Arbitration — Leave to appeal arbitrator’s award — Whether greater weight in holding parties to award where arbitrator relied on opinion of counsel at parties’ request
By a lease
dated August 26 1987 the respondent tenant holds a term of 20 years from August
14 1987 of a warehouse and office premises from the applicant landlord; neither
party being the original parties to the lease. The building was constructed
shortly before the grant of the lease and by agreement the original tenant
improved the building at its expense. In determining the rent at review the
arbitrator incorporated the legal opinion of counsel in his award to the effect
that in correspondence prior to the grant of the lease the original parties
agreed, inter alia, that the effect of certain items of expenditure by
the original tenant was to be disregarded at the first review and the effect of
other items was to be disregarded for the purposes of all rent reviews,
including the first. That effect of the correspondence was not reflected in the
formal agreement for the lease. The landlord applied under section 1(3)(b)
of the Arbitration Act 1979 for leave to appeal
result in an agreement; and (2) if there was an agreement it was personal to
the original parties and did not bind the landlord.
questions of law should be referred to counsel by the arbitrator, this weighs
in favour of the view that, having chosen to have their dispute referred in
this way as part of the arbitration, the parties should be held to that unless
there are strong reasons for not doing so. In order to obtain leave the
landlord has to show a prima facie case that the arbitrator was wrong
near the top of the scale; a moderately strong case will not do. The opinion of
counsel advising the arbitrator that there was a concluded agreement in the
correspondence was a tenable view. The parties anticipated that their agreement
would last for the complete term of the lease and must have intended it to bind
successors.
The following
case is referred to in this report.
Ipswich
Borough Council v Fisons plc [1990] Ch 709;
[1990] 2 WLR 108; [1990] 1 All ER 730; [1990] 1 EGLR 17; [1990] 04 EG 127, CA
This was an
application under section 1(3)(b) of the Arbitration Act 1979 by the applicant
landlord, Gladesmore Investments Ltd, to appeal an arbitrator’s award made in a
rent review; the respondent tenant was Caradon Heating Ltd.
James Thom
(instructed by Wayne Leighton Berger) appeared for the applicant; Nicholas
Dowding (instructed by McKenna & Co) represented the respondent.
Giving
judgment, WARNER J said: This is an application under section 1(3)(b) of
the Arbitration Act 1979 for leave to appeal against an arbitration award on
questions of law. The arbitrator was a Fellow of the Royal Institution of
Chartered Surveyors and the arbitration was under a rent review clause in a
lease. The applicant, the landlord, is Gladesmore Investments Ltd, and the
respondent, the tenant, is Caradon Heating Ltd.
The lease was
dated August 26 1987 and was made between R E Hatfield (Contractors) Ltd (as
landlord) and Stelrad Group Ltd (as tenant). I shall refer to them as ‘the
original parties’. The applicant is an assignee, and not the first assignee, of
the freehold and the respondent is an assignee of the lease. The lease was for
a term of 20 years from August 14 1987. The demised premises were a mixed
warehouse and office building called Accord House in Hull. The rent under the
lease was reviewable at the end of the first five years of the term, at the end
of the first 10 years and at the end of the first 15 years. There was a break
clause in the lease entitling the tenant to break at the expiration of the
first 10 years.
The building in
question was being built immediately before the grant of the lease and it was
agreed between the original parties that certain works to improve it relative
to what was provided in the specification should be carried out at the cost of
Stelrad Group Ltd. The issues in the arbitration related largely to the
treatment of the effect of those works on the rent review.
The
arbitration proceeded on written representations, including not only written
representations by the parties’ surveyors but also legal submissions by Mr
Nicholas Dowding, for the tenant, and Mr James Thom, for the landlord. The
arbitrator was authorised by the parties to take, and did take, the opinion of
counsel, Mr John Male, on a number of points of law that were in issue. The
arbitrator completely accepted Mr Male’s opinion and in effect incorporated
that opinion in his award. I think it is common ground that the effect of that
was that Mr Male’s reasons became the arbitrator’s reasons so far as legal
questions were concerned.
