England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Royal Courts of Justice
IN THE MATTER OF The Arbitration Act 1996

		Strand, London, WC2A 2LL
		10.11.04

HIS HONOUR JUDGE PETER COULSON Q.C:

[1] INTRODUCTION

1. Pursuant to a Written Agreement ("the Agreement) dated 7^th May 2002, Mr and Mrs John Tomlinson ("the Tomlinsons") agreed to sell their house at 255 Inner Promenade, Fairhaven, Lytham St. Annes, to Newfield Construction Ltd., ("Newfield") for £820,000 together with a possible share in a part of the profits of the wider development scheme to be carried out by Newfield at the Inner Promenade, known as Ribble Point. Before the development had been completed, the parties fell out as to the precise mechanism by which those shared profits would be calculated and, in November 2003, pursuant to Clause 22 of the Agreement, the Tomlinsons commenced Arbitration proceedings, seeking a Declaration as to the true construction of the relevant terms of the Agreement.
2. Mr Paul Jensen, the well-known construction arbitrator and adjudicator, was appointed as the Arbitrator. Following a preliminary meeting on 14.1.04 and a dispute as to his jurisdiction, the Tomlinsons served an Amended Statement of Case ("ASOC") on 12.3.04 in accordance with the Arbitrator's ruling and Order for Directions of 27.2.04. Newfield's Defence was drafted by Mr Derek Pye, an arbitrator and construction claims consultant, and was served on 6.4.04. The Reply was served on 26.4.04. There was a Hearing before the Arbitrator on 7.5.04, at which the Tomlinsons were represented by Mr T.O. Trotman of Counsel, who also appeared on their behalf in this Court. Newfield were represented at that Hearing by Mr Pye.
3. On 26^th May 2004, the Arbitrator produced his First Partial Award, in which he declared the true meaning and effect of the relevant clauses of the Agreement. He also decided – without giving reasons - that the Tomlinsons had substantially succeeded in the Arbitration and, subject to one exception which is irrelevant for present purposes, he awarded them their costs on the basis that, as he correctly put it, "costs should follow the event". Newfield took grave exception to this conclusion, arguing that it was they who were the successful party in the Arbitration, and it was therefore they who should have been awarded their costs. There followed various exchanges of correspondence with the Arbitrator, in which he explained his decision on costs, concluding with his Review dated 21.6.04. This confirmed his conclusion that, on his understanding of the dispute before him, the Tomlinsons had substantially succeeded in the Arbitration and were entitled to their costs.
4. On 14^th July 2004 Newfield made two applications to this Court, namely: An application under Section 68 of the Arbitration Act 1996 for an order setting aside the Award and/or the Review on the grounds of serious irregularity; and an application under Section 69 of the Arbitration Act 1996 for leave to appeal and, if leave was granted, for an order awarding them the costs of the Arbitration. These applications were prepared by Messrs Shadbolt & Co. and Mr Alexander Nissen of Counsel, neither of whom had any involvement in the Arbitration. Mr Nissen appeared on behalf of Newfield in this Court.

[2] PROCEDURE

5. There was a dispute between the parties as to the correct procedure to be adopted for these applications. Whilst an application for leave under Section 69 of the Arbitration Act ought to be a paper-only application, (Section 69(5)) an application under Section 68 for setting aside due to a serious irregularity will usually be heard orally. Having received in writing a note of the parties' respective arguments as to procedure, I resolved that dispute on 27.9.04 by deciding to follow the approach of Colman J. in Bulfracht (Cyprus) Ltd. v Boneset Shipping Co. Ltd. [2002] EWHC 2292 (Comm) where he had this to say about multiple applications of this kind:

"Although applications for leave to appeal under Section 69 are normally on paper without an oral hearing, the course adopted in the present case of hearing oral argument on the application for leave at the same hearing as for the Section 68 application, is a sensible and more cost efficient approach, particularly having regard to the fact that the underlying facts and legal submissions relevant to both applications are so closely related."

6. Accordingly, at the Hearing before me on 15.10.04, whilst I invited the parties to make short oral submissions on the Section 69 application, the bulk of the Hearing was concerned with the application under Section 68. It was also agreed by both parties that, if I was of the view that leave should be given under Section 69, I should also deal with the substantive appeal, since the arguments that arose on the appeal itself were precisely the same. Whilst I have no doubt that this was the correct course to adopt in the present case, and both counsel made effective and succinct oral submissions in accordance with this procedure, I am aware that, in other cases, applicants can be tempted to use the cover of a Section 68 application in order to argue the detail of their Section 69 application orally. Such a course is contrary to the Arbitration Act and the CPR and will not be permitted.
7. Before ruling on the detail of the applications under Section 68 and 69, it is necessary that I set out the relevant terms of the Agreement, and summarise the dispute, in the Arbitration before Mr Jensen.

