting at Esso House.
Later in the same section of the award the arbitrator continued as follows:
The subject building stands alone and apart from any of the comparables in its requirements concerning electrical and mechanical services. There is no direct comparability available and the parties are not disagreed that where a substantial sum needs to be spent this is dealt with by capitalisation.
He proceeded to the calculation of the base rent and he made the adjustment of £977,955 to which I referred in the judgment delivered yesterday.
What the arbitrator appears to have done, therefore, is to have proceeded upon the basis that work of the same scale and nature in relation to the mechanical and electrical services had been carried out as at Esso House as was put forward by Mr Jones by way of a deduction in his calculation of the unimproved rental value of City Hall. In other words, the arbitrator appears to have decided, or perhaps assumed, that Esso House was in an improved state so far as its services were concerned rather than an unimproved one, the latter being the basis upon which Esso House was put forward as a comparable by Mr Krendel on behalf of Land Securities. That approach of Mr Krendel in putting forward Esso House on that basis was not an approach with which, as I read the material before me, Westminster had ever disagreed. The furthest Westminster went, as I read the material, was to suggest that certain works of refurbishment had been carried out to the air conditioning system at Esso House, a suggestion to which Mr Heskett responded in the passage from his cross-examination to which I referred earlier.
What was not, as far as I can see, put forward at any point in the course of the reference was the suggestion that at Esso House a scheme of overall improvement had been carried out to the services so as to place Esso House in that respect in a condition comparable with the condition which City Hall would have been in had the works specified by Mr Jones, at stage 2 of his valuation calculation, been carried out to City House. It was upon that basis, as I understand it, that the arbitrator made the deduction of which Land Securities complain.
Although I have to say I find the arbitrator’s reasoning in relation to this aspect of the matter not always easy to follow that is the only logical basis I can discern for the introduction of the deduction in question into the arbitrator’s calculation of the fair market rack-rent of City Hall. That being so it is clear, in my judgment, that the issue as to the physical state of the services at Esso House was a highly material matter which, to adapt Bingham J’s words in the course of his judgment in the Zennalt case [1985] 2 EGLR 14, was never in the arena of argument at all. In my judgment, rules of natural justice required the arbitrator, if he was contemplating making an adjustment of the kind which in fact he made, to put the parties clearly on notice of that fact so that they, and particularly Land Securities, could have a chance to adduce evidence and make submissions in relation to it.
In my judgment, the arbitrator failed to do that and was thereby in breach of the rules of natural justice. As Bingham J said:
It is not right that a decision should be based on specific matters which the parties have never had the chance to deal with, nor is it right that a party should first learn of adverse points in the decision against him. That is contrary both to the substance of justice and to its appearance …
That, in my judgment, is precisely what has happened unfortunately in this case. Mr Cullen submits that there was before him evidence from which the arbitrator could draw the conclusion that some adjustment of the kind which he in fact made should be made and that the amount of the adjustment was essentially a matter for the arbitrator. But even if that be right — and I am not satisfied that it is — that, in my judgment, is nothing to the point where there has, as I see it, been a clear breach of the rules of natural justice in the route which the reference took.
In short, it does not seem to me that in relation to the matter in question Land Securities had a fair crack of the whip, to use Lord Russell’s expression in the Fairmount case [1976] 1 WLR 1255 at p1266A. In the circumstances, I find the averments in Land Securities’ notice of motion to be made out, in particular the averments in paras 7 and 8 of that notice of motion, which I propose to read again. They read as follows:
7. As a result of the matters aforesaid the arbitrator based his decision on a matter which the parties never had the chance to deal with and the applicant first learned about an adverse point against it in the award.
8. The arbitrator thereby acted in breach of the rules of natural justice and committed misconduct.
In the circumstances therefore I allow Land Securities’ application.
