England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
Patten J
HC03 C03838

		Royal Courts of Justice Strand, London, WC2A 2LL
		02 March 2007

Lady Justice Arden :

Introduction

1. In 1969, Lymington Marina Limited ("LML"), the appellant to this appeal, developed land at Lymington forming part of the premises of the boatyard run by Berthon Boat Company Ltd ("Berthon"), its parent company, as a marina. To finance this development, it issued 52 debentures for £4,000 each and granted each debenture holder a 98 year licence to berth a yacht in the marina. One licence was issued to a Mr R. S. Armitage. On 1 January 1973, Mr Armitage transferred his licence to Air Commodore B.R. Macnamara, a keen yachtsman. In July 1999, Air Commodore Macnamara died, leaving three sons: I will refer to Air Commodore Macnamara's sons by their first names: Bingham, John and Rory. After a protracted dispute, the licence was assigned by the executor of Air Commodore Macnamara, with the approval of LML, to Bingham. In the course of this dispute, there was substantial correspondence between the executor, Mr Clive Sutton, a solicitor, and LML. I will need to refer to some of this correspondence below. In the course of the dispute, Mr Sutton issued proceedings in the Southampton County Court. These proceedings were compromised when the licence was assigned to Bingham.
2. Bingham, as assignee from the executor of his late father of the licence, now wishes to grant sub licences, to his brothers John and Rory. This appeal concerns the powers of LML under the licence to withhold its approval to sub licences to John and Rory in the events which have happened. As part of its case, LML relies on certain passages in letters written by Mr Sutton during the dispute referred to in the preceding paragraph. In short, whereas Bingham had a yacht at the time of the correspondence which he proposed to berth in Lymington, he no longer has such a yacht and he now wishes to grant sub licences for short periods on a recurring basis to his two brothers. Sub licences of this kind have been referred to in argument as "rotational".
3. The judge set out the facts in detail in his judgment. For the purposes of this judgment it is sufficient to refer to the salient events. On 25 March 2002, Bingham sought the approval of LML to a sub licence in favour of Rory. LML declined to give its approval on the footing that Bingham had not yet taken up residence. Bingham started proceedings challenging the refusal to give approval. The proceedings were defended on the basis of an argument that the sublicensee had to use the licensee's yacht. Bingham obtained summary judgment from the district judge, which was upheld by HHJ Thompson QC, on appeal on 2 January 2003. This court subsequently refused permission for a second appeal from the order of HHJ Thompson QC.
4. Bingham then applied to LML for approval of a sub licence to John for May and June 2003 and to Rory for July to September of that year. Approval was given. On the 15th September 2003, Mr Sutton applied for consent to sub licences in favour of John from 1 October 2003 to 31 May 2004 and in favour of Rory from 1 June 2004 to 30 September 2004. LML refused its approval.

The terms of the licence

5. The licence granted by LML is purely contractual and confers no interest in any tangible property. The material terms of the licence are as follows:

"T H I S L I C E N C E is made the 11^th day of March One thousand nine hundred and sixty nine B E T W E E N LYMINGTON MARINA LIMITED whose Registered Office is situate at The Shipyard Lymington Hampshire (hereinafter called "the Company" which expression where the context so admits shall include its successors in title to the property hereafter described) of the one part and [,as from 5 February 2002, Bingham as assignee] (hereinafter called "the Licensee" which expression where the context so admits shall include persons deriving title under the Licensee) of the other part.

1. IN consideration of the sum of ONE THOUSAND POUNDS paid by the Licensee to the Company the receipt whereof the Company hereby acknowledges the Company HEREBY GRANTS unto the Licensee for NINETY EIGHT YEARS from the First day of April One thousand nine hundred and sixty nine (a) the right to moor a yacht not exceeding Fifty five feet in length overall or Twenty feet in beam owned by the Licensee and nominated by him in writing to the Company not less than one month before exercising the rights hereby granted at such place within the Marina at Lymington Hampshire owned by the Company as the Company may from time to time indicate (b) the right to park not more than two private cars in such place or places as may from time to time be indicated by the Company adjacent to the Marina and (c) to use such lavatories showers and washing facilities as are to be provided adjacent to the Marina.

2. THE Licensee shall pay to the Company a yearly sum of FIFTY POUNDS per annum in advance on the First day of March in each year the first payment to be made on the First day of March One thousand nine hundred and sixty nine

3. The Licensee HEREBY AGREES AND UNDERTAKES with the Company:

(a) to pay the sum hereby made payable promptly on the day and in the manner aforesaid…

(k) not to assign transfer charge or otherwise alienate this Licence or the rights hereby granted or any of them and will not [sic] part with possession or occupation or use or grant any licence in respect of the said rights or any of them or any part thereof

PROVIDED ALWAYS that the Licensee may:

(i) assign this Licence as a whole (but not any of the rights hereby granted separately) to an assignee approved by the Company which approval may be granted or withheld at the Company's absolute discretion or

(ii) authorise a third party to exercise all the rights hereby granted as a whole but not any of the rights hereby granted separately for a period of not less than one month and not more than twelve months PROVIDED ALWAYS that such third party shall first be approved by the Company or

(iii) serve on the Company three months' notice in writing calling on the Company to accept a surrender of this Licence and on the expiry of such notice the Company shall in exchange for such surrender pay to the Licensee the market value of the licence at such date of surrender. The market value is to be decided in default of agreement between the parties by an independent expert to be appointed by the President for the time being of the Institute of Chartered Accountants in England and Wales acting as an expert and not as an arbitrator

(l) that the Licensee will within four weeks after the date of every assignment or sub-licence leave the assignment or instrument of devolution with the Company for the purpose of registration… "

