Jersey Unreported Judgments

Arbitration- application for leave to appeal against arbitration award made on 24 July 2015.

[2016]JRC006

Royal Court

(Samedi)

8 January 2016

Before     :		T. J. Le Cocq, Esq., Deputy Bailiff, sitting alone
Between	Public of the Island of Jersey		Applicant
And	Jersey Electricity Company		Respondent

Advocate J. M. Dann for the Applicant.

Advocate M. W. Cook for the Respondent.

judgment

the deputy bailiff:

Introduction

1.        This is an application for leave to appeal pursuant to Article 21(3) of the Arbitration (Jersey) Law 1998 ("the 1998 Law") against the arbitration award made by Mr Stephen Downham on 24^th July, 2015, ("the Downham Award").  The applicant for leave is the Public of the Island of Jersey ("the Public") and the respondent to that application is Jersey Electricity Plc ("JE").  The Downham Award relates to the level of rent following review that JE should pay to the Public under a lease between them of 14^th April, 1967, ("the Lease"). 

2.        There are two matters that fall to be considered in this application.  The first is whether or not the Public is prevented from seeking leave to appeal by reason of a provision contained in the lease and, secondly, if they are not so prevented, whether the Court should on normal principles give leave to appeal against the Downham Award. 

The factual background

3.        The lease relates to a portion of land at La Collette, St Helier on which JE was (at the time at which the lease commenced in 1967) in the course of constructing a power station.  The lease was subsequently varied on 23^rd April, 1999. 

4.        The terms of the lease required JE to construct amongst other things a retaining sea wall and to establish a footpath at its own expense.  The initial term of the Lease was 42 years at a fixed annual rental of £1,000.  Clause 22 of the lease provides that following the expiry of the initial term JE could extend the lease for successive periods of 10 years on the same terms and conditions save as to rent for a maximum of five times.  In effect, therefore, it was open to JE to extend the lease until 25^th June, 2059. 

5.        Clause 22 of the lease also provides:-

"...Etant stipulé et accordé que ledit Public de cette ile aura le droit d'augmenter le loyer payable ... pour chaque période de renouvellement du present Bail, le montant de laquelle augmentation sera fixé par accord ... et si lesdites parties ne peuvent tomber d'accord sue le montant de ladite augmentation le différend sera remis au dire d'arbitres comme il est ci-aprés mentionné."

6.        It appears that the use of the terms "augmenter" and "augmentation" anticipated an increase in the rent. 

7.        Clause 24 of the lease ("Clause 24") provides as follows:-

"Et qu'aucune dispute résultant de cet accord: ... sera remise à deux arbitres, l'un choisi par ledit Comité dit "Harbours and Airport Committee" et l'autre par la Société Preneuse, lesquels deux arbitres en cas de désaccord seront le droit de nommer un tiers arbitre et la decision desdits arbitres ou de la majorité d'eux sera finale et sans appel."

8.        In effect, therefore, the arbitration provision in the lease provides that any dispute would be remitted to two arbitrators, one chosen by the Public and the other by JE, and in the case of disagreement between them they would have the right to nominate a third arbitrator and the decision of the arbitrators or of the majority of them would be final and without appeal. 

9.        That process was not followed.  Instead on the 7^th April, 2011, the legal advisers of the Public wrote to the legal advisers of JE suggesting a simpler process.  Having set out the gist of Clause 24 in English, the legal advisers to the Public then went on to say:-

"It appears to the Public that the mechanism for the resolution of the dispute by arbitration set out in the Lease - principally the requirement for each party to appoint an arbitrator and in default of agreement a third - is unnecessarily unwieldy and potentially will add significantly to the expense of the arbitration. 

We write, therefore, in the first instance, the Public having determined to refer the matter to arbitration, to seek the JEC's agreement to alter the mechanism for resolution of the dispute so as to agree to the appointment of a single arbitrator. 

We would have in mind the appointment of an experienced Queen's Counsel from one of the leading property sets in London as sole arbitrator. 

...Clearly if the agreement can be reached as to the appointment of single arbitrator the matter can proceed in that way.  Alternatively if there is not agreement on that course of action then the public will proceed, in accordance with Clause 24, to appoint its own choice of arbitrator".   

