Jersey Unreported Judgments

Appeal against arbitration award made on 24 July 2015.

[2016]JCA169

Court of Appeal

23 September 2016

Before     :		Jonathan Crow, Q.C., President; George Bompas Q.C., and David Perry., Q.C.
Between	The Jersey Electricity PLC		Appellant
And	Public of the Island of Jersey		Respondent

Advocate J. M. Dann for the Appellant.

Advocate J. P. Speck for the Respondent.

judgment

the president:

Introduction

1.        A contract of lease was passed before the Royal Court on the 14^th April 1967 ("the Lease") whereby the public of the Island of Jersey ("the Lessor") demised to the Jersey Electricity Company Limited ("the Lessee") a portion of land at La Collette for 42 years commencing on the 24^th June 1964 at an annual rent of £1,000.  The Lease was subsequently varied by a contract passed before the Royal Court on the 23^rd April 1999. 

2.        Clause 22 of the Lease confers (i) on the Lessee a right of renewal, which can be exercised up to five times, in each case for a period of ten years on the same terms and conditions save as to rent, and (ii) on the Lessor "the right to increase the rental payable"[1] by the Lessee for each renewal period, the amount of any increase to be fixed by agreement and, in default of agreement, to be determined by arbitration. 

3.        The mechanism for arbitration is set out in clause 24.  Each party is entitled to appoint one arbitrator and, in the event of disagreement between them, a third may be appointed by the arbitrators jointly.  The clause concludes with the words "and the decision of the said arbitrators or the majority of them shall be final and without appeal."

4.        In May 2005 the Lessee exercised its right to renew the Lease for a ten year extension from June 2006.  The Lessor sought an increase in rent.  The parties were unable to agree the amount of any increase, and it was therefore accepted that the matter would need to be referred to arbitration. 

5.        However, the arbitration mechanism specified in the Lease was varied by an agreement made between the parties in the course of correspondence in April/May 2011 ("the 2011 Agreement").  The terms of that correspondence will be considered in more detail below, but in essence the effect of the agreement was that instead of each side appointing an arbitrator, with an opportunity for a third to be appointed in the event of disagreement, the parties agreed to the joint appointment of a single arbitrator.  It was common ground between the parties that the agreed variation would also apply to future rent review disputes.  

6.        They also agreed that the arbitration should be resolved in a two-stage process.  The first involved a determination of the basis for the rent review, and of the matters which might be taken into account or disregarded in fixing the new rent: the parties agreed that a lawyer was more suitable to determine those issues.  The second stage involved the determination of the new rent:  for that, the parties agreed to appoint a valuer. 

7.        The arbitrator in relation to the first stage, Nicholas Dowding QC, issued his award on the 18^th July 2012 ("the 1^st Award").  Although this involves a degree of over-simplification, the main issue before the arbitrator at that stage was essentially whether (as the Lessee contended) the effect of the Lease was that any rental increase would necessarily be limited so as to produce a similarly nominal figure as had been agreed in the 1960s, or whether (as the Lessor contended) the determination of any increase was at large, such that the arbitrator would be entitled to take into account matters such as the current open market rental value.  On that point, the arbitrator preferred the Lessor's argument.  The second question concerned the date from which any increased rent would be payable.  As to that, the arbitrator again preferred the argument of the Lessor, holding that any increased rent would be payable with effect from the commencement date of the renewed lease, not from the date (if later) on which the increased rate was determined. 

8.        The second stage of the arbitration was determined by Stephen Downham FRICS MCIArb, who issued his award on the 24^th July 2015 ("the 2^nd Award").  He determined the rent for the renewed period of ten years from the 24^th June 2006 to be £1,000 per annum.

9.        The Lessor then sought leave to appeal against the 2^nd Award pursuant to Article 21(3) of the Arbitration (Jersey) Law 1998 ("the Arbitration Law").  In essence, the Lessor's argument was that Mr Downham erred in law, and fundamentally misunderstood the findings in the 1^st Award. 

10.      The matter came before T.J. Le Cocq Esq., Deputy Bailiff, on the 21^st October 2015.  In a careful, reserved judgment given on the 8^th January 2016 he decided two issues - first, that the exclusion provision in clause 24 of the Lease did not apply to the arbitration regime that had been established under the 2011 Agreement, and second that there was a sufficiently arguable case for leave to appeal to be granted under Article 21(3). 