6. I refer below to (a) proviso (ii) to clause 3(k) simply as "clause 3(k)(ii)"; (b) third parties authorised to exercise rights under clause 3(k)(ii) as "sub licensees", and (c) a period of a sub licence within clause 3(k)(ii), that is not less than one month and not more than twelve months, as a "permitted period".
7. According to LML, one of the original reasons for setting up the marina was to provide Berthon with a regular clientele and a source of income for its repairing business. LML fears that sub licensees would be casual users of berths in the marina and therefore would be much less likely to make use of the repair facilities than long-term users. LML also has a concern that the sub licensees may not fit into the ethos of the marina, and that this would discourage annual licence holders, who are attracted by the social atmosphere of the marina. LML does not suggest that John or Rory would not fit in with the ethos of the marina.
8. LML's position was that clause 3(k)(ii) of the licence agreement did not, on its true construction, permit the grant of successive sub licences and only permitted the grant of temporary and occasional sub licences. LML contended, firstly, that it had had an absolute discretion whether or not to approve a third party under clause 3(k)(ii). The only restriction was that it should act honestly and in good faith. Secondly, it contended that the licence holder could not exercise the power in clause 3(k)(ii) on a "revolving" basis so as to grant successive sub licences and thirdly, the licence had been assigned to Bingham on the basis of Bingham's representations that there would be no "sharing" of the licence and any sub licences would be temporary and ancillary to its own use of the mooring, and that the request for approval of the sub licences to Rory and John was in breach of those representations. There would appear to be an unspoken concern that the grant to John and Rory of sub licences for 2003 and 2004 would be repeated in future years so long as Bingham had no immediate use for the licence himself.

Judgment of Patten J

9. Patten J, in his judgment dated 4 April 2006 ([2006] 2 All ER (Comm) 200), considered the circumstances in which LML had agreed to the assignment of the licence by the executor of Air Commodore Macnamara to Bingham. The judge rejected the argument that LML's consent to the assignment had been procured by misrepresentation on the part of Bingham, although this, in fact, was not in issue in this action.
10. The judge considered the interpretation of the licence in detail. He held that the right of the licensee to grant sub licences of his mooring rights was subject to three restrictions, namely that the sublicense should be of all the licensee's rights for the period of the sub licence, that that period should be between one and twelve months in length and that the sub licensee should be approved by LML.
11. The judge rejected the argument that LML could simply withhold consent on the grounds that the sub licences would be successive back to back sub licences.
12. The judge further held that under clause 3(k)(ii) LML could not decline to approve the sub licensee except on grounds concerned with the identity of the sub licensee in relation to his proposed use of the marina. The proviso that the sub licensee should first be approved by LML did not entitle LML to decline to give its approval simply in order to protect its own commercial interest. If LML considered the sub licence was not permitted by clause 3(k)(ii), its remedy was to refuse to allow the sub licensee to exercise rights, which under the licence could not be granted.
13. The judge referred to the well-known test, applicable to public bodies performing statutory functions or exercising statutory discretions, which was propounded by this court in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223. He held that a public body, which misconstrued its own powers, acts unlawfully and it is no answer to say that it acted in good faith. He held that, since LML had declined to give its approval to the sub licences on its erroneous view as to the scope of the power to grant sub licences, its refusal was also invalid on this principle.
14. The judge then turned to the question whether the discretion conferred by clause 3(k)(ii) to approve a sub licensee was a qualified one. Neither side contended that the exercise of the discretion was to be judged by the standard of reasonableness equivalent to that imposed by section 19 of the Landlord and Tenant Act 1927. After considering a number of authorities, the judge adopted the approach of Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (2)[2001] 2 All ER (Comm) 299 and held that the power of approval had to be exercised in good faith on relevant grounds.
15. The only issue was whether the proposed licensee was an appropriate person to be granted a sub licence. On this basis, it was unlikely that LML could properly object to a particular person on the grounds of its own commercial interests.
16. The judge rejected the argument that LML was entitled to act as it did because its belief as to the scope of the power to refuse approval was held in good faith. The judge rejected this argument on the grounds that the refusal of approval in the circumstances would be outside the scope of the power of refusal. Alternatively, the exercise of the discretion to refuse and the circumstances would be unreasonable in the Wednesbury sense. No licensor acting reasonably could have come to that conclusion. The judge rejected the argument that the decision of the House of Lords in Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180 had left open the question whether the landlord had acted unreasonably in refusing his consent in circumstances in which he had been mistaken as to his legal right to do so.
17. The judge accepted the submission of both counsel that there was no duty to give reasons although he pointed out that the court can infer from failure to give reasons that no such reasons existed.
18. The judge's order was the subject of a minute of order agreed by counsel. In material part, it was in the following terms:

"1. All the Claimant's claims in this Action (save to the extent that any of the same are consistent with the declaratory relief set out below) are dismissed

2. It is declared that the Claimant was not entitled to act as it did in refusing by its solicitors' letter dated 30^th September 2003 to approve the 2^nd and 3^rd Defendants as third parties for the purposes of clause 3(k)(ii) of the licence dated 11^th March 1969 and referred to in paragraphs 4 and 5 of the Particulars of Claim.

3. In relation to clause 3(k) of the licence it is further declared as follows:

a. The power of the Claimant to refuse to approve an assignee or a third party may only be exercised on grounds which relate to the proposed person and his suitability as an assignee or user of the mooring rights as the case may be:

b. Such power may not be exercised so as to further the commercial interests of the Claimant or any associated company such as the Berthon Boat Company Limited:

c. There is no duty to give reasons but the absence of reasons given [sic] which conform to the grounds for refusal permitted under clause 3(k) may be taken as indicating that no proper reasons exist.

4. It is further declared that the discretion to approve an assignee under clause 3(k)(i) of the licence and a third party under the proviso to clause 3(k)(ii) is qualified to the extent that it is to be exercised honestly in good faith and rationally in the Wednesbury sense after consideration and on the basis of grounds relevant to the suitability of the assignee or third party to exercise the rights granted under clause 1.

5. It is further declared that clause 3(k)(ii) of the licence permits the licensee to grant authorities thereunder subject only to the following 3 (and to no other) restrictions:

a. That the authority granted should be of all the rights granted under clause 1:

b. That the authority granted should be between 1 and 12 months in length:

c. That the third party authorised should be first approved by the Claimant.

