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Arnold and others v National Westminster Bank plc

Landlord and tenant — Rent review clause in lease — Reopening of construction point — Further stage in litigation beginning with decision of Walton J in National Westminster Bank plc v Arthur Young McClelland Moores & Co — Difficulties of relitigating matter so as to produce justice for further rent reviews in the present case, although decision of Walton J had been disapproved in other cases — Whether issue estoppel rule an absolute bar — Cause of action estoppel and issue estoppel discussed by Court of Appeal — Ruling of Sir Nicolas Browne-Wilkinson V-C upheld

Walton J,
having decided ([1985] 1 EGLR 61) that the hypothetical lease should be
construed as not containing any provision for rent review such as was contained
in the actual lease, refused leave to appeal and refused to grant a certificate
under section 1(7)(b) of the Arbitration Act 1979 that the question of law was
either one of general public importance or one which for some other special
reason should be considered by the Court of Appeal — The tenants sought to
appeal to the Court of Appeal, but, although that court could itself have given
leave to appeal, it clearly had no jurisdiction, owing to the wording of
section 1(7), to grant the necessary certificate; and the court so held — The
tenants then started proceedings for the rectification of the lease (it was in
fact a subunderlease) and, further or in the alternative, for a declaration as
to the true construction of the rent review clause, the very point decided,
unfavourably to the tenants, by Walton J — The landlords, defendants in the
proceedings, then applied to strike out the claim for a construction
declaration on the ground that it was barred by the principle of issue estoppel
in view of Walton J’s decision — Sir Nicolas Browne-Wilkinson V-C rejected the
landlords’ application to strike out and held, as a preliminary point of law,
that the tenants were not estopped from raising the issue as to the true
construction of the rent review clause — This is the landlords’ appeal against
the Vice-Chancellor’s decision — It may be mentioned at this point that the
evidence at the 1983 rent review was that if, in accordance with Walton J’s
ruling, the hypothetical lease provided for no rent reviews, the rent during
the secured rent period would be 20% higher than if reviews were to be assumed
to operate

It was
accepted that the two questions which were before the Court of Appeal were
those identified by the Vice-Chancellor, namely (1) whether the doctrine of
issue estoppel was absolute or whether a party could in exceptional
circumstances be allowed to relitigate a point; (2) whether the circumstances
in the present case constituted exceptional circumstances sufficient to defeat
the estoppel — The exceptional circumstances relied on were that the decision
of Walton J was wrong

The judgments
in the Court of Appeal, in particular the judgment of Dillon LJ, considered in
some detail, and with references to a number of authorities, developments in
the law of estoppel — The simplest and oldest form of estoppel in the present
context was estoppel per rem judicatam, now called ’cause of action estoppel’

The rule as
to cause of action estoppel was strict: ‘Cause of action estoppel binds
absolutely. There is no qualification, such as except in special
circumstances,’ per Dillon LJ

A
modification, referred to by Dillon LJ as ‘extended res judicata’ was that
mentioned in the old case of Henderson v Henderson, which appeared
to lay it down that special circumstances could be pleaded where a party had
omitted part of his case through negligence, inadvertence or accident (these
events not being in themselves special circumstances) — The expression ‘issue
estoppel’, apparently first used in Australia, was introduced into this country
by Diplock LJ in Thoday v Thoday; and the ‘special circumstances’ exception in issue estoppel
cases was recognised in Fidelitas Shipping Co Ltd v V/O Exportchleb — In The Mekhanik
Evgrafov (No 2) the special circumstances related, as in the present case, to
matters of law, not fact — The modern doctrine was consolidated in Mills v Cooper and
Hunter v Chief Constable of the West Midlands Police — The authorities cited
covered the present case, which was concerned with an issue fully litigated in
the proceedings before Walton J on the 1983 rent review

Having
established that the issue estoppel rule permitted of a mitigation based on
special or exceptional circumstances, and that these could include developments
in the law, the court held that the Vice-Chancellor had come to the correct
conclusion in the present case — Walton J’s decision was not in accordance with
the guidelines subsequently laid down and approved by the Court of Appeal — The
assumption of a hypothetical lease with no rent reviews was contrary to the
underlying purpose of a rent review clause and saddled the tenants with a term
which they did not have, at a fixed rent without reviews — Appeal dismissed

The following
cases are referred to in this report.

Amax
International Ltd
v Custodian Holdings Ltd
[1986] 2 EGLR 111; (1986) 279 EG 762

Badar Bee v Habibs Merican Noordin [1909] AC 615

Basingstoke
and Deane Borough Council
v The Host Group Ltd
[1988] 1 WLR 348; (1987) 56 P&CR 31; [1987] 2 EGLR 147; 284 EG 1587, CA

Berkeley v Berkeley [1946] AC 555

British
Gas Corporation
v Universities Superannuation
Scheme Ltd
[1986] 1 WLR 398; [1986] 1 All ER 978; [1986] 1 EGLR 120; (1986)
277 EG 980

Bynoe v Bank of England [1902] 1 KB 467

Carl
Zeiss Stiftung
v Rayner and Keeler Ltd (No 2)
[1967] 1 AC 853; [1966] 3 WLR 125; [1966] 2 All ER 536, HL

Connelly v Director of Public Prosecutions [1964] AC 1254; [1964] 2
WLR 1145; [1964] 2 All ER 401, CA

138

Equity
& Law Life Assurance Society plc
v Bodfield
Ltd
[1987] 1 EGLR 124; (1987) 281 EG 1448, CA

Fidelitas
Shipping Co Ltd
v V/O Exportchleb [1966] 1
QB 630; [1965] 2 WLR 1059; [1965] 2 All ER 4; [1965] 1 Lloyd’s Rep 223, CA

Henderson v Henderson (1843) 3 Hare 100

Hoystead v Commissioner of Taxation [1926] AC 155, PC

Hunter v Chief Constable of the West Midlands Police [1982] AC 529;
[1981] 3 WLR 906; [1981] 3 All ER 727, HL

Isle of
Thanet Electric Supply Co Ltd, Re
[1949] 2 All ER
316

Ladd v Marshall [1954] 1 WLR 1489; [1954] 3 All ER 745, CA

Mekhanik
Evgrafov, The (No 2)
[1988] 1 Lloyd’s Rep 330

Mills v Cooper [1967] 2 QB 459; [1967] 2 WLR 1343; [1967] 2 All ER
100; (1964) 62 LGR 168, DC

