England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London WC2A 2LL
		8 October 2004

Introduction

1. This is an application by St George's Investment Company, the Claimant, for the remission of an arbitration award pursuant to the Court's powers under s.68(1) of the Arbitration Act 1996 ("the 1996 Act"). By an award dated 1 October 2003 ("the Award"), the arbitrator, Mr Anthony Salata ("the Arbitrator") determined the reviewed rent payable under an underlease of office premises in Knightsbridge known as Lower Ground Floor, 1 Knightsbridge, London SW1 ("the Premises").
2. The reviewed rent fell to be determined pursuant to the rent review provisions contained in the underlease of the Premises ("the Lease"). The Lease is dated 22 May 1997 and was made between the Claimant as landlord and Gemini Consulting Limited, the Defendant, as tenant. The Lease provides for the rent to be reviewed on 25 December 2001 and it was this reviewed rent which fell to be determined by the Arbitrator. The Claimant challenges the Award on the basis that a serious irregularity occurred in the course of the proceedings before the Arbitrator. The Claimant says that this irregularity caused a substantial injustice to the Claimant which justifies the Court remitting the Award to the Arbitrator for reconsideration under s.68 of the 1996 Act.

Background

3. The Premises comprised part of the lower ground floor of the building known as No. 1 Knightsbridge. This building was constructed in the early 1990s to provide office accommodation over lower ground, ground and five upper floors. The Premises themselves comprised office premises.
4. The Lease was granted for a term commencing on 22 May 1997, expiring on 24 December 2008 with the tenant's option to determine on 24 March 2007 on giving not less than 13 months' prior written notice.
5. The rent review provisions are to be found in clause 8 of the Lease. Clause 8.1 provides:

"Procedure

The rent reserved by this deed shall be revised at 25^th December 2001 and 25^th December 2006 respectively ("the review date") and after the review date the rent shall be such sum ("the revised rent") as shall (in default of agreement between the Landlord and the Tenant within three months before the review date) be determined by a valuer to be agreed upon by the Landlord and the Tenant (or in default of agreement between the Landlord and the Tenant within one month before the review date be nominated at the request of either the Landlord or the Tenant by the President for the time being of the Royal Institution of Chartered Surveyors) to represent the full yearly rack rent which would be payable for the property (after the expiration of any rent-free period or period of reduced or concessionary rent and after the willing tenant hereinafter mentioned had received the full benefit of any other inducement of whatever nature which might be given or allowed on a letting of the property with vacant possession in accordance with the practice of the willing landlord hereinafter mentioned or of the open market at the review date) let as a whole on the open market as between a willing landlord and a willing tenant at the review date for a term of years equal to the term of years hereby granted with vacant possession…"

The clause then went on to provide for certain assumptions which were to be made in reviewing the rent.

6. In short, the rent review provisions provide for the review of rent to be determined by reference to an assumed letting of the Premises between a willing landlord and a willing tenant for a 7-year term, and subject to a tenant's only option to determine the Lease as at 24 March 2007.
7. The Claimant and the Defendant failed to agree on the level of the reviewed rent payable on 25 December 2001. Pursuant to the request of the parties, the President of the Royal Institute of Chartered Surveyors appointed the Arbitrator on 5 February 2003. The seat of the Arbitration was England and the Arbitration was to be governed by the 1996 Act. The Arbitrator held a preliminary meeting on 4 March 2003 and issued directions on 27 March 2003. The parties were content that there should be written representations and counter-representations together with a statement of agreed facts. Neither the parties nor the Arbitrator required an oral hearing.
8. The parties made their representations through their expert valuers. The expert valuer on behalf of the Claimant was Mr John Kent, a partner of CB Richard Ellis. The Defendant's expert valuer was Mr James Baker, a partner in White Druce & Brown.
9. The Arbitrator issued the Award on 1 October 2003. By his Award he determined that the annual rent of the Premises should be £472,624 as at 25 December 2001. His conclusion and valuation are set out in paragraph 16 of the Award and it is necessary to set out that paragraph of the Award:

"16.1 I have valued the properties in accordance with the terms of the lease and the Statement of Agreed Facts and my conclusions are based on the parties' representations in their submissions.

16.2 I have inspected all of the comparables put forward. Both parties were agreed that the external comparables were of little value for direct comparison and both parties agreed that the evidence of value in 1 Knightsbridge was the most important. I was also persuaded of this and found that the other comparables were of limited assistance except in so far as they indicated parameters of value. I have restricted my comments to the comparables that were geographically the closest. I have accepted the parties' submissions that the most important comparables are the transactions in the subject property. The parties' representatives have adopted very different methodologies in order to arrive at a rental value. Mr Kent has arrived at rental value by considering the value of an upper floor and then applying a current market discount. He has supported his view of an appropriate discount by reference to the comparables submitted by him. Mr Baker in contrast has concentrated more on the discount relationship between the original lettings as well as analysing the growth in rental values over the preceding period by reference to chronologically similar transactions.

