Landlord and tenant — Rent review clause in lease — Reopening of construction point — Whether barred by issue estoppel rule — Further stage in litigation which began with decision of Walton J in National Westminster Bank plc v Arthur Young McClelland Moores & Co and centred on the words ‘subject to the provisions of this subunderlease other than the rent hereby reserved’ — The subsequent history up to the present proceedings was as follows — Walton J, having decided 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 lessees 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 lessees then started proceedings for rectification of the lease and, further or in the alternative, for a declaration as to the true construction of the rent review clause, the very point decided by Walton J — The present application, made by the lessors in the proceedings, was to strike out the claim for a construction declaration on the ground that it was barred by the principle of issue estoppel
Vice-Chancellor in his judgment explained that as the declaration sought was on
the exact construction point determined by Walton J it would clearly be
excluded if the issue estoppel rule was absolute — There were, however,
authorities which established that there could be exceptional circumstances
which prevented such an estoppel from arising — In order for such special
circumstances to exist it had to be shown either that the first decision was
impeachable on some such ground as fraud or collusion or that it was a default
judgment or that relevant new material, not available at the time of the first
decision, had become available — The last condition was the one relevant to the
present case and the Vice-Chancellor was prepared to hold that the new material
could either be the discovery of new facts or a change in the law — In the
present case there had been a change in the law in the form of cases indicating
that the previous decision was wrong — The question then was whether the
injustice of holding the plaintiffs bound by the erroneous decision in the
first action outweighed the hardship to the other party in having to relitigate
the matter and the public interest in the finality of legal proceedings
Vice-Chancellor held that in the present case justice did require the matter to
be relitigated — Considerations which supported this course were (1) that the
prior decision if held to be immutable would affect four further rent reviews,
involving large sums of money, and (2) that, owing to the peculiarities of the
procedure applicable to appeals from arbitrators, the decision of Walton J not
to grant the necessary certificate put an end to the possibility of an appeal —
Held accordingly that the application to strike out must be 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
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
Carl
Zeiss Stiftung v Rayner and Keeler Ltd (No 2)
[1967] 1 AC 853; [1966] 3 WLR 125; [1966] 2 All ER 536, HL
Dallal v Bank Mellat [1986] 1 QB 441; [1986] 2 WLR 745; [1986] 1
All ER 239
Equity
& Law Life Assurance Society plc v Bodfield
Ltd [1987] 1 EGLR 124; (1987) 281 EG 1448, 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
McIlkenny v Chief Constable of the West Midlands [1980] QB 283; [1980]
2 WLR 689; [1980] 2 All ER 227, CA
Mills v Cooper [1967] 2 QB 459; [1967] 2 WLR 1343; [1967] 2 All ER
100; (1964) 62 LGR 168, DC
New
Brunswick Railway Co v British and French Trust
Corporation [1939] AC 1
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
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
The present
application by the landlords, National Westminster Bank plc, in their capacity
as trustees for British Rail Pension Trustee Co Ltd, was to strike out the
claim by the tenants, Michael John Arnold, Peter Robert Edwards and Simon
Francis Phillips, senior partners of Arthur Young, chartered accountants, for a
declaration seeking the construction of the rent review clause in a
subunderlease of 7 Rolls Buildings, Fetter Lane, London EC4. The application
was made in proceedings for rectification of the subunderlease by the tenants
and further or in the alternative for the construction of the relevant clause.
Terence Cullen
QC and Miss Hazel Williamson QC (instructed by Stephenson Harwood) appeared on
behalf of the landlords, National Westminster Bank; Donald Rattee QC and
Jonathan Gaunt (instructed by Freshfields) represented the tenants, Michael
John Arnold and others.
Giving
judgment, SIR NICOLAS BROWNE-WILKINSON V-C said: This is an action brought by
the plaintiffs as the present lessees of 7 Rolls Buildings, Fetter Lane. They
hold under a subunderlease for a term of 32 years from October 28 1976. The
defendants are their present landlords. The rent reserved was originally
£800,000 per annum, but there are provisions for review of the rent on June 24
1983, 1988, 1993, 1998 and 2004 (‘the review dates’). The dispute relates to
that rent review clause.
Under the rent
review provisions the rent payable as from each review date is whichever is the
greater of £800,000 or the fair market rent, which is defined as follows:
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 subunderlease other than the rent hereby reserved . . .
The
subunderlease contains provision for arbitration as to the fair market rent in
case of dispute between the parties.