National
Westminster Bank plc
v Arthur Young McClelland
Moores & Co
[1985] 1 WLR 1123; [1985] 2 All ER 817; [1985] 2 EGLR 13;
(1985) 272 EG 717, CA

Peareth v Marriott (1882) 22 ChD 182

Phosphate
Sewage Co
v Molleson (1879) 4 App Cas 801

Property
& Reversionary Investment Corporation Ltd
v Templar
[1977] 1 WLR 1223; [1978] 2 All ER 433; (1977) 245 EG 307, [1978] 1 EGLR 92, CA

R v Humphreys [1977] ACI; [1976] 2 WLR 857; [1976] 2 All ER
497, HL

R v Inhabitants of the Township of Hartington Middle Quarter
(1855) 4 E&B 780

Thoday v Thoday [1964] P 181; [1964] 2 WLR 371; [1964] 1 All ER
341, CA

Waring,
Re, Westminster Bank
v Awdry [1942] Ch 426

Waring,
Re, Westminster Bank
v Burton-Bulter [1948]
Ch 221; (1948) 64 TLR 147; [1948] 1 All ER 257

Yat
Tung Investment Co Ltd
v Dao Heng Bank Ltd
[1975] AC 581; [1975] 2 WLR 690, PC

This was an
appeal by defendant landlords, National Westminster Bank plc (in their capacity
as trustees for British Rail Pension Trustee Co Ltd), from the dismissal by Sir
Nicolas Browne-Wilkinson V-C, of the bank’s application to strike out a
paragraph in the plaintiff tenants’ statement of claim. The plaintiffs,
respondents to this appeal, were Michael John Arnold, Peter Robert Edwards and
Simon Francis Phillips, partners in the firm of Arthur Young (formerly Arthur
Young McClelland Moores & Co). The paragraph which the defendant landlords
wished to strike out sought a declaration as to the true construction of the
rent review provisions of the tenants’ subunderlease of 7 Rolls Buildings,
Fetter Lane, London EC4.

Terence Cullen
QC and Miss Hazel Williamson QC (instructed by Stephenson Harwood) appeared on
behalf of the appellant landlords; James Munby QC and Jonathan Gaunt
(instructed by Freshfields) represented the respondents.

Giving
judgment, DILLON LJ said: This is an appeal against a decision of Sir
Nicolas Browne-Wilkinson V-C given on July 1 1988. His judgment was reserved
and is reported in [1989] Ch 63.*  The
appeal is by the National Westminster Bank plc, the defendants in the
proceedings, as trustees of the British Rail Pension Trust. They are the
landlords of the premises in question. The plaintiffs, who are the tenants, are
the partners in the well-known firm of Arthur Young, formerly Arthur Young
McClelland Moores & Co.

*Editor’s
note: Also reported at [1988] 2 EGLR 161.

The
Vice-Chancellor rejected a claim by the defendants to strike out parts of the
statement of claim as disclosing no reasonable cause of action and held on a
preliminary point of law that the plaintiffs are not estopped from raising in
this action the issue of the true construction of the rent review clause in a
certain subunderlease.

The
subunderlease (‘the lease’) is dated October 28 1976. It demised to the
plaintiffs the premises known as 7 Rolls Buildings, Fetter Lane in the City of
Westminster, for a term from October 28 1976 to June 24 2008 (just under 32
years) at an initial yearly rent of £800,000, subject to review on June 24
1983, 1988, 1993, 1998 and 2004. The freehold reversion immediately expectant
on the lease has been vested in the defendant bank since 1977.

The scheme of
the lease is that there are six rent periods: the first period began on the day
on which the term created by the lease began and ended on June 24 1983; the
second period began on June 24 1983; and the third, fourth, fifth and sixth
periods were to run from the subsequent rent review dates, which I have
mentioned. The rent payable is reserved during the first rent period as the
basic rent of £800,000 per year. During the subsequent rent periods the rent is
whichever is the greater of a rent equal to the rent payable during the last
preceding rent period and the fair market rent at the relevant review date
which in default of agreement is to be fixed by arbitration. The ‘fair market
rent’ is defined as meaning:

such amount
as shall represent a yearly rent at which the demised premises might reasonably
be expected to be let at the Relevant Review Date in the open market by a
landlord to a tenant without a premium with vacant possession and subject to
the provisions of this Sub-Underlease other than the rent hereby reserved there
being disregarded any effect on rent of any of the matters set out in
paragraphs (a), (b) or (c) of Section 34 of the Landlord and Tenant Act 1954
(as amended).

It is common
ground that that presupposes a hypothetical lease for the unexpired residue of
the term of the lease. The question was whether that hypothetical lease did or
did not include rent review provisions at the successive review dates as under
the actual lease. The evidence on the 1983 rent review was that if no rent
reviews were to be taken into account, the rent during the second rent period
would be 20% higher than if the reviews were taken into account.

The present
action claims primarily rectification of the lease, on the basis that it was
not the intention of the parties that the words in the definition of ‘fair
market rent’ for the purpose of the rent review clause, referring to a letting
‘subject to the provisions of this Sub-Underlease other than the rent hereby
reserved’ were to exclude all future rent reviews from the hypothetical lease.
However, para 20 in the statement of claim claims further or in the alternative
to the claim for rectification a determination as to the basis on which the
periodic reviews are to be conducted.

The defendant
claims to strike out that paragraph and the consequential prayers for relief on
the ground that there is issue estoppel per rem judicatam because of a
decision of Walton J on the 1983 rent review.

The decision
of Walton J was given on November 26 1984. It is reported in [1985] 1 EGLR 61.
Walton J refused a certificate under section 1(7)(b) of the Arbitration Act
1979 that the question of law was one of general public importance or one which
for some other reason should be considered by the Court of Appeal. There is no
appeal against the refusal of such a certificate. (See National Westminster
Bank plc
v Arthur Young McClelland Moores & Co [1985] 1 WLR
1123*, the decision of this court on the attempt by the plaintiffs to appeal
against Walton J’s refusal of the certificate.)

*Editor’s
note: Also reported at [1985] 2 EGLR 13.

