Landlord and tenant — Rent review provisions — Rent of hotel — Dispute as to the rent payable under formula in review clauses — Reference of dispute to independent chartered accountant acting as expert — Expert, sitting with QC as legal adviser, decided in favour of construction contended for by landlords — Decision challenged by tenants — Principles governing challenge to decisions of expert — Judge bound by unreported Court of Appeal decision in Jones v Sherwood Computer Services Ltd — Expert’s decision final and conclusive unless he has not performed task assigned to him — Tenants’ summons dismissed
litigation arose from the somewhat unusual nature of the rent review provisions
in the lease (actually an underlease superseded in its rental provisions by a
deed of variation) of a London hotel — The underlying intention of the review
provisions was to enable increases to be made in the rent of the hotel in
harmony with increases in the charges made for accommodation to customers of
the hotel — The mechanism was to link the reviewed rents with changes in the
‘room rate’ at the relevant review date — The ‘average room rate’ was defined
as the average price per room per night (including continental breakfast) at
which bedrooms in the hotel were made available to members of the general
public during the period of 12 months expiring on December 25 immediately prior
to the review date — The precise formula for an increase had a slightly
mathematical flavour — It provided that the rent should be increased to such
figure as would be obtained by multiplying £125,000 by y/x, where ‘X’ was
£28.40 (being the average room rate agreed at the date of the underlease) and
‘Y’ was the average room rate at the relevant rent review date — There were
provisions for the production of certified statements of average room rents —
Translated into actual figures for the year ended in 1987, the result, as
calculated by the tenants, was £125,000 multiplied by £95.96 (the average room
rent for the relevant period) and divided by £28.40 — This calculation produced
a rent of £422,359.15 — The landlords immediately disputed this calculation,
contending that it was based on the average room rate actually achieved in the
year, whereas it should have been based on the room prices made available to
members of the general public, ie published prices — The rent as calculated by
the landlords was £597,315.14 and this figure was agreed by both parties if the
landlords’ construction was found to be correct
with the review provisions the matter in dispute, although a question of
construction and therefore of law, was referred to a chartered accountant
appointed as an expert, who sat with a QC as legal adviser — The expert decided
in favour of the landlords’ construction and therefore of the figure of £597,315.14
mentioned above — The tenants, who had been somewhat restive about the whole
form of the inquiry, took out an originating summons, by which they challenged
the expert’s determination, maintaining that it was a nullity as based on a
misconstruction of the expression ‘average room rate’
question which Knox J had to decide was whether it was open to the tenants to
challenge the expert’s determination by proceedings in court — Knox J explained
that the law on challenging an expert’s decision had undergone some changes
over the years, but was now governed by the unreported Court of Appeal decision
in Jones v Sherwood Computer Services Ltd, which disapproved the earlier case,
still quoted in text books, of Burgess v Purchase & Sons (Farms)
Ltd — The decision in Jones v Sherwood Computer Services Ltd provided for a contractual analysis
of the expert’s task — The position is that if parties agree to refer to the
final and conclusive judgment of an expert an issue which either consists of a
question of construction or necessarily involves the solution of a question of
construction, the expert’s decision will be final and conclusive, and therefore
not open to review or treatment by the courts as a nullity on the ground that
the expert’s decision on construction was erroneous in law, unless it can be
shown that the expert has not performed the task assigned to him — If he has
answered the right question in the wrong way, his decision will nevertheless be
binding — If he has answered the wrong question, his decision will be a nullity
these principles to the present case, the question was whether the expert here
had assessed the wrong subject-matter as a result of a mistake or whether he
carried out the very task which was entrusted to him (even if he reached an
erroneous conclusion as a result of that assumed mistake) — The tenants
submitted that the expert’s mistake was that of assessing the average published
room rate instead of the average charged room rate, a mistake comparable with
valuing the wrong number of shares (an example given by Dillon LJ in the Jones
case) — Knox J rejected this criticism, holding that the expert answered the
questions entrusted to him, with the result that his decision was binding on
the parties, whether it was right or wrong — Knox J considered the cases of
Absalom v Great Western (London) Garden Village Society and Re Davstone
Estates Ltd’s Leases, cited on behalf of the tenants, but did not find that
they affected his conclusion — Declaration sought by tenants refused and
summons dismissed with costs
The following cases are referred to in
this report.
Absalom v Great Western (London) Garden
Village Society [1933] AC 592
Baker v Jones [1954] 1 WLR 1005; [1954]
2 All ER 553
Burgess v Purchase & Sons (Farms) Ltd
[1983] Ch 216; [1983] 2 WLR 361; [1983] 2 All ER 4
Collier v Mason (1858) 25 Beav 200
Davstone Estates Ltd’s Leases, Re [1969] 2 Ch 378; [1969] 2 WLR
1287; [1969] 2 All ER 849; (1969) 20 P&CR 395
Dean v Prince [1954] Ch 409; [1954] 2
WLR 538; [1954] 1 All ER 749, CA
Jones v Sherwood Computer Services Ltd
unreported, December 7 1989
Lee v Showmen’s Guild of Great Britain
[1952] 2 QB 329; [1952] 1 All ER 1175; [1952] 1 TLR 1115, CA
Pioneer Shipping v BTP Tioxide Ltd (‘The
Nema’) [1982] AC 724; [1981] 3 WLR 292; [1981] 2 All ER 1030; [1981] 2
Lloyd’s Rep 239, HL
This was an originating summons taken out
by the plaintiff tenants, Nikko Hotels (UK) Ltd, underlessees of the Montcalm
Hotel, Great Cumberland Place, London W1, seeking a declaration against the
defendant landlords, MEPC plc, the reversioners in respect of the plaintiffs’
underlease. The declaration sought was that the determination as to rent made
by the expert, Mr Lawrence, a chartered accountant, appointed in accordance
with the rent review clauses, was a nullity on the ground that he had
misconstrued the expression ‘average room rate’.
Jonathan Gaunt (instructed by Wilde
Sapte) appeared on behalf of the plaintiffs; Gavin Lightman QC (instructed by
Nabarro Nathanson) represented the defendants.