10.      By response dated 20^th April, 2011, JE's legal advisers indicated that their client agreed in principle to the proposal to alter the mechanism for resolution of the rent review dispute "so as to appoint a single arbitrator".  They indicated that in their view the lease may need to be varied to include a revised arbitration mechanism.  They expressed the view that without such a variation there could be no contractual basis on which the arbitrator could accept appointment. 

11.      On 4^th May, 2011, the Public's legal advisers wrote an email in the following terms:-

"You suggest the lease will need to be varied to agree appointment of the arbitrator to include revised arbitration mechanism.  We do not consider that a formal variation to the Lease - which may have inter alia stamp duty implications for instance - is strictly necessary.  Our understanding of the position in England is that where there is to be a departure from the arbitration provisions in the Lease in respect of a particular rent review or future disputes, all that is necessary is that there should be a written agreement to that effect signed on behalf of each party which can be copied to the arbitrator together with the Lease so that, as you say, he can be satisfied that his appointment is valid.  It follows that such an agreement should be drawn and executed before an appointment is made." 

12.      By email in response of 27^th May, 2011, JE's legal advisers indicated that their client was prepared to proceed on the basis suggested. 

13.      In fact the arbitration, by agreement, took place in two stages.  Firstly various issues were submitted to Mr Nicholas Dowding QC to determine how the second stage, the consideration and quantification of the revised rental, should be carried out.  This first stage of the arbitration was, therefore, to set the principles and ground rules that would be adopted by the second arbitrator in making the final determination.  The first arbitrator was to make a determination of the review basis and the matters which may be regarded or disregarded in assessing the new rent.  Mr Dowding delivered his award on 18^th July, 2012, ("the Dowding Award").  I will make reference to the Dowding Award later in this judgment. 

The Exclusion Provision

14.      Article 21 of the 1998 Law states:-

"1.  Without prejudice to the right of appeal conferred on paragraph 2 the Court shall not have jurisdiction to set aside or remit an award on an arbitration agreement on the ground of errors of fact or law on the face of the award. 

2.  Subject to paragraph 3 an appeal shall lie to the Court on any question of law arising out of an award on an arbitration agreement, and on the determination of such an appeal the Court may

(a)       confirm, vary or set aside the award; or

(b)       remit the award to the reconsideration of the arbitrator or umpire together with the Court's opinion on the question of law which was the subject of the appeal,

And where the award is remitted under sub-paragraph (b) the arbitrator or umpire shall, unless he other or otherwise directs, make his or her award within three months after the date of the order.

3.  An appeal under this article may be brought by any of the parties to the reference

(a)       with the consent of all of the other parties to the reference; or

(b)       subject to article 23 with the leave of the Court. 

4.  The Court shall not grant leave under paragraph 3(b) unless it considers that, in regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement, and the Court may make any leave which it grants conditional upon the applicant complying with such conditions as it considers appropriate."

15.      Article 23 of the 1998 Law states:-

"1.  Subject to the following provisions of this Article

(a)       the Court shall not, under Article 23(1)(b) grant leave to appeal with respect to a question of law arising out of an award;

(b)       the Court shall not under Article 21(5)(b) grant leave to make an application with respect to that award; and

(c)       No application may be made under Article 22(1)(a) with respect to a question of law,

if the parties to the reference in question have entered into an agreement in writing (in this Article referred to as an "exclusion agreement") which excludes the right of appeal under Article 21 in relation to that award or, in a case falling within sub-paragraph (c) in relation to an award to which the determination of the question of law is material."

16.      JE argues that Clause 24 clearly contains an express provision which makes the determination of any arbitration award final and binding and without appeal.  This, so JE argues, is an exclusion clause and accordingly the Public is not entitled to leave to appeal against the award. 

17.      The Public, for its part, argues that the arbitration process in Clause 24 is effectively null and void having been superseded by the agreement between the parties to adopt a different process for arbitration.  As the agreement to adopt a different course does not deal with the ability or otherwise to appeal the award, there is no exclusion clause within the meaning of Article 23 of the 1998 Law and, accordingly, the Court is able to grant leave. 

18.      In my view the position advanced on the part of the Public is correct.  Clause 24 as a whole makes it clear that the process envisaged is that the decision which might be "sera finale et sans appel" is either the unanimous decision of two arbitrators or the majority decision of three arbitrators.  The position with regard to the decision of a single arbitrator, with the attendant risk that a single arbitrator may fall into error, is not covered by Clause 24. 