The view of
Walton J was that future rent reviews were excluded from consideration in
operating the 1983 review. In the relevant part of his judgment [p 62] he said:

The first and
I think probably the main question which arises here is whether, when the
arbitrator is deciding what is to be the fair market rent for the next rent
period, he is to do that upon the basis that the lease contains (as, of course,
we know it does in fact contain) a rent review clause or whether, on the other
hand, he is to fix the fair market rent on the basis that there is no such
clause in the lease. I do not think that there is a presumption one way or the
other. I think that in every case that must depend upon the precise terms of
the lease, because it must be very much borne in mind that there is no such
thing as a fair market rent of any premises in the abstract. There is only a fair
market rent upon a set of abstractions which may be actual, may be hypothetical
and in most cases under rent reviews are a mixture of the one and the other.
For example, here we have that the premises are expected to be let with vacant
possession, which is, of course, something which we know as a fact just is not
the case because the tenants are actually in possession and are certainly not
just going to move out for the purpose of a rent review.

So the
attempt by Mr Morritt [who was appearing for the tenants] to poison my mind in
advance to achieve the lower of the two values by defining the fair market rent
as something which favours the tenant, as in fact he was attempting to do, I do
not think impresses me very much.

Then he went
on to say that the words were unusual and seemed to him to be very odd, and he
said that something was missing from the clause and that quite clearly the rent
was not a provision. He said what ‘rent’ was. He suggested various words that
might be written in and then referred to the odd suppositions that would arise
if the words were taken literally. He said:

One might
have the supposition that there is no direct covenant to pay the rent. One
might have the supposition that there was no power of re-entry for non-payment
of the rent. Be it so, if those have any effect on the valuation of the rent .
. .

Later he said:

. . . however
unfortunate it may be and whether it was intended or not, in this particular
lease the fair market rent is to be ascertained upon the somewhat curious assumption
that there is no rent revision clause contained in the hypothetical terms which
the arbitrator is considering. In the present case, that is stated by the
arbitrator, who told us what the effect of that would be. It would be very
considerable because it would put up a not inconsiderable rent by no less than
20.5%; but it is a simple point and it seems to me an inescapable one in view
of the way the definition of ‘fair market rent’ is drawn.

In his
judgment under appeal the Vice-Chancellor sets out at p 66F the two questions
which, as he saw it, arise.

139

(1)   Is the doctrine of issue estoppel absolute or
can a party in exceptional circumstances be permitted to relitigate a point?

(2)   Are the circumstances of this case such as
(as the Vice-Chancellor thought) to constitute exceptional circumstances which
would defeat the estoppel?

Basically the
circumstances are that later decisions on rent review clauses indicate that
Walton J was wrong.

The
Vice-Chancellor in British Gas Corporation v Universities Superannuation
Scheme Ltd
[1986] 1 WLR 398* laid down general guidelines for the
construction of rent review clauses which this court has approved in Equity
& Law Life Assurance Society plc
v Bodfield Ltd [1987] 1 EGLR
124 and Basingstoke & Deane Borough Council v Host Group Ltd
[1988] 1 WLR 348†   The particular
guidelines laid down by the Vice-Chancellor are set out on p 67 B-C of his
judgment. He recognises in (b) that ‘clear words which require the rent review
provisions (as opposed to all provisions as to rent) to be disregarded . . .
must be given effect to, however wayward the result’, but continued in (c):

subject to
(b), in the absence of special circumstances it is proper to give effect to the
underlying commercial purpose of a rent review clause and to construe the words
so as to give effect to that purpose by requiring future rent reviews to be
taken into account in fixing the open market rental under the hypothetical
letting.

*Editor’s
note: Also reported at [1986] 1 EGLR 120.

† Editor’s
note: Also reported at [1987] 2 EGLR 147.

It is plain
that the approach of Walton J, in the passage I have cited from his judgment,
is inconsistent with that guideline. There is also the more recent case of Amax
International Ltd
v Custodian Holdings Ltd [1986] 2 EGLR 111; (1986)
279 EG 762, where it appears that Hoffmann J construed a rent review clause
similar to the present one in the opposite way so as to take account of rent
reviews.

The simplest
and oldest form of estoppel per rem judicatam is what is now called
’cause of action estoppel’. That is referred to by Lord Reid in Carl Zeiss
Stiftung
v Rayner & Keeler Ltd (No 2) [1967] 1 AC 853 where he
says at p 909F:

There is a
vast amount of authority on estoppel per rem judicatam. ‘The object of
the rule of res judicata is always put upon two grounds — the one public
policy, that it is the interest of the State that there should be an end of
litigation, and the other, the hardship on the individual, that he should be
vexed twice for the same cause’ (per Lord Blackburn in Lockyer v Perriman).
And the general principle is clear, that the earlier judgment relied on must
have been a final judgment, and that there must be identity of parties and of
subject matter in the former and in the present litigation.

One instance
of cause of action estoppel is, in my view, pace the Vice-Chancellor,
the decision of Jenkins J in Re Waring, Westminster Bank v Burton-Butler
[1948] Ch 221. In that case a testator had by his will made in February 1939
bequeathed two annuities payable free of income tax. He had given directions to
his trustees to set up an annuity fund and he died in 1940. The trustees took
out a summons asking whether, in setting aside the fund, they ought to provide
for the annuities at their face value or whether they fell to be reduced under
the wartime provisions of section 25 of the Finance Act 1941. Farwell J held
that section 25 did not apply, but his decision was reversed by the Court of
Appeal, who held in the reported case of Re Waring, Westminster Bank Ltd
v Awdry [1942] Ch 426 that section 25 did apply, notwithstanding that
the testator had not died until 1940. The trustees accordingly appropriated a
fund sufficient to pay 20/29ths of the gross amount of the tax-free annuities
in accordance with the section. Only one of the annuitants had been a party to
that decision and no representation order had been made. Subsequently the House
of Lords, in a case between other litigants, Berkeley v Berkeley
[1946] AC 555, had held that Re Waring had been wrongly decided and
therefore it followed that the section which replaced section 25 did not apply
where the testator had died after the commencement of the war, which was the
crucial date. Jenkins J held that in the case of the annuitant who was a party
to the previous proceedings, the principle of res judicata applied and
he was bound by the decision of the Court of Appeal that section 25 of the 1941
Act applied to reduce his tax-free annuity to the appropriate fraction of the
full amount. The second annuitant, however, who had not been a party to the
previous decision, and was not bound by any representation order, was entitled
to claim retrospectively the full amount of her annuity. That is a case where
the earlier decision had decided the precise point. There was no further point
to litigate, although it was suggested that the change in the statutory
provision produced a further point.