16.3 The 1 Knightsbridge third floor rent review award arises from an Arbitration of KTA Gyngell. In general such an award would have less weight attached to it, however both parties are content to place some reliance on it. I have accordingly also placed some reliance upon it and have been persuaded that it is at an appropriate level.

16.4 The parties are not in dispute as to the value of the car parking accommodation.

16.5 The parties have given me very little assistance in respect of the value of the storage accommodation.

16.6 Although I have had regard to all of the evidence submitted I was most assisted by the use of discounting from an upper floor value. Both parties used this method to some extent and both parties relied particularly on the third floor of the subject property. Using that valuation method but also having some regard to the other comparables I find that the value is

16.7 Upper floor adjusted rent £55

Lower ground floor discount 60%

Net £33

Less adjustments for

Lease term 2.5%

Alienation 5%

Reservations concerning access 5%

Restricted user 2.5%

Adjusted Rent £28.05 per square foot

Offices

16,639 square foot @ £28.05 per square foot £466,724

Storage

190 square foot @ £10 per square foot £ 1,900

Car space £ 4,000

Total £472,624

10. Finally, by way of background I should refer to the fact that the third floor of 1 Knightsbridge is also demised to the Defendant by a separate lease which was subject to a rent review with effect from 25 December 2001. The parties were unable to agree on the reviewed rent and the rent review was determined by Mr K.T.A. Gyngell acting as an arbitrator. Mr Gyngell determined that the rent per square foot of the third floor should be £53 per square foot as at 25 December 2001. In all material respects, the terms of the lease of the third floor premises are identical to the terms of the Lease.

The submissions before the Arbitrator

11. The written submissions before the Arbitrator were voluminous and I shall only shortly summarise those matters that are relevant to this application.
12. Mr Kent for the Claimant landlord submitted that the correct way to ascertain the reviewed rent was to take the reviewed rent determined for the third floor by Mr Gyngell and then apply an appropriate discount to arrive at the appropriate figure for the Premises ("the Third Floor Discount Method"). Mr Kent submitted that the appropriate discount was 30% which took the rent per square foot from a figure of £55 (£2 per foot being added to take into account the lack of fenestration on the third floor) to the figure of £38.50. Using that rate of £38.50 per square foot and adding on small sums for some storage space and a car parking space, Mr Kent arrived at a figure for the reviewed rent of £646,502 per annum.
13. Against this, Mr Baker for the Defendant tenant submitted that the rental valuation was difficult with poor comparable evidence. In these circumstances Mr Baker considered that the best method of valuing the Premises was to take the reviewed rent determined for the third floor premises and apply a percentage discount in order to arrive at the review rent for the Premises. Like Mr Kent, Mr Baker preferred the Third Floor Discount Method. Mr Baker's view was that the appropriate discount could be derived from the differences between the rents achieved for the third floor premises and the premises when each was demised in 1997.
14. Mr Baker submitted that the appropriate discount was 65% which took the figure per square foot for the Premises to £18.55. Using that rate, and adding small sums for storage space and the car parking space, Mr Baker arrived at a figure for the reviewed rent of £313,400 per annum.
15. It is important to note (because it featured heavily in the argument before me) that Mr Baker considered what the reviewed rent should have been if comparable evidence had been used despite the fact that he rejected this method in favour of the Third Floor Discount method. In carrying out the comparables exercise, Mr Baker stated that the terms of the Lease were in various respects more onerous than the equivalent lease terms in the comparable evidence. Accordingly, Mr Baker made downwards adjustments to reflect those onerous terms in carrying out his alternative valuation exercise.