[3] THE AGREEMENT

8. Clause 1.8 of the Agreement provided a definition of 'the Appraisal' as:

"A detailed development appraisal of the Combined Site inclusive of a 25% gross developer's margin".

Clause 20 explained how the Appraisal would then be used to calculate the profit-sharing element of the price:

"…Prior to applying for Planning Permission the Buyer [Newfield] shall provide the Seller [the Tomlinsons] with the Appraisal and the Buyer and Seller or their nominated Quantity Surveyors shall agree the Appraisal. Once this is agreed, it shall form the basis of the calculation of the anticipated profitability of the development of the Combined Site. In the event that the Buyer sells the units comprising the Combined Site for a value in excess of that set out in the Appraisal, then that excess value shall be divided equally between the Buyer and the Seller within 14 days of the sale of the last unit in the Combined Site. The Buyer undertakes to proceed in good faith and to perform its best endeavours to ensure that it completes the construction and sale of all of the units in the Combined Site at the best price reasonably obtainable and as expeditiously as possible…."

9. It should be noted that the Appraisal is to be provided before any building work has actually started, let alone been completed. This is because its purpose it to provide a benchmark or baseline, against which the actual sales values, can later be compared. It is only if the actual sales values are higher than the figure in the Appraisal, in other words only if there is an excess, that there is any 'profit' to be shared between the parties.

[4] THE ARBITRATION

10. Following the production by Newfield of a 'Commencement Appraisal' in September 2003, the Tomlinsons took issue with the way in which the Appraisal had been calculated. They commenced Arbitration proceedings promptly on 14.11.03, when their solicitor wrote to the RICS Dispute Resolution Service seeking the appointment of an Arbitrator. That letter defined the dispute between the parties in these terms:

"A dispute has arisen with regard to the interpretation of Clauses 1.8 and 20 of the Contract, which provide for an Appraisal to determine the minimum development value and the division of any additional profit stemming from the eventual sale of the development.

The nature of the dispute is limited to the way in which the minimum development value is calculated in the Appraisal and, in particular, the calculation of the Buyer's profit therein."

11. Following the appointment of Mr Jensen as Arbitrator and his order of 27.2.04, the ASOC defined the dispute in detail at paragraphs 6.1-6.3:

"6.1 Under clause 20 it is necessary to establish a figure (say, "Y") as the "basis of calculation" in order to proceed to the division of excess value as set out therein.

6.2 If, upon the appraisal as set out in paragraph 3.1 and 3.2 above, the total development costs equal "X", the Claimants contend that on a proper construction of the parties' agreement,

Y = X + 25% X

This can also be expressed as Y = 1.25 X. This will be referred to as the "direct approach".

6.3 If, upon the appraisal as set out in paragraphs 3.1 and 3.2 above, the total development costs equal "X", the Respondents contend that on a proper construction of the parties' agreement

Y – 25% Y = X

This can also be expressed as Y = 1.333X.

The respondent's approach is artificial and requires, as an intermediate stage, for a figure to be devised which, less 25% amounts to X. For this reason, it will be referred to as the "hypothetical approach".

12. The Defence of 6.4.04 contained two sections: a lengthy introduction, and a specific response to the ASOC. Paragraph 8 of the introduction said:

NCL [Newfield] further submits that put simply, this means that the Arbitrator's jurisdiction and Award, save for the matter of Costs of the Arbitration, are effectively confined to answering one question, namely:-

Does the phrase '25% gross developer's margin' admit a meaning that:-

a) the 25% profit is 25% of sales value? (NCL's case), or

b) the 25% profit is 25% of costs? (JLT's case).

13. Newfield's 'Primary Case' was set out at paragraphs 29-32 of the first part of the Defence, to the effect that the words '25% gross developer's margin' had an established technical meaning; that "the percentage derived by expressing gross margin (gross profit) as a percentage of sales revenue and not as a percentage of cost"; and reliance was placed on various authorities and text books in support of this proposition. Newfield's 'First Alternative' case at paragraphs 33-35 of the Defence, argued for exactly the same result, but this time relied upon the parties' correspondence and other documents.
14. Newfield's specific response, in their Defence, to paragraphs 6.1-6.3 of the Amended Statement of Claim was as follows:

"6.1 (a) It is accepted that under clause 20 it is necessary to establish a figure (say 'Y') as the basis of calculation.

(b) What JLT appear to overlook is that when the Feasibility Appraisals were produced in January 2002 by NCL, the primary reason for which was to establish a land value figure, the first figure to be written down was the projected sales figure.

(c) This being the case it is perfectly simple and natural to calculate 25% of this figure to represent the 'gross developer's margin'.

6.2. (a) It is denied that the JLT formula represents the proper construction of the Parties' Agreement.

(b) Such a formula completely ignores the effect of the word 'gross' in the phrase '25% gross developer's margin".