I take that
case to have been rightly decided, because it is in line with the decision of
this court in Peareth v Marriott (1882) 22 ChD 182, which in turn
led to the decision in Badar Bee v Habib Merican Noordin [1909]
AC 615, where the opinion of the Judicial Committee was delivered by Lord
Macnaghten and has never since been doubted.

Cause of
action estoppel binds absolutely. There is no qualification, such as except in
special circumstances. The only way round a decision on a point of law, which
is subsequently held by a higher court in proceedings between other parties to
have been erroneous, is to appeal, if necessary getting leave to appeal out of
time. An instance of that, to which we were referred, is the case of Property
& Reversionary Investment Corporation Ltd
v Templar [1977] 1 WLR
1223. That was also concerned with a rent review clause in a lease. The
landlords’ claim for an increase in rent under the rent review clause had been
dismissed in 1974 on the ground that they had failed to comply strictly with
the time-limits for initiating the review. Two and a half years later,
decisions of the House of Lords on the construction of rent review clauses in
general threw doubt on whether the terms of the clause in the lease required
the landlords to comply strictly with the time-limits and the landlords
therefore applied for, and were granted, leave to appeal out of time albeit on
terms that they should not claim rent retrospectively. Roskill LJ said:

The real
point here, as

counsel

ultimately
accepted, is whether it is right that these parties should have these
continuing contractual relationships governed by a lease the terms of which
have assumedly been erroneously construed in the court below.

I think that
notwithstanding Mr Hunt’s submissions put the case that the landlords should be
left to receive the lower rent for the next 18 months or so

— that was to
the next rent review date —

and
thereafter become entitled to claim the higher rent in accordance with the
House of Lords’ decision, there are special circumstances which justify leave
to appeal out of time.

Cumming-Bruce
LJ said:

Now that the
House of Lords has decided that the proper construction of the contract is
other than that decided by the judge, I agree that there are special
circumstances here because it does not seem just that future obligations
between the parties to the lease should depend upon the construction now shown
to be wrong.

A similar
instance where leave to appeal out of time was granted because of a decision of
the House of Lords which had overruled the decision of the Court of Appeal on
which the judgment at first instance had been founded was Re Isle of Thanet
Electric Supply Co Ltd
[1949] 2 All ER 316. There, leave to appeal out of
time was granted by the judge at first instance, but it seems that under the
present rules it would have to be granted by the Court of Appeal.

There have
been two separate extensions of the doctrine of res judicata.

One is what is
called ‘extended res judicata. The classic statement of this is in the
judgment of Sir James Wigram V-C in Henderson v Henderson (1843)
3 Hare 100. He said:

I believe I
state the rule of the Court correctly when I say that, where a given matter
becomes the subject of litigation in, and of adjudication by, a Court of
competent jurisdiction, the Court requires the parties to that litigation to
bring forward their whole case, and will not (except under special
circumstances) permit the same parties to open the same subject of litigation
in respect of matter which might have been brought forward as part of the
subject in contest, but which was not brought forward, only because they have,
from negligence, inadvertence, or even accident, omitted part of their case.
The plea of res judicata applies, except in special cases, not only to
points upon which the Court was actually required by the parties to form an
opinion and pronounce a judgment, but to every point which properly belonged to
the subject of litigation, and which the parties exercising reasonable
diligence might have brought forward at the time.

I stress the
words ‘under special circumstances’ and ‘except in special cases’.

In Hoystead
v Commissioner of Taxation [1926] AC 155 Lord Shaw, citing this passage,
said at p 170:

This
authority has been frequently referred to and followed, and is settled law.

It has indeed
been referred to and followed many more times since 1926.

Lord
Kilbrandon, in Yat Tung Investment Co Ltd v Dao Heng Bank Ltd
[1975] AC 581, gave an explanation of the doctrine at p 590E-F as follows:

140

The shutting
out of a ‘subject of litigation’ — a power which no court should exercise but
after a scrupulous examination of all the circumstances — is limited to cases
where reasonable diligence would have caused a matter to be earlier raised;
moreover, although negligence, inadvertence or even accident will not suffice to
excuse, nevertheless ‘special circumstances’ are reserved in case justice
should be found to require the non-application of the rule.

It was held in
Zeiss that Henderson v Henderson was concerned with cause
of action estoppel, rather than issue estoppel, to which I shall come. That was
stated by Lord Reid at p 916B-C, by Lord Upjohn at p 946F-G and Lord
Wilberforce at p 966E-F.

Henderson v Henderson was also concerned with a cause of action that
was not litigated in the earlier proceedings, rather than the cause of action
that had been litigated. Therefore in Zeiss, as Lord Reid pointed out at
p 916C, it was not necessary to explore Henderson v Henderson
more deeply, as Zeiss was concerned, as is the present case, with what
had been litigated in the earlier proceedings. But Henderson v Henderson
comes back into the law of issue estoppel, as we shall see.

The second
development from cause of action estoppel is now called issue estoppel and was
recognised in Zeiss. The phrase ‘issue estoppel’ was apparently first
used in Australia and was introduced in this country by Diplock LJ in Thoday
v Thoday [1964] P 181. He said at p 197:

The
particular type of estoppel relied upon by the husband is estoppel per rem
judicatam
. This is a generic term which in modern law includes two species.

He then dealt
with the first, which he called ’cause of action estoppel’, and then said (at p
198):

The second
species, which I will call ‘issue estoppel’ is an extension of the same rule of
public policy. There are many causes of action which can only be established by
proving that two or more different conditions are fulfilled. Such causes of
action involve as many separate issues between the parties as there are
conditions to be fulfilled by the plaintiff in order to establish his cause of
action; and there may be cases where the fulfilment of an identical condition
is the requirement common to two or more different causes of action. If in
litigation upon such one cause of action any of such separate issues as to whether
a particular condition had been fulfilled is determined by a court of competent
jurisdiction, either upon evidence or upon admission by a party to the
litigation, neither party can in subsequent litigation between one another upon
any cause of action which depends upon the fulfilment of the identical
condition, assert that the condition was fulfilled if the court has in the
first litigation determined that it was not, or deny that it was fulfilled if
the court in the first litigation determined that it was.