6. It is further declared in relation to authorities granted under clause 3(k) (ii) of the licence:

a. That it is not a pre-condition of the right to grant such an authority that the licensee should first have exercised his own rights under clause 1

b. That there is no restriction against successive grants of authority (whether or not the same be to the same person)."

Issues on this appeal

19. Four issues, which are issues of law only, are raised by this appeal:

i. Does clause 3(k)(ii) permit Bingham to grant rotational sub licences to John and Rory, that is sub licences for permitted periods on a recurring basis, or is the holder of the licence restricted to granting a sub licence on a temporary and occasional basis?

ii. On what grounds can LML refuse to approve a third party under clause 3(k) (ii) of the licence?

iii. Was LML's refusal in fact for reasons that fell within clause 3 (k)(ii)?

iv. Was a refusal on good faith but in error as to the permitted grounds for refusing approval a valid refusal of approval for the purposes of clause 3(k)(ii)?

Issue (i): rotational licences

20. This is a short point. The provisos to clause 3(k) constitute a threefold structure. If the licensee wishes to dispose of his licence as a whole, he can do so, provided that the disposal is of the whole and the assignee is approved by LML, which may grant or withhold approval in its absolute discretion (clause 3(k)(i)). LML is not then concerned for instance with the consideration provided by the assignee. The assignment could therefore be a gift or a sale. If the licensee wishes to dispose of his licence but is unable or unwilling to find an assignee, he has a put option against LML, and he will obtain the market value of the licence at the date of the surrender (clause 3(k) (iii)). LML could then re-issue the licence to someone else and indeed there appears to be no restriction on its granting further licences anyway. Clause 3(k)(ii) covers a situation which in some senses is a halfway house. The assignee does not wish to dispose of his licence or to give it up. He merely wishes to authorise someone else to use the berth for a period of between one and 12 months (proviso (ii)). Again, there is nothing to prevent him from doing this on any terms he thinks fit but it has to be borne in mind that he cannot use his yacht for commercial purposes under other provisions of the licence. The reason for the dispute between the parties in this case is that where the licensee proposes to grant sub licences under clause 3(k)(ii) the control exercised by LML is expressed in narrower terms than that conferred by clause 3(k)(i).
21. What Mr Bartley Jones QC, for LML, seeks in part to achieve is the restriction of clause 3(k)(ii) to temporary and occasional sub licences. He relies on the restriction in clause 3(k)(ii) on the length of the permitted period. He submits that the judge's conclusion that rotational sub licences could be granted renders this restriction otiose. He points out that the sub licence does not create a contractual relationship between LML and the sub licensee. This result is uncommercial, because, if the sub licensee is responsible for damage, LML would have rights in contract only against the licensee.
22. In my judgment, the judge came to the right conclusion on this point. We must test the interpretation of clause 3(k) in favour of rotational sub licences by reference to the situation in which the holder of the licence has no immediate use for the berth himself and simply grants a series of sub licences. This is not the most extreme situation. The sub licences in the postulated case, and in the case before us, are not for the whole of the remaining period of the licence, and there is more than one sub licensee. There is no suggestion that the grant of sub licences is a sham and that the real transaction is one of outright assignment to Rory and John. If that had been the position, the court might well have treated the sub licences as constituting an assignment for the purposes of clause 3(k)(i). However, that has not been argued and so I can leave that situation on one side.
23. Even in the postulated case, however, it can be said that, in substance, by granting rotational licences what the licensor seeks to do is to assign all the benefit of his licence for a period exceeding that permitted by clause 3(k)(ii) and that therefore the sub licence is outside clause 3(k)(ii). Mr Bartley Jones does not go so far as to say that the power under clause 3(k)(ii) can only be exercised once and once only. Accordingly, to achieve his interpretation, it is necessary to write into clause 3(k)(ii) words which limit the number of occasions on which sub licences shall be granted. He submits that the interpretation of documents in accordance with the modern principles laid down by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 no longer necessitates the formulation of a precise form of words. It is enough for him to submit and show that having regard to the commercial context of the licence the judge's interpretation could not have been intended.
24. I doubt whether the court could reach the conclusion that the parties could not have intended the type of case postulated above. After all, the licence is to last for 98 years, and in the course of that period the holder of the licence may have his yacht moored in some other part of the world for substantial periods, or he may be unwell or in financial difficulties, and thus unable to keep the yacht for long and indefinite periods. There is a clear difference in the terms of the powers of LML conferred by clause 3(k)(i) and that conferred by clause 3 (k)(ii). Under the next issue, I will turn to consider whether this difference in wording is of significance. It is not appropriate to test the meaning of clause 3(k)(ii) by reference to its substantial or economic result. It is a sufficient objection to Mr Bartley Jones' interpretation that it would require the writing in of words, that it is uncertain what those words would be (for instance, there would have to be some provision as to the period of time that would have to elapse between grants of sub licences, and if it was said that the sub licence could only be ancillary to the use of the licence by the holder of the licence, there would have to be some means of determining how ancillary use was to be ascertained) and that the parties did not agree upon any such provision. The fact that there would be no privity of contract between LML and the sub licensee cannot drive a contrary interpretation. For all those reasons I reject Mr Bartley Jones' arguments on this first issue.