The works to which
I referred were particularised in a letter dated February 27 1987 from Stelrad
Group Ltd to its own solicitors, Payne & Payne, as being works which
‘should be excluded at the rent review stage’. They were listed as 17 items,
the total cost of which was estimated at £128,650.
The tenant’s
contention before the arbitrator was that, in correspondence between the
original parties’ solicitors which took place between February 1987 and August
1987, an agreement was reached that the effect of items 1, 2, 3, 4 and 14 in
that list was to be disregarded for the purposes of the first rent review and
the effect of the other items was to be disregarded for the purposes of all
rent reviews, including the first. That contention, in accordance with the
advice of Mr Male, was accepted by the arbitrator.
The landlord
seeks leave to appeal against the arbitrator’s decision on two grounds. The
first is that the correspondence on which the tenant relies did not on its true
construction result in any agreement and the second is that, if that
correspondence did result in an agreement, it was an agreement that was
personal to the original parties and not binding on the landlord, which is a
successor in title to the original landlord and was not a party to the
correspondence.
I am told that
there was a formal agreement for a lease, which was made in February 1987 and
which incorporated the form of lease that was eventually executed on August 26
1987. The effect of the correspondence was not reflected in the terms of any
formal agreement or in the terms of the lease as executed.
I am also told
that before the arbitrator the tenant argued that the effect of the works
should be disregarded because of the express disregard provisions in the lease.
But that argument was rejected by Mr Male and by the arbitrator and there is no
cross-appeal on that point.
There is, of
course, a certain amount of authority on the question as to how the court
should exercise its discretion to grant leave to appeal under section 1(3)(b)
— authority which culminates in the decision of the Court of Appeal in Ipswich
Borough Council v Fisons plc [1990] Ch 709*. I was
referred by both counsel to the judgment of Lord Donaldson MR in that case. The
principles on which the court should act in the light of those authorities and,
in particular, of that judgment are common ground. There is a presumption in
favour of the finality of arbitral awards. That is because the parties
themselves have chosen arbitration rather than resorting to the courts as the
means of resolving differences between them. That presumption can never be
rebutted by showing merely that there is a doubt as to whether the arbitrator
was right on a point of law. In what is called a ‘one-off case’, the judge
hearing the application for leave to appeal must be satisfied before he grants
that leave that it is obvious that the arbitrator was wrong on a point of law.
In a case that is not one-off — that is to say where, for instance, the case
gives rise to a question of construction of a common form clause or where it
gives rise to a general question of law or, in the case of an arbitration under
a rent review clause, where the decision will affect subsequent rent reviews
between the same parties — leave should be granted only if the judge is
satisfied that there is a strong prima facie case that the
arbitrator was wrong. Mr Thom agreed to a suggestion, that I made to him, that
that meant that the court must be satisfied that the arbitrator was more
probably wrong than right.
*Editor’s
note: Also reported at [1990] 1 EGLR 17.
How strong a prima
facie case has to be shown will depend upon all the circumstances. One
such circumstance is the nature of the dispute and the nature of the expertise
of the arbitrator. At p724 in the Ipswich case Lord Donaldson said:
So, how
strong is strong? No meter can be
applied or indeed devised. It is a matter of relative values. If the chosen
arbitrator is a lawyer and the problem is purely one of construction, the
parties must be assumed to have had good reason for relying upon his expertise
and the presumption in favour of finality or, to put it the other way round,
the strength needed to rebut it will be greater. So too if the dispute really
centres upon an issue calling for non-legal expertise, albeit with some
underlying question of law, and the chosen arbitrator has that expertise. But
if the chosen arbitrator is not a lawyer and the whole dispute centres upon a
difficult question of law, less strength may be required.
Here, the
chosen arbitrator was not a lawyer, but the questions at issue between the
parties are questions of law. On the other hand, as I have said, the parties
agreed that those questions of law should be referred to a lawyer — Mr Male —
and that, as Mr Dowding suggested, weighs in favour of the view that, having
chosen to have
should be held to that unless there are strong reasons for doing otherwise.