A classic
instance of issue estoppel is to be found in the case of R v Inhabitants
of the Township of Hartington Middle Quarter
(1855) 4 El & Bl 780.

The next step
in the development of the law of issue estoppel was that in Fidelitas
Shipping Co Ltd
v V/O Exportchleb [1966] 1 QB 630 this court applied
the principles of Henderson v Henderson to issue estoppel. There,
owners had a claim against charterers for the balance of demurrage which was
referred to arbitration. The arbitrators having disagreed, an umpire was
appointed, who stated his award in the form of a special case. The special case
raised two of the three issues in the arbitration but not the third. It was
held that, as the owners had failed to take the necessary steps to have the
third issue included in the special case, they were estopped from raising the
third issue after the second issue had been decided against them on the
proceedings on the special case. If the owners had been right on the third
issue, the second issue would not have arisen.

Lord Denning
MR, with whom Danckwerts LJ agreed, said:

The umpire
held in his interim award (subject to the opinion of the court) that the claim
was not excluded. The court took a different view and held that the claim was
excluded by the cesser clause. That issue having been decided by the court, can
it be reopened before the umpire?  I
think not. It is a case of ‘issue estoppel’ as distinct from ’cause of action
estoppel’ and ‘fact estoppel’, a distinction which was well explained by
Diplock LJ in Thoday v Thoday. The law, as I understand it, is
this: if one party brings an action against another for a particular cause and
judgment is given upon it, there is a strict rule of law that he cannot bring
another action against the same party for the same cause. Transit in rem
judicatam: see King v Hoare. But within one cause of action,
there may be several issues raised which are necessary for the determination of
the whole case. The rule then is that, once an issue has been raised and
distinctly determined between the parties, then, as a general rule, neither
party can be allowed to fight that issue all over again. The same issue cannot
be raised by either of them again in the same or subsequent proceedings except
in special circumstances: see Badar Bee v Habib Merican Noordin, per
Lord Macnaghten.

Lord
Macnaghten did not refer to, and was not concerned with, special circumstances.

And within
one issue, there may be several points available which go to aid one party or
the other in his efforts to secure a determination of the issue in his favour.
The rule then is that each party must use reasonable diligence to bring forward
every point which he thinks would help him. If he omits to raise any particular
point, from negligence, inadvertence, or even accident (which would or might
have decided the issue in his favour), he may find himself shut out from
raising that point again, at any rate in any case where the self-same issue
arises in the same or subsequent proceedings. But this again is not an
inflexible rule. It can be departed from in special circumstances.

He then
referred to Henderson v Henderson and Hoystead v Commissioner
of Taxation
and certain other decisions.

Diplock LJ
dealt with the matter at p 642B:

In the case of
litigation the fact that a suit may involve a number of different issues is
recognised by the Rules of the Supreme Court which contain provision enabling
one or more questions (whether of fact or law) in an action to be tried before
others. Where the issue separately determined is not decisive of the suit, the
judgment upon that issue is an interlocutory judgment and the suit continues.
Yet I take it to be too clear to need citation of authority that the parties to
the suit are bound by the determination of the issue. They cannot subsequently
in the same suit advance argument or adduce further evidence directed to
showing that the issue was wrongly determined. Their only remedy is by way of
appeal from the interlocutory judgment and, where appropriate, an application
to the appellate court to adduce further evidence: but such application will
only be granted if the appellate court is satisfied that the fresh evidence
sought to be adduced could not have been available at the original hearing of
the issue even if the party seeking to adduce it had exercised due diligence.

This is but
an example of a specific application of the general rule of public policy, nemo
debet bis vexari pro una et eadem causa
. The determination of the issue
between the parties gives rise to what I ventured to call in Thoday v Thoday
an ‘issue estoppel’. It operates in subsequent suits between the same parties
in which the same issue arises. A fortiori it operates in any subsequent
proceedings in the same suit in which the issue has been determined. The
principle was expressed as long ago as 1843 in the words of Wigram V-C in Henderson
v Henderson which were expressly approved by the Judicial Committee of
the Privy Council in Hoystead v Commissioner of Taxation. I would
not seek to better them.

He then
proceeds to quote the words of Sir James Wigram which I have already read. At p
649E-F he said:

In these
circumstances the principle approved and applied in Hoystead’s case
applies to this case too. They are estopped from reopening this issue and are
accordingly precluded from contending before the umpire that their claim
against the charterers is not excluded by clause 27 of the charterparty so far
as it relates to demurrage alleged to have been incurred at the port of
loading, either on the grounds of waiver or any other ground.

In Zeiss
some of their lordships were doubtful about the extension of the principles of Henderson
v Henderson to issue estoppel (see per Lord Reid at pp 916-7 and per
Lord Upjohn at p 947B-E). They were afraid that the extension might in some
cases have too stringent results where there was a good practical reason for
not having raised a particular issue in earlier proceedings.

We are,
however, bound by Fidelitas. Henderson v Henderson is concerned
with causes of action or (on Fidelitas) issues which were not
raised in the earlier proceedings, whereas, as Mr Cullen has stressed as the
cornerstone of his argument on the present appeal, we are concerned with an
issue which was fully litigated in the proceedings before Walton J on the 1983
rent review. It seems to me, however, with all respect to the doubts expressed
by others, that the development of the law in Fidelitas flows logically
from the earlier cases and that the answer to the disquiet felt by their
lordships is to be found in the proper application of the words used by Sir
James Wigram ‘except under special circumstances’. Proper application of those
words should achieve the objective of Lord Upjohn where he said in Zeiss
at p 947D-E:

All estoppels
are not odious but must be applied so as to work justice and not injustice and
I think the principle of issue estoppel must be applied to the circumstances of
the subsequent case with this overriding consideration in mind.

A useful
instance of the application of the words ‘except in special circumstances’ is
to be found in the decision of Sheen J in The Mekhanik Evgrafov (No 2)
[1988] 1 Lloyd’s Rep 330. There, cargo owners had issued a writ claiming
damages against the shipowners. It had been suggested by the cargo-owners,
while the action was pending, that if the shipowners were minded to claim to
limit their liability they should do so by pleading their right to limit as a
defence in the action. The shipowners declined to do so and, after judgment had
been given against them in the action, they started a second action claiming to
limit their liability. It was asserted by the cargo owners that the second
action should be struck out on the ground of141 res judicata in the extended sense under Henderson v Henderson.
The judge held, however, that there were special circumstances which warranted
allowing the second action to proceed.