Issue (ii) the ambit of the power to decline to approve

25. There are two material questions here: (1) is LML's power to refuse to approve the sub licensee restricted to grounds related to the particular sub licensee? and (2) Is the power to refuse to approve the licensee subject to any restrictions, such as that it must be exercised in good faith, and for grounds related to the grant of the sub licence?
26. On question (1), the contest is between an absolute discretion, which can be exercised on any ground, and a discretion which can only be exercised on the basis that there is some objection to the chosen sub licensee arising in connection with his proposed use of the marina. The judge preferred the latter interpretation (judgment para. 80), and in my judgment, he was correct.
27. It is common ground that the statutory implication that consent should not be unreasonably withheld, applying to leases by virtue of section 19 of the Landlord and Tenant Act 1927, does not apply to a contractual licence. Mr Bartley Jones submits that, as a matter of interpretation, there is no difference in substance between provisos (i) and (ii) to clause 3(k) and that accordingly, LML has a wide discretion to refuse to approve a sub licence. He submits that LML could take account of its own commercial interests or those of its parent company.
28. In my judgment, the express wording of clause 3(k)(i) and clause 3 (k)(ii) makes it impossible to hold that there is no distinction between LML's power to refuse approval under those provisions. Clause 3(k)(i) gives LML an express power to withhold approval in its absolute discretion, whereas clause 3(k)(ii) does not. Moreover, even without that point, clause 3(k)(ii) expressly states that what has to be approved is the third party himself. It says nothing about approval of the terms of the sub licence, a point which I have already made. (In this respect, clause 3(k)(i) and clause 3(k)(ii) do not differ). I agree with the judge that the ambit of the power to refuse approval in clause 3(k)(ii) must be found by interpreting clause 3(k)(ii) in the context of the licence. That leads him to the conclusion that the grounds for objecting to a particular licensee must be grounds that arise out of his proposed use of the marina. Accordingly, it would not be enough that the proposed sub licensee, say, has in the past lived outside the United Kingdom, since that could not be said to affect his use of the marina in any way. On the other hand, if the proposed sub licensee were known to have avoided payment of mooring fees in other marinas, this might suggest that the sub licensee would avoid payment of his debts for goods and services provided in the marina or clubhouse. This might, depending on the facts, afford a good ground for refusing approval under clause 3(k)(ii). However, that is not this case. It also follows from the interpretation which I have adopted that LML cannot refuse to approve a sub licensee on the basis that sub licences are contrary to the commercial interests of itself or Berthon, save in so far as its commercial interests coincide with the refusal of approval to the grant of the sub licence on grounds related to the particular sub licensee. This qualification should in my judgment have been made explicit in para. 3(b) of the judge's order.
29. I consider the application of this conclusion to the facts of this case when I come to issue (iii).
30. I now turn to question (2) set out in para 25 above. In reaching his conclusion the judge examined a number of cases, starting with Price v Bouch (1987) 53 P & CR 257 and including Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (2). It is sufficient for me to refer to the Gan case. In that case, the court had to interpret a reinsurance contract which provided that the insured should not compromise or settle its liability without the prior consent of reinsurers. I make further reference to this case below.
31. Mr Bartley Jones submits that the court should construe clause 3(k)(ii) in the way that the parties would have understood it when they executed the licence in 1969 and not in the light of this case law. In support of the submission that the law was different in 1969, he relies on Viscount Tredegar v Harwood [1929] AC 72. In that case, the question was as to the ambit of the rights of the lessor under the lessee's covenant to insure against fire in a named office "or in some other responsible insurance office to be approved by the lessor". The House of Lords held that the lessor had an absolute right to refuse his approval to an alternative office without giving reasons, and thus could take into account the administrative convenience to him as the lessor of a large number of properties of dealing with a single insurance office.
32. On Mr Bartley Jones' submission, any terms to be implied into the licence must depend on the state of the law when the licence was executed in 1969. He submits that the parties are likely to have agreed their contract in accordance with the law as they then understood it. The law as it stood in 1969 was part of the factual matrix. The licence would have been drafted in the light of the law as it then stood.
33. In my judgment there can be no necessary implication that, where parties come to an agreement, that agreement must be interpreted on the basis of the law as it stood when the agreement was made as if it were in some time warp. It is part of the factual matrix known to both parties that both statute law and the common law develop over time. Developments in the common law apply retrospectively unless, exceptionally, the court makes an order for prospective overruling: see generally re Spectrum Plus [2005] 2 AC 680. If the parties have been content to leave a matter to the general law, they must be taken to have agreed that their agreement should be interpreted in the light of the general law from time to time.
34. Mr Bartley Jones did not submit that the Gan case is inconsistent with the Tredegar case. The issue in each case was the true interpretation of the contractual documentation and therefore neither case establishes a rule of law to which the doctrine of precedent applies.
35. Mr Bartley Jones further submits that the judge did not take into account the reasons for having an absolute discretion to refuse to give approval to sub licences. (This submission does not arise on my answer to question (1) under this issue, but I put that point to one side.) On Mr Bartley Jones' submission, if the judge is right, LML is unable to take into account any estate management considerations whatsoever. Estate management considerations would include ambience: the marina was a highly exclusive club. So LML needs to have an absolute discretion to refuse to approve the grant of sub licences. In return, LML committed itself to the put option in clause 3(k)(iii). In my judgment, the desirability of LML taking into account estate management considerations is not relevant to the interpretation of the licence. If it had wanted a wider power, it should have sought to negotiate it before the licence was granted. As it is, the wording is quite clear.
36. On question (2) under this issue, the judge held that the refusal of consent to the sub licensee failed the test of Wednesbury unreasonableness (judgment para. 81). Here the judge was applying the principle, well-known in judicial review against public authorities:

"The court is entitled to investigate the action of the local authority with a view to seeing whether they have taken into account matters which they ought not to take into account, or, conversely, have refused to take into account or neglected to take into account matters which they ought to take into account. Once that question is answered in favour of the local authority, it may still be possible to say that, although the local authority have kept within the four corners of the matters which they ought to consider, they have nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it." (per Lord Greene MR in the Wednesbury case at pages 233 to 234)

37. In my judgment, the judge was in error in using public law principles in this context, and so the declaration in para. 4 of the judge's order requires amendment. The right approach was to ask whether any term should be implied into clause 3(k)(ii) so that, even if LML exercised the power for reasons related to the identity of the proposed sub licensee, the exercise of the power could still be set aside if the grounds for refusal of approval were, for instance, in bad faith or wholly unreasonable. A term is only to be implied into a contract in this type of situation if it is so obvious that reasonable parties would not have thought it necessary to include it or if the implication of the term is necessary to give the contract business efficacy: see Chitty on Contracts, Vol. 1 (29 ed) paras 13-004 to 13-007.
38. Mr Bartley Jones accepts that the reference to the Wednesbury case is something of a red herring. But he submits that the only limitation is that the power to refuse approval should not be exercised for a collateral purpose and that the power has to be exercised honestly and in good faith.
39. Mr Bartley Jones relies on the judgment of Dyson LJ in Paragon Finance PLC v Nash [2002] 1 WLR 685. Dyson LJ referred to the earlier dictum of Leggatt LJ in The Product Star (2) [1993] 1 Lloyd's Rep 397, at 404 where Leggatt LJ said that:

"Where A and B. contract with each other to confer a discretion on A, that does not render B subject to A's uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably."