Mr Dowding
submitted that the present case was to some extent a hybrid. So far as the
items 1 to 4 and 14 in the list of February 27 1987 are concerned, it was a
one-off case because they were to be disregarded only on the first rent review.
So far as the other items in that list are concerned, it was not a one-off
case. It is difficult on the wording of the award to assess the relative
importance of items 1 to 4 and 14 and the remaining items. Both counsel
attempted such an assessment, but I found those attempts somewhat inconclusive.
One also has to bear in mind the break clause which means that there might
never be another rent review.
Taking it all
in all, it seems to me that this is a case where, in order to obtain leave to
appeal, the landlord has to show a prima facie case that the arbitrator
was wrong near the top end of the scale; by which I mean that a moderately
strong case will not do.
I must now go
through the correspondence on which the tenant relies and which the landlord
says does not evince an agreement. It starts, so far as material, with a letter
of March 3 1987 from Payne & Payne to the original landlord’s solicitors,
Gosschalks Weldon Chambers Thomas, whom I shall call for short Gosschalks
Weldon. That letter enclosed the letter of February 27 1987 to which I have
already referred and I understood it to be common ground that it embodied an
offer that all the items in the list in the letter of February 27 should be
disregarded at any rent review.
The letter of
March 3 was followed by a letter of March 26 from Payne & Payne to
Gosschalks Weldon, which was merely a chaser. The reply to that from Gosschalks
Weldon to Payne & Payne was dated March 30 and stated that they had
referred the matter to their client’s agents, who in turn had written to the
agents acting for the proposed freeholders, and they said:
As soon as we
receive the appropriate confirmation we will write to you.
That is a
reference to the fact that at the time, as was known to all the parties, R E
Hatfield (Contractors) Ltd were going to sell the freehold of the property to a
company called Kennel Ride (Properties) Ltd as soon as the lease was entered
into.
There were
then further letters from Payne & Payne to Gosschalks Weldon, of May 29 and
July 7, asking for a reply on the matter. On July 7 Gosschalks Weldon wrote to
Payne & Payne saying that they were still waiting for their client’s future
landlord’s solicitors to confirm the matters referred to in their letter of
March 30. Again, on July 15 Gosschalks Weldon wrote to Payne & Payne saying
that they were waiting for written confirmation from the solicitors acting for
Kennel Ride (Properties) Ltd.
Then came an
important letter from Gosschalks Weldon to Payne & Payne in which they
said:
We have now
received confirmation from Kennel Ride (Properties) Ltd’s solicitors that the
matters set out in your letter of the 27th February 1987 are in order, in that
items 1, 2, 3, 4 and 14 are to be excluded only from the first rent review. The
further numbered items in the letter are to be treated as standard tenants’
improvements.
It is common
ground that that letter is to be regarded as a counter-offer to the offer
contained in the letter from Payne & Payne of March 3.
On August 20
1987 there was a bizarre letter from Payne & Payne to Gosschalks Weldon,
which said:
We would
refer to your letter of 23 July in connection with the above. The only item
with which our client and its surveyor disagrees is number 15, in that it is
their opinion that this should be excluded from the first rent review. Our
clients have improved the quality of the works and as such feel entitled on the
first review to exclude the effect from the rent. We should be obliged if you
would take your client’s further instructions thereon. Subject to the above,
all outstanding items seem to be agreed and we expect to be in receipt of the
rent tomorrow to enable us to effect completion.
That was
followed by a further letter from Payne & Payne on August 24 1987 to
Gosschalks Weldon, saying:
With
reference to our client’s letter dated 27 February detailing items 1 to 17
inclusive, we confirm the agreement that these shall be excluded from all rent
reviews with the exception of items 1 to 4 inclusive, and 14, which are to be
excluded only from the first rent review.
The last
letter in the correspondence was a letter dated August 25 1987 from Gosschalks
Weldon to Payne & Payne saying:
Thank you for
your letter of the 24th of August, 1987. The position is clearly set out in our
letter to you of the 23rd of July, 1987.