The Award

16. As is apparent from paragraph 16.2 of the Award, the Arbitrator accepted the submissions of both expert valuers that the most important comparable evidence was that provided by the transactions at 1 Knightsbridge: see paragraph 16.6 of the Award. The Arbitrator recorded that both parties had used this method to some extent and that they relied on Mr Gyngell's valuation of the third floor. The Arbitrator expressly stated that he was using the Third Floor Discount Method but that he was also having "some regard to the other comparables".
17. In paragraph 16.7 of the Award, the Arbitrator has applied a discount of 40% so that the rent of the lower ground floor is shown as 60% of that applicable to the upper floor adjusted rent. In his representation, Mr Kent had submitted that the discount should be 70% whilst Mr Baker had submitted that it should be 35%. The Arbitrator then went on to make further discounts to the figure of £33 per square foot adjusting for the onerous features of the Lease ("the Onerous Terms Discounts"). These amounted to some 15% in total but since they were 15% of 60% of the adjusted rent of the third floor they in fact represented a further discount of 9% on the third floor adjusted rent. This reduced the rent per square foot to £28.05 and together with the additional sums for the storage and car spaces it produced a rent of £472,624 per annum.
18. It is the Claimant's case that the Arbitrator has produced a result which was not the subject of submission before him and which it had no opportunity to answer. The Claimant submits that the Arbitrator has departed from the agreed basis upon which the case was put to him.

The jurisdiction to review

19. Section 68(1) of the 1996 Act provides:

"(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award."

20. Section 68(2) provides so far as material:

"(2) Serious irregularity means an irregularity of one or more of the following kind which the court considers has caused or will cause substantial injustice to the applicant –

(a) failure by the tribunal to comply with section 33 (general duty of the tribunal); …"

21. Section 33 of the 1996 Act provides:

"33 General duty of the tribunal

(1) The tribunal shall -

(a) act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and

(b) adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.

(2) The tribunal shall comply with that general duty in conducting the arbitral proceedings, in its decisions on matters of procedure and evidence and in the exercise of all other powers conferred on it."

22. By section 68(3) of the 1996 Act if there is shown to be a serious irregularity affecting the tribunal, the proceedings or the award, the Court may remit the Award to the tribunal in whole or in part for reconsideration or may set aside the Award, in whole or in part, or declare the Award to be of no effect in whole or in part. In the instant case, the Claimant asks the Court to remit the Award to the Arbitrator for reconsideration.

The authorities

23. Two recent Court of Appeal authorities have considered s.68 of the 1996 Act and the principles can be clearly stated from those authorities.
24. First, an arbitrator is entitled to use his expert knowledge to arrive at his award, provided it is of the kind and in the range of knowledge one would reasonably expect the arbitrator to have and providing he uses it to evaluate the evidence called and not to introduce new and different evidence: see Checkpoint Limited v. Strathclyde Pension Fund [2003] EWCA Civ 84 [2003] 1 EGLR 1 per Ward LJ at paras 28-34. An arbitrator does not have blanket permission to use his own expert knowledge to arrive at an award. For example, if an arbitrator proposes to take into account evidence which is not being called it is his duty to expose those matters for comment by the party. It should also be borne in mind that the terms of appointment in Checkpoint were unusual in that the arbitrator to be appointed was to be a chartered surveyor experienced "in the letting and/or valuation of property which is of a similar nature to the premises, is situated in the same region as the premises and used for purposes similar to those authorised under this lease at the date of the surveyor's appointment": see paragraph 3 of the Judgment of Ward LJ. I pause to say that I do not consider the instant case to be one where the Arbitrator has crossed the line between acting as an arbitrator and an expert and this was not seriously argued before me.
25. Second, the arbitrator is entitled to arrive at his award by deploying the evidence in a way which is materially different from the way that the parties' valuers deployed them, providing that the award addresses a matter which has been put into the arena by the valuers and with which they have had an opportunity to deal: see Warborough Investments Limited v. S. Robinson & Sons (Holdings) Limited [2003] EWCA Civ 751 [2003] 2 EGLR 149 per Jonathan Parker LJ at paras 52-53. In Warborough the arbitrator fixed the rent on a basis for which neither valuer had contended. The issue of an adjustment based on the lack of retail user had been raised by the valuers and Jonathan Parker LJ concluded at paragraph 54 that the Judge was right to conclude that such matters had been put into the arena. As recorded at paragraph 43 of the Judgment of Jonathan Parker LJ, the Judge at first instance, Lawrence Collins J, at paragraph 64 of his Judgment had stated that the arbitrator could not be held to have acted in breach of his duty under section 33 of the 1996 Act "in extracting from the submissions an alternative case".
26. Third, the issue is not whether the Arbitrator came to the right conclusion. The sole issue is whether he committed a serious irregularity in coming to the conclusion that he did: see paragraph 64 of the extract of the Judgment of Lawrence Collins J in Warborough.
27. Fourth, in deciding whether a serious irregularity has caused substantial injustice, the Court should not decide what rent the Arbitrator might have fixed if he had dealt with the case differently. The Court should try to assess how the aggrieved party would have conducted his case but for the irregularity. Only if the aggrieved party has suffered a substantial injustice because he was unable to present his case and so obtain a fair hearing of his case will the irregularity be treated as falling within s.68: see Checkpoint per Ward LJ at paras 57-58, Warborough per Jonathan Parker LJ at paras 55-59.
28. Fifth, the test of "substantial injustice" is intended to be applied by way of a support of the arbitral process and not by way of interference with that process. It is only in those cases where it can be said that what is happened was so far removed from what could reasonably be expected of the arbitral process that the Court will interfere. Section 68 is a long stop which is only available in extreme cases where the arbitrator has gone so wrong in his conduct of the arbitration that justice calls out for it to be corrected. It is not a soft alternative to an application for leave to appeal: see Checkpoint per Ward LJ at para 59.
29. Sixth, pursuit of the overall objective of arbitral proceedings, and the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense, requires that the Courts accord a reasonably generous margin of appreciation to arbitrators in the discharge of their functions: see Warborough per Jonathan Parker LJ at para 60.
30. Seventh, an arbitrator must not make an award based on arguments or evidence which were not presented to him or on a basis which is contrary to the common assumption of the parties as represented to him. See the Judgment of Bingham J in Zermalt Holdings SA v. Nu-Life Upholstery Repairs Limited [1985] 2 EGLR 14, at 15 K-M:

"If an arbitrator is impressed by a point that has never been raised by either side then it is his duty to put it to them so that they have an opportunity to comment. If he feels that the proper approach is one that has not been explored or advanced in evidence or submission, then again it his duty to give the parties a chance to comment. If he is to any extent relying on his own personal experience in a specific way, then that again is something that he should mention so that it can be explored. It is not right that his decision should be based on specific matters which the parties have never had the chance to deal with, nor is it right that a party should first learn of adverse points in a decision against him. That is contrary both to the substance of justice and to its appearance, and on the facts of this case I think the landlord's case is made out."

Claimant's submissions

31. Mr Edwin Johnson, Counsel for the Claimant, submitted that in making the additional discounts of 9% for the Onerous Lease Terms the Arbitrator was carrying out a process which mixed the methodologies of the two valuers. Since neither party had suggested that such discounts should be made when using the Third Floor Discount Method the Arbitrator was adopting an approach in respect of which he had not invited comment from the parties and in respect of which he had not heard a submission. Alternatively, Mr Johnson argued that the common approach of the valuers before the Arbitrator depended on the Third Floor Discount methodology, which did not include further discounting for the Onerous Lease Terms and it was therefore irregular for the Arbitrator to have proceeded in a way contrary to the common approach of the parties. It was submitted that if the Arbitrator had given Mr Kent the opportunity of dealing with these issues Mr Kent would have been able to tell the Arbitrator that the discounts which he was proposing to make had already been taken into account with the starting rent of £55 per square foot. He would have pointed out that the Arbitrator's formulation would have involved double counting.

The Defendant's submissions

32. Mr Stephen Jourdan, Counsel for the Defendant, submitted that there was no serious irregularity because the issue of the Onerous Lease Term discounts was in the arena before the Arbitrator. Further, he submitted that even if there had been a serious irregularity, no substantial injustice occurred.
33. Mr Jourdan starts from the premise that the Arbitrator was clearly aware that Mr Gyngell had reviewed the rent for the third floor and that the third floor lease was on the same terms and subject to the same provisions as the lease of the lower ground floor. Mr Kent had pointed out to the Arbitrator that Mr Gyngell had not made any of the Onerous Lease Term discounts in his award.
34. Mr Jourdan submitted that it was clear from Mr Baker's submissions to the Arbitrator that he was saying that the market for the larger ground floor premises was extremely limited and it was very different to upper floor premises or smaller lower ground floor premises. Accordingly the reasons given by Mr Baker for considering the alienation and user provisions to be onerous would not have applied to an upper floor at all. Mr Jourdan pointed out that the Arbitrator had not applied the full discounts as suggested by Mr Baker so it was plain that the Arbitrator had applied his mind to the appropriate discount and was doing so because the short lease term and Onerous Lease Terms had a greater effect on the rental value of the Premises than on the third floor premises.

Disposition

35. There is always a danger in paper arbitrations where an arbitrator is deprived of the opportunity of testing arguments that he will arrive at a conclusion which is not envisaged by the parties. That will not be an unfair result if the parties had an opportunity to deal with the issues. The warning given by Colman J in Pacol Limited v. Joint Stock Co Rossakhar [1999] 2 All ER (Comm) 778 at p.787 F-H is relevant.