(c) There is no reason to consider the method set out by JLT as the 'direct approach' when one considers that the original method used in the Feasibility Appraisals by NCL was of itself the 'direct approach' in that 25% was applied to the forecast sales revenue.

6.3. (a) NCL agrees that its method of applying 25% to sales revenue gives the same answer as applying a one third addition to costs.

(b) It is denied that NCL's method is a hypothetical approach when one considers the history of the documentation particularly the Feasibility Appraisals dated 8^th January 2002 and the Dewhurst letter of 18^th January 2002.

NCL draws the Arbitrator's attention to the use in paragraph 3 of Dewhurst's letter of 18^th January 2002 of the phrase '25% gross developer's margin'.

NCL says that this phrase was taken by Dewhurst from the various alternative Feasibility Appraisals dated 8^th January 2002 and included within JLT's Statement of Claim which make it plain that percentage growth margin is obtained by expressing the actual margin (profit) as a percentage of sale revenue and not as a percentage of cost."

15. Paragraph 8(b) of the second, responsive part of the Defence said "It is agreed that all profit between the forecast sales revenue and the actual sales revenue would be split 50/50". Paragraph (c)(ii) said:

"The appraisals submitted by NCL to JLT, whether 25% or 33?% is added to cost, effectively still produce a projected sales value. If the intent of the Agreement was that the detailed development appraisal produced an 'actual' sales value there would never have been any excess profit to be shared."

And at paragraph 11, Newfield sought a Declaration that:

(i) the correct construction of the parties' agreement is '25% gross developer's margin' means that 25% margin is to be calculated by reference to sales revenue.

For the avoidance of any doubt, NCL accept that this is the same as applying 33?% to costs."

16. The Tomlinsons' Reply, dated 26.4.04 contained a lengthy response to paragraphs 6.1-6.3 of the Defence. Mr Trotman's Opening for the Hearing on 7.5.04 concentrated on the difference between applying the 25% to cost (his case) and "likely sales value" (his depiction of Newfield's case). At Paragraph 3.1 of that document, he said:

"…neither party could predict the likely sales values of a residential development due for completion in about two years' time. The Respondents themselves have advertised many different sale prices. Reasonable persons in the parties' shoes would, in May 2002, have therefore considered a cost based appraisal as the reasonable approach to setting the base development value. Inevitably that appraisal would have included a best estimate at the time of likely construction cost, together with costs of site acquisition and professional fees. There was no necessity to define "costs" for this purpose…."

17. The Opening prepared by Mr Pye included, amongst other statements, the following:

"3. The burden of proof is on JLT to demonstrate on the balance of probabilities that '25% gross developer's margin' means 25% on Cost.

…

5. It is not for NCL to prove its own contrary argument that 25% gross developer's margin means 25% on Sales Revenue.

…

29. On the basis of the above, the meaning of the phrase and intention of the parties is clear:-

25% gross developer's margin is calculated by taking 25% of anticipated Sales Revenue and not anticipated Cost."

The Opening prepared by Mr Pye maintained the two points set out in the Defence, namely that the words 'gross developer's margin' had an established technical meaning and that in any event, the parties had accorded it a particular meaning in their correspondence.

[5] THE FIRST PARTIAL AWARD

18. In his First Partial Award of 25.5.04, at paragraphs 10 and 11, the Arbitrator purported to summarise the dispute between the parties as follows:

"10. It is common ground that the Appraisal would comprise the costs of development, a 25% margin and a sale value. The actual sale value will not be known until the last dwelling has been constructed and sold.

11. The Claimants claim that their share of the proceeds of sale is half the difference between the Appraisal cost as increased by 25% and the actual sale value. The Respondent claims that the Claimants' share is to be calculated at half the difference between the Appraisal cost, and the actual sale value as reduced by 25%."

19. At paragraph 14 of the Award, the Arbitrator rejected Newfield's primary case as to the established technical meaning of the words. However, at paragraphs 15-21 he accepted Newfield's alternative case that the parties' oral and written evidence demonstrated an agreed meaning of the relevant words. Having set out the evidence, his conclusion was as follows:

"19. I find that it is clear from the above documentary and oral evidence that the phrase "25% developer's margin" used in relation to the appraisal was accepted by both parties as meaning 25% of the sale value in the appraisal. In all four appraisals, however, the 25% margin was the exact difference between the cost and the sale value; that is that the sale value when reduced by 25% equated to the cost. In other words the sale value for the purpose of an appraisal was derived, in effect, by adding 33.33% to the cost. I find therefore that the meaning given to the phrase by the parties is that the appraisal sale value is to be derived by adding 33.33% to the costs.

…

21. The true meaning and effect of clauses 1.8 and 20 therefore, is that the appraisal sale value is 133.33% of the estimated cost and that the difference between that appraisal sale value and the actual sale value is to be divided equally between the two parties and I SO DECLARE".