40. In Paragon Finance PLC v Nash, this court had to consider the power of mortgagee to set interest rates from time to time. Dyson LJ, with whom Thorpe LJ and Astill J. agreed, held that this power was subject to an implied term that the discretion to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily or in a way that no reasonable mortgagee, acting reasonably, would do. At para 38, Dyson LJ held:

"In that case, the judge held that the owner acted unreasonably in the sense that there was no material on which a reasonable owner could have exercised the discretion in the way he did. Leggatt LJ (with whom the other two members of the court agreed) found that various factors called into question the owners' good faith and strongly suggested that their decision was arbitrary. He also upheld the judge's approach to the question of reasonableness. Thus the word "unreasonably" in the passage at page 404 must be understood in a sense analogous to unreasonably in the Wednesbury sense: Associated Provincial Picture Houses Ltd v Wednesbury Corporation…"

41. Mr Michael Norman, for the respondents, referred the court to Horkulak v Cantor Fitzgerald [2004] IRLR 942, in which Potter LJ, giving the judgment of the court , reviewed the authorities, including the Gan case and the Paragon case and held as follows with respect to in cases of this kind:

"30… While, in any such situation, the parties are likely to have conflicting interests and the provisions of the contract effectively place the resolution of that conflict in the hands of the party exercising discretion, it is presumed to be the reasonable expectation and therefore the common intention of the parties that there should be a genuine and rational, as opposed to an empty or irrational, exercise of discretion. Thus the courts impose an implied term of the nature and to the extent described."

42. I have already held that as a matter of interpretation of clause 3(k)(ii) the grounds on which approval of the sub licensee may be withheld by LML are limited to those which relate to the proposed sub licensee himself and which arise out of his proposed use of the marina. That conclusion establishes the limits of the power to withhold approval. The question now under consideration relates to the manner in which the power can be exercised: is there any constraint on how LML exercises its powers within those limits? Is its decision valid for the purpose of clause 3 (k)(ii) provided it did not act wholly unreasonably or is some term to be implied into the licence as to some higher standard? There can be no doubt that LML must act in good faith. But, leaving aside the obligation on LML to consider the application in good faith and to exercise the power within its proper scope, there is a range of possibilities. At one end of the spectrum, it may be said that the proper implication into the licence is that LML can only withhold approval if its decision is objectively justifiable. At the other end of the spectrum, it may be said that the only term to be implied is a term that LML should not act arbitrarily. There is a practical difference between these two ends of the spectrum, which is illustrated by the following example. Suppose that LML refuses to approve the grant of a sub licence to X on the ground that it genuinely and on the basis of some material, but nonetheless mistakenly, considers that X's understanding of English is poor, and that this could lead to an accident when X is manoeuvring his yacht into or in the marina. The licence holder may respond that LML has failed to make any appropriate investigations into X's ability to speak English and that X is in fact able to understand and speak English sufficiently well. If LML has to establish that its decision is objectively justifiable, it may have to make investigations in this situation as to X's ability to speak English. If its only obligation is not to act arbitrarily, then it need only have some basis for its decision.
43. I have already set out the test for implying terms into a contract (see the end of para 37 above). To apply that test, the power of approval in clause 3(k)(ii) has to be considered in the context of the operation of the licence as a whole. The implication of a term that any refusal of approval should be objectively justifiable would be onerous to LML and therefore cannot be so obvious that the parties to the licence would not have thought it necessary to mention it. Likewise, and this is relevant to the question of business efficacy, the provisions of clause 3 can work even if under clause 3(k)(ii) LML's rejection does not have to be on objectively justifiable grounds. If LML refuses its permission, the licence holder cannot go ahead with the sub licence and that decision will no doubt result in inconvenience, but it will not as such impose any liability on either him or LML to prevent the licence holder making another application. In those circumstances, I do not consider the term could be implied that consent can only be withheld on objectively justifiable grounds.
44. Nonetheless, I consider that there has to be implied a term that the power to withhold approval should be exercised in good faith and that the approval will not be withheld arbitrarily. This is because the parties clearly intended that the holder of the licence should have power to grant sub licences under clause 3(k)(ii), subject only to the withholding of approval to the proposed sub licensee. It is obvious that if the licence holder is to obtain the proper benefit of that clause LML should not be in a position to withhold its approval in bad faith or capriciously. Nothing further than this is required for the business efficacy of the licence. Subject to one point, this conclusion is the same as that reached by Mance LJ with respect to the claims co-operation clause that he had to construe in the Gan case. He concluded as follows:

"76. In summary, the right to withhold approval was, here, Gan's, and no one else's. It is a right to be exercised in good faith after consideration of and on the basis of the facts giving rise to the particular claim, and not with reference to considerations wholly extraneous to the subject matter of the particular reinsurance or arbitrarily. It is to be exercised by considering the claim as a whole. The court cannot substitute its own view of the reasonableness of the reinsurer's decision to withhold approval …"