Giving judgment, KNOX J said: The
plaintiff before me, Nikko Hotels (UK) Ltd, is the lessee under an underlease
dated October 8 1973 and made between MEPC Ltd of the first part, Piccadilly
Estates Hotels Ltd of the second part, and Piccadilly Estates Ltd of the third
part. That lease granted a term of 87 years from September 29 1970 to the
plaintiff’s predecessor in title over premises called the Montcalm Hotel in
Great Cumberland Place in London. The defendant is entitled to the reversion on
that underlease.
The dispute before me relates to the rent
payable under the underlease with effect from March 1 1988. There were rental
provisions in the underlease, but they have been totally superseded by the
provisions of a deed of variation dated March 1 1975 and made between MEPC Ltd
of the first part, Ardenchoice Ltd of the second part and Court Hotels (London)
Ltd of the third part.
That deed provided for stepped rents to
come in force as from the date of the deed in March 1975 down to March 1 1988.
It is not necessary to set them out. The provision governing the rent payable
after March 1 1988 reads as follows. It is, in fact, clause 1(e) of that deed:
For the period from the 1st March, 1988,
for the remainder of the term hereby granted, yearly and proportionately for
any fraction of a year, whichever is the higher of the yearly rent of £165,000
or such other rent or rents as may become payable under and by virtue of the
provisions of the third schedule hereto.
And then there are provisions that need
not be read about the way and the times at which that rent is to be paid.
The third schedule contains the following
provisions. It starts with definitions in clause 1. The rent review dates are
defined effectively as March 1 1988 and the sixth anniversaries thereafter during
the term. Rent notice is defined as a notice prepared and served by the
landlord on the tenant, effecting an increase in the rent hereinbefore
reserved, as provided for in para 5 of this third schedule. The landlord and
the tenant are, of course, the parties under the underlease who hold those
titles.
I come now to the critical definition,
which is of the average room rate at the relevant rent review date, and that is
defined in the following terms:
The average price per room per night
(including continental breakfast but excluding any taxes or service charge
levied upon such price) at which bedrooms within the demised premises are made
available to members of the general public during the period of 12 months
expiring on the 25th day of December, immediately prior to the relevant rent
review date.
Para 2 provides for the preparation of a
statement of the average room rate in the following way:
(a)
Within the period of three months immediately prior to each of the rent
review dates, the tenant shall at its own cost and expense prepare a certified
statement of the average room rate at the relevant rent review date and submit
the same to the landlord.
There is then a provision for a
certificate from the tenant’s auditor and the terms of that certificate are set
out. They require the auditor to certify that they have examined the underlease
and the deed of variation, and the remainder of the certificate is required to
read in the following terms:
We have examined the room rates for the
said hotel premises at Great Cumberland Place, London, W1, as shown by the
tenant’s published prices, books of accounts and other relevant records. We
have also examined the system of internal control relative thereto. In our
opinion, based upon our examination, the attached statement shows in respect of
the period stated the average room rate at the relevant rent review date, as
defined in paragraph 1 of the third schedule to the said underlease as varied
by the said deed.
Para 3 required the tenant to make
available books of accounts and other information. Para 4 reads as follows,
under a heading, ‘Ascertainment of Statement of the Average Room Rate in
Default’:
If the tenant shall not submit a duly
certified statement of the average room rate within the said period of three months,
immediately prior to any relevant rent review date, or if any dispute shall
arise between the parties hereto out of this third schedule, then the statement
of the average room rate shall be prepared or any dispute shall be determined
by an independent chartered accountant nominated by the President, for the time
being, of the Institute of Chartered Accountants in England and Wales . . .
— and I pass over some irrelevant words —
. . . and the decision of such chartered
accountant, acting as expert and not as arbitrator, shall be final and binding
on the parties hereto.
Clause 5 provides for the notice, defined
as the rent notice in the way already read, to be served by the landlord, and
the result of that is described as follows:
The annual rent hereinbefore reserved
shall be increased to such figure if higher than the rent reserved hereunder
immediately prior to the relevant rent review, as is obtained by multiplying
£125,000 by ‘Y’ over ‘X’, where ‘X’ = £28.40, being the average room rate
agreed between the parties hereto at the date of this underlease, and ‘Y’ = the
average room rate at the relevant rent review date.
There were then provisions for the
payment of the reviewed rent, effectively providing for the preceding rent to
continue to be payable until the rent notice is served, but once the rent
notice is served the new rent is to become effective as from the relevant rent
review date. But there is no provision for any interest in respect of any delay
that may occur.
Finally, the provision with regard to
costs was as follows:
The costs of the computation of any rent
review, pursuant to the provisions of this third schedule, including but
without prejudice to the generality of the foregoing the fees and expenses of
any accountant appointed under the provisions of this third schedule, shall be
borne and paid for by the tenant.
The tenant did, indeed, produce a
certificate. Their solicitors wrote a letter on February 29 1988, the first
paragraph of which reads:
Further to our letter of the 25th February,
in accordance with the terms of the lease to our clients dated the 8th October,
1973, as varied by a Deed of Variation dated the 1st March, 1975, we enclose
the statement of average of room rate for our client’s accounting year just
ended, together with the auditor’s certificate.
That year, in fact, did not exactly match
with the year provided for by the deed of variation because the accounting year
finished on December 31 rather than on Christmas Day as the deed provided, but
nothing very much seems to turn on that at this stage.
The certificate contains a calculation of
the number of rooms and the figure applied by way of average to that number of
rooms which is added to the price of the relevant number of continental
breakfasts — one breakfast being attributed to a single room, two to a double —
and the end result produces a formula, in accordance with the lease, of
£125,000 multiplied by £95.96 and divided by £28.40; £95.96 is, of course, the
average room rate for the relevant period. The fruits of that calculation were
a rent of £422,359.15. The auditors gave a certificate which included the
following sentence in relation to the date of December 31 which was the actual
date chosen, rather than Christmas Day.
This date is so close to December the
25th that we consider that any differences in the average room rate achieved in
the 12 months ended 25th December, 1987 would be insignificant.
That highlighted the difference between
the parties which was picked up at once in a letter from the landlord’s solicitors,
Nabarro Nathanson, who, on March 17 1988, after quoting the relevant definition
in the third schedule, said this:
It is clear that the revised rent must be
based on the average room price as made available to members of the general
public. The computation enclosed with your letter of the 29th February, 1988
was based on the average room rate achieved in the year ended the 31st
December.