Such a dispute
arose at the first review date and was referred to an arbitrator. Among the
matters in dispute was whether under the definition of ‘fair market rent’ the
rent under the hypothetical lease had to be fixed on the basis that it (a)
contained the same provisions for five-year rent review as the actual
subunderlease or (b) contained no provision for review. The arbitrator was
asked to refer that matter for decision to the court under section 2(1) of the
Arbitration Act 1979 but he declined. The arbitrator decided that the
hypothetical lease should be treated as containing provisions for five-year
rent reviews. On that basis he fixed the rent at £1.003m per annum. However, in
case he was wrong on the question of construction, he also determined that if
there were no rent review clause in the hypothetical lease the rent should be
some 20% higher, namely, £1.209m.
The landlords
appealed the point of law and their appeal came before Walton J. He held that
the arbitrator was wrong and that the hypothetical lease should be treated as
not containing any provision for rent review. As a result of that decision the
rent payable was £1.209m: his decision is reported at [1985] 1 EGLR 61. The
lessees asked Walton J for leave to appeal and for 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 judge refused both.
Notwithstanding such refusal, before his order was drawn up the lessees renewed
their application for a certificate and introduced evidence showing that the
matter was one of general public importance. Walton J rejected this further
application.
The lessees
then sought to appeal to the Court of Appeal against the refusal of Walton J to
grant a certificate. The Court of Appeal held that they had no jurisdiction to
entertain such an appeal: [1985] 1 WLR 1123.*
*Editor’s
note: Also reported at [1985] 2 EGLR 13; (1985) 275 EG 717.
Therefore, as
from the first review date the rent payable was £1.209m. Now the second review
date has arrived. Not unnaturally, the lessees are anxious to reopen the same
question as to the true construction of the rent review clause. They therefore
started the present proceedings by which they claim, first, rectification of
the subunderlease so as to produce the result they desire and, further or in
the alternative, a determination as to the true construction of the rent review
clause, ie the very point decided by Walton J.
By this application,
the landlords seek to strike out the claim for a declaration on construction on
the basis that there is an issue estoppel on the matter and that accordingly it
is vexatious for the lessees to seek to relitigate the matter.
It is common
ground, first, that Walton J determined the exact question of construction
which is sought to be reopened and, second, that save for exceptional
circumstances there would be an issue estoppel as to the construction of the
rent review clause which would render it vexatious to relitigate the matter.
However, the lessees contend that issue estoppel is not an absolute doctrine
and that, in exceptional circumstances such as those which here apply, the
plaintiff is not precluded from relitigating the same point.
The special
circumstances relied on by the lessees are that, subsequent to the decision of
Walton J, there have been decisions on the construction of rent review clauses
which show his decision to be wrong. There was a division of opinion among the
judges as to the proper approach to the construction of rent review clauses.
One group considered that each rent review clause had to be construed in
isolation, there being no presumption that the intention of such clauses was to
give the landlord the current open market rent of the demised premises if let
on the same terms as under the actual lease. Walton J belonged to that group
and in his judgment on this rent review clause expressly said that there was no
presumption either way. The other group (to which I am an adherent) took the
contrary view. In British Gas Corporation v Universities
Superannuation Scheme Ltd [1986] 1 WLR 398†
having referred to the difference in judicial approach (including the
decision of Walton J in this case), I said this:
In my judgment
the correct approach is as follows:
(a) words in a rent exclusion provision which
require all provisions as to rent to be disregarded produce a result so
manifestly contrary to commercial common sense that they cannot be given
literal effect;
(b) other clear words which require the rent
review provision (as opposed to all provisions as to rent) to be disregarded .
. . must be given effect to, however wayward the result;
(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; (1986) 277 EG 90.
In Equity
& Law Life Assurance Society plc v Bodfield Ltd [1987] 1 EGLR
124 Dillon LJ, in giving the decision of the Court of Appeal, quoted that
passage and stated that he welcomed and approved it as a rough guideline while
stressing that it was only a guideline and the function of the court in each
case was to construe the lease before it.
It does
therefore appear that the Court of Appeal has approved the general approach to
construction expressly rejected by Walton J. To put it no higher, there is a
very substantial chance that if the rent review clause in this subunderlease
were now to be construed in the light of the Court of Appeal decision, the
opposite result would be achieved. Indeed, in Amax International Ltd v Custodian
Holdings Ltd (1986) 279 EG 762‡ , Hoffmann J construed a rent review clause
the terms of which are virtually indistinguishable from that in the present
subunderlease so as to require the new rent to be fixed on the basis that the
hypothetical lease did contain a rent review clause.
‡ Editor’s
note: See also [1986] 2 EGLR 111.