This was, on its face, precisely the Declaration which Newfield had contended for: see paragraph 15 above, and Paragraph 11 (i) of the responsive part of the Defence.

20. The Arbitrator then went on to deal with costs and at paragraph 22 he said that "the claim has substantially succeeded". As a result of this conclusion, with the exception of the costs that had arisen on an earlier dispute as to jurisdiction, he ordered that Newfield should pay the Tomlinsons' costs. He did not in his Award explain why he had concluded that "the claim has substantially succeeded".

[6] THE REVIEW

21. Following Mr Pye's letter of 26.5.04, which pointed out that, as he saw it, the Tomlinson's claim had failed and that the Newfield contention had been successful, there were a number of letters between the parties and the Arbitrator in which the Arbitrator explained why he had concluded that the Tomlinsons had substantially succeeded. Mr Trotman submitted that, whilst this review process might shed light on the Award, it was not open to Newfield to search for discrete errors of law within the Review correspondence itself. Whilst I think that is right, I regard the letters from the Arbitrator to Mr Pye, from which I set out certain extracts below, as setting out his reasons for his terse conclusion in the Award, that "the claim has substantially succeeded". I therefore regard those letters – and the documents referred to therein - as an effective part of the Award, a proposition which Mr Trotman expressly accepted. The important passages from the letters from the Arbitrator seem to me to be as follows:

a) Letter 27.5.04

"The Respondent's case is as set out in paragraph 11 of my Award, that is that the "margin" was to be 25% of the actual sale value. This would have given the Claimant only 37.5% instead of 50% of the excess as explained by Claimant's counsel in his written opening address and I found against that. It is correct that the Claimant did not succeed in its contention that the margin to be allowed in the appraisal was to be 25% of costs as I found it was to be 33.33% of cost but nevertheless the Claimant has clearly gained a material benefit from the arbitration and has therefore had a substantial success."

b) Letter 28.5.04

My Award is between the cases put forward by the parties that is that the appraisal sale figure less 25% should equal the cost. This was my interpretation of Clause 1.8. I also decided that the difference between the appraisal sale figure and the actual sale figure should be shared equally; this was my interpretation of clause 20.

You are now saying the dispute related only to the application of 25% of the appraisal sale figure and not to the actual sale figure. If that had been the case, there would have been no dispute about the true construction of clause 20……..

If, however, the description of the dispute now put forward by the Respondent is correct then my award as to costs would be incorrect and the proper award would be that the Claimant should pay the Respondent's costs. In the latter case one would expect that there would be a legal route, whether via the slip rule or otherwise, to put right what would in that case be an injustice".

c) Letter 1. 6. 04

"By your letters following receipt of the claimant's Statement of Case regarding jurisdiction and by your conduct at the Jurisdiction Hearing, you demonstrated that you were very sharp to immediately notice any possible widening of the dispute beyond that which was within my jurisdiction and you were very capable of making immediate and persuasive reponses. Your inaction in remaining silent in the face of the Claimant's written opening submission and Claimant Counsel's detailed explanation of that submission at the Hearing is inconsistent with the assertion you now make that the interpretation of Clause 20 regarding apportionment of any excess was not in dispute. In fact if my award had been that the actual sale figure should be reduced by 25% before sharing the excess, you would have been in an almost invincible position if you had then chosen to say that the sharing of any excess was a matter in dispute".

d) Letter 21.6.04

"It is clear from the above that from the Preliminary Meeting right through to the Hearing, the Claimant saw and explained the dispute as being as I have set it out in my Award. It may well be that the Respondent saw the dispute differently but did not say so either at the Preliminary Meeting or at the Hearing and that apart from one exception, its pleadings were consistent with the Claimant's explanation of the dispute.

To state the obvious, my task was not to resolve the dispute which actually existed between the parties but the dispute which was defined by the Claimant without objection by the Respondent and I believe that that is what I have done".

[7] THE CENTRAL POINT IN THESE APPLICATIONS

22. There is in essence one central point behind these two applications. In short, Newfield say that they only issue in the Arbitration was a narrow one, namely whether the 25% should be added to the construction costs (the Tomlinsons' case) or to the estimated sales value (their case) which, given the natural relationship between costs and estimated sales value, had the effect of adding 33.33% to the construction costs. They say that their case was precisely that which the Arbitrator found to be the right interpretation of the Agreement, and that he failed to award them their costs because he (wrongly) thought that their case on the Appraisal somehow involved a consideration of actual sales values. It is Newfield's case that this was a fundamental error which lies at the root of both their applications under Sections 68 and 69.

[8] APPLICATION UNDER SECTION 69/GENERAL

23. I can only grant Newfield leave to appeal under Section 69 of the Arbitration Act 1996 if I am satisfied that the point at issue:

a) Is a point of law;

b) Which will substantially affect the rights of the parties;

c) Which the Tribunal was asked to determine;

d) On which the Arbitrator was obviously wrong;

e) Which it is just and proper for me to determine.