Correspondence ensued establishing that
if the landlord’s construction was correct, that is to say that the calculation
should be based upon published prices, both parties were, in fact, agreed that
the rent should be £597,315.14, and on that supposition which is, of
course, the matter of dispute, that remains the position and there is no
dispute as to that particular figure.
On June 13 1988, there not being any
agreement on the underlying difference, there was a letter written on behalf of
the landlord to the tenant, care of their solicitors, which included the
following formal request:
On behalf of our clients, MEPC Plc, we
invite you to concur in a joint application to the President of The Institute
of Chartered Accountants in England and Wales to appoint an independent
chartered accountant to determine the statement of the average room rate in
accordance with the provisions of the third schedule to the underlease as
varied by the Deed of Variation.
On October 20 1988 Mr Lawrence of Coopers
& Lybrand was appointed the expert in accordance with that invitation, and
on November 15 1988 he wrote to the landlord’s solicitors saying that he
acknowledged his appointment and was writing to the solicitors on behalf of the
landlord and to the tenant’s solicitors on their behalf, to invite them to put
forward their proposals for the manner in which this determination might be
conducted. He continued:
I would envisage that the scope of the
matter for determination should, if possible, be agreed between the parties and
that each side would then wish to make submissions setting out their position
in relation to the matters in dispute. Thereafter it may be appropriate for
staff of my firm to investigate on my behalf the relevant facts as appearing
from the detailed records of the hotel.
Representations were indeed made and
cross-representations by both sides to the expert, Mr Lawrence. They are very
adequately rehearsed in the award that Mr Lawrence subsequently made and need
not, at this stage, be further referred to. Mr Lawrence gave directions by way
of a preliminary hearing on January 27 1989 which included the following:
The parties must agree the issue or such
issues in question by the 1st March, 1989; alternatively, the parties must
agree to differ and by this date each of the parties must state what it
believes to be the issue or issues.
(2)
The parties must make their submissions and produce all the evidence on
which they intend to rely by the 15th March.
(3)
The parties, if they wish, may make submissions in reply by the 29th
March, and
(4)
Oral submissions may be made on a date to be arranged to allow counsel
to be instructed.
The two issues which potentially arose
were, effectively, isolated and formulated in correspondence, and I take as an example
a letter to the tenant’s solicitors from the landlord’s solicitors which
included the following:
We believe that the issues may more
conveniently be summarised as follows:
(1)
The primary issue was whether, as we contend, if your client’s published
prices are available covering the entire period, as they are, the statement
should be prepared by reference to such public prices.
(2)
The secondary issue arises if the answer to the primary issue is in the
negative, namely by reference to what other criteria and what other books of
account or other relevant records and, indeed, what, if any, other material
should the statement be prepared. If it is necessary for the expert to
determine this issue, we would request the expert to prepare a statement of the
average room rate.
The tenant’s solicitors, Wilde Sapte,
made it clear in a letter of May 3 1989 that there were a number of matters
which they thought would need to be dealt with as a matter of procedure, and
they mentioned four of which I need mention only three.
(1)
Mr Lawrence’s formal confirmation that he is prepared to deal with the
question of law as a preliminary issue will be required.
(2)
Assuming Mr Lawrence is prepared to hear the issue, we shall need to
agree the formal wording of the question or questions which he will be asked to
decide.
(3)
The nature of the hearing will need to be discussed, in particular
whether or not Mr Lawrence will be taking independent legal advice prior or
subsequent to the oral submissions and/or whether he will wish to have a legal
adviser present at the same.
The letter also included the following:
We would also make it plain that, with
all due respect to Mr Lawrence, neither our clients nor ourselves are convinced
that it is appropriate for him to determine the question of law and we are
currently considering with our clients whether or not to take this part of the
issue to the court.
That was effectively repeated in a letter
of May 9 in which they said:
In our opinion an important question of
law has arisen and our clients take this very seriously. As we believe you
concede, Mr Lawrence’s agreeing to decide the point would neither initially nor
subsequently preclude the matter being referred to the court, and in this
situation we believe that making a formal application at this stage may well
serve to expedite rather than delay matters.
Mr Lawrence’s attitude was contained in a
letter that he wrote to the solicitors on either side, dated May 17 1989, in
the course of which he said:
The three points raised by Mr Manhennet
— he was the solicitor acting for the
tenants at that stage —
are as follows:
(1)
Are you prepared to hear the legal point which has arisen first as a
preliminary issue? If so, are you
prepared to decide this as an expert or would you wish the parties to agree
that you should hear this as an arbitrator?
(2)
Assuming you are prepared to hear the case, do you wish to take legal
advice prior to the hearing and/or will you wish to have a legal
adviser/assessor present during the submissions?
and (3) I need not read.
He answered the first point as follows:
As regards the first of the above points,
Nabarro Nathanson have defined the preliminary issue in their letter of the 9th
March, 1989 as follows: ‘Whether, as the landlord contends, if the tenants
published prices are available covering the entire period, as they are, the
statement should be prepared by reference to such published prices.’ Mr Manhennet’s letter of the 15th March, 1989
confirms that Wilde Sapte are in broad agreement with the proposals made in Mr
Hogan’s letter of the 9th March, while not agreeing entirely with the wording
of the questions. However, no alternative wording has so far been put before
me. I confirm that I am prepared to hear oral submissions on the preliminary
issue and that I am prepared to decide it as an expert, which is the capacity
in which I have been appointed. If the parties wish to replace that appointment
with an appointment as arbitrator I would be equally prepared to deal with the
matter in that capacity.
And para 5 reads:
As regards the second point, I propose to
hear the oral submissions and then to consider, in the light of these
submissions, whether I wish to seek legal advice. However, if the parties would
like me to have a legal adviser or assessor present during the submissions, and
that can be agreed upon, I would, of course, be prepared to adopt that
procedure.
Finally, he said that if it were the
intention of Nikko Hotels (UK) Ltd to refer the matter to the court, it was
clearly desirable that they should make a decision to that effect as soon as
possible in order to avoid unnecessary costs in arranging for the hearing which
he had referred to above.
Wilde Sapte continued to say that they
proposed to take the matter to court. In a letter of May 18 they said: ‘I
should none the less mention that our clients are seriously considering
referring the legal question to the court as a preliminary issue’, and they say
that they have arranged a conference with counsel as a result of which,
presumably, on May 24, they wrote, inter alia: ‘We are accordingly
making preparations to take out an originating summons in the Chancery Division
for a declaration relating to the question of law which has arisen’.
