England and Wales Court of Appeal (Civil Division) Decisions

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(Handed down transcript of

Smith Bernal Reporting Limited

180 Fleet Street, London EC4A 2HD

Tel: 0171 421 4040 Fax: 404 1424

Official Shorthand Writers to the Court)

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Mr J Brock QC, Mr A Hill-Smith (instructed by Brock Street Desroches for the Appellant)

Mr G Fetherstonhaugh (instructed by Wallace and Partners for the Respondent)

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(As approved by the court)

©Crown Copyright

LORD JUSTICE MUMMERY:

This is an appeal against the order made on 19 March 1998 by Pumfrey J striking out an Originating Summons dated 30 March 1997 by which the appellant National Grid Company PLC (National Grid) sought a series of declarations on the construction of a lease of 8 July 1968. The declarations related to the conduct of a rent review by a valuer appointed under the terms of the lease.

Pumfrey J granted leave to appeal. On 28 August 1998 the Court of Appeal (Simon Brown,Auld and Chadwick LJJ) dismissed a renewed application by National Grid for an order that their appeal should be expedited.

There was a further flurry of activity on 9 October 1998 when,on a motion by National Grid, a consent order was made by Pumfrey J. The order was made on various undertakings given by Nation Grid and upon an agreement by the parties that, within 14 days of receipt of the interim account of the expert, they would pay 50% each of that account. On the basis of those undertakings and that agreement the parties agreed to instruct the expert

"to stay all further proceedings in his determination of the rent payable under the said lease until determination of the appeal currently pending in these proceedings before the Court of Appeal or the determination of any application for leave or appeal to the House of Lords from any decision of the Court of Appeal, if any".

The issue which has produced such strong contention between the parties is a dry legal dispute about jurisdiction: does the court have jurisdiction to determine the questions raised in the Originating Summons? Or should those questions be determined exclusively by the independent valuer?

The grounds on which it was sought by summons dated 11 November 1997 to strike out National Grid's Originating Summons were want of jurisdiction and abuse of the process. The dispute becomes a little more comprehensible once it is appreciated that as much as £10m might be at stake on the ultimate result of this dispute.

The lease of 8 July 1968 was made between the predecessors in title of the parties to these proceedings. The landlord was the British Waterways Board. The respondent M25 Group Ltd is now entitled to the freehold reversion. The lessee was the Central Electricity Generating Board. National Grid is their successor in title to the residue of the term.

The lease was for a 60 year term from 24 June 1964. The subject matter of the lease was described in the parcels clause as follows

"ALL THAT piece of land having an area of 3,420 sq yds or thereabouts situate on the North side of the Grand Union Canal at Acton Lane partly in the London Borough of Ealing and partly in the London Borough of Brent formerly at Willesden and Acton in the County of Middlesex as the same is delineated on the plan annexed to these presents and thereon verged blue (all such premises being hereinafter called "the demised premises" which expression shall whether context so admits include all additions or improvements hereafter made to the demised premises and all fixtures drains and other works now or hereafter thereon and the Waterway wall fences walls and gates thereof and any fences walls or gates hereafter erected by the lessee on the demised premises but without any right of access thereto over the Board's adjoining land".

The original rent was agreed at £830 per annum.On a review on the 23 June 1979 it was increased to £5,500 per annum. It was also provided in the lease that before the expiration of the 30th and 45th year of the term (June 1994 and June 2009 respectively) the landlord could serve on the lessee a rent notice providing for the increase of the rent and thereupon certain provisions should have effect. There was provision for service of a counter-notice calling on the landlord to negotiate with the lessee the amount of rent from the expiration of the 30th and 45th years.

The provisions which have given rise to the present dispute relate to the machinery for rent review contained in clause 1(3) and (4) which provide as follows

"If the Lessee shall serve on the Board a counter-notice calling upon the Board to negotiate with them as aforesaid then the parties hereto shall forthwith consult together and use their best endeavours to reach agreement as to the amount of the rent to be paid hereunder as from.... the expiration of the 30th and 45th years but failing agreement within one month after service of such counter-notice (or within such such extended period as the parties hereto shall mutually agree) the question of whether any and if so what increase ought to be made in the rent payable hereunder as from ........ the expiration of the 30th or 45th year shall be referred to the valuation of a single valuer who (failing agreement between the parties hereto) shall be nominated on the joint application of the parties hereto (or if either of them shall neglect forthwith to concur in such application then on the sole application of the other of them) by the President for the time being of the Royal Institution of Chartered Surveyors.