It was agreed that b), c) and e) were satisfied. The principal issues therefore arise under a) and d).

24. Furthermore, in line with the many decisions of the Commercial Court on the point, in considering the Section 69 application for leave to appeal, I should only have regard to the Award itself which, as I have explained, in this case also includes the correspondence in which the Arbitrator set out his reasons for the costs Award and the documents on which he relies in giving that explanation. It was agreed by both parties that I should decide the Section 69 application by reference to those documents. I have set out the relevant extracts from the Award and the other documents in Paragraphs 8-20 above, and it is therefore unnecessary to repeat them.

[9] POINT OF LAW/RELEVANT PRINCIPLES

25. Mr Nissen argues that Paragraph 11 of the Award completely misdescribed the point at issue in the Arbitration, because instead of identifying the dispute as being between the addition of 25% on costs (the Tomlinsons' pleaded case) and 25% on estimated sales values, which equated to 33.33% on costs (Newfield's pleaded case), the Arbitrator said that Newfield's case on the construction of the Appraisal involved a consideration of the actual sales value of the properties. He goes on to argue that, having wholly misunderstood what their case was, the Arbitrator thus failed to appreciate that the result of his Award was entirely in Newfield's favour, and he therefore got the award on costs completely wrong, so that costs did not follow the event, but were instead awarded to the loser, not the winner, of the Arbitration. Mr Nissen contends that this is a point of law because the Arbitrator failed to understand the dispute before him and thus construed 'the event' wrongly. He argues that the Arbitrator has purported to construe 'the event' on the basis of what he mistakenly understood the dispute to be, rather than what it actually was, and he did not have the power or jurisdiction to do so. Although Newfield's application properly set out the points of law (6 in all) which they say arise out of the Award on costs, I believe that the essential point under Section 69 is as I have summarised it above.
26. Mr Trotman argued that this was not a point of law, and that Newfield were simply endeavouring to draw an artificial distinction between what the dispute was on the one hand and how it was explained, on the other. Whilst Mr Trotman had a variety of points on the precise formulation or presentation of the 6 points of law identified by Newfield, he accepted that the real dispute concerned whether the Arbitrator's construction of 'the event' gave rise to a point of law, on which (if it did) the Arbitrator was obviously wrong, and he helpfully focussed his submissions on those two questions.
27. In setting out their rival contentions as to whether or not Newfield's criticism of the Award on Costs constituted a point of law, both Counsel referred to and relied on the decision of His Honour Judge Thornton QC in Fence Gate Ltd v. NEL Construction Ltd (2001) 82 Con LR 41. In that case, an Arbitrator's Award on costs was altered by the Court due to a variety of errors by the Arbitrator in his original Award, which the Judge decided were matters of law. In a helpful section of the Judgment, at Paragraphs 37-40, Judge Thornton sets out the principles to be adopted in applications of this sort. Rather than simply setting out the passages of the Judgment themselves, I will summarise them into what seem to me to be four central principles:

i) For the complaint about a costs award to arise in the form of an appeal, it must be one that can be expressed in the form of a clear question of law (Paragraph 37 of the Judgment).

ii) If the complaint is that the decision that the Arbitrator arrived at was wrong because of an error in his appreciation or understanding of the material used as the basis of the award, it may amount to a serious irregularity. But it does not give rise to a question of law (Paragraph 37 of the Judgment).

iii) The Arbitrator must not take into account matters which the law or the powers given him by the parties or the general law preclude him from acting on and, conversely, he must not fail to take account of, and give effect to matters that the law requires him to take account of. Moreover, since the tribunal must observe and give effect to the law, the overall discretionary exercise must not be perverse nor one that a reasonable arbitration tribunal properly directing itself could not have reached (Paragraph 38 of the Judgment).

iv) A question of law can arise, if it is contended that the Arbitrator misdirected himself by taking into account factors which he should not have done or by failing to take into account factors he should have done (Paragraph 40 of the Judgment).

28. On this last point, Mr Trotman sensibly accepted that if I concluded that the Arbitrator had taken into account factors which he should not have done or failed to take into account factors which he should have done, in deciding what the dispute was (and therefore what the 'event' was) this properly constituted a point of law. So it is appropriate to turn to consider what the Arbitrator did and did not do, and why.