19.      It is perhaps understandable that parties to a lease might be comfortable in excluding appeal rights if they have the benefit of a unanimous decision of two arbitrators.  It is not, it seems to me, apparent that parties would necessarily be prepared to agree that an arbitration award is not susceptible to appeal when it is given by one arbitrator alone.  No matter how able the arbitrator, there is always the risk that a single arbitrator may be more prone to falling into error than two agreeing together or a majority of two out of three. 

20.      Furthermore the words "sera finale et sans appel" in Clause 24 cannot be severed from the sentence in which they appear and imputed, thus severed, into the new arbitration arrangements which actually applied.  It is clear that Clause 24 provides that the finality provision is linked to a process in which there is a unanimous decision of two or a majority decision of three. 

21.      In my view, Clause 24 has effectively been removed and the arrangements between the parties agreed in correspondence, where there is no express exclusion clause, is the arbitration agreement that governed the conduct of the arbitration leading up to the Award. 

22.      Accordingly, in my judgment, there is no exclusion provision within the meaning of Article 23 of the 1998 Law which prevents the Public from seeking the leave of the Court. 

Leave to Appeal

23.      Having determined that the Public is not prevented from seeking the leave of this Court to appeal against the award I now turn to consider whether or not that leave should, in fact, be granted. 

24.      In Jersey Sports Stadium Limited -v- Barclays Private Clients International Limited [2013] JRC 059 Sir Michael Birt, Bailiff, observed that the relevant provisions of the 1998 Law were almost identical to the provisions of Section 1 of the Arbitration Act 1979.  In deciding the correct approach to be adopted in considering whether or not to grant leave the Court endorsed the judgment of Diplock L in Pioneer Shipping Limited -v- PTP Dioxide Limited ("the Nema") [1982] AC 724 where at paragraph 744 he said:-

"In deciding how to exercise his discretion whether to give leave under Section 1(2) what the judge should normally ask himself in this type of arbitration, particularly where the events relied on are "one off" events, is not whether he agrees with the decision reached by the arbitrator, but: does it appear upon perusal of the award either that the arbitrator misdirected himself in law or that his decision was such that no reasonable arbitrator could reach?"

25.      The English statutory regime has now altered but the Arbitration Act 1979 provides the closest parallel to the 1998 Law.  In Ipswich Borough Council -v- Fisons Plc 1989 1 CH 709 Donaldson MR, in considering the judgment in the Nema in the context of a rent review arbitration held (at 724H):-

"The bottom line must always, I think, be that the judge concludes that there is a more or less strong, but still "strong" prima facie case that the arbitrator has erred in law."

26.      Both parties agree that this approach should govern consideration of the grant of leave to appeal.  JE also brings to my attention the case of Zumalt Holdings SA -v- New Life Upholstery Repairs Limited [1985] 2 EGLR 14 in which Bingham J (as he then was) stated:-

"As a matter of general approach, the courts strive to uphold arbitration awards.  They do not approach them with a meticulous legal eye endeavouring to pick holes, inconsistencies and faults in awards and with the objective of upsetting or frustrating the process of arbitration.  Far from it.  The approach is to read an arbitration award in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it."

27.      In the Law and Practice of Commercial Arbitration in England (Second Edition 1989) the learned authors Mustill and Boyd state at page 607:-

"That the award must be "obviously wrong on the perusal; but it must be "clearly wrong"; that the judge "would need a good deal of convincing that the arbitrator was right".  Leave would however be given if the judge received the decision with "very considerable surprise".  It is not, however, always enough to show "very considerable doubt".  ... In exceptional cases, however, where the point is one of general importance, it may well be enough to show that the arbitrator may have been wrong, or that the point is capable of serious argument."

28.      As I have already said this arbitration was conducted in two stages.  Firstly, the legal framework under which the final award would be made was set out in the Dowding Award.  Armed with that framework, which he was bound to apply, Mr Downham made the Downham Award. 

29.      The Downham Award maintained the existing rental of £1,000 per annum. 

30.      It is the Public's case that Mr Downham failed to apply properly or at all material principles established in the Dowding Award and accordingly the Downham Award is flawed and wrong in law. 