In fact, Mr Lawrence, encouraged by the
landlord’s solicitors in that way, decided that he was going to press on with
the hearing, and he said so in a letter of June 5 which contains the following,
notably:
Having carefully considered the matter, I
have decided that the proper course of action for me is to proceed with the
hearing of oral submissions, unless I am ordered by the court not to do so. The
parties to the lease agreed that disputes should be referred to an independent
expert for determination and I have been appointed under the terms of the lease
to determine the dispute. It therefore appears to me that I have a duty to
proceed to make the determination without undue delay. However, in view of the
importance which Nikko Hotels (UK) Ltd and their advisers attach to the legal
construction of the lease, I have decided that I should sit with a legal
adviser. I have therefore decided to proceed with the hearing of oral
submissions, as arranged, on June 22 at 10am and I will be accompanied by Mr Nicholas
Stewart QC.
Wilde Sapte agreed to that proposed
course in a letter of June 15 1989, in the course of which they said:
As you know, we have always maintained
that the court is the proper forum to interpret the rent review clause in the
lease, but as you consider yourself able to make a decision and have decided to
sit with a legal adviser, we accept that you are entitled to proceed with the
hearing next Thursday.
They then go on to explain that there
seems little point in those circumstances to launch the proceedings in the High
Court at that stage. But they do say, in terms, after asking for detailed
reasons for the decision that he has reached: ‘My clients also reserve their
right to apply to court in any event’.
The hearing did, indeed, take place on
June 22 1989 before Mr Lawrence, who sat with the assistance of Mr Stewart.
Counsel appeared on both sides, in fact the same counsel as appeared before
me. Mr Lawrence gave his decision in the form of a letter on June 30 1989 in
which he rehearsed his appointment and the fact that he had heard submissions.
He identified the preliminary issue in the way in which it was already quoted
in the earlier letter that he wrote and he recorded the parties’ agreement to
the figure if he found in favour of the landlord on the preliminary issue. He
set out the definition in the deed of variation of the particular clause that
he was required to operate, namely the average room rate at the relevant rent
review date, and he then set out what he understood to be the main points at
issue and the parties’ submissions. He identified the main points at issue as
being the meaning of the words ‘made available’ and ‘general public.’
He summarised the landlord’s position in
the following terms:
For the landlord, it was argued that the
price list published from time to time constituted the criteria upon which the
calculation was to be based, unless it could be shown that some other prices
were available to the public generally and that ad hoc reductions in the
prices charged to particular customers and the prices charged to customers
having some special relationship, or forming part of some special sub-division
of the public, were not in point. A simple accountancy exercise was envisaged.
If the tenant’s submission was correct, a detailed inquiry would be necessary
into the circumstances in which each room rate actually charged that was
different from the published tariff came to be charged. Nothing in the Deed of
Variation suggested such an intention.
The reference to an average allowed for
the possibility of more than one published tariff during the course of the base
year. I need not read the rest of the summary of the landlord’s position.
The tenant’s position was stated by Mr
Lawrence as follows:
For the tenant it was argued that the
landlord’s interpretation resulted in a maximum room rate and that this was
inconsistent with the requirement for an average rate. The average achieved
rate for each category of room for the days when it was let was the relevant
rate to apply to all rooms of the same category for the purposes of the
required calculation. ‘Made available’ meant actually let to members of the
general public, not ‘published’, ‘advertised’ or ‘offered’. The averaging
exercise included the averaging acknowledged by the landlord but should also
include the averaging of the prices at which lettings actually occurred,
whatever the reasons for those fluctuations.
Then arguments were adduced in favour of
that particular construction.
Mr Lawrence gave his determination in the
following terms:
Having carefully considered the written
and oral submissions made to me and the advice of Mr Nicholas Stewart QC as
regards the legal issues affecting the proper construction of the relevant
provisions of the Deed of Variation, I find that the words ‘members of the
general public’ in the context in which they appear in the definition of the
average room rate in the Deed of Variation, mean any and all members of the
public, and not any particular sub-division of the public distinguishable by some
special characteristic, such as having booked through a particular agency to
whom a special discount was made available by the tenant or having been
passengers on or booked through Japan Airlines.
Pausing there for a moment, although the
tenant’s arguments before Mr Lawrence had not accepted that proposition, it is
now accepted by and on behalf of the tenant that thus far Mr Lawrence’s
determination is not one with which they still quarrel. Continuing with Mr
Lawrence’s determination, he went on:
I find also that the words ‘made
available to members of the general public’ mean made available to any member
of the public seeking a room or suite of the class concerned, without seeking
to strike a special bargain. I do not regard the price charged to guests, in
fact, seeking a room of a lower category and being charged the room rate
appropriate to that lower category as being the price at which the higher
category of room is made available to members of the general public.
Although the tenant argued for the actual
achieved room rate as being the relevant criterion and referred to the
availability of daily average rates already published, it was conceded that not
all types of reduction or discount were to be regarded as ‘available to the
general public’. It therefore follows that the adoption of the tenant’s
interpretation of the Deed of Variation would entail a detailed examination of
the circumstances underlying each departure from the published tariff to see
whether it did or did not fall to be taken into the calculation. I am satisfied
that the intention of the parties to the Deed of Variation was that the
exercise of calculating the average room rate should be a straightforward
arithmetic exercise, not entailing such detailed enquiries.
And he found in favour of the figure
which was, in the circumstances, an agreed one of £597,315.14.
The originating summons before me seeks,
in para 1, a declaration that the determination by Mr Lawrence, dated June 30,
that the yearly rent under the lease and the deed of variation should be
£597,315.14 was a nullity and of no effect on the grounds that Mr Lawrence
misconstrued and misapplied the expression ‘average room rate’ as used in the
said deed.
The first question that I have to grapple
with is whether it is open to the tenant, in these circumstances, to challenge
the decision of Mr Lawrence in this court.
The law on the subject of the extent to
which parties can challenge a decision of an expert to whom they have entrusted
the determination of a question has gone through several changes over the years
and in this court is now governed by a decision of the Court of Appeal, Jones
v Sherwood Computer Services Ltd, which was decided on December 7 1989.