45. The qualification on the application of this conclusion to the present case is this. Mance LJ held that the right to withhold approval in the Gan case had to be exercised "after consideration of and on the basis of the facts giving rise to the particular claim". That formula has been translated in this case into an obligation to exercise the power to withhold consent "after consideration and on the basis of grounds relevant to the suitability of the assignee or third party to exercise the rights granted" under clause 3(k) (see para. 4 of the judge's order). In my judgment, all that LML needs to do is to consider any application for approval made to it. In my judgment, it has no obligation to the licence holder to seek out other facts, and in so far as paragraph 4 of the judge's order suggests otherwise, I would disagree with it. In addition, the judge's order should have made it clear that the power to refuse to approve a sub licensee cannot be exercised by LML arbitrarily, and as already indicated should have made no reference to the Wednesbury case. Finally, on this point, I note that both para.3 and para. 4 of the judge's order refer to assignees as well as third parties. In my judgment, references to assignees should be deleted as clause 3(k)(ii) does not apply to them. Under clause 3(k)(i) (which is not directly in issue in this case and which has not been the subject of full argument), LML may on the face of it withhold its approval at its absolute discretion.

Issue (iii): lawfulness of the LML's actual reasons for declining to approve the proposed sub licences

46. The judge found that LML declined to approve the sub licences to John and Rory because (i) it took the view that clause 3(k)(ii) gave it an absolute discretion to refuse to approve the sub licence, (ii) it took the view that clause 3(k)(ii) could not be used to grant successive (that is, rotational) sub licences and (iii) it contended that Bingham obtained LML's consent to the assignment of the licence to him by misrepresenting the way in which he intended to use his rights under the licence. The judge held that LML was wrong on its interpretation of the licence. He also held that Bingham had not misrepresented the position as to his intentions when the application for the approval of the assignment was made. Accordingly he held that LML had purported to exercise the power to refuse approval for reasons outside the powers given to it by clause 3(k)(ii).
47. As I have said, the judge rejected LML's case that it had been led to approve the assignment of the licence from the executor of Air Commodore Macnamara to Bingham as a result of misrepresentations as to Bingham's intentions. Those representations were contained in correspondence. I need only refer to some of the relevant extracts from the correspondence. The original application for LML's approval to the assignment by the executor of Air Commodore Macnamara to Bingham was contained in a letter dated 14 June 2000 (which appears to have been an error for 14 June 2001) from Mr Clive Sutton to LML. Mr Sutton explained that Bingham was currently cruising in Europe, but intended to return to the UK and then to keep his vessel on the south coast. His letter further stated that when the boat returned, Bingham "would intend to use the berth in the same way as any other licensee, namely a permanent mooring of his vessel subject to absences during short or extended periods of cruising. During those periods of absence he would anticipate using the subletting provisions of the licence...". This letter also stated that:

"What can be said is that there would not be any sharing of the rights under the licence between the three brothers. Any use by persons other than Mr Bingham Macnamara would be on a casual and temporary basis and be entirely subsidiary to Mr Bingham Macnamara's use of the marina berth. There would then be no effective subdivision of the licence as feared by you."

48. By an earlier letter dated 23 April 2001, Mr Sutton told Wacks Caller, solicitors for LML that:

"In this case the beneficiaries understand your clients' concerns not to have a situation where the berth is effectively used in rotation by three people. In saying this they do not necessarily accept that the terms of the licence preclude this, because Clause 3(k)(ii) allows the licensee to authorise a third party to use the whole of the rights granted by the licence separately for a period of not less than one month and not more than 12 months with the proviso that only the third party, as opposed to the letting itself, should be approved by the company.

However, if it assists in an understanding of the respective parties' positions my clients are quite content that one of the beneficiaries shall continue to use the licence in the same way as the late Brian Macnamara, and any necessary adjustments between the beneficiaries can be made through the estate…

In operating the licence on the above basis your clients said they would be assiduous to ensure that the licence was operated for the sole purpose of the licensee and not for any collateral purpose, such as the division of the use of the licence amongst more than one party. Accordingly their policy is to approve sublettings which are consistent with normal non use of the berth. This would be on the basis of the licensee being absent from the berth in the normal course of sailing or extended cruising. However, the artificial removal of the yacht from the berth in order to accommodate another yacht by way of sub licence would not be approved and similarly the extended absence of the vessel from the berth for the purposes of accommodating a sub licensee would also not be approved.

Similarly the artificial return of the authorised vessel to the berth for the purposes of the appearance of compliance with the above requirements would not be accepted."

49. By a further letter, dated 30 May 2001, Mr Sutton told Wacks Caller:

"The licence does not specify that the vessel in question nominated has to be moored. The licence is only for the right to moor a yacht. There then appears to be no other necessary procedures before the right to subletting can be invoked. There is no limitation on the exercise of his right by virtue of any delay or qualifying period or frequency on which the right can be exercised. The right is quite clear, namely for a period of not more than 12 months. This obviously prevents casual day lettings which understandably would be inconvenient to the marina because of the potential changes of vessel, and also extended sublettings which by virtue of their length could virtually be assignments."

50. Later, by a letter dated 30 November 2001, written following the commencement of the proceedings against LML seeking the grant of the licence to assign , Mr Sutton gave an assurance to Wacks Caller, in answer to the latter's request that a document be agreed setting out the basis on which the rights conferred by the licence could be exercised, that:

"[LML's] rights under the licence will be fully preserved…[Bingham], through me, has given a clear statement of the basis upon which he intends to exercise his rights under the licence when assigned to him. I would hope that would be a reasonable position, and if and when he exercises his rights, and he acts in a significantly different way, it would obviously be a point you would be able to make in any action needed to be taken to enforce the licence. His view is that the licensing operated perfectly satisfactory during the time it was used by his father for the last 30 years and also that he cannot see that there is any need for the terms to be reinterpreted at this stage.