"It is particularly important in arbitrations which are conducted on documents alone that the arbitrators should be alive to the dangers of introducing into their awards matters which have never been, or have ceased to be, matters in issue between the parties. This case is a particularly glaring example of the arbitrators simply ignoring the definition of issues which had been arrived at prior to the time when they had to determine the issues then referred to them."

36. I also bear in mind that I must be careful not to speculate about the unexpressed reasons for the conclusion at which the Arbitrator arrived. Having said that, it is quite clear to me that paragraph 16.7 of the Award shows that the Arbitrator started with the Third Floor Discount methodology. He started with the adjusted rent of £55 per square foot. This was based on Mr Gyngell's award in which he had specifically declined to discount for Onerous Lease Terms. The question of the amount of the discount depended upon whether the Arbitrator adopted Mr Kent's opinion based on comparables or Mr Baker's view based on comparing historic discounts for the lower ground floor, producing a discount of 35%. The way in which the Onerous Lease Term discounts came to be introduced appears from paragraph 10.35 of Mr Baker's representation. He had started at paragraph 10.19 with the Third Floor Discount Method and stated that other properties might well have a different rental relationship between lower and upper floors which would be due primarily to factors such as location, quality of space, size and the amount of natural light the floors offer. He commented that other buildings which had a higher percentage than 35% were affected generally by two factors namely size and poor natural light. He then analysed the comparables focusing on 4-5 Grosvenor Place SW1 and Cassini House, 57-59 St James's Street SW1. He then calculated an adjusted rent for Grosvenor Place and Cassini House and at paragraph 12.22 set out a valuation which was based on a mean rental of £23.40 per square foot and then deducted some 22.5% for the Onerous Lease Terms. The reason that the Onerous Lease Terms were deducted in this comparable example was because those terms were not present in the comparable examples. It was simply part of the calculation to enable a proper comparison to be made with the Premises. It is plain that the Onerous Lease Terms discount would never have been appropriate on the basis of the Third Floor discount method. It would necessarily have involved double counting.
37. There can be no doubt that both valuers submitted to the Arbitrator that the market norm for valuations was to apply a discount rate to the upper floor rent applicable at the valuation date: see paragraph 12.24 of Mr Kent's report. The issue between the valuers was the discount rate to be applied.
38. The question is whether the Onerous Lease Terms Discount was in the arena for decision by the Arbitrator. Mr Kent, at page 32 of his counter-representation, replies to Mr Baker's original representation (paragraph 12.20). There can be no doubt that Mr Kent invited the Arbitrator to ignore the Onerous Lease Terms and reminded the Arbitrator that Mr Gyngell had ignored them in his award. However, this representation of Mr Kent has to be put in the context that it was a riposte to Mr Baker's evidence as to the discount which should be applied to comparable properties. It was not a discount which was to be applied in determining the discount between an upper floor and a lower ground floor. Accordingly, despite Mr Jourdan's formidable submissions that the Onerous Lease Terms Discount was in the arena I am satisfied that it was not in the arena because the parties made their representations to the Arbitrator on a totally different basis.
39. It is perhaps unfortunate that when setting out his calculation in paragraph 16.7 of his Award the Arbitrator did not explain how he had arrived at this calculation. It seems to me that the Award as presently formulated gives the appearance that the Arbitrator has made his calculations on a basis which was contrary to the agreed assumptions between the parties and which appears to confuse the two methodologies of valuation. In a paper arbitration such as this, the Arbitrator could have avoided these problems by either writing to the parties seeking their comments as to the course which he proposed to adopt or since his fees had been paid on an interim basis he could have sent them a draft of the Award and invited their comments before publishing the Award. Had that been done, there is no doubt these proceedings would not have taken place.
40. Having concluded that there was a serious irregularity, I must now determine whether this serious irregularity has caused substantial injustice to the Claimant. It can be seen that the Award was at the mid-point between Mr Kent's valuation of £646,502 (based on £38.50 per square foot) and Mr Baker's at £313,400 (based on £18.55 per square foot) since the mid-point would have been £479,951 (£28.53 per square foot) and the Award was at £472,624 (£28.05 per square foot). However to conclude that the Arbitrator intended to reach a mid-point result would be to speculate. It is not how the Arbitrator expressed himself. It seems to me more likely that the Arbitrator has become confused with the two methodologies and that had the Arbitrator given the Claimant the opportunity to address him on this issue, the Arbitrator would have realised that he would have been acting against the common assumption of the valuers and that such a calculation would have resulted in double counting. I am therefore satisfied that a substantial injustice to the Claimant has occurred because of the irregularity.
41. In these circumstances, the Court should exercise its jurisdiction under s.68 of the 1996 Act and remit the Award in whole to the Arbitrator for reconsideration.