Giving judgment on July 23 1993, Jonathan Parker J said: By an originating notice of motion dated February 1 1993 Land Securities plc applied pursuant to section 1(3)(b) of the Arbitration Act 1979 for leave to appeal on a number of questions of law arising in an award in respect of which I have already delivered two judgments. I refer to those two judgments for the general background to the matter.
On the April 23 1993 Mr Andrew Park QC, sitting as a deputy High Court judge in this division, gave leave to appeal in respect of paras 6 and 7 of the originating notice of motion. Those paragraphs are to be found in that part of that notice of motion which sets out the grounds for the application and they read as follows:
Further the arbitrator misconstrued the rent review provisions and in particular the assumption that the respondent is deemed to have complied with its covenants and that City Hall should be deemed to be in a proper state of repair at the review date.
Para 7(1):
The arbitrator erred in law in finding that on a proper construction of the lessees repairing covenants in the lease City Hall would be in a state of repair consistent with full compliance with those covenants notwithstanding that the air conditioning plant therein would have ‘a maximum extended life of five years only’ and would be ‘very close to the end of its useful life’.
(2) Further and/or alternatively the arbitrator erred in law in that he held that on a proper construction of the repairing covenants in the lease City Hall would be in a proper state of repair if instead of replacing the air conditioning plant patch repairs, crisis repairs or ad hoc repairs were done to bits of that plant from time to time, whereas a reasonably minded tenant would not regard a building with such plant as being in repair.
(3) Further and/or alternatively the arbitrator erred in law in impliedly holding that provided the air conditioning plant in City Hall was functioning, notwithstanding that an ill-advised regime of patch repairs, crisis repairs, or ad hoc repairs was necessary to achieve this City Hall would be in a proper state of repair.
Essentially the complaint of Land Securities is that the arbitrator, in rejecting Land Securities’ contention that the only way by which Westminster could comply with their repairing obligations under the lease of Westminster City Hall was by replacing the air conditioning|page:252| system so that for valuation purposes the air conditioning system was to be deemed to have been replaced, failed or may have failed to address properly or at all the question of law as to whether the lesser option proposed by Westminster involving piecemeal repairs to the air conditioning system fulfilled the test of good tenantable repair laid down by Lord Esher in the case of Proudfoot v Hart (1890) 25 QBD 42. At p52 of that report Lord Esher adopted the definition of the term ‘tenantable repair’ drawn up by Lopes LJ, that definition was in the following terms:
… Good tenantable repair is such repair as, having regard to the age, character, and locality of the house, would make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it.
Mr Michael Barnes QC, for Land Securities, points out that all that the arbitrator has done on the face of the award is to accept the evidence called by Westminster as to: (a) the extent of the proposed repairs being less in extent than full replacement of the air conditioning system; and (b) the state of the air conditioning system after such repairs have been carried out and then to proceed on the footing that such repairs constituted in law compliance by Westminster with their repairing obligations, without having at any stage expressly stated or applied the relevant test as laid down in Proudfoot v Hart.
Mr Barnes complains that there must, in such circumstances, be at least a reasonable possibility that the arbitrator did not apply that test either properly or at all.
On that footing he invites the court to remit to the arbitrator the question of law as to whether the repairs to the air conditioning system proposed by Westminster would constitute compliance by Westminster with their repairing obligations under the lease.
The relevant obligations are contained in clause 2(5) of the lease and I read the material parts of the covenant:
From time to time and at all times during the said term well and substantially to repair, uphold, maintain cleanse and keep in good and substantial repair and condition the demised premises and all additions thereto, including without prejudice to the generality of the foregoing and then the covenant refers to the foundations of the building, its structure, a service road and ramp shown on the plan and pavements at the rear… and all drains, soil and other pipes and sanitary and water apparatus thereof and all glass in the windows and all lessors plant, fixtures and fittings and the pertinances thereunto belonging of whatsoever nature.