Remarkably and unfortunately, that decision has so far gone unreported. In the
course of it, both members of the Court of Appeal, Dillon and Balcombe LJJ,
expressed their disapproval of a decision, or much of what was said in the
course of a decision, Burgess v Purchase & Sons (Farms) Ltd
[1983] Ch 216, which is a decision still found in textbooks without any record
of that disapproval. For example, it figures in Chitty on Contracts,
26th ed, para 4716, note 51.
In Jones v Sherwood Computer
Services there was a contract for the offer and acceptance on sale by the
plaintiffs to the defendants of the issued share capital of a company called
Corporate Technology Group Ltd. That company had two operating subsidiaries, LG
Software Ltd and CTG Software Ltd. The consideration payable in respect of that
proposed sale was, in certain events, made to depend upon what were defined as
‘sales’ by a highly complex formula, and there was a provision for a statement
to be prepared of such ‘sales’. It is not necessary for the purposes of this
judgment to set out that formula in full. It will suffice to say that it
referred to the sales by those two subsidiaries, LG Software Ltd and CTG
Software Ltd and there were various provisions for inclusions and exclusions
among those sales.
The agreement provided in relation to the
statement of the sales as follows:
The said statement, when prepared, shall
be reviewed by Peat, Marwick, Mitchell and Co on behalf of Sherwood and
Deloitte, Haskins and Sells on behalf of accepting shareholders under the
ordinary offer (together called the accountants) who shall, (a) jointly approve
such statement as prepared by Sherwood or, (b) make such adjustments thereto as
they may jointly agree, and shall deliver a copy of such statement as approved
or adjusted to Sherwood.
The next clause provided as follows:
If the accountants are unable either to
approve the statement as prepared or to agree the adjustments to be made
thereto, the matter shall be referred to an independent chartered accountant,
or a firm of chartered accountants (‘the expert’) to be agreed between the
accountants, or failing agreement to be nominated by the President for the time
being of the Institute of Chartered Accountants in England and Wales, who shall
be instructed to determine the amount of the Sales and to provide a report
stating such amount to Sherwood within the shortest practicable time. Sherwood
shall procure to be provided to the expert all such information as may
reasonably be required by him to enable him to determine the amount of the
Sales and provide his report as aforesaid.
Finally, paragraph seven provided:
The accountants and the expert, if any,
shall act as experts and not as arbitrators and their or his determination
shall be conclusive and final and binding for all purposes.
There was, indeed, a disagreement between
Peat and Deloitte, and they jointly appointed Coopers & Lybrand to be the
expert. The judgment of Dillon LJ sets out Coopers’ terms of reference in which
the differences of opinion between the other two firms of accountants, Peat and
Deloitte, were set out and precisely identified. The lord justice found that
those were intructions, as indeed had the judge below, which could properly be
given to Coopers within the paragraph which I have read which provided for the
expert to resolve the disputes.
Coopers sent to the defendants a document
which they signed, which read as follows:
We have acted as independent chartered
accountants to determine the combined software sales of LG Software Ltd and CTG
Software Ltd for the period of 12 months ended 30th November, 1987, calculated
in accordance with Appendix 1 to the offer document for the acquisition of
Corporate Technology Group Plc and schedule 5 to the deed dated the 30th
February, 1987 relating to the acquisition of Corporate Technology Group Plc
(the Sales). We determined that the sales amount to £2,527,135.
That made it
clear, as the learned lord justice observed, that they had chosen the figure at
which Peat had assessed the amount of the sales and had therefore decided that
two specific classes of disputed
agreed with the conclusions of Peat rather than with the conclusions of
Deloitte.
The plaintiffs then brought proceedings
for a declaration that the certificate was defective and of no effect, and the
defendants moved the court to strike out the part of the prayer for relief that
was dealing with this matter, on the basis that there was no jurisdiction in
the court to decide such a question because the determination by the expert had
been agreed by the parties to be conclusive and binding for all purposes.
Dillon LJ went on as follows:
It is therefore necessary to see how the
law stands on the question of challenging an expert’s certificate on the
grounds of mistake. We are not, of course, here concerned with any question of
fraud or collusion on the part of the expert. The cases have been fully
analysed by Sir David Cairns in Baber v Kenwood Manufacturing Co Ltd
[1978] 1 Lloyd’s Rep 175 at 181-3, and by Nourse J in Burgess v Purchase
& Sons (Farms) Ltd [1983] Ch 216. The starting point for the modern
statement of the law is, in my judgment, a decision in Campbell v Edwards
[1976] 1 WLR 403, and in particular the passage at 407G in the judgment of Lord
Denning MR, where he said:
‘It is simply the law of contract. If two
persons agree that the price of the property should be fixed by a valuer on
whom they agree, and he gives that valuation honestly and in good faith, they
are bound by it. Even if he has made a mistake, they are still bound by it. The
reason is that they have agreed to be bound by it. If there were fraud or
collusion, of course, it would be very different, fraud or collusion unravels
everything.’
That statement was, as a matter of
principle and disregarding the earlier authorities, endorsed by Megaw LJ in Baber
v Kenwood at p 179, and concurred in by the other members of this court
in Baber v Kenwood. It is in line with the passage cited by Sir
David Cairns in Baber v Kenwood from the judgment of Sir John
Strange MR in Belchier v Reynolds (1754) 3 Keny 87 at p 91;
‘Whatever be the real value is not now to
be considered for the parties made Harris their judge in that point; they
thought proper to confide in his judgment, and must abide by it, unless they
could have made it plainly appear that he had been guilty of some gross fraud
and partiality.’
Dillon LJ continues:
Geoffrey Lane LJ in Campbell v Edwards
followed and applied an earlier statement by Lord Denning to the same effect in
Arenson v Arenson [1973] Ch 346 at p 363. Both Campbell v Edwards
and Baber v Kenwood were cases of non-speaking valuations, and it
is convenient to say a little at this juncture about the distinction between
speaking and non-speaking valuations or certificates, which to my mind is not a
relevant distinction. Even speaking valuations may say much or little, they may
be voluble or taciturn, if not wholly dumb. The real question is whether it is
possible to say from all the evidence which is properly before the court and
not only from the valuation or certificate itself, what the valuer or certifier
has done and why he has done it. The less evidence there is available, the more
difficult it will be for a party to mount a challenge to the certificate.