11.      Only the first of those issues is challenged on appeal.  The Lessee contends that the exclusion provision in clause 24 of the Lease continued to apply to the arbitration regime established under the 2011 Agreement.  For its part, the Lessor disputes that, and it also submits that the wording of clause 24 is in any event insufficient to oust the jurisdiction of the Royal Court for the purposes of Article 23.[2] 

The effect of clause 24

12.      It is convenient to start by considering whether clause 24 would, on its face, be sufficient to preclude any appeal to the Royal Court.  If not, then the question whether it was incorporated into the 2011 Agreement would not matter.  (We mention in passing that the learned Deputy Bailiff did not deal with this issue in terms, because he held that the provision formed no part of the 2011 Agreement, but nevertheless he appears to have assumed that clause 24 would have precluded any appeal to the court if it had applied). 

13.      Before the enactment of Article 23 of the Arbitration Law, it might fairly have been suggested that any agreement to oust the jurisdiction of the court would be contrary to public policy, or would at least be so abnormal as to justify a presumption being raised against interpreting any contract as having that effect unless very clear wording was used.  Since the enactment of Article 23, however, no such objections can be raised.  The legislation now expressly contemplates the possibility of excluding a right of appeal to the court, which no doubt represents one aspect of a wider policy objective designed to achieve finality in arbitration awards:  see Jersey Sports Stadium Ltd v Barclays Private Clients International Ltd [2013] (1) JLR 190, at §18, citing Pioneer Shipping v BTP Tioxide Ltd, 'The Nema' [1982] AC 724.[3]  For these reasons, we do not approach the exercise with any presumption against ouster, and we are not looking for any unusually compelling contractual language.  The starting point is entirely neutral, save to note that the onus of proof is on the Lessee to satisfy the court that its jurisdiction is ousted by clause 24. 

14.      The exercise is simply one of contractual interpretation.  So far as that is concerned, the correct approach is not in doubt and was not in dispute.  The function of the court is to ascertain the parties' intentions, as derived from the words used in the agreement as they would be understood by a reasonable person in the parties' position in the relevant context that was known to them at the time the contract was made: see Home Farm Developments Ltd v Le Sueur [2015] JCA 242, at §32, affirming Hyams v Russell [1970-1971] JJ 1891, at 1910. 

15.      Turning to the words used in this Lease, we consider that the parties made it entirely clear that their intention was to exclude any possibility of an appeal to the court.  That is the only sensible meaning that can be given to the words "without appeal". 

16.      That conclusion is reinforced by considering the relevant context: (i) the Lease was an agreement made between (on the one hand) a public authority and (on the other) a public service company which was majority owned by the public authority, and (ii) the purpose of the Lease was to enable that public service company to continue providing an efficient service to the public.  In that situation, it is entirely understandable that the parties would have wished any disputes to be resolved economically and expeditiously, without adding layers of appeal. 

17.      A number of authorities were cited to us in which different contractual wording has been considered by the courts in other cases.  It has, for example, been held that where the parties have agreed that an arbitration award would be "final and binding", that is not sufficient to oust the jurisdiction of the court: see Mark Amy Ltd v Olcottt Investments Ltd [1996] JLR 333 & [1998] JLR 62, and Essex County Council v Premier Recycling Ltd [2006] EWHC 3594.  We do not derive any real assistance from this case-law, because it is not dealing with identical wording to that in clause 24, nor is it dealing with an identical factual context to that of the Lease as a whole.  In particular, there is a fundamental difference between agreeing that an arbitration award shall be "binding" (meaning that it cannot be ignored) and agreeing that it shall be "without appeal" (meaning that it cannot be challenged in court). 

18.      Finally, the Lessor sought to support its argument by reference to the fact that the Deputy Bailiff had granted permission to appeal against the 2^nd Award, on the basis that there was (in the Lessor's words) a "very strong possibility of [the Lessor] succeeding" in reversing it.  In our judgment, that is an irrelevance.  The question whether the 2^nd Award was arguably wrong, or even very strongly arguably wrong, is entirely fortuitous, and it cannot affect the answer to the issue under appeal.  The correct interpretation of an exclusion clause must be ascertained from the words used in the contract, construed in their relevant context at the time the contract was made - not by reference to subsequent events.  The correct interpretation cannot be influenced by the possibly unwelcome consequences for one party or the other.  The effect of an exclusion clause is by definition to preclude any judicial consideration of an award, and the court cannot dilute the effect of a clear provision simply because it suspects that on the particular facts of the case in hand (assuming that judicial consideration were to be allowed) the award might well have been set aside.  A contract means what it means, irrespective of the varying factual contexts in which it might fall to be construed.  (We say nothing about an interpretation which would necessarily lead to absurd results in all circumstances:  that is not this case). 