It was common ground between the parties that for the purposes of the rent review the tenants, that is to say Westminster, were to be assumed to have complied with all their obligations in the lease including their repairing obligations. In giving judgment on Land Securities’ notice of motion seeking remission on grounds of misconduct or procedural mishap I endeavoured to explain the three-stage valuation approach adopted by Mr Jones for Westminster, involving at stage 2 a deduction representing the costs of works required to be carried out to City Hall in order, according to Mr Jones, to bring it up to a marketable standard. Land Securities contended that the major parts of this work ought to have been carried out by Westminster in any event by virtue of the repairing covenant, hence the issue as to whether the proposed works of repair would, constitute compliance with Westminster’s repairing obligations. The total cost of the mechanical work specified by Mr Jones in putting forward his valuation amounted to £2,095,000. This contained three elements relating to the air conditioning system: (a) replacement of the refrigeration plant; (b) replacement of the air handling plant; and (c) replacement of the induction units. These amounted to £1,350,000 of the total. Land Securities, as landlords, contended that these items were within the repairing obligation of Westminster and should have been carried out by March 25 1991, being the relevant date for the purposes of the reference.
In the event, the arbitrator determined the fair market rack-rent of City Hall on the basis that, contrary to Land Securities’ contentions, Westminster was not obliged to carry out those works of replacement; and this in turn led to a reduction in the rent awarded by some £200,000 pa. The arbitrator was advised on questions of law by Mr Jonathan Gaunt QC, and Mr Gaunt’s opinion is annexed to the award. Mr Gaunt dealt with the arguments concerning repairs in a section headed ‘The repairs point’ and in order to set Mr Barnes’ submissions in proper context it is, I think, necessary that I read the greater part of what Mr Gaunt said in that part of his opinion. Having set out the terms of the relevant covenant to which I have already referred, he continued as follows:
Mr Barnes argued that as a result the tenant must be deemed to have replaced certain plant in the building before the review date and that the cost to the incoming tenant of replacing that plant should therefore be left out of account if Mr Jones’ approach discussed above is to be applied. In the course of the hearing the plant in question was narrowed down to the air handling plant, the refrigeration plant and the induction units and it was agreed that the cost of replacing these would at most have been £1,350,000.
The question therefore was whether the tenants repairing covenant obliged him to replace these elements before the review date.
Then under the heading ‘The landlord’s case’ Mr Gaunt proceeded as follows:
Mr Barnes argued that to keep an entity in repair it was necessary to replace its component parts from time to time. This was especially true of plant in a building which is not expected to last the life of the building and so an obligation to repair plant imports an obligation to replace it at some stage. This stage had been reached by or before the review date because (a) the life expectancy of the plant assessed in accordance with published tables had been exceeded and (b) running repairs would be an uneconomic or inefficient way of putting right the defects which were acknowledged to exist. He relied on the well-known authority of Proudfoot v Hart and in particular the test propounded by Lord Esher at page 52, namely whether the works are necessary in order to make the demised premises reasonably fit for the occupation of a reasonably minded tenant of the class who would be likely to take them. Mr Barnes suggested that on the evidence a reasonably minded tenant preparing to take City Hall would not regard the building as being in good repair if it had ‘a somewhat clapped out system of air conditioning which had been there for 26 years, was under a crisis repair system only, did not really work and by reference both to published guides and examination in 1989 needed replacement’. Indeed Mr Jones’ case for the tenant was after all based on the proposition that an incoming tenant would replace the air conditioning system at the outset of his lease.
Then in a section headed ‘The tenants case’ Mr Gaunt said:
Mr Cullen argued that a repairing covenant does not require the replacement of items of plant at the expiration of any fixed period or at any stated intervals. The evidence was that the air handling plant and the chillers were capable of repair so as to have a further life of about five years and that such repairs would bring them back to near their maximum efficiency. The defects in the induction units were due to three causes, all of which could be put right without the units having to be replaced.