On that
correspondence, Mr Thom takes two points. One, which he referred to as ‘the
counter-offer point’, was that the letter of August 20 was itself a
counter-offer which destroyed the offer in Gosschalks Weldon’s letter of July
23, so that there was no offer in existence available for acceptance by Payne
& Payne’s letter of August 24. Mr Thorn’s second point, which he called
‘the formulation point’, was that the parties were never ad idem as to
whether the items other than items 1 to 4 and 14 were, in the words of
Gosschalks Weldon’s letter of July 23, to be ‘treated as standard tenant’s
improvements’ or were, in the words of Payne & Payne’s letter of August 24,
to be ‘excluded from all rent reviews’.
I deal first
with the formulation point. Mr Thom submits that it is not clear what the
phrase ‘to be treated as standard tenants’ improvements’ means. It is not
clear, he says, that they mean the same as ‘to be disregarded on all rent
reviews’, which was what Mr Male held that they meant and was the result, of
course, that was contended for on behalf of the tenant.
Mr Thom points
out that in the letter of July 23 the words used by Gosschalks Weldon are to
the effect that the matters set out in the letter of February 27 are ‘in order’
— that may be taken to mean are agreed — ‘in that items 1, 2, 3, 4 and 14 are
to be excluded only from the first rent review’, which, of course, was not what
was proposed in the letter of February 27; and then in a new sentence, quite
separately, they say:
The further
numbered items in the letter are to be treated as standard tenants’
improvements
instead of
saying that those further numbered items were, as envisaged in the letter of
February 27, to be excluded from all rent reviews, or disregarded in all rent
reviews. Nor, when Gosschalks Weldon wrote on August 25 in reply to Payne &
Payne’s letter of August 24, did they simply say:
The position
as set out in your letter of the 24th of August is agreed
— they went
back to their letter of July 23.
Mr Male
advised that the effect of the correspondence was, as I have said, in
accordance with the tenant’s contentions. He said that the effective reply to
the letter of March 3 was that dated July 23 and he said:
In the
language of rent review, I read this letter as saying that the specified items
were to be disregarded upon the first rent review and that all the other items
were to be disregarded upon all rent reviews. By the expression ‘treated as
standard tenants’ improvements’, I take this to mean works falling within the
standard disregard of tenants’ improvements. Thus, in terms of offer and
acceptance, the letter dated the 23rd of July 1987 was, in my opinion, a
counter-offer to that contained in the letter dated the 3rd of March 1986. The
reply to the counter-offer was on the 20th August 1987 when Payne & Payne
indicated that the only item on which there was disagreement was item 15.
However, this disagreement was not pressed by Payne & Payne because on the
24th August 1987 that firm wrote in relation to items 1 to 17 in the letter
dated the 27th of February, 1987:
‘We confirm
that these shall be excluded from all rent reviews with the exception of items
1 to 4 inclusive, and 14, which are to be excluded only from the first rent
review.’
In my
opinion, this letter corresponded with the letter dated 23rd of July 1987 in
that both sides were saying that items 1 to 4 inclusive and 14 were to be
treated as falling within the disregard of tenant’s improvements for the first
rent review and all the other items to be so treated for the first and all
subsequent rent reviews. The parties were therefore ad idem. There was,
in my
in the letter dated the 24th of August 1987.
It seems to me
that that is an eminently tenable view. I listened to the arguments of Mr Thom
and of Mr Dowding on the point and in the result it seemed to me that they were
fairly evenly balanced. As Mr Dowding pointed out, one has to see what a
reasonable recipient of the letter of July 23 in the circumstances would have
taken it to mean, rather than make a close semantic analysis of the
correspondence. It is perfectly true that, as both counsel said, the letter of
August 20 is bizarre. But the obscurity of it does not, in my judgment, tip the
scale in favour of the view that there is a strong prima facie case that
Mr Male’s opinion was wrong. It seems clear to me, as I think it must have been
to Mr Male, that the parties thought that they had reached agreement because
the lease was signed on August 26.