19.      For these reasons, in our judgment the effect of clause 24 is indeed to preclude any right of appeal to the court under Article 23 of the Arbitration Law.  The next question is whether clause 24 applies under the 2011 Agreement. 

The application of clause 24

20.      The issue is again one of contractual interpretation, but here the relevant instruments that need to be interpreted are the letters and emails passing between the parties and their legal advisers which comprise the 2011 Agreement.  We would emphasise this point at the outset, because it appears that the learned Deputy Bailiff's starting point in §18 of his judgment was to focus instead on the interpretation of clause 24 of the Lease:-

"In my view the position advanced on the part of the [Lessor] 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. "

That was, in our judgment, the wrong point of departure.  The question under this heading is to ascertain whether clause 24 was incorporated into the 2011 Agreement, and that obviously requires the court to consider the true meaning and effect of that agreement, not of the Lease.

21.      The correct approach to contractual interpretation has already been outlined above, but it is worth emphasising again because there is a suggestion in §19 of the learned Deputy Bailiff's judgment that he approached the matter by reference to his own view of what a reasonable bargain would have been, rather than by analysing the words of the contract that was actually made:-

"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 a 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."

The correct starting point in any case of contractual interpretation is to construe the words used by the parties in their bargain.  In cases of ambiguity, it may well be appropriate to consider the perceived commercial sense of any competing interpretations, but even then the court should be very wary about speculating as to what it (the court) might consider to have been a commercially sensible bargain for the parties to make, rather than interpreting the words used: in this regard, we would refer to the cautionary words expressed by the Supreme Court in Arnold v Britton [2015] AC 1619, which should be taken as good law in this jurisdiction.  

22.      Before turning to the detailed wording of the 2011 Agreement, it is important first to identify the relevant context.  The following four factors are particularly significant:-

(i)        The agreement made in the course of correspondence in April/May 2011 was not made in a vacuum between parties with no previous contractual dealings.  Rather, as is obvious, the agreement was made between two parties who had negotiated at arms' length more than 40 years earlier and had entered into a detailed, written contract which had been performed ever since. 

(ii)       Although the parties contemplated in that correspondence the possibility that they might enter into a free-standing arbitration agreement,[4] in the event they never did.  As a result, the agreement between them in April/May 2011 only makes sense if the correspondence is read together with the Lease.  If the correspondence were to be read completely in isolation, any putative arbitration agreement between the parties would be both meaningless and inconclusive: in particular, it would not on its face identify the property in respect of which the rent is to be determined, and it would not make any provision for the parties to accept the determination of the single arbitrator (irrespective of any right of appeal to the court). 

(iii)      It is important to recognise that clause 24 of the Lease does two things.  First, it provides a regime for the appointment of arbitrators.  Second, it specifies the effect of the arbitral award. 

(iv)      The 2011 Agreement was made after the Lessor had already indicated an intention to initiate the dispute resolution mechanism which had been agreed in the Lease.  In particular, the letter from Appleby of the 7^th April 2011 referred in terms to "the arbitration provision set out in Clause 24 of the Lease" and stated that the Lessor had "determined to refer the matter to arbitration and to seek the resolution of the rent review dispute".  The Lessor plainly had no entitlement to have that dispute resolved by means of arbitration other than by reference to clause 24 of the Lease, and accordingly that was the mechanism it was proposing to operate. 

23.      For this accumulation of reasons, the agreement contained in the correspondence in April/May 2011 can only sensibly be treated and interpreted as a consensual variation of the mechanism for arbitration set out in the Lease.  The question for the court is accordingly to ascertain the extent to which that mechanism was varied.  In particular, the court must ascertain whether the last few words of clause 24 (which as we have already found would, if they remained operative, have precluded any appeal to the Royal Court under Article 21 of the Arbitration Law) were disapplied in relation to the arbitration process to which the parties then agreed. 