In reply he accepted as correct in law the test proposed by Mr Barnes by which I took him to be referring to the passage in the transcript at day 8 page 36H to 37A and then he quotes: ‘An overall judgment has to be made as to whether in terms of keeping the whole building in proper repair a component piece of plant has so worn out or reached the end of its life that the only way the building as a whole can be kept in proper repair is if that particular piece of plant is then replaced as opposed to patch repairs, crisis repairs, ad hoc repairs being done to bits of it from time to time.’
Then Mr Gaunt’s opinion continues:
Mr Cullen suggested that that test had not been satisfied because replacement of the plant was not, on the evidence referred to above, the only way that the building could be kept in proper repair. The fact that the tenant might be ill-advised to do ad hoc repairs rather than replace was neither here nor there. As to Proudfoot v Hart he drew attention to certain passages in the judgments which showed that one of the matters to be taken into account is the age of the building and its constituent elements. If the plant is in reasonable working order at the date in question bearing in mind its age then it is in good tenantable repair.
Then under the heading ‘In my opinion’ Mr Gaunt said:
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Counsel were in agreement as to the appropriate test to apply to answer the question whether the tenants repairing obligations obliged him to replace the plant before the review date, namely whether to replace those items of plant was the only way that the building could have been put into proper repair. I consider that that is right and that if there are alternative ways of performing the covenant the tenant is entitled to choose the least onerous. It is clear from Proudfoot v Hart that to be in repair the building does not have to be in perfect repair or in as good a condition as at the date of grant. Allowance is to be made for its age and the age of its components.
Finally, under the heading ‘Conclusion’ Mr Gaunt said:
It must be a matter for you (and that is of course the arbitrator) how to apply this test to the evidence in the present case, but if you are satisfied that the evidence was to the effect that Mr Cullen claimed as summarised above by me it would seem to follow that the replacement test is not passed and that the tenant would have complied with his covenant if he had simply carried out running repairs to the three items of plant before the review date without replacing them.
Turning to the award itself, under the heading ‘Whether or not the sitting tenant is deemed to have replaced the air conditioning within the property prior to the review date’ the arbitrator said:
The legal aspect of this is dealt with in Mr Gaunt’s opinion which he calls ‘The replacement of plant’ point.
I interpolate to say that in fact Mr Gaunt referred to it as the ‘repairs point’. The award continues:
Mr Gaunt draws my attention to Mr Cullen’s claims on behalf of the respondent which were based on the evidence of Buildings, Services Design Group which in turn was the best evidence as to the state of the existing installations. They stated that the plant and chillers could be repaired to bring them back to near their maximum efficiency and that the defects in the induction units were due to three causes, all of which could be rectified without replacement. There would be a maximum extended life of five years only but none the less it would mean that the air conditioning was working satisfactorily on the due date, although very close to the end of its useful life.
It will be appreciated that the notice of motion quotes certain parts of the last sentence of that passage as part of the grounds for the relief which Land Securities now seek.
Later under the heading ‘Works that would be considered reasonable by both hypothetical parties’, the arbitrator said in a passage to which I have already referred in the course of my earlier judgments in this matter:
Due to the direct comparison with Esso and its condition on letting certain works need not be considered. However direct comparison endorses the shortcomings demonstrated in the evidence at the subject building concerning the mechanical and electrical installations due to the age and original specification of the building including the fact that the air conditioning is not deemed to have been replaced …
I draw particular attention to those last words for reasons which will appear later in this judgment.
Turning to Mr Barnes’ submission in support of Lands Securities’ application, at one stage Mr Barnes submitted, although he did not I think press the submission, that Mr Gaunt had himself made an error of law in in effect assuming, without specifically addressing the question, that the works of repair proposed by Westminster, falling short of replacement, constituted compliance with Westminster’s repairing obligations.
In my judgment, however, on a proper analysis of Mr Gaunt’s opinion in this respect it becomes clear that he made no such assumption. Indeed he left the question entirely properly to the arbitrator. This is clear, in my judgment, from the terms of that part of that opinion under the heading ‘Conclusion’, which I have already read. I accordingly reject that submission (made but, as I have indicated, not pressed by Mr Barnes) and I turn to his submissions based on the terms of the award itself.