[10] WHAT THE ARBITRATOR DID AND DID NOT DO

29. In his Award, the Arbitrator upheld Newfield's alternative case, expressly pleaded at paragraphs 33-35 of the Defence, that on the basis of the inter-party correspondence, 25% gross developer's margin meant 25% of the sales value. He upheld Newfield's claim, at Paragraph 11 (ii) of the Defence, that this was the equivalent of applying 33.33% to the construction costs. He rejected the Tomlinsons' only pleaded claim that the Appraisal should have applied 25% to the costs. Yet, despite all this he failed to give Newfield their costs of the Arbitration, deciding that Newfield had lost the Arbitration because their construction of the Agreement had somehow involved a consideration of actual – as apposed to estimated – sales values.
30. Where did he get that understanding from? He did not get it from the Tomlinsons' solicitor's letter to the RICS of 14.11.03 (Paragraph 10 above) which made clear the limited nature of the dispute was the calculation of the figure in the Appraisal, which, at some date in the future, would be compared to the figures from "the eventual sale of the development" in order to calculate "additional profits". He did not get it from Paragraphs 6.1 – 6.3 of the Tomlinsons' ASOC (Paragraph 11 above), because that summarised the differences between the parties solely by reference to the 25% or 33% difference noted above. He did not get it from the Defence (Paragraphs 12-15 above) which set out Newfield's position by reference to sales values which was the equivalent of 33.33% on costs; which, at both Paragraph 6.2 and 8(b) referred to 'forecast sales revenue, and 'forecast' 'Sales Value' respectively; and which, at Paragraph 9 (c)(i) expressly pleaded that the Appraisal could not involve a consideration of actual sales value because, if it did, there would be nothing, at a later date to act as a comparitor, and there would be no excess profit to be shared between the parties. Neither could this understanding have come from the text of either side's written openings for the Hearing on 7.5.04. which made it clear expressly that the dispute was between costs and 'likely' sales values. Finally, and most significantly of all, it could not come from the substance of the Arbitrator's own Award, because there he had considered and upheld Newfield's alternate case as to the meaning of the words '25% gross developer's margin', that they involved a consideration of anticipated sales values. Indeed, all those documents clearly set out the dispute in terms that were wholly contrary to the Arbitrator's description of it in Paragraph 11 of the Award and his later letters.
31. As I understand the Arbitrator's letters (paragraph 21 above) his description of the dispute was based on a document (which I have not seen) provided at the Preliminary meeting, before the Arbitrator's ruling on jurisdiction and before the ASOC was provided; and one footnote in Mr Trotman's written Opening for the Hearing on 7.5.04 which I have seen but which does not seem to me to have anything to do with Newfield's pleaded case. In any event the footnote is contradicted by Paragraph 3.1 of his Opening (paragraph 16 above) which does summarise Newfield's case correctly. I simply do not understand how it can be said that by apparently relying on these two documents, and by ignoring the description of the dispute in all the pleadings produced by both parties in the Arbitration, the Arbitrator did anything other than misdirect himself as to the nature of the dispute between them, and therefore 'the event' on which his Costs Award would turn. Indeed, before me, Mr Trotman sensibly did not seek to elaborate his submissions in reliance on either of these documents.
32. Instead Mr Trotman's clear oral submissions were to the effect that, since the words 'estimated' or 'forecast' were not inserted before the references to 'sales value' in the Newfield Defence, Newfield's case was unclear and could have given the impression that it related to actual sales value. As a result, he says, the Arbitrator cannot be criticised for his conclusion. On the material to which I have already referred, I reject that submission for four separate reasons. First, references to 'estimated' or 'forecast' sales were quite unnecessary. The parties were agreed that the only point of the Appraisal was to provide a benchmark or baseline against which the actual sales values could one day be measured for the purpose of calculating whether there was any profit to be shared.. Accordingly, it was clear that the sales values to be used to calculate the figure in the Appraisal were estimated sales values: otherwise there was nothing against which the actual values could be compared in the future. Secondly, since the Appraisal was to be produced before work on the development actually started, it was quite impossible for actual sales values to be used to calculate the relevant baseline figure, a point recognised by the Tomlinsons' solicitors in the original reference letter to the RICS of 14.11.03. Thirdly, the very point about estimated and actual values, and the irrelevance of the actual values for the purposes of the Appraisal, was clearly explained at Paragraph 9(c)(i) of the Defence, and there was no suggestion that the point was not understood by all sides. Fourthly, the word 'forecast' is in fact used in the Newfield pleadings (see, for instance paragraph 8(b) of the second part of the Defence), an express reference which, as Mr Nissen pointed out, Mr Trotman did not address at all. I note that the word 'forecast' was also used in Paragraph 6.2(c) of the second part of the Defence: see paragraph 14 above.

[11] POINT OF LAW/SUMMARY

33. For the reasons set out above, I am in no doubt at all that the Arbitrator failed to have regard to the material that he should have looked at when construing what the 'event' was, namely all the pleadings produced by both sides. Those documents made the scope of the dispute quite clear: it concerned solely whether the 25% was to be applied to costs or (anticipated) sales value. Actual values were wholly irrelevant to either side's case, a point expressly made at paragraph 9(c)(i) of Newfield's Defence. In addition, to the extent that these matters are still relied on by the Tomlinsons, I consider that, by purporting to rely on one superseded document and one contradicted footnote in the Tomlinsons' own Opening to define the dispute, the Arbitrator had regard to material that was quite irrelevant for such a purpose. I therefore conclude that the complaint raised by Newfield is a point of law in accordance with the principles set out by His Honour Judge Thornton QC in Fence Gate.