24.      That being the correct approach, in our judgment the learned Deputy Bailiff erred in considering (in §20 of his judgment) whether the words "shall be final and without appeal" in clause 24 of the Lease could "be severed from the sentence in which they appear and imputed ... into the new arbitration agreements" (emphasis added).  The correct question was almost exactly the reverse - namely, whether under the 2011 Agreement the relevant words in clause 24 had been severed and were not included in the agreement between the parties.  The exclusion provision undoubtedly formed part of the arbitration regime to which the parties had subscribed under the Lease: the relevant question before the court was whether the parties agreed to disapply it to the arbitration regime under the 2011 Agreement.  

25.      So far as that is concerned, the first and most obvious point is that the correspondence does not say expressly that the last few words of clause 24 are disapplied.  Accordingly, if those words were disapplied, it can only have been the result of implication.  That is not a promising starting point for the Lessor, because it is at best difficult to imply a term into an agreement which is inconsistent with its express terms. 

26.      Turning to the actual wording used in the relevant correspondence, the most important letter is the one from Appleby to the Lessee dated the 7^th April 2011.  We would draw particular attention to the following parts of that letter:-

(i)        As noted above, the Lessor referred in terms to the "rent review under the terms of the Lease" and to its own decision to "refer the matter to arbitration".  The letter was accordingly being written in the context of a proposed arbitration under clause 24. 

(ii)       The Lessor's suggestion was 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 un-wieldy and potentially will add significantly to the expense of the arbitration."  In our judgment, both the language used in this passage and the sense that was conveyed by it strongly indicate that the only change to the arbitration regime under the Lease that was being proposed was the appointment of a single arbitrator, instead of two or three.  In particular: (i) Appleby's comments were directed towards the mechanism for dispute resolution "by arbitration", not to the separate question whether there might, or might not, be a right of appeal to the court once the arbitration process had run its course.  (ii) The only suggested disadvantage of the mechanism under the Lease that was identified in the letter was the need for two, or possibly three, arbitrators.  True it is that, in identifying that disadvantage, the letter used the word "principally", but in the context of the document as a whole that was clearly being used imprecisely to mean the equivalent of "namely".  (iii) The suggested advantage of appointing a single arbitrator was to make the mechanism under the Lease less unwieldy, and to reduce costs: by contrast, the introduction of a further stage of potential dispute by way of an appeal to the court, which is excluded on the face of the Lease, would have had exactly the opposite effect. 

(iii)      In the next paragraph, Appleby stated that the Lessor, "having determined to refer the matter to arbitration", was seeking the Lessee's agreement "to alter the mechanism for resolution of the dispute so as to agree to the appointment of a single arbitrator" (emphasis added).  Again, this strongly suggests that the proposal was only to alter the number of arbitrators ("so as"), but otherwise to leave the provisions of the dispute resolution regime under the Lease entirely unchanged.  In particular, the letter clearly suggests that, if the Lessee were to agree the proposal and a single arbitrator were to be appointed, his decision would result in a "resolution" of the dispute.  That is entirely inconsistent with the suggestion now being made by the Lessor, namely that it was also proposing the introduction of a right of appeal to the court.  

(iv)      The same strong implication can be derived from the penultimate paragraph in the letter, which said that "if agreement can be reached as to the appointment of a single arbitrator the matter can proceed in that way" (emphasis added):  no other agreement was being sought.  As such, the proposal was to vary one part, but not the whole, of clause 24. 

(v)       In the final substantive paragraph of the letter, Appleby reverted to the perceived advantage of the proposal, inviting the Lessee to agree "in the interests of costs".  Any alteration of the existing arbitration mechanism under clause 24 which had the effect of introducing a right of appeal to the court (which was hitherto unavailable) could not possibly have been justified by reference to any supposed saving of costs:  on the contrary, an appeal against the arbitrator's decision to the court would necessarily increase costs. 

27.      For these reasons, it is quite apparent that the proposal being made to the Lessee was simply that a single arbitrator should be appointed, instead of two or three, but apart from that the parties would leave the arbitration mechanism under the Lease unaltered, including the exclusion provision in clause 24.  That is how the proposal was understood and accepted by the Lessee's legal advisers, Mourant Ozannes, who replied by letter dated the 20^th April 2011 saying that their client "agrees in principle to your proposal to alter the mechanism for resolution of the rent review dispute so as to appoint a single arbitrator" (emphasis added).  No other alteration had been sought and no other alteration was agreed.  The rest of Mourant Ozannes' letter was concerned with matters of case handling (namely, the two-stage process described in §6 above).  The only other point to note is that they did suggest that the Lease would need to be