The learned lord justice then mentions
other questions that might arise in that context. He deals with some of the
earlier authorities on this matter and then refers to what he describes as the
more important case of Dean v Prince*, and he deals with that case,
which came before Harman J at first instance, and then went on appeal. With
regard to the appeal, Dillon LJ said:
On appeal, the substantive judgment of
Harman J was reversed on the ground that in the unusual circumstances of the
company in question, the basis of valuation adopted by the auditor was
appropriate. However, both parties and all members of this court took as
settled law a dictum of Sir John Romilly MR in Collier v Mason 25
Beav 200 at p 204, that:
‘This court upon the principle laid down
by Lord Eldon, must act on that valuation, unless there be proof of some
mistake, or some improper motive, I do not say a fraudulent one; as if the
valuer had valued something not included, or had valued it on a wholly
erroneous principle,
— and then there are some dots, showing
an omission —
or even in the absence of any proof of
any of these things, if the price were so excessive or so small as only to be
explainable by reference to some such cause; in any one of these cases the
court would refuse to act on the valuation.’
Denning LJ, in particular, at p 427 in Dean
v Prince, stressed that:
‘If the courts are satisfied that the
valuation was made under a mistake, they will hold it not to be binding on the
parties. A valuation could be impeached, not only for fraud but also for
mistake or miscarriage. For instance, if inter alia the expert had interpreted
the agreement wrongly.’
Plainly, Lord Denning came to change his
views between 1954 and 1976. The reason for that was that in 1954 there was an
established line of authority from Pappa v Rose (1871) LR 7 CP
32, to Finnegan v Allen (1943) KB 425, to the effect that a
valuer who has given a certificate as an expert was not liable to an action
unless he was dishonest. But that line of authority has been overruled by the
House of Lords in Arenson v Casson, Beckman, Rutley & Co
[1977] AC 405, and Sutcliffe v Thackrah [1974] AC 727, where the
dissenting judgment of Lord Denning in Arenson v Arenson was
approved and it was established that the expert could be liable for damages in
negligence if he had acted negligently in giving his certificate.
In Dean v Prince at p 427,
Denning LJ had expressed the view that the cases on the immunity of the valuer
had no application when the court was considering the validity of the valuation
itself.
Looking at the problem from the other
end, however, the members of this court in Campbell v Edwards and
Baber v Kenwood were concerned to see how a valuer could be
liable for a negligent mistake in giving a certificate as an expert if the
effect of that mistake was that the certificate was not binding on the parties.
(See especially the judgment of Geoffrey Lane LJ in Campbell v Edwards
at p 409, and of Megaw LJ in Baber v Kenwood at p 181, concurred
in by Lawton LJ.)
The result is, in my judgment, that in
those two cases, this court has decided to look at the question of setting
aside certificates of experts on grounds of mistake afresh in the light of the
principle that the expert or valuer can be sued for negligence. (See also per
Sir David Cairns in Baber v Kenwood at p 183.) In so doing, this court has rejected the latter
part of Sir John Romilly’s dictum, ‘Or even in the absence of any proof of any
of these things’ etc. We also, therefore, are free to look at the matter afresh
on principle and are not bound by the law as stated by common consensus in Dean
v Prince.
*Editor’s note: Reported at [1954] Ch
409.
Pausing there for a moment, when the
learned lord justice said in terms that the Court of Appeal had rejected the
latter part of the quotation from Sir John Romilly’s dictum in Collier v
Mason, which was earlier quoted by the lord justice, I am not satisfied
that he thereby meant that the Court of Appeal had approved the whole of the
preceding passage. It seems to me, as a matter of the interpretation of this
judgment as a whole, that the latter part was obviously overruled, but also
that there is a total inconsistency between some of what Sir John Romilly said
in the first part of the passage in Collier v Mason, namely that
proof of the mistake would be sufficient, and the whole tenor of the decision
of Dillon LJ, which I take to be that a mistake by itself, whether of law or of
fact, is not necessarily enough.
Dillon LJ then proceeded to set out what
the proper course was, in his view, in the following passage:
On principle, the first step must be to
see what the parties have agreed to remit to the expert, this being, as Lord
Denning said in Campbell v Edwards, a matter of contract. The
next step must be to see what the nature of the mistake was, if there is
evidence to show that. If the mistake made was that the expert departed from
his instructions in a material respect, eg if he valued the wrong number of
shares, or valued shares in the wrong company, or if, as in Jones v Jones
(1971) 1 WLR 840, the expert had valued machinery himself, whereas his
instructions were to employ an expert valuer of his choice to do that, either
party would be able to say that the certificate was not binding because the
expert had not done what he was appointed to do.
The learned lord justice then continued
to apply that process of reasoning to the particular certificate that Coopers
had given in that case, and he reached a conclusion that Coopers had done
precisely what they were instructed to do and that the plaintiffs could not
challenge their determination of the amount of the sales.
Balcombe LJ concurred in that decision.
His judgment contains the following passage:
The principle applicable to a case of
this type is that stated by Lord Denning MR in Campbell v Edwards
[1976] 1 WLR 403-407. It has been cited by Lord Justice Dillon but I will
repeat it here; it is simply the law of contract, if two persons agree that the
price of property should be fixed by a valuer on whom they agree and he gives
that valuation honestly and in good faith, they are bound by it. Even if he had
made a mistake, they are still bound by it. The reason is because they have
agreed to be bound by it. If there were fraud or collusion, of course, it would
be very different. Fraud or collusion unravels everything.
Then the learned lord justice continues:
That principle was expressly approved by
this court in Baber v Kenwood. In my judgment that principle
cannot be affected by the change (sic) whether the valuation is or is
not a speaking valuation.
I agree with Dillon LJ that that is not a
relevant distinction, and it follows that I also respectfully disagree with the
judgment of Nourse J in Burgess v Purchase & Sons [1983] Ch
216.
That, indeed, is something that Dillon LJ
had said, because in his judgment, at the end, he had included this:
It follows from the foregoing that I
respectfully differ from much that was said by Nourse J in Burgess v Purchase
& Sons.
I mention that simply to provide the
context for the observation that I made earlier in this judgment, that it is
unfortunate that Jones v Sherwood Computer Services Ltd should
not have been reported, because it does effectively overrule an earlier
decision whose authority seems to be unimpaired in the current textbooks.