Mr Thom
introduced a refinement to this argument which was to the effect that, where
parties differ in their formulation of a particular term in a contract, there
may be no effective agreement between them even though on their true
construction the two formulations mean the same thing. That is an argument
which, of course, would be very strong in a case where, for instance,
solicitors were negotiating on the basis of a draft and they had not reached
agreement on the precise wording to be inserted in the draft. But I do not
think that the argument has the same force in a case like this of a contract by
correspondence, where the use of different phrases to mean the same thing (if
they do) is not necessarily indicative that the parties are not ad idem.
Mr Thom’s
counter-offer point was a novel one in the sense that it is common ground that
no reliance was placed on it in the arguments put forward to the arbitrator and
to Mr Male. I thought that, on this point also, the arguments of counsel were
fairly evenly balanced. It depends upon whether the letter of August 20 can be
regarded as impliedly rejecting the offer contained in the letter of July 23.
That, in the end, must be a question of construction. Moreover, as Mr Dowding
pointed out, although on an appeal the landlord would not be precluded from
relying on this argument by reason only that it had not relied on it during the
arbitration, it does not sit well with the presumption of finality in the case
of arbitral awards to allow an appeal to be brought on the basis of a new
point. That, I think, supports the view that leave should not be given to
appeal on the counter-offer point.
The second
main ground on which the landlord seeks leave to appeal is that the agreement
was personal to the parties to the correspondence and not binding on the
applicant, who was not a party to that correspondence. On that issue both
counsel relied before me on the arguments that they had put forward in writing
to the arbitrator and, indeed, they read those arguments to me. Mr Male in
substance accepted Mr Dowding’s argument and I am bound to say that it seems to
me he was right to do so, the main points being that, with a term as long as 20
years, the parties must have contemplated that the reversion might change hands
during the term and, indeed, the correspondence itself shows that there was to
be an assignment of it as soon as the lease was entered into, an assignment to
Kennel Ride (Properties) Ltd.
Mr Thom in his
written submissions suggested that in some way, which I found very difficult to
follow, Kennel Ride was in a different position from subsequent assignees of
the reversion. Before me, Mr Thom went so far as to suggest that R E Hatfield
(Contractors) Ltd were acting as Kennel Ride’s agents. I certainly do not find
that from the correspondence. Mr Thom also suggested that the purpose of the
agreement was to remove the unfairness of the tenant paying the landlord to
make improvements and then paying the landlord again for them in rental terms.
Although the effect on the tenant is the same, the degree of unfairness in
paying an enhanced rent to a new landlord is markedly less, he said. Mr Male
said of that that it seemed to him that the answer to the point was that if the
agreement was intended to prevent a perceived unfairness to the tenant in
paying the landlord more than once for improvements, then that unfairness to
the tenant could not change when the landlord changed. Mr Thom also argued that
it could be a complicated matter to value disregards and if there was to be a
sale on by Kennel Ride, the purchaser, if aware that he would face a disregard,
would have to discount his bid to reflect not only the reduction in rent but
also the increased likelihood of disputes on rent review with attendant delay
and expense. If a purchaser would be bound, the value of the reversion would be
diminished, he said. To that Mr Male answered that the lease already contained
a disregard of improvements, the effect of which a purchaser would have to
consider in formulating his bid. I cannot see any possibility of saying that
there is a strong prima facie case that Mr Male was wrong on this issue.
There was in
the notice of motion reference to another ground of appeal which was that, even
if the agreement was intended to bind successors to the original landlord, the
present landlord had no notice of it. But Mr Thom told me, quite rightly, that
he did not pursue that ground because on reflection he did not feel that there
had been an error of law by the arbitrator about it plain enough to warrant
leave to appeal.
Having reached
those conclusions, I need not express any view on the question whether the
effect of the arbitrator’s or Mr Male’s alleged errors was substantial. Certain
calculations were put forward by Mr Thom to show that it was and, had I thought
that there was a strong prima facie case, I would have said that the
effect of the errors was substantial enough. However, for the reasons I have
attempted to formulate, I think that this application should be dismissed.