Mr Barnes submits that having referred to and impliedly accepted Westminster’s evidence as to the nature of the proposed repairs to the air conditioning system and as to the result of doing those repairs, that is to say, a system ‘working satisfactorily on the due date although very close to the end of its useful life’ the arbitrator should have gone on expressly to state and then to apply the test laid down in Proudfoot v Hart to the factual situation which he was describing. The arbitrator having failed to do so there is, submits Mr Barnes, at least a reasonable possibility that he never applied the right test or that he did not apply it properly.
Mr Cullen, for Westminster, submitted first that the test in Proudfoot v Hart does not apply to what he described as functional items in precisely the same way as it applies to decorative items. In support of that submission he cited Murray v Birmingham City Council [1987] 2 EGLR 53, a decision of the Court of Appeal and an unreported decision of the Court of Appeal in the Dame Margaret Hungerford Charity Trustees v Beazley dated April 29 1993*.
*Editor’s note: Reported at [1993] 2 EGLR 143.
Second, he submitted that in making his award the arbitrator in fact applied the correct test, alternatively that there is no basis on the face of the award for inferring that he did not do so. For those reasons Mr Cullen submitted that no relief should be granted on this application.
My conclusions on these submissions are as follows. In the first place it is clear that the question before the arbitrator in relation to the matter of repairs was, and I quote from Mr Gaunt’s opinion,
the question whether the tenants repairing obligations obliged him to replace the plant before the review date.
Second, it was common ground before the arbitrator, as it is common ground before me, that Westminster’s repairing obligations would only have so obliged them (that is to say, they would only have been obliged to carry out the works of replacement) if there was no other lesser way of complying with those obligations short of replacement. Third, the arbitrator expressly concluded that (to use his own words, in a passage to which I drew attention):
the air conditioning is not deemed to have been replaced
In other words the arbitrator is saying that Westminster were not obliged by the repairing covenant to carry out the works of replacement. Ergo, as it seems to me, the arbitrator was thereby acknowledging that there was in fact another way by which Westminster could comply with its repairing obligations, short of replacement. In context that in turn can only mean that he was satisfied that the repairs as to which Westminster led evidence would, if carried out, comply with their repairing obligations.
As to the appropriate test in law I reject Mr Cullen’s submission that the test laid down in Proudfoot v Hart is not applicable to functional items as it is applicable to decorative items. In my judgment, neither of the authorities which he cited supports such a proposition, but the arbitrator had had Proudfoot v Hart cited to him by Mr Barnes and indeed Proudfoot v Hart is referred to expressly by Mr Gaunt in his opinion in the passages which I have already read. On the face of it, therefore, there is nothing to suggest that the arbitrator did not apply the right test in reaching the conclusion which, in my judgment, he must have reached, namely that the repairs proposed by Westminster would, if carried out, constitute compliance by Westminster with their repairing obligations.
Mr Barnes suggests that the arbitrator’s omission to deal expressly with his point (referred to by Mr Gaunt in his opinion) that Mr Jones’ own valuation approach involved the proposition that an incoming tenant would replace the air conditioning system at the commencement of his lease, coupled with the arbitrators failure to set out the Proudfoot v Hart test in terms indicates that the arbitrator failed properly to address the question of whether the proposed works of repair met that test. I am not prepared to draw that inference.
Moreover, the highest Mr Barnes felt able to put his case was (as I have indicated) that there was at least a reasonable possibility that the arbitrator made an error of law. In my judgment, that is not in any event enough to justify the remission of the question under section 1 of the 1979 Act.
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In any event, although it would naturally have been preferable for the arbitrator to have set out his reasoning and his conclusions on this aspect of the matter in extenso, his mere omission to do so is not, in my judgment, enough to found a suspicion that he erred in law, particularly where, as here, the relevant question of law and the B relevant authority relating to it were fairly and squarely before him.
For those reasons, therefore, I reject this application.