Your clients of course have their remedies in the event that you feel there is an improper use of the licence…"

51. There was a meeting between the parties in December 2001. By this date, Bingham's intentions about returning to the United Kingdom were, as the judge put it, "more fluid", but it still was a distinct possibility that he would return to England. At this meeting LML agreed to consent to the assignment of the licence to Bingham. The judge found that the assignment:

"proceeded on the basis that LML had not resiled from its stated position in relation to clause 3(k)(ii) and that [Bingham] (despite having formerly taken issue with this through Mr Sutton) had indicated that when he returned with his boat to the marina any sublicensing would be of a very limited kind. Later, of course, his position changed when he decided to remain in Spain and subsequently sold his boat." (judgment, para. 51)

52. The judge rejected the argument that LML's consent to the assignment was procured by misrepresentation although that was not in fact in issue in the action. The judge held that the highest that it could be put was that Bingham was prepared to accept that he would only sub license his mooring rights when he was not himself using them. (judgment, para. 52).
53. In cross examination before the judge, Bingham accepted that Air Commodore Macnamara was generally in residence on his yacht in the marina, that he used the power to grant sub licences very infrequently, and that, when he did so, the grant of the sub license was entirely subsidiary to his primary use of the berth.
54. The judge concluded that the letter of 30 November 2001 did no more than suggest that LML could take any point it wished, if Bingham were to exercise his rights under clause 3(k)(ii) in a different way from that referred to in the letter of application dated 14 June 2000. Mr Bartley Jones does not challenge the judge's conclusion. He accepts that he cannot submit that LML's approval of the assignment to Bingham was procured by misrepresentation. What he submits is that the pleading alleged in very general terms that LML was entitled to refuse to approve the sub licences in the light of what was said in the course of correspondence. In other words, he submits that it was within clause 3(k)(ii) for LML to decline to approve the sub licences on the footing that the Macnamaras were not men of their word.
55. In my judgment, this point, when analysed, is a short one. Mr Bartley Jones does not suggest that there was any contractual variation or estoppel. We cannot go into the judge's finding that the assignment was not procured by misrepresentation. The case as it is now put seeks to meet the difficulty for LML that the judge has found this point against it. Mr Bartley Jones relies on the correspondence taken as a whole and with the events at the December meeting. He submits that the present position, and the proposed grant of sub licences, does not accord with what the Macnamaras said they would do. He further relies on the fact that the points of claim merely allege that LML was entitled to refuse its approval to the grant of the sublicenses on their true interpretation and "in the events which have happened". Mr Bartley Jones submits that the representations made by Mr Sutton were made on behalf of John and Rory, as well as Bingham. However, there was no specific pleaded allegation that LML was entitled to refuse its approval of the sub licences because the Macnamaras were not men of their word. That would have been capable of being an objection relating to the particular sub licensees for the purposes of clause 3(k)(ii), but, if that was the basis on which the refusal of approval was sought to be justified, it should have been pleaded expressly so as to give the respondents an opportunity of dealing with it and if necessary calling further evidence. There was no application to amend the points of claim, even in the course of the trial after Bingham had given his evidence referred to above. The point now sought to be raised does not appear to have been raised as a separate point before the judge, and it was not dealt with by the judge as such. In all the circumstances, it cannot now be raised.

Issue iv: Was a refusal in good faith but in error as to the permitted grounds for refusing approval a valid refusal of approval for the purposes of clause 3(k)(ii)?

56. Mr Bartley Jones accepts that success on this last issue would merely mean that LML had not acted wrongfully in refusing to approve the sub licences to John and Rory for the period 1 October 2003 to 30 September 2004. It would not affect any subsequent exercise of rights by Bingham under the licence. Accordingly, success on this issue would probably be relevant only to issues of costs.
57. Mr Bartley Jones' argument arises out of the decision of the House of Lords in Ashworth Frazer Ltd v Gloucester City Council. In that case, the tenant wished to assign his lease and the proposed assignee proposed to use the premises for a purpose which the landlord considered was prohibited. The landlord therefore refused consent to the assignment on the ground that the proposed user would be in breach of covenant. The Court of Appeal, which was bound by its earlier decision in Killick v Second Covent Garden Property Co Ltd [1973] 1WLR 658, held that, while the proposed user would be a breach of covenant, the refusal of consent was unreasonable because, in effect, the landlord would still be able to enforce the covenant as to user after the assignment and this position would not be affected by the assignment. The landlord accepted that, if the tenant succeeded on the user point, it would have to give consent to the assignment. However, the landlord did not accept, for the purposes of any claim for damages by the tenant for breach of duty under section 4 of the Landlord and Tenant Act 1988, that it had acted unreasonably in earlier refusing its consent on the basis of its interpretation of the use of clause.
58. The House held that this issue raised a question of fact and remitted the case to the Chancery Division to consider whether, in all the circumstances, the landlord's original refusal of consent to the assignment was unreasonable. Therefore the House left open, as an issue of fact, the question whether a genuine and reasonable, although mistaken, interpretation of the user clause would necessarily render a refusal of consent unreasonable.
59. In my judgment, the submission is not a good one. The mistake in the Ashworth Frazer case related to the basis on which the discretion to refuse consent to the assignment was to be exercised, namely whether the lease restricted user of the demised property in the manner contended for by the landlord. In the present case the error is as to the ambit of the power to decline to give approval to sub licences: LML thought that the power was wider than it is. If LML is correct on the submission it would mean that LML could unilaterally extend the scope of the power, at least until the mistake was revealed. If that principle is correct, there is no logical reason why the principle should apply only to powers in a licence. Although, in the present case, a single decision on the basis of a mistake as to the scope of the power is unlikely to have a wide effect, the position could be different in other cases or with respect to other powers. For example, the articles of private companies often restrict the power of directors to decline to approve transfers to grounds personal to the transferee. If the directors mistakenly interpret the power as enabling them to decline to approve a transfer on wider grounds, the transfer may be rejected with the result that the transferee may fail to become a registered member of the company and lose the ability to exercise rights, for example to vote at an important general meeting of the company or to participate in a rights issue, before the mistake can be revealed. In my judgment, it is not open to LML to go outside the four corners of the powers which it has been given by clause 3(k)(ii) by making a mistake as to the scope of the power.
60. The argument adduced by Mr Bartley Jones is reminiscent of the Chevron doctrine in the federal law of the United States (so called after the decision of the United States Supreme Court in Chevron v Natural Resources Defense Council (1984) 467 US 867). Under this doctrine, where a statute is ambiguous with respect to a specific issue and the actions of the executive are sought to be judicially reviewed with respect to that issue, the question for the court is not whether the executive's interpretation of its statutory powers is correct but whether the interpretation applied by the executive is a permissible interpretation of the statute. I am not aware of any authority for that proposition in English law, which would seem to involve a departure from both the rule of law and the approach of the courts to reviewing executive action, as those matters are usually understood in this jurisdiction.
61. As the judge said, Mr Bartley Jones' submission would, if correct, involve an extension of the powers given to LML by the contract made between the parties. That is not permissible save by mutual agreement. Accordingly, in my judgment this ground does not succeed.