(4) The valuer shall determine the question so referred to him by ascertaining the rent at which the demised premises might reasonably be expected to be let in the open market for the remainder of the term hereby granted as between a willing lessor and willing lessee as at the date of the Rent Notice having regard to the terms of this Lease other than those relating to rent but disregarding

(a) any effect on rent of the fact that the Lessee has been in occupation of the demised premises

(b) any goodwill which shall have become attached to the demised premises since the commencement of the term hereby granted by reason of the carrying on thereat of the business of the Lessee and

(c) any effect on rent of any improvement carried out by the lessee otherwise than in pursuance of an obligation to the Board.

And if the rent so ascertained exceeds the rent payable hereunder the difference shall be the increase in the rent payable hereunder".

It is agreed between the parties that the valuer so appointed acts as an expert and not as an arbitrator.

The lease contained other provisions including covenants by the Lessee to keep the demised premises in good and substantial repair and condition and not to assign charge sublet or part with possession of the whole or any part of the demised premises or part with these presents except to another electricity board after obtaining the Board's written consent, such consent not to be unreasonably withheld. There was also provision in clause 4(3) that

"all electric and other machinery apparatus wires and cables placed by the Lessee in on or under the demised premises during the said term shall be and remain the property of the Lessee who shall be entitled subject to the provisions of sub-clauses (7) and (12) of Clause 3 herein before contained to remove or replace the same making good any damage caused to the demised premises by such removal".

The material review date was 24 June 1994. In February 1994 National Grid served a rent notice. The parties were unable to reach agreement. National Grid proposed a rent of £25,000 per annum. M25 Group proposed a value of £914,925 per annum.

On 20 December 1995 the President of the Royal Institution of Chartered Surveyors appointed Mr Ivor French FRICS to determine the dispute between the parties. Mr French is a partner in a firm of chartered surveyors, Leighton Goldhill. The parties made legal representations to him and Mr French himself instructed a legal assessor to assist him.

It is not in dispute that the questions of law canvassed by National Grid and M25 Group with the valuer give rise to serious questions of law, which are the subject of the declarations sought in the Originating Summons. National Grid seek the determination of the Court on 8 questions set out in the Originating Summons as follows:

"(1) A declaration that upon the true construction on the above- mentioned Lease the demised premises for the purposes of the valuation to be conducted by reference to clause 1(4) in determining rent payable from the 24 June 1994 comprises the piece of land having an area of 3,420 sq yds described in clause 1 without any buildings or other structures thereon.

(2) A declaration as to the nature and extent of the demised premises for the purposes of the said calculation.

(3) A declaration that any improvement carried out by the Central Electricity Generating Board on the said demised premises falls to be disregarded for the purposes of the said calculation by reference to clause 1(4)(c) of the said Lease.

(4) A declaration as to the identity and extent of all or any improvements falling to be disregarded for the purposes of the said calculation by reference to clause 1(4)(c) of the said Lease.

(5) A declaration as to the identity of all or any tenant's fixtures or chattels on the premises demised by the Lease falling to be disregarded for the purposes of the said calculation in respect of the rent so payable from the 24 June 1994.

(6) A declaration as to what if any access to the said premises is to be assumed to exist for the purposes of calculating the rent so payable from the 24 June 1994.

(7) The declaration that upon the true construction of the said Lease the Plaintiff does not fall within the category of the willing lessee for the purposes of the hypothetical transaction required to assumed by clause 1(4) of the said Lease.

(8) A declaration that the hypothetical Lease for the purposes of the transaction posited by clause 1(4) of the said Lease would contain a provision identical to clause 3(13) thereof."

With the exception of the declaration set out in paragraph (5), which is not pursued, the declarations all relate to issues of law concerning the hypothetical lease which the valuer is obliged to assume in accordance with clause 1(4) for the purposes of his rental valuation.