The case is, I
apprehend, strictly one of cause of action estoppel, but so close to issue
estoppel that it underlines how desirable it is that the same rule should apply
to both. What is more important for present purposes is that the special
circumstances on which Sheen J relied related to matters of law and not fact —
the uncertainty as to what the correct Admiralty practice was and the differing
views expressed by the members of this court in an earlier case on when the
defence of limitation of liability should be raised. Sheen J’s conclusion was
at p 335 (in the right-hand column) that:

having regard
to the manner in which the Court of Appeal dealt with the case of the Penelope
II it seems to me that it would be unjust to hold that the Baltic Shipping Co
could not now obtain a declaration that their liability to the cargo-owners was
limited.

I stress the
word ‘unjust’, which echoes what Lord Upjohn had said, and also what Lord
Kilbrandon said in Yat Tung, to which I have already referred.

Again this was
a case where the issue had not been taken in the earlier case. I turn to the
way the law has developed where the issue had been taken. The starting point
for this latest development is a passage in the judgment of Diplock LJ in the
case of Mills v Cooper [1967] 2 QB 459 at pp 468B to 469A. That
was a decision of a divisional court of the Queen’s Bench Division. The
position was that an information had been preferred against the defendant,
alleging that he, being a gipsy, had without lawful authority or excuse
encamped on a highway on a certain date contrary to a certain statutory
provision. His defence was a plea of issue estoppel on the ground that an
earlier information against him for the same offence had been dismissed on a
finding that he was not a gipsy. The court overruled that defence on the ground
that being a gipsy is not an unalterable status. In giving his judgment,
Diplock LJ took the opportunity to set out his understanding of the modern
common law doctrine of issue estoppel. He said:

If that
meaning is adopted, it follows that being a gipsy is not an unalterable status.
It cannot be said, ‘once a gipsy always a gipsy’. By changing his way of life a
modern Borrow may be a gipsy at one time and not a gipsy at another.

It is in the
light of that meaning to be attached to the word ‘gipsy’ that the question of
any so-called ‘issue estoppel’ must be considered in the present case. The
doctrine of issue estoppel in civil proceedings is of fairly recent and
sporadic development, though none the worse for that. Although Hoystead
v Taxation Commissioner did not purport to break new ground, it can be
regarded as the starting point of the modern common law doctrine, the
application of which to different kinds of civil actions is currently being
worked out in the courts. That doctrine, so far as it affects civil
proceedings, may be stated thus: a party to civil proceedings is not entitled
to make, as against the other party, an assertion, whether of fact or of the
legal consequences of facts, the correctness of which is an essential element
in his cause of action or defence, if the same assertion was an essential
element in his previous cause of action or defence in previous civil
proceedings between the same parties or their predecessors in title and was
found by a court of competent jurisdiction in such previous civil proceedings
to be incorrect, unless further material which is relevant to the correctness
or incorrectness of the assertion and could not by reasonable diligence have
been adduced by that party in the previous proceedings has since become
available to him.

Several points
emerge from that.

First, he
refers to Hoystead where Sir James Wigram’s principle in Henderson
v Henderson had been stated. He cannot have been intending to depart
from his view in Fidelitas that he would not seek to better the words
used by Sir James Wigram.

Second, he is applying
the approach in Hoystead to a case where the assertion which was in
issue had been made in the previous proceedings and found to be incorrect; not
merely to a case where the assertion was not made but could and should have
been made.

Third, he was
applying that approach whether the assertion was of fact or of law, that is to
say, the legal consequences of fact.

He formulated
his qualification, in a case which depended on the facts, as being:

unless
further material which is relevant to the correctness or incorrectness of the
assertion and could not by reasonable diligence have been adduced by that party
in the previous proceedings had since become available to him.

He clarified
this in Hunter v Chief Constable of the West Midlands Police
[1982] AC 529, where he said, agreeing with what Goff LJ had said in the Court
of Appeal in that case, that the standard of fresh evidence required to
override an issue estoppel was the standard prescribed by Lord Cairns LC in Phosphate
Sewage Co Ltd
v Molleson (1879) 4 App Cas 801 at p 814, where Lord
Cairns had said:

My Lords, the
only way in which that could possibly be admitted would be if the litigant were
prepared to say, I will shew you that this is a fact which entirely changes the
aspect of the case, and I will shew you further that it was not, and could not
by reasonable diligence have been, ascertained by me before.

Lord Diplock
commented that this was perhaps stronger than the familiar Ladd v Marshall
test.

All the other
members of the House of Lords agreed with Lord Diplock’s speech in Hunter.
What he said about the standard of fresh evidence was relevant to one of the
issues before their lordships in that it was said for Hunter, the appellant,
that he had fresh evidence sufficient by the Mills v Cooper formulation
to override in his new action against the Chief Constable any issue estoppel
which might otherwise have stood against him as a result of the conclusion of
the judge on a voir dire at his earlier criminal trial. In my judgment,
we should regard Lord Diplock’s formulation in Mills v Cooper, as
explained in Hunter, as binding on us.

If therefore
the binding nature of an issue estoppel, where a point has been litigated in
earlier proceedings, may be qualified on new facts of sufficient cogency being
brought forward in a second action, why as a matter of common sense should it
not equally be qualified as a result of new developments in law?  If one has in mind Lord Upjohn’s overriding
consideration of working justice and not injustice, there can be no reason why
not.

The
Vice-Chancellor said in his judgment under appeal at p 70GH:

If, as I
think, the yardstick of whether issue estoppel should be held to apply is the
justice to the parties, injustice can flow as much from a subsequent change in
the law as from the subsequent discovery of new facts.

Respectfully, I
entirely agree with him. I pray in aid also the observation of Cumming-Bruce LJ
in Property & Reversionary Investment Corporation Ltd v Templar,
which I have already cited.

It is not
enough for a litigant who has argued a point of law and lost to say, in order
to avoid issue estoppel, merely that it is arguable in the light of other
decisions at first instance that the previous decision at first instance might
have been wrong. He must go further. But the tenants here do go further. The
Vice-Chancellor said at p 67E:

To put it no
higher, there is a very substantial chance that if the rent review clause in
this sub-underlease were now to be construed in the light of the Court of
Appeal decision, the opposite result would be achieved.