[12] OBVIOUSLY WRONG?

34. As to whether or not the Arbitrator was obviously wrong, it follows from my analysis in paragraphs 29-33 above that I have no hesitation in concluding that he was. Indeed Mr Trotman realistically accepted that, having upheld Newfield's alternative case, as to the meaning of '25% gross developer's margin' the Arbitrator had no reason at that stage to conclude that Newfield's case had anything to do with actual sales value. I therefore consider that the obvious error of law is apparent from the face of the Award itself, because the Arbitrator upheld Newfield's precise construction of '25% gross developer's margin' and rejected the Tomlinsons' case, but then deprived Newfield of their costs. It is also apparent from the letters he wrote explaining his Award on costs (which must be read as part of that Award), in which he ignored the pleadings – including those produced by the Tomlinsons – and instead relied on wholly irrelevant material. This was an approach which drove him to say in the Review letter of 21.6.04 that his task "was not to resolve the dispute which actually existed between the parties but the dispute which was defined by the Claimant [in the footnote in the written Opening] without objection by the Respondent." In my judgment, this conclusion only has to be stated in these terms for it to be immediately apparent that such an approach was obviously wrong. The Arbitrator ignored both sides' pleadings which, in my view, defined the dispute clearly and unequivocally, and thus strayed outside what the parties had agreed that he was to do.
35. On this point, I should add that Mr Trotman placed reliance on the Arbitrator's letter of 22.6.04, which was sent immediately after the Arbitrator had completed his Review. Mr Nissen submitted that in consequence of this it was irrelevant, but in my view, it is both relevant and a document I should take into account. In it, the Arbitrator said to Mr Pye:

"The actual figures are not yet known but as long as the actual sales figures is greater than the cost plus 33.33% then the arbitration will have been of benefit to the claimant and thereby entitling him to his costs."

This statement (which essentially repeats a point made by the Arbitrator in his letter of 27.5.04, set out at paragraph 21(a) above) confirms my conclusion that the Arbitrator obviously failed to construe, or properly understand, the nature of the dispute that he was deciding. In my judgment, the Arbitrator was solely concerned with the Appraisal; the baseline against which the actual sales figures would one day be compared. Whether those actual figures turn out to be higher or lower than the Appraisal was irrelevant to the Arbitration before the Arbitrator. The Arbitration was ultimately concerned only with whether the Appraisal figure should be cost plus 25% or cost plus 33.33%. The higher the Appraisal figure, of course, the lower the profit to be shared in the future, and therefore the better for Newfield. The higher figure contended for in the Pleadings – cost plus 33.33% - was the one decided upon by the Arbitrator. Newfield therefore won the Arbitration. How the comparison with the actual sales value will pan out in the future was nothing to do with this Arbitration. The Arbitrator's remark as to possible benefit in the future was misconceived since what provided that benefit was the existing provision of the Agreement at Clause 20, not the dispute about how the Appraisal figure was to be calculated. The letter, therefore, only serves to confirm my conclusion that his whole approach to the construction of the 'event' and therefore to the award of costs, was obviously wrong.

[13] LEAVE TO APPEAL AND THE SUBSTANTIVE APPEAL

36. It follows from the preceding paragraphs that Newfield have fulfilled every element of Section 69(3) of the Arbitration Act 1996 and are entitled to leave to appeal. Counsel agreed that precisely the same points arose on the substantive appeal as have been addressed above; in other words, if I granted leave to appeal I would inevitably allow the substantive appeal for the same reasons. I therefore allow the appeal for the reasons set out above.

[14] RELIEF

37. Pursuant to Section 69(7) of the Act, I have a wide discretion as to the substantive relief which I grant. In other circumstances I would have little hesitation in remitting the question of costs back to the Arbitrator. However, that seems to me to be unnecessary in this case. The Arbitrator, very properly in my view, said in his letter of 28.5.04 that if the dispute before him was as contended for by Newfield "then my award as to costs would be incorrect and the proper award would be that the Claimant should pay the Respondent's costs." Since I have found that the dispute was as contended for by Newfield, and the award as to costs was wrong (as the Arbitrator accepted that it would be if he was wrong about the nature of the dispute) I can and do order that the Tomlinsons should pay Newfield's recoverable costs of the Arbitration, since it is plain that that is precisely what the Arbitrator would do if the matter were remitted to him.
38. I therefore order that the Arbitrator's Award of 26.5.04 be varied at Paragraph 22, and that an order be substituted that the Claimant (Mr and Mrs Tomlinson) shall pay the recoverable costs of the Respondent (Newfield).