On the application by M25 group to strike out the Originating Summons on the ground that the jurisdiction of the court to determine those questions had been ousted by the terms of the Lease the judge held that the court had no jurisdiction to determine these questions for the following reasons:

(1) The questions raised in the Originating Summons are questions which must be determined by the expert "on his way to reaching his determination to the new rent" under clause 1(4). He said (at page 15 of the judgment)

"They are questions of interpretation which the expert has necessarily to undertake along the way to determine the rent."

(2) Those questions had been remitted by the terms of the Lease to the expert to determine, exclusively of the power of the court.

(3) He was required to reach this result by the reasoning in the decision of the Court of Appeal in Norwich Union Life Insurance Society -v- P & O Property Holding Limited [1993] 1 EGLR 164, a decision which was not overruled by the later decision of the House of Lords in Mercury Communications Ltd -v- Director General of Telecommunications [1996] 1 WLR 48.

(4) If, contrary to his conclusion, he had a discretion in the matter he would have held that the court should construe the lease in advance of the determination of valuation by the expert. He said at p.16 of the transcript

"Although it is not strictly necessary for me to do so, I should add a word concerning factors which would have affected my discretion if I considered that I had one. It is plain that there has been serious delay in this rent review. However, I do not consider that this delay had caused the landlord significant prejudice, since Mr Brock was prepared to concede that the landlord should be protected by the payment of interest at the going judgment rate since 6 June 1997. It is true also that all the matters have already been ventilated before the expert, but it seems to me that this is principally a question of costs, which the tenant is perfectly capable of paying. In the end, I consider that the questions being both seriously arguable and central to the question of valuation and having potentially a very substantial effect on the determination should have been decided by the court, and I would have exercised my discretion to permit the originating summons to proceed, staying the rent review proceedings if necessary."

Mr J Brock QC made the following submissions on behalf of National Grid:-

(1) The critical question is whether the issues on the construction of the lease are within the exclusive authority of the expert, as decision- maker on the question of the revised rent. Serious questions of construction arise. Their determination substantially affects the continuing rights of the parties under the lease. They would normally be appropriate for consideration by the court.

(2) Issues of construction of documents do not become exclusively the province of an expert merely because a conclusion has to be reached by him on those issues in order to make his decision on valuation.

(3) The lease requires the expert to determine the rent on the basis of the facts and matters set out in clause 1(4) and in accordance with the true construction of the lease. The parties have not, however, entrusted to the valuer the exclusive task of determining the construction of the lease.

(4) Even in a case where a matter is within the remit of an expert, the court retains a discretion to determine matters of law for itself. The judge was correct in concluding that any discretion that he might have ought to be exercised in favour of the determination of those issues by the court in advance of the expert's valuation of the rent. Those issues are complex. Mr French does not profess to have any expertise in determining questions of construction. The determination of the questions of construction will make a huge difference to the eventual outcome of the valuation procedure. Time and expense may be wasted if the expert proceeds to his determination on valuation on a legal basis which is later held to be incorrect in law.

Mr Featherstonhaugh made the following submissions on behalf of M25 Group.

(1) The judge was right to hold that the expert appointed by the parties had exclusive jurisdiction to resolve the questions of construction. That was part of carrying out the functions which the parties had entrusted to him and to him alone. The lease did not confine him to determining questions of fact. It was the duty of an expert, when necessary, to grapple with questions of construction.

(2) That approach to the construction of the lease was consistent with modern trend towards alternative dispute resolution and keeping cases out of the courts.

(3) If the court has a discretion to determine the issues, it should decline to do so at this late stage and it should stay the proceedings accordingly. In this case the parties had already embarked on the rent review procedure. Mr French was ready to give his determination now. The court's decision on issues of construction would not be made until after the expert had arrived at his determination. Nothing could be done by the court to prevent him from arriving at his determination on valuation and from notifying it to the parties. Nothing would be gained from incurring additional expense in litigating identical issues in the court. Mr Fetherstonhaugh emphasised that, on the question of discretion, the judge had wrongly thought that he had jurisdiction to stay the expert's review. No such jurisdiction existed. There was not even before him any application by National Grid to stay the expert's determination. Until the expert had given his decision and until it was clear that he had proceeded on an incorrect construction, there was nothing that the court could stop him from doing. If the court had a discretion (which he contended it did not have), the judge was wrong in his reasoning as to how it should be exercised.