31.      Paragraph 80 of the Dowding Award says:-

"First the rent that it would be reasonable for the parties to agree must reflect what the public is providing and what the JEC is getting.  So the market rent to which regard must be had is the market rent for the land in its unimproved state and let on the renewal date on the terms on which it is in fact to be let to JEC, that is to say 1) for 10 years from the renewal date; 2) on the same terms of the lease including in particular Clauses 22 (save that only four renewals are permissible) and 23 (by virtue of which JEC has the right, and can be compelled by the Public, to remove all its works (save the sea wall) at the end of the term and to restore the land in a good state, but if neither party exercises such right, the value of JEC's works will inure to the Public on the termination of JEC's interests); and 3) for use as a power station (it being accepted by the Public that the land could only be used as a power station).  It follows that rents derive from transactions involving the letting of land in other locations, or on different terms, or for other purposes, may (depending on the evidence) have to be adjusted accordingly."

32.      And at paragraph 81:-

"Second, the market value of the land is not determinative of the level of rent, because account must also be taken of any relevance and objective factors which apply as between the parties but which would not apply on a new letting in the market.  On the arguments advanced at the hearing, such factors include in particular (without necessarily intending to limit them) 1) the factors set out above and 2) the fact that JEC's works, including the construction of the power station, had been carried out before the renewal date and did not have to be done again."

33.      Whilst the Dowding Award did not say that the rental after renewal must inevitably be a higher rental than the current rent it determined that the rent that must be established by arbitration was "the rent which it would have been reasonable for them to agree" (see paragraph 68 of the Dowding Award) and goes on to say:-

"It follows that what must be determined in the present case is the rent which it would have been reasonable for the parties to agree in the light of all the circumstances which existed on 24^th June 2006.  On the face of it, those circumstances include whatever reasonable parties at the time would have regarded as relevant and are not limited to whether or not the factors by reference to which the original rent was agreed in 1963 had changed." 

34.      The Dowding Award goes on, in paragraph 69, to state:-

"The above approach accords with the relevant factual background.  The initial rent was a nominal rent which was agreed by reference to the particular factors that seem relevant to the parties at the time, and, (importantly, to my mind) at a time when the maximum guaranteed length of term was 42 years only.  When JEC subsequently sought the inclusion of the right of renewal, HAC's response was to agree, but to stipulate in return for a right to increase the rent on each renewal.  The right to a rent increase was therefore the quid pro quo for the grant of the unilateral right to extend the term for an additional period of 50 years.  Both parties would have known that by the time the right came to be exercised, the relevant works would long since have been completed, and JEC would have been paying a nominal rent for 42 years.  It seems to me that a reasonable person, knowing these facts, would not understand Clause 22 as meaning that any new rent would likewise be a nominal rent or that any increase would depend upon whether or not there had been any material change in the factors which influenced the setting of the original rent.  Instead, he would interpret Clause 22 as meaning that, once the initial term expires, the new rent is to be agreed or determined by reference to all circumstances prevailing at the renewal date."

35.      The Downham Award does not appear to follow this approach.  At paragraph 3.13 it states:-

"Having looked closely at both arguments I am swayed by the first arbitrator's use of the words "unimproved" rather than "undeveloped".  I believe the basis of the land to be valued is in the unimproved state of the ground as at June 1967, namely the original harbourmaster's yard with part of the site being beach, part rock and areas liable to flooding."

36.      Further, the Downham Award also states, at paragraph 7.4:-

"...The parties at the time of negotiation would have regard for the works carried out by the tenant, albeit some 42 years before ....".

This, is not it seems to me what the Dowding Award was saying at paragraph 69. 

37.      The Downham Award also does not appear to give any weight to the fact that although the hypothetical contemplated term of renewal is one of 10 years in fact JE had the unilateral right to renew the lease for a further 40 years beyond 2016.  The Downham Award appears to focus on the 10 year term in isolation. 

38.      In Humber Oils Terminals Trustee Limited -v- Associated British Ports 2012 EWHC 1336 (CH), in assessing a rent review where construction work had been undertaken by the lessee, the court held:-

"[The rent] should be assessed in a practical and fair way, having regard to the actual circumstances which it is contemplated at the start of the interim rent period will apply during the period for which the rent is to be paid.  In my judgment, since it has always been contemplated that HOTT would be operating the oil jetty in the usual way in the interim period, shipping about 20 million tonnes of crude oil and refined products across it each year, it is obvious its reasonable for it to pay rent which reflects such actual usage of the oil jetty, which was foreseeable when the interim period commenced.  The court should not assume that, contrary to the facts, there was only a bare jetty in place."