[15] THE SECTION 68 APPLICATION/GENERAL

39. In view of my decision to allow Newfield's appeal under Section 69 of the Arbitration Act 1996, it is unnecessary for me to deal in any detail with the section 68 application. However, in deference to both Counsel and the submissions which they made, I should set out my conclusions on this alternative application.
40. Under Section 68, a complainant can get an award remitted or set aside, in whole or in part, if there has been a "serious irregularity affecting the tribunal, the proceedings or the award". Such an irregularity is defined by Section 68(2) in a number of ways. Those relied upon by Mr Nissen are:

a) a failure by the Arbitrator to comply with his general duty under Section 33 of the Act to 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;

b) the Arbitrator exceeding his powers;

c) a failure by the Arbitrator to conduct the proceedings in accordance with the procedure agreed by the parties.

41. I was referred to a number of authorities concerning Section 68 of the Act, including the decision of His Honour Judge Lloyd QC in Weldon Plant v The Commission for New Towns (2000) BLR 496 in which he held that the mere fact that there was an error in the Award which was unfair to a party did not mean that there must have been a failure to comply with Section 33 of the Act and therefore a serious irregularity for the purposes of Section 68(2)(a). The limited applicability of Section 68 was emphasised by the DAC Report, quoted by Tuckey J (as he then was) in Egmatra AG v Marco Trading Corporation [1999] 1 Lloyd's 862 at page 865: "[Section] 68 is really designed as a long stop, only available in extreme cases where the tribunal has gone so wrong in its conduct of the Arbitration that justice calls at for it to be corrected." Similar points, also emphasising the additional requirement of substantial injustice, were made by Cresswell J in Petroships Pte Ltd v Petex Trading and Investment Corp [2001] 2 Lloyd's 348 and Colman J in Aoot Kalmnefv v Gencore International (27.7.01: unreported) in which, at Paragraph 85, he said:

"Further, intervention under Section 68 should be invoked only in a clear case of serious irregularity. The court's powers to interfere with an arbitrator's discretionary decision as to how he should exercise his discretion under Section 30(1) should not be engaged unless it is clear that in exercising his discretion he has failed to have regard to the relevant facts and to his duty under Section 33. Unless he has arrived at a conclusion which no reasonable arbitrator could have arrived at in the case in question having regard to his duties under Section 33, it cannot be said that his decision is capable of being characterised as a serious irregularity."

42. This last passage (although specifically concerned with an application under Section 30 of the Act, which does not arise here), is emphasising that the Arbitrator's obligation under Section 33 and the types of serious irregularity listed at Section 68(2) are linked: as His Honour Judge Lloyd QC put it in Weldon Plant, "although a failure to comply with Section 33 is placed first in Section 68(2), it is in reality more in the nature of a general provision of which Section 68(2) contains further examples."
43. I have found that the Arbitrator construed 'the event' not by reference to all the pleadings, but by reference to two other, irrelevant documents which, to put it at the very lowest, all the pleadings expressly contradicted. That was not what the parties wanted him to do: the whole point of the pleadings was to define and, as actually happened here, to narrow the disputes between the parties; the parties wanted the Arbitrator to construe the 'event' by reference to their pleadings and were entitled to have it so construed; his complete failure to do so therefore amounted to a serious irregularity. Whilst such an irregularity probably triggers each of Sections 68(2)(a) (b) or (c) it is in my judgment closest to 68(2)(c); a failure by the Arbitrator to deal with the question of costs in accordance with the procedure - the tabling of extensive pleadings settling out both parties cases – agreed by the parties' themselves and ordered by the Arbitrator. It also seems to me that Judge Thornton's point in Fence Gate (paragraph 27 ii) above), to the effect that a failure by the Arbitrator to understand the material used as the basis of the award may amount to a serious irregularity, is also relevant here. That is another way to describe what happened in this case when the Arbitrator wholly misdescribed the dispute between the parties.
44. But that is not the end of the application under Section 68, because the authorities make clear that the serious irregularity must have caused a substantial injustice. In my judgment the Arbitrator's letter of 28.5.04 makes clear that what I have found to be the serious irregularity has caused substantial injustice because, but for the irregularity, the Arbitrator himself explains that his Award on costs would have been completely reversed. He also says, expressly, that this would be an "injustice". I therefore accept Mr Nissen's submission that that letter and that(correct) conclusion is the best possible evidence of the substantial injustice to Newfield arising out of the serious irregularity.
45. I therefore find that serious irregularity has been made out under Section 68(2) of the Act and that it has caused substantial injustice. It is of course unnecessary for me to remit the Award to the Arbitrator for the reasons explained in Paragraph 37 above.
46. I shall deal with the precise formulation of the required order, and any issues on costs, when this judgment is formally handed down.

H.H.J COULSON Q.C.

5 November 2004