That seems to
be an understatement, but it is not necessary for us to reach a final
conclusion. I merely draw attention to three points:

(1)   It is admitted that
Walton J’s approach was not in accordance with the guidelines since laid down
and approved by this court.

(2)   There was nothing in this
lease, properly construed, to constrain him to the extreme (and to my mind
ridiculous) position that he seems to have taken of assuming a hypothetical
lease with no covenant for payment of rent and no power of re-entry for
non-payment.

(3)   His decision is contrary
to commercial sense and the underlying commercial purpose of a rent review
clause in that he has saddled the tenants with the rent for a term they do not
have, that is to say a term at a fixed rent without reviews.

I agree with
the conclusions of the Vice-Chancellor and I would dismiss this appeal.

Agreeing, STAUGHTON
LJ
said: Two of the definitions in clause 1 of the lease were as follows:

‘the basic
rent’ means a rent of EIGHT HUNDRED THOUSAND POUNDS which basic rent shall be
subject to review as provided in clause 2 hereof.

‘Fair market
Rent’ means such amount as shall represent a yearly rent at which the demised
premises might reasonably be expected to be let at the Relevant Review Date in
the open market by a landlord to a tenant without a premium with vacant
possession and subject to the provisions of this Sub-Underlease other than the
rent hereby reserved there being disregarded any effect on rent of any of the
matters set out in paragraphs (a) (b) or (c) of Section 34 of the Landlord and
Tenant Act 1954 (as amended).

The meaning of
those provisions is not directly in issue on this appeal. Nevertheless, for
reasons which will appear later, I feel bound to consider them. With all due
respect to those who have thought otherwise, it seems to me that the words ‘the
rent hereby reserved’ refer to the basic rent of £800,000 a year and to nothing
else. I have considered the reasons given by Walton J for reaching a different
conclusion in National Westminster Bank plc v Arthur Young McClelland
Moores & Co
[1985] 1 EGLR 61, but I am afraid that I cannot agree with
them. Nevertheless that decision remains binding between the parties so far as
concerns the rent payable between June142 1983 and June 1988. The question is whether it is still binding from 1988
onwards.

All are agreed
that in the absence of fraud or collusion there is no escape from the doctrine
of res judicata in a case of cause of action estoppel, subject to a
possible exception in The Mekhanik Evgrafov (No 2) [1988] 1 Lloyd’s Rep
330, a most unusual case. As I understand it, this means that when a plaintiff
has once failed on a given cause of action he cannot afterwards succeed on the
same cause of action, and vice versa. Equally, it is agreed that where a party
did not raise a particular issue in the earlier proceedings but could and
should have done so, he will not normally be allowed to raise that issue in
later proceedings (this I would call, with somewhat perverse logic, non-issue
estoppel). But in such a case there may be special circumstances which require
that he should still be allowed to raise it in the later proceedings.

The dispute
here has not been about either of those extremes, but about the middle case,
where the issue was raised and decided in the earlier proceedings. That
is issue estoppel stricto sensu. Can there in that case be special
circumstances which justify the court in allowing the issue to be reopened
later?

Mr Cullen for
the landlords argues that logically cause of action estoppel and issue estoppel
should be treated in the same way; in each case the point has already been
decided by the court; they are to be contrasted with non-issue estoppel, where
the point has not been previously decided. In addition, he can point to the
speeches of Lord Reid and Lord Upjohn in Carl Zeiss Stiftung v Rayner
& Keeler Ltd (No 2)
[1967] 1 AC 853 at pp 917, 947, which observe that
a litigant may have good reason for not taking a particular point on the first
occasion when it is theoretically relevant.

If a
declaration had been made on a construction summons it would, as Mr Cullen
says, have been conclusive for the remainder of the lease. However, in such a
case there could have been an appeal to this court. The arbitrator, in 1984,
was not asked to make a declaration, and I doubt if the lease gave him
jurisdiction to do so.

So far as I
recollect, it was not argued that there is any decision which compels us to one
conclusion or the other on this dispute. But a good many cases have touched
upon it. As Miss Williamson, also for the landlords, pointed out, there are two
lines of authority, and two views expressed by judges of great distinction.
Thus Lord Devlin in Connelly v Director of Public Prosecutions
[1964] AC 1254 at p 1358 said:

Res judicata
imposes a rigid bar and Wigram V-C’s principle a flexible one.

I take this to
mean that there is no exception in a case of cause of action estoppel or issue
estoppel in the strict sense, but that there is flexibility in the case of
non-issue estoppel.

By contrast,
Lord Denning MR in Fidelitas Shipping Co Ltd v V/O Exportchleb
[1966] 1 QB 630 at p 640 was evidently prepared to allow flexibility in the
second case as well as the third. And in Mills v Cooper [1967] 2
QB 459 at p 468 Diplock LJ said of issue estoppel:

That
doctrine, so far as it affects civil proceedings, may be stated thus: a party
to civil proceedings is not entitled to make, as against the other party, an
assertion, whether of fact or of the legal consequences of facts, the
correctness of which is an essential element in his cause of action or defence,
if the same assertion was an essential element in his previous cause of action
or defence in previous civil proceedings between the same parties or their
predecessors in title and was found by a court of competent jurisdiction in
such previous civil proceedings to be incorrect, unless further material which
is relevant to the correctness or incorrectness of the assertion and could not
by reasonable diligence have been adduced by that party in the previous
proceedings has since become available to him.

There in plain
terms he allowed an exception, even where the issue had previously been
decided, if there was fresh material which showed it to have been decided
wrongly either in fact or in law. Lord Diplock in Hunter v Chief
Constable of the West Midlands Police
[1982] AC 529 at p 541 said, with the
concurrence of other members of the House, that this statement had been
approved by the House of Lords in R v Humphrys [1977] AC 1. Hunter’s
case was actually decided on abuse of process of the court. But issue estoppel
in the strict sense was also a live topic, since the plaintiff sought to
complain of an assault which, in a previous criminal trial, had been found not
to have occurred. It is therefore, as I see it, persuasive authority of a
powerful nature that, even when an issue has been decided, there may be
circumstances which justify a later court in allowing it to be reopened. I
think it right to adopt that view of the law.