I would allow this appeal for these reasons:-

(1) It is common ground that the question whether the rent review provisions in the lease exclude the jurisdiction of the court to construe the lease turns on the construction of the provisions in the particular lease. On questions of construction little assistance can be gained from authority. As Sir Donald Nicholls VC said in Norwich Union Life Insurance Society -v- P & O Property Holdings Ltd & Ors [1993] 1 EGLR 164 at 166

"On this question of interpretation, each agreement must depend on its own terms, read in its own context. Comparing one case and one document with another gives, at best, very limited assistance."

(2) It is clear from the provisions of clause 1(3) and (4) that the single valuer appointed by the President of the Royal Institution of Chartered Surveyors has the exclusive power to determine the question referred to him. But what is that question? It is the valuation question identified in clause 1(3) of the lease, namely

"..the question of whether any or if so what increase ought to be made in the rent payable.."

It is for the single valuer and not for the court to determine that question. If clause 1 had stopped at sub-clause (3), I would agree that the court would have no jurisdiction to entertain proceedings for a decision of the court on the valuation question referred to the valuer.

(3) In this lease, however, the parties agreed that, in determining the question referred to him, the valuer should observe certain agreed contractual directions. The directions contained in clause 1(4) are of three kinds: first, that he shall ascertain the rent on an open market basis for the remainder of the term as between a willing lessor and a willing lessee as at the date of the rent notice; secondly, he is to have regard to the terms of the lease other than those relating to rent; and, thirdly, he is to disregard the three particular factors listed in (a), (b) and (c), namely, the occupation of the lessee, any goodwill attached to the premises and the effect on the rent of any improvement carried out by the lessee otherwise than in pursuance of an obligation to the Board. The valuer must ascertain the rent in accordance with these contractual criteria. He can only lawfully do what he was appointed to do under the lease. If he does something which he was not appointed to do, he is acting outside his terms of reference. He does not have a completely free hand in deciding the question what increase ought to be made in the rent payable. Whether he is acting within the perimeter of his contractual power depends on ascertaining the correct limits of the power conferred on him by the lease. Those limits are ascertained by a process of construction of the lease. The terms of the lease do not confer on the valuer, either expressly or by implication, the sole and exclusive power to construe the lease.

(4) Do any of the decided cases prevent this particular lease from having this effect? In my judgment, they do not. Counsel for M25 Group relied most strongly on the decision of this court in the Norwich Union case (Supra) and on the summary of the principles governing the status of decisions of a person occupying a role of an expert usefully summmarised in the judgment of Lightman J in British Ship Builders -v- VSEL Consortium PLC [1997] 1 Lloyds Law Reports 106 at 109. That passage was set out in the judgment of Pumfrey J at p.8 of the transcript.

(5) As for the Norwich Union case (supra) I would follow the guidance of the Vice-Chancellor in that case on the importance of looking at the terms of each particular agreement in its own context. The Court of Appeal upheld the decision of the Vice-Chancellor that the questions raised by the originating summons were matters which fell to be determined by the expert. The relevant provision is set out in page 165 of the report. The provision was contained in a funding agreement, which provided that a dispute arising out of it should be referred to an expert for determination. It was provided in clause 6(9) of that agreement that the "dispute as to whether the date of practical completion can also properly be regarded as the completion date" was a matter which should be referred "to an independent and appropriate person acting as an expert." It was then provided that the completion date should be that "so determined". The court held that it was the function of that expert and not of the court to make the decision entrusted to the expert. The Vice-Chancellor said at page 166C

"In my view, the key question on this application is whether the society is entitled to have the court, rather than Mr Reilly [the expert], determine the matters raised by the originating summons. If yes, then an injunction will follow, subject always to questions of the so-called balance of convenience. If not,not. Whether the society is so entitled in turn depends on what, as a question of interpretation of the funding agreement, is the ambit of the matters entrusted by the parties to the nominated arbiter for determination by him....... If, on the proper construction of the agreement, the question sought to be put to the court is an issue within the scope of the matters remitted to the nominated arbiter, then (by definition) the parties have chosen, for better or for worse, to have that question determined by a tribunal other than the court.