This decision of the Court of Appeal in Jones
v Sherwood Computer Services is, of course, binding on me, as counsel on
both sides before me accepted. In my judgment, it provides for a contractual
analysis of the task set for the expert to perform and it gives full effect to
the parties’ agreement regarding with what it was that the expert should be
entrusted.
The result, in my judgment, is that if
parties agree to refer to the final and conclusive judgment of an expert an
issue which either consists of a question of construction or necessarily
involves the solution of a question of construction, the expert’s decision will
be final and conclusive and, therefore, not open to review or treatment by the
courts as a nullity on the ground that the expert’s decision on construction was
erroneous in law, unless it can be shown that the expert has not performed the
task assigned to him. If he has answered the right question in the wrong way,
his decision will be binding. If he has answered the wrong question, his
decision will be a nullity.
I turn, therefore, to consider the
present case. It will be recalled that the present clause which calls for the
appointment of the expert, so far as relevant, reads as follows:
. . . if any dispute shall arise between
the parties hereto out of this third schedule, then . . . any dispute shall be
determined by an independent chartered accountant nominated by the President
[of the Institute] . . . and the decision of such chartered accountant, acting
as expert and not as arbitrator, shall be final and binding on the parties
hereto.
I see no significant difference between
the turn of phrase used in that clause, ‘final and binding’, and the turn of
phrase that was used in Jones v Sherwood, ‘conclusive and final
and binding for all purposes’. Any dispute in the context of clause 4 of the
deed of variation, in my judgment, means any dispute whether of fact or of law,
subject, of course, to the requirement that it must arise out of the provisions
of the third schedule to that deed.
Mr Gaunt, who appeared for the tenant
before me and indeed before Mr Lawrence, identified, while accepting that Jones
v Sherwood was the decision that should guide this court, two questions
as needing solution. The first was, what was it that the parties remitted? And the second was, what was the
mistake? For this purpose, of course, I
assume, in his favour, that the construction which was urged upon Mr Lawrence
and me by the tenant is the correct one. He answered those questions as
follows: that the question that was remitted by the parties to the expert’s
decision was the determination of the average room rate, and he accepted that
any disputes of interpretation that arose would have to be solved on the way to
that determination. He identified the nature of the mistake as one of assessing
the average published room rate rather than the average charged room rate, and
he submitted in accordance with that that Mr Lawrence had, in effect, done the
wrong thing, which was in principle the same as valuing the wrong number of
shares, to use the example that Dillon LJ had adopted in his judgment in the Jones
case.
The issue, in my judgment, comes down to
whether Mr Lawrence has assessed the wrong subject-matter as a result of the
mistake, which I assume for present purposes that he made, or whether he did do
the very task which was entrusted to him but reached an erroneous conclusion as
a result of that assumed mistake.
It was argued by Mr Lightman that the
issue entrusted to Mr Lawrence was the preliminary issue that was agreed
between the parties in the correspondence and recorded by Mr Lawrence in the
course of his letter of determination. I do not accept that way of looking at
the matter, because I prefer the broader approach based on a contractual
analysis to see what it is that the contract between the parties under the deed
had agreed should be the subject-matter of the expert’s determination. I am not
satisfied that the parties’ dealings leading up to the hearing before Mr
Lawrence were such as to effect an alteration in the contractual agreement
between them as to the subject-matter of the expert’s determination. It seems
to me that the parties’ contractual rights have to be determined in accordance
with what they provided in the document to which they — or their predecessors
in title — put their names, rather than in the light of the procedural
manoeuvrings that perfectly properly took place before Mr Lawrence heard the
argument before him.
Mr Lightman also relied on an analogy
with the position under the Arbitration Act 1979, and in relation to the
situation that obtained before the Arbitration Act 1979, on what was said in
the House of Lords in F R Absalom Ltd v Great Western (London) Garden
Village Society [1933] AC 592. In the latter case, Lord Wright, at p 615,
distinguished, from the general rule then operative that where an error of law
appeared on the face of an award that error could be reviewed, a special type
of case, which he described as follows:
To be contrasted with such cases there is
the special type of case where a different rule is in force, so that the Court
will not interfere even though it is manifest on the face of the award that the
arbitrator has gone wrong in law. This is so when what is referred to the
arbitrator is not the whole question, whether involving both fact or law, but
only some specific question of law in express terms as the separate question
submitted; that is to say where a point of law, which is all that the
arbitrator is required to decide, no fact being, quoad that submission, in
dispute. Such a case is illustrated by the Government of Kelantan v Duff
Development Co, where Lord Cave LC, whose opinion was that of the majority
of this house, said:
‘But where a question of construction is
the very thing referred for arbitration, then the decision of the arbitrator
upon that point cannot be set aside by the Court only because the Court would
itself have come to a different conclusion.’
This house held in that case that the
only questions to be determined by the arbitrator, there being no facts in
dispute, were the questions of law as to the construction of the contract. That
decision followed In re King and Duveen in which Channell J said, in
distinguishing the case of The British Westinghouse Co v Underground
Electric Railways Co:
‘It is equally clear that if a specific
question of law is submitted to an arbitrator for his decision and he does
decide it, the fact that the decision is erroneous does not make the award bad
on its face so as to permit of its being set aside.’
The learned judge shrewdly adds:
Otherwise it would be futile ever to
submit a question of law to an arbitrator.
I derive limited assistance in this case
from that statement, because it was concerned with the pre-1979 Arbitration Act
situation and with error on the face of an award, and the analogy with expert’s
awards, is not, in my view, a precise one. The passage does, however, negative
any suggestion that there is a rule of public policy that prevents parties from
agreeing to remit to the exclusive and final jurisdiction of an expert a
question of law.
I was referred, in connection with such a
possible view of the law, to the decision of Ungoed-Thomas J in Re Davstone
Estates Ltd’s Leases [1969] 2 Ch 378, where there was a provision in a
lease for a contribution to be made by a lessee towards expenses in complying
with the lessor’s covenant, and an issue arose as to whether the certificate
that the surveyor for the lessor had granted prevented the tenant’s arguing a
question of construction which the surveyor had answered in a way which was
contrary to the tenant’s interest.
The learned judge held, as a first point,
that on the true construction of the leases the particular question of
construction was not a matter for decision by the surveyor’s certificate, and
to that extent the case is of no assistance, because it turns on the special
terms of that particular lease, which have no relevance to any question that I
have to decide. The learned judge did, however, in the alternative — and in
this respect the headnote is perhaps not entirely accurate in saying ‘held
further’ — hold that the provision in the relevant clause that the surveyor’s
certificate should be conclusive was void as contrary to public policy.