It is
therefore said that there has been a change in the law. Moreover, it is pointed
out that the question of construction in relation to which the issue estoppel
is said to arise governs the legal relationship between landlord and tenant for
the residue of the term: unless the matter can be reopened, there will be an
issue estoppel on all rent reviews as a result of which the lessees will be
wrongly required to pay 20% more rent throughout the remainder of the term,
costing them several million pounds in all. All this, they say, follows from a
decision which the lessees did everything possible to challenge but against
which they were held to have no right of appeal.
During the
hearing, the parties agreed that I should treat as being before me a
preliminary issue whether in the circumstances I have recited the plaintiffs
are estopped by the judgment of Walton J from putting forward the case pleaded
in para 20 of the statement of claim.
I confess
that, until Mr Rattee made his submissions in this case, I had thought that the
doctrine of issue estoppel was an absolute one: although it might be difficult
to decide whether or not the earlier decision did expressly or impliedly decide
the very point sought to be litigated in the second action, once that had been
demonstrated an issue estoppel necessarily arose. However, the authorities show
clearly that from the first the doctrine has been expressed to be subject to
exceptions. Thus in Henderson v Henderson (1843) 3 Hare 100
Wigram V-C stated the rule to apply ‘except in special cases’ (p 115) and
investigated whether there were ‘special circumstances . . . sufficient to take
the case out of the operation of the general rule’ (p 116). The classic modern
statement of the law is that given by Diplock LJ in Mills v Cooper
[1967] 2 QB 459 at p 468F:
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.
That
formulation of principle was approved by the House of Lords in R v Humphrys
[1977] AC 1 at pp 19 and 48; at p 39 Lord Hailsham particularly stressed the
proviso at the end of the passage I have quoted. See also Hunter v Chief
Constable of West Midlands Police [1982] AC 529 at p 541 per Lord
Diplock; New Brunswick Railway Co v British & French Trust
Corporation Ltd [1939] AC 1 at p 21; Dallal v Bank Mellat
[1986] 1 QB 441.
It is
therefore clearly established (and Mr Cullen accepts) that there can be
exceptional circumstances which prevent an issue estoppel from arising. In my
judgment, it is equally clear that in order for such special circumstances to
exist it must be shown either that the first decision is impeachable on the
usual grounds (that is to say fraud, collusion etc) or that the first decision
was a default judgment, or that relevant new material, not available at the
time of the first decision, has since become available.
Mr Rattee
accepts that there being no ground for attacking the decision of Walton J on
the grounds of collusion, fraud etc, in order to avoid an issue estoppel he has
to show that further relevant material has since become available. He contends
that such material may be either new facts or a change in the law. Mr Cullen on
the other hand submits:
(a) that the exception relating to further
material applies only in cases where the plaintiff in the second action is
alleged to be estopped from arguing a point that could have been, but was not
in fact, argued in the first action; (b)
that in any event only the discovery of new facts (as opposed to a
change in the law) brings the matter within the exception.
As to Mr
Cullen’s first point, he relies on the fact that in Spencer Bower and Turner
on Res Judicata 2nd ed, pp 160 to 162 the exception is discussed only in
the context of cases where the relevant point was not taken in the first
action: the learned authors do not mention any such exception when dealing with
issue estoppel by matters which were actually raised and decided in the first
action. Mr Cullen submits that the many passages in the authorities referring
to the exception must be read as referring only to cases where the point was
not raised in the first action and not as referring to cases where the point
was actually raised and decided.
I do not
accept this submission. First, the decided cases give no hint
special circumstances bringing the case within the exception where, in the
first action, the point was not taken at all than where the point was argued.
But the legal principle as stated in Henderson v Henderson was
stated to be the law even where the point was taken in the first action: see
for example Hoystead v Commissioner of Taxation [1926] AC 155.
Moreover, I can see no reason for drawing such a distinction. Take a case where
the issue decided in the first action was a pure question of fact and then
facts are subsequently discovered which show that the first decision was wrong.
Why should it make any difference to the merits of allowing the matter to be
reopened whether in the first action the exact issue of fact had been argued
(on what, ex hypothesi, was inadequate material) or assumed (because no
evidence to the contrary was then available)?
As to Mr
Cullen’s second point, I feel considerably greater difficulties. Although many
of the statements of the exception are in such general terms as to cover both
the discovery of new facts and subsequent changes in the law, there are others
which do expressly limit the exception to the case where new facts have been
discovered: see Phosphate Sewage Co Ltd v Molleson (1879) 4 App
Cas 801; McIlkenny v Chief Constable of the West Midlands [1980]
1 QB 283 per Lord Denning MR at pp 319-320. However, those were cases in which
the plaintiff had only sought to bring himself within the exception by relying
on the discovery of new facts (as opposed to some change in the law) and the
judgments must be read in that light. I was not referred to any case which
directly decides that a change in the law subsequent to the first decision does
not suffice to bring the case within the exception. In Re Waring (No 2)
[1948] Ch 221 Jenkins J held that a legal decision as to the effect of a
statute on a will made in the first action was res judicata as against a
party to the first action notwithstanding a subsequent House of Lords decision
which demonstrated that the first decision was wrong in law. But, so far as I
can see, the argument advanced in the present case was not before the learned
judge and I cannot treat that decision as decisive.