There then
arises the question, which is equally difficult, whether such circumstances
exist in the present case. As was conceded before us, it cannot by itself be
enough that the previous decision was arguably wrong in law; nor, in my
judgment, is it by itself enough that the previous decision was plainly wrong
in law. The remedy for such errors is that provided by the appellate process.
Where the legislature has chosen to limit the right of appeal, as in section
1(7) of the Arbitration Act 1979, it is not for the courts to circumvent that
policy: see Bynoe v Bank of England [1902] 1 KB 467 at p 471,
where Sir Henn Collins MR said:

If we yielded
to his argument, we should be constituting ourselves a Court of Appeal in a
matter in which the Legislature has thought fit to declare that there shall be
no appeal.

However, the
remedy which the landlords seek in this action is not wholly equivalent to what
might have been granted in an appeal from Walton J, if one had been permitted.
The rent for 1983 to 1988 remains as Walton J determined it.

There is, I
think, still some guidance to be found in the circumstances in which leave to
appeal out of time is granted by the Court of Appeal. In Property &
Reversionary Investment Corporation Ltd
v Templar [1977] 1 WLR 1223
it was held that the continuing contractual relationship between the parties
could rank as a special circumstance which might help to justify the grant of
leave. And Cumming-Bruce LJ said (at p 1225):

Now that the
House of Lords has decided that the proper construction of the contract is other
than decided by the judge, I agree that there are special circumstances here
because it does not seem just that future obligations between the parties to
the lease should depend upon the construction now shown to be wrong.

In this case,
too, there has been future elucidation of the law since the decision of Walton
J, as Dillon LJ has explained. That, with the continuing contractual
relationship, is in my judgment, sufficient to justify the decision to allow
the tenants in this case to argue the construction of the lease anew. But I do
not say that the result would have been different if there had been no further
elucidation of the law. I have difficulty in seeing why the tenants would have
failed if the original decision had merely been plainly wrong (as I think it
was) but should succeed now that subsequent courts have shown that to be the
case. That difficulty may have to be resolved on another occasion.

There can be
no doubt that the courts must in general enforce the principle of res
judicata
. The waiting lists are long enough in all conscience, and the
expense and anxiety for litigants great enough, when disputes are tried only
once; they would be vastly increased if disputes were tried twice or several
times. So I would confine narrowly the special circumstances in which a party
may reopen an issue already decided against him. But there is a danger that the
law will appear absurd if identical or similar cases are finally decided in
different senses. Hard cases must not be allowed to make bad law. Nevertheless,
I consider that such circumstances exist here. I, too, would dismiss this
appeal.

Also agreeing,
MANN LJ said: The rule upon res judicata has two meanings. They were put
thus by Lord Upjohn in Carl Zeiss Stiftung v Rayner & Keeler Ltd
(No 2)
[1967] 1 AC 853 at p 946E:

The broader
principle of res judicata is founded upon the twin principles so frequently
expressed in Latin that there should be an end to litigation and justice
demands that the same party shall not be harassed twice for the same cause. It
goes beyond the mere record; it is part of the law of evidence for, to see
whether it applies, the facts established and reasons given by the judge, his
judgment, the pleadings, the evidence and even the history of the matter may be
taken into account (see Marginson v Blackburn Borough Council).
Res judicata
itself has two branches: (1) cause of action estoppel — that
is where the cause of action in the second case has already been determined by
the first. To such a case the observations of Wigram V-C in Henderson v Henderson
apply in their full rigour. These observations have been so often approved in
your Lordships’ House that I will not repeat them. I need not pursue this
matter further for the alleged res judicata with which your Lordships are concerned
certainly has nothing to do with any cause of action in the proceedings. (2)
Issue estoppel — a convenient phrase first coined apparently by Higgins J in
the High Court of Australia in Hoystead v Federal Commissioner of
Taxation
whose dissenting judgment was upheld by the Privy Council in 1926.
But issue estoppel has been recognised ever since The Duchess of Kingston’s
Case
and there are many quite early examples of it, see, for example, Reg
v Inhabitants of the Township of Hartington Middle Quarter and many
others.

The two
branches there referred to by his lordship have separately developed. Each is
of antiquity. Henderson v Henderson (1843) 3 Hare 100, in
particular at p 115, was a decision upon cause of action estoppel. The question
now before us is whether that decision has143 spilled into issue estoppel. Issue estoppel can no doubt be divided into
sub-species; for example, where a question has been raised in previous
litigation and decided, or where a question could have been raised but for some
reason was not. In my judgment, Henderson has now come into a field of
issue estoppel. In so concluding I would look at Fidelitas Shipping Co Ltd
v V/O Exportchleb [1966] 1 QB 630 at p 640E, a passage in the judgment
of the then Master of the Rolls which has already been cited: Mills v Cooper
[1967] 2 QB 459 at p 468E, which has already been cited, and Hunter v Chief
Constable of West Midlands Police
[1982] AC 529 at p 540H into p 541, a
passage expressly approved by four other members of the House. I find, therefore,
no difficulty in concluding that Henderson is applicable to issue
estoppel.

It therefore
follows that nowadays ‘special circumstances’ or ‘exceptional circumstances’
can defeat an issue estoppel of whatever species. What is a special or, if one
wishes it, exceptional circumstance cannot, and in my judgment should not, be
defined. It is a matter for the judge in any case. I only say that a special or
exceptional circumstance may relate to fact, law or even, apparently, practice:
see The Mekhanik Evgrafov (No 2) [1988] 1 Lloyd’s Rep 330.

I would not
disagree with the Vice-Chancellor’s finding of special circumstances in this
case. I regret to say that Walton J’s decision was, in my view, plainly wrong.
If it were arguably wrong, I might have taken a different view as to whether it
was a special circumstance.

I wish to add
only this. I was at one time during the course of argument troubled by Re
Waring, Westminster Bank
v Burton-Butler [1948] Ch 221. However,
that case is distinguishable, in my view, because it was a decision of the
court which it was sought to reopen. Here there is no attempt to reopen the
rent review for 1983 to 1988. The present question is as to a totally
independent rent review and the respondents to this appeal have expressly disclaimed
any intent to upset the previous determination. Therefore Re Waring no
longer troubles me.

I agree that
this appeal should be dismissed.

The appeal
was dismissed with costs. Application for leave to appeal to the House of Lords
was refused.

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