He dealt with this aspect of the matter
at p 385, where he said of the conclusion that it was not within the surveyor’s
remit to decide that particular question of construction:
Although this conclusion answers the
question that it raised, nevertheless it might be helpful if I briefly express
my view on the alternative contention of the tenants that, on the footing that
the leases provide that the surveyor’s certificate is conclusive on what, as a
matter of construction and therefore, it is conceded, of law, is within the
meaning of clause 3, such provision is void as totally ousting the jurisdiction
of the courts on a question of law.
Then the learned judge quoted from the
judgment of Denning LJ in Lee v Showmen’s Guild of Great Britain,
a passage which is concerned with domestic tribunals and the necessity for them
to observe the rules of natural justice. He also, at p 386, said:
It was suggested that the law as stated
in the passage which I have quoted from the judgment of Denning LJ in Lee
v Showmen’s Guild of Great Britain applied to decisions of arbitrations
or tribunals only and not to decisions by experts. But the public policy
objection to the ouster of the court’s jurisdiction does not turn on any
distinction between decision by arbitration or by an expert.
And he refers to the decision of Baker
v Jones [1954] 1 WLR 1005, saying that it was not an arbitration of a
tribunal case.
When one looks to see what was argued
before the learned judge, one finds that he intervened in counsel for the
plaintiffs’ address and said: ‘What is the position when the jurisdiction of
the court is excluded on points of law?’
and the answer that he received was: ‘A
void as contrary to public policy. Here, however, the surveyor is acting as an
expert and not as an arbitrator, nor do the parties appear to be excluding
recourse to the courts’.
There was no reference to Absalom’s
case or, indeed, to any other case where there was referred to an arbitrator a
pure question of law. In those circumstances it does seem to me that the
decision which the learned judge reached in Re Davstone Estates Ltd’s Leases
is put on too wide a basis, if and to the extent to which it suggests that
there is a rule of public policy which prevents parties from referring to the
conclusive decision of an expert any question of construction or other similar
question of law. If there were any question about public policy being thus wide
at the time when Re Davstone Estates Ltd’s Leases was decided, in my
judgment it could not survive in that wide form in the context of the
Arbitration Act 1979, which Parliament has passed since that case was decided
and which makes express provision for parties to enter into what are called
exclusion agreements under section 3 of that Act. It is perfectly clear that
Parliament contemplates, as a lawful and proper thing for citizens to do, the
exclusion of a resort to the court in the particular circumstances envisaged,
and no question of public policy striking down any such provision as we have here
in my view really arises.
It should be recorded that Mr Gaunt did
not put his case that high, no doubt wisely seeing some of the difficulties
involved in doing so. He did, however, submit that the courts do lean against
excluding the courts from deciding questions of law. I do not accept that there
should be in today’s climate any such leaning. It seems to me that if there is
a leaning to be discerned, it is in favour of allowing the parties to do what
they wish and keeping parties to their agreement, if they make one, that an
expert, as opposed to the courts, should decide particular issues. The parties
may well have all sorts of very justifiable reasons for preferring an expert’s
decision in such a matter over the decision that might be reached in the courts,
and I do not, myself, discern any particular policy of the law as being likely
to lead to any different result in that regard. One could gain support of a
much more eloquent nature for that approach in the speech of Lord Diplock in Pioneer
Shipping v B T P Tioxide Ltd [1982] AC 724 at p 736.
I therefore reach the conclusion in
applying the test in Jones v Sherwood that the questions of
construction of the third schedule were, indeed, remitted to the expert, and it
does seem to me that he answered the questions which were entrusted to him.
That means that that decision is, as I see it, binding on the parties, whether
it be right or wrong.
I bear in mind that Mr Gaunt submitted
that there were various ways in which Jones v Sherwood could be
distinguished. He submitted, first, that in that case the issue was not one of
interpretation at all, but of the correct accountancy treatment of the relevant
contracts that were concerned with what were defined as the sales, whereas here
a pure question of construction is involved. With the latter part I entirely
agree. With the former I do not agree in that, although the precise nature of
the issue is not easy to isolate in the rather complicated circumstances that
there seemed to have obtained, nevertheless the principle which was enunciated
by the Court of Appeal does seem to me to be just as applicable to an issue of
law as it is to an issue of fact.
Second, he submitted that, if he were
right on construction, Mr Lawrence, in fact, departed from his instructions
because he valued the wrong thing. That is a submission with which I have
already dealt. It is not one that bears very much elaboration. It seems to me
that he did what he was asked to do, whether or not he got it right.
Finally, while accepting that in
principle there is no difference between a speaking and a non-speaking award in
the light of the Jones v Sherwood case, he pointed to the fact,
which again is incontrovertible, that where you have a non-speaking award it is
more difficult in practice to show what it is that was the mistake upon which
the challenge is based. That does not seem to me to impinge on the validity of
the approach and its relevance to the present case. True it is that it becomes
more difficult the less the expert says to show that he has got it wrong. It
does not, in my judgment, affect the task which faces the court, which has to
grapple with a problem, as before me, of what it was that the parties entrusted
to the expert.
For all those reasons I have reached the
conclusion that it would not be right for this court to make a declaration as
prayed in para 1 of the originating summons.
That is not the only paragraph in the
originating summons, because it also asks for a determination as to the true
interpretation of the expression ‘Average room rate as used in the said
deed.’ There may of course be and, in
fact, almost certainly will, unless rents fall and continue to fall for the
whole of this long lease, be other occasions on which applications will be made
for a rental increase in accordance with the terms of the deed of variation. So
the problem that faced Mr Lawrence may well face other gentlemen in the future.
But it seems to me that all the arguments that apply in relation to Mr
Lawrence’s determination in the past apply with equal force to any possible
determination by some other expert that may be made hereafter. There are, in
addition, not inconsiderable difficulties in making a declaration that is
likely to be of assistance in the circumstances which will obtain at six-yearly
intervals, from 1994 onwards, as long as this term lasts.
In those circumstances I decline to
exercise the jurisdiction, if I have one, to make a declaration regarding the
true construction of that provision. That, I think, covers all the issues which
were argued before me.
The summons was dismissed with costs.