In answering that question of interpretation, I must apply the ordinary principles of construction. I must have regard to the language used and interpret that in the context of the funding agreement and its provisions as a whole. I must have in mind the commercial background to the agreement".

The Vice-Chancellor observed at p.166G that the parties to a contract entered into a clause such as clause 6(9)

"with the object of obtaining a speedy and conclusive determination on the matter in dispute by the tribunal they have chosen. They are not readily to be taken to have intended that any necessary pre requisite to that determination which raises a question of law, is to be outside the matter so remitted. On the contrary, they are unlikely to have intended that fine and nice distinctions were to be drawn between factual matters which fall within the expert's remit and questions of law or questions of mixed law and fact which do not".

He therefore held that it was not for the court to intervene or take away from the valuer the determination of those questions.

In the Court of Appeal Dillon LJ held at p. 168M that the questions raised in the originating summons in that case were

"entirely within the remit of the nominated arbiter since they are matters which he must necessarily decide as he proceeds to amass and marshall the design documents for the purposes of determining whether the development has been completed in accordance with the design documents".

He concluded on page 169F

"The function of the expert is to make the decision and that is not the function of the court where the decision has been entrusted to the expert. It is otherwise if both parties agree - as they often do - to get a ruling from the court to determine the basis on which an expert is to proceed, and if it is practical to assist the court will do so. But here there is no such agreement".

In my judgment, that case is readily distinguishable from the present by reason of the presence in this lease of clause 1(4) which sets limits on the expert's power to determine an increase in rent. No such limits were set on the power of the expert in the Norwich Union case.

(6) On this point I agree with the analysis in the dissenting judgment of Hoffmann LJ in Director General of Telecommunications -v- Mercury Communications Limited (Transcript 22 July 1994) which was upheld in the House of Lords in [1996] 1 WLR 48. At page 32 of the Court of Appeal transcript Hoffmann LJ said

"So in questions in which the parties have entrusted the power of decision to a valuer or other decision-maker, the courts will not interfere either before or after the decision. This is because the courts' views about the right answer to the question are irrelevant. On the other hand, the court will intervene if the decision-maker has gone outside the limits of his decision-making authority.

One must be careful about what is meant by "the decision-making authority". By "decision-making authority" I mean the power to make the wrong decision, in the sense of a decision different to that which the court would have made. Where the decision-maker is asked to decide in accordance with certain principles, he must obviously inform himself of those principles and this may mean having, in a trivial sense, to "decide" what they mean. It does not follow that the question of what the principles mean is a matter within his decision- making authority in the sense that the parties have agreed to be bound by his views. Even if the language used by the parties is ambiguous, it must (unless void for uncertainty) have a meaning.

Accordingly, if the decision-maker has acted upon what in the court's view was the wrong meaning, he has gone outside his decision-making authority."

In the House of Lords Lord Slynn took the same approach: see [1996] 1 WLR at 58C-59B.

(7) It is common ground that,even if the jurisdiction of the court is not excluded,the court has a discretion to decline to resolve the issue of construction in advance of the expert's determination. In this case the judge helpfully indicated how he would have exercised the discretion which he had earlier held he did not have. He would not have stayed the court proceedings. I would not disagree with the judge's assessment of the factors affecting the exercise of his discretion. It is impossible to say that his conclusion on the discretionary position was plainly wrong or that he made any error of principle.

For the reasons stated I would allow the appeal and I would not stay the proceedings. As for the position of the valuer, he was not a party to this appeal and he was not represented at the hearing. It would not therefore be right to make any decision as to what he should or should not do. I would only add that, as at present advised,I would agree with the observations of Chadwick and Simon Brown LJJ on the power of the court to stay the determination of the valuation. See the judgments given on 28 August 1998.

LORD JUSTICE THORPE: I agree.

LORD JUSTICE STUART-SMITH: I also agree.

Order: Appeal allowed with costs here and below;

cross-appeal dismissed with costs.