39.      The Public argues that this case illustrates that it is not appropriate to ignore what has happened in the period since the renewal.  JE have continued and will continue to operate a power station.  The Downham Award clearly placed weight upon the submission from JE that there was a potential liability to demolish the power station which could potentially curtail the 10 year term.  This has, of course, not happened.  It is equally of course that such an event is under JE's control in that JE have a unilateral ability to extend the lease for a further 40 years from 2016. 

40.      JE point out that the application for leave to appeal relates only to the Downham Award and not to the Dowding Award.  Because Mr Downham was the expert non-lawyer and was therefore to apply the legal principles established the Dowding Award, JE characterise the application before me as really not an argument based on an error of law but rather an argument seeking an alternate view of the facts. 

41.      I do not agree with that characterisation.  It seems to me that, taking the arbitration as a whole, had there been a single arbitrator who had first identified the legal principles but then had failed to apply them in determining the award this could have been characterised as an error of law.  It does not seem to me to be different merely by reason of the fact that we are considering the sequential decisions of two different arbitrators in these circumstances, one establishing the correct principles in law and the other in applying them.  Separating the two awards for the purposes of that submission is, to my mind, artificial. 

42.      Similarly, JE point out that it is not at all surprising that there was no increase in rental.  In addition to the parts quoted above at paragraph 16 of the Dowding Award it states:-

"It may be convenient at this point to say that I do not read Clause 22 itself as meaning that there must inevitably be an increase on each renewal.  On the agreed formation, the rent must be such as would be reasonable for the Public and the JEC to agree.  It is implicit in this that the particular circumstances at the time may be such that it would not be reasonable to agree an increase."

43.      I accept, and it seems to me to be clear, that the result of an arbitration on the rent review provisions in this lease could theoretically result in the fact that the rent does not increase.  That is as much as I think the Dowding Award is saying in paragraph 60.  All it is saying is that Clause 22 does not inevitably mean that there must be an increase but that to my mind must be viewed in the light of the other principles that the Dowding Award identified. 

44.      Further, at paragraph 76 the Dowding Award says:-

"The factors by reference to which the original rent were agreed are not determinative of the rent on renewal in the manner contended for by the JEC.  But it does not follow that they are necessarily irrelevant.  I understood the Public to accept that regard must still be had to them, but not to the exclusion of other relevant factors, such as the market rent, and only to the extent that 1) they still exist on the renewal date and 2) they would affect the level of rent which it would have been reasonable for actual parties to agree..."

45.      And, at paragraph 71:

"...The parties obviously did not intend the rent to go on being £1,000 because the Public was given the right to increase that figure...".

46.      Similarly, at paragraph 78, the Dowding Award states that there was no good reason "for saying that Clause 22 is to be read and construed as excluding from consideration what would inevitably be an important factor in any negotiations, namely, what the land would fetch if let in the market".

47.      By reason of the apparent discrepancies between the principles established by the Dowding Award and the principles actually applied in the Downham Award it seems to me that there is a strong enough case to consider that the Downham Award misapplied the principles set out in the Dowding Award in a material way.  It is surprising that the Downham Award, in the light of the principles set out in the Dowding Award, established precisely the same rental figure that was already payable under the lease. 

48.      In my view the Public has established to my satisfaction that there is a strong case that in some respects at least the Downham Award erred on the application of the appropriate principles and I grant leave to appeal. 

Authorities

Arbitration (Jersey) Law 1998.

Jersey Sports Stadium Limited -v- Barclays Private Clients International Limited [2013] JRC 059.

Arbitration Act 1979.

Pioneer Shipping Limited -v- PTP Dioxide Limited ("the Nema") [1982] AC 724.

Ipswich Borough Council -v- Fisons Plc [1989] 1 CH 709.

Zumalt Holdings SA -v- New Life Upholstery Repairs Limited [1985] 2 EGLR 14.

Law and Practice of Commercial Arbitration in England (Second Edition 1989.

Humber Oils Terminals Trustee Limited -v- Associated British Ports [2012] EWHC 1336 (CH).