Accordingly, I
must decide the question on first principles. Res judicata, whether
cause of action estoppel or issue estoppel, is based on the fundamental
principle that it is unjust for a man to be vexed twice with litigation on the
same subject-matter coupled with the public interest in seeing an end to
litigation. So far as cause of action estoppel is concerned, the rule is
absolute; you cannot sue twice for the same relief based on the same cause of
action even if new facts or law have subsequently come to light. But it is
clear that the rule as to issue estoppel is different, as the authorities which
I have quoted demonstrate: there are circumstances in issue estoppel where the
injustice of not allowing the matter to be relitigated outweighs the hardship
to the successful party in the first action in having to relitigate the point.
The rules
applicable to issue estoppel and the proper exceptions to it are in course of
development: see Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2)
[1967] 1 AC 853 at p 917E. The authorities show that the exception applying to
‘special circumstances’ is designed to ensure that where justice requires the
non-application of issue estoppel, it shall not apply: see Yat Tung
Investment Co Ltd v Dao Heng Bank Ltd [1975] AC 581 at p 590E. In
the Carl Zeiss case (supra) Lord Upjohn said this (at p 947D):
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.
The question,
therefore, is whether, given a subsequent change in the law indicating that the
earlier decision was wrong, the injustice of holding the plaintiff in the
second action bound by the erroneous decision in law in the first action
outweighs the hardship to the other party in having to relitigate the matter
and the public interest in the finality of legal proceedings. To hold a man
bound by what is subsequently shown to be an erroneous decision in law is
harsh. The Court of Appeal will grant leave to appeal long out of time if there
has been a change in the law and if, but only if, there is a continuing
contractual relationship between the parties (such as a rent review clause)
governing their relationship for the future: Property & Reversionary
Investment Corporation Ltd v Templar [1977] 1 WLR 1223. However,
there are great dangers in allowing allegations that the law has changed (as
opposed to allegations of new facts) to be the basis of allowing a case to be
relitigated. There will be many cases in which the decisive effect of the new
authority on the law will be a matter of dispute.
For the
purposes of this case, it is not necessary for me to say that in all
circumstances a subsequent change in the law showing the earlier decision to be
wrong will enable that point to be reopened in a later action. It is sufficient
for my purposes in the present case to decide whether, in some circumstances, a
change in the law can constitute ‘further material which is relevant to the
correctness or incorrectness’ of the earlier decision and then to consider the
special circumstances of this case to see whether justice requires the point to
be reopened.
In my
judgment, a change in the law subsequent to the first decision is capable of
bringing the case within the exception to issue estoppel. 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. In both cases the injustice lies in a
successful party to the first action being held to have rights which in fact he
does not possess. I can therefore see no reason for holding that a subsequent
change in the law can never be sufficient to bring the case within the
exception. Whether or not such change does or does not bring the case within
the exception must depend on the exact circumstances of each case.
Turning again
to the circumstances of the present case, I have no doubt that justice does
require the matter to be relitigated. The following factors are in my judgment
relevant:
1 There is a continuing
contractual relationship of landlord and tenant under which (if there is an
issue estoppel) the decision of Walton J will regulate four further rent
reviews and thereby affect the rent payable until the end of the term.
2 Because of the
peculiarities of the procedure applicable to appeals from arbitrators, unlike
the ordinary case of a prior decision by a judge, the decision of Walton J was
not subject to appeal. Therefore a matter of very great financial importance
involving millions of pounds will, if an issue estoppel applies, be decided on
a point of law which the lessees have never had the opportunity to test in the
higher courts.
3 The decision whether or
not to permit an appeal was the decision of Walton J himself and there was no
right of appeal against his refusal to certify the matter fit for appeal. The
lessees took every possible step to test the decision in the earlier case in
the higher courts but without success.
4 Subsequent decisions, in
particular that of the Court of Appeal in the Equity & Law Life
case, make it, at the lowest, strongly arguable that the decision of Walton J
was wrong.
These factors
taken together satisfy me that this is a case in which justice requires that
issue estoppel should not apply. I therefore hold that the plaintiffs are not
estopped from raising the matter of construction pleaded in para 20 of the
statement of claim and accordingly dismiss the application to strike out that
paragraph.