Disposition

62. For the reasons given above, I would dismiss this appeal.

Sir Martin Nourse:

63. I have had the advantage of reading in draft the judgments of Lord Justice Pill and Lady Justice Arden. I agree with them and cannot usefully add anything of my own.

Lord Justice Pill:

64. I agree. The licence provides, amongst other things, that the licensee may

ii) authorise a third party to exercise all the rights hereby granted as a whole but not any of the rights hereby granted separately for a period of not less than one month and not more than twelve months PROVIDED ALWAYS that such third party shall first be approved by the company.

65. I agree with Arden LJ, and Patten J, that the proviso in that sub-clause does not entitle LML to prevent a third party from exercising its power under the sub-clause to grant successive sub-licences for periods permitted by the sub-clause. LML's refusal to give approval was based on an erroneous view of the power conferred on the licensee by the sub-clause as qualified by the proviso, and was invalid.
66. That finding disposes of the substance of the appeal but, in considering the issues stated by Arden LJ at paragraph 19 of her judgment, Arden LJ has gone on to define the power of LML under the proviso and I follow her example. The declarations made by the judge require comment.
67. Dyson LJ, with whom Thorpe LJ and Astill J agreed, considered the extent of such a discretion in Paragon Finance plc v Nash & Or [2002] 1 W L R 685, in the different commercial context of the power of a mortgagee to set interest rates. Dyson LJ cited the judgment of Leggatt LJ in Abu Dhabi National Tanker Co v Product Star Shipping Ltd (No.2) [1993] 1 Lloyd's Rep 397. The issue was whether, in a contract, there was any restriction on the exercise of an apparently unqualified discretion in the owners of a vessel to determine whether any port to which the vessel was ordered was dangerous. Leggatt LJ stated, at page 404:

"Where A and B contract with each other to confer a discretion on A, that does not render B subject to A's uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably."

68. Dyson LJ also cited, at paragraphs 39 and 40, the judgment of Mance LJ, with whom Latham LJ agreed, in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No.2) [2001] 2 All ER (Comm) 299. The issue was as to reinsurers' powers under a reinsurance contract which provided that no settlement or compromise of a claim could be made or liability admitted by the insured without the prior approval of the reinsurers. Mance LJ stated, at paragraph 64, that the authorities proscribed "unreasonableness in the sense of conduct or a decision to which no reasonable person having the relevant discretion could have subscribed." Mance LJ added, at paragraph 67:

"I would therefore accept, as a general qualification, that any withholding of approval by re-insurers should take place in good faith after consideration of and on the basis of the facts giving rise to the particular claim and not with reference to considerations wholly extraneous to the subject matter of the particular reinsurance."

69. In Paragon, Dyson LJ adopted, at paragraph 41, that approach:

"It is one thing to imply a term that a lender will not exercise his discretion in a way that no reasonable lender, acting reasonably, would do. It is unlikely that a lender who was acting in that way would not also be acting either dishonestly, for an improper purpose, capriciously or arbitrarily. It is quite another matter to imply a term that the lender would not impose unreasonable rates."

The submission that once the rate charge exceeded by two percentage points standard rates on the market, unreasonable rates were being charged within the meaning of the implied term was rejected. Reasonableness was not to be assessed by the objective standards of the market. In the present case, the judge introduced Wednesbury: Associated Provincial Picture Houses Ltd v Wednesbury Corpn [1948] 1 KB 223. While I accept that unreasonableness, in the sense used by Leggatt LJ and Mance LJ is analogous to the use of the word in Wednesbury, it appears to me unnecessary, and undesirable, to introduce expressions appropriate to public law challenges, of which reasonableness is only one, into the construction of commercial contracts. I agree with Arden LJ that it was inappropriate to use the expression "Wednesbury sense" in the order made in this case, particularly when Wednesbury is misquoted in that the word "reasonable" is replaced by the word "rational". It does not lead to clarity.

70. In considering the extent of the discretion, I would adopt the expression of Leggatt LJ in the Abu Dhabi case that the discretion "must not be exercised arbitrarily, capriciously or unreasonably", and the analysis of Mance LJ in Gan Insurance, paragraph 73, of the word unreasonably:

"If there is any further implication, it is along the lines that the re-insurer will not withhold approval arbitrarily, or (to use what I see as no more than an expanded expression of the same concept) will not do so in circumstances so extreme that no reasonable company in its position could possibly withhold approval. This will not ordinarily add materially to the requirement that the re-insurer should form a genuine view as to the appropriateness of settlement or compromise without taking into account considerations extraneous to the subject matter of the reinsurance."

71. As stated by Mance LJ, at paragraph 67, the decision must be taken "after consideration of and on the basis of the facts giving rise to the particular claim". In the example given by Arden LJ, at paragraph 42 (and without deciding or assuming that it is relevant to seafaring) some knowledge of an enquiry into X's linguistic ability is necessary. It is essential to any genuine view. To assume an absence of knowledge of English, and act upon it, would be to act capriciously. Where a genuine view can be formed, however, I agree with Arden LJ that the decision about linguistic ability does not have to be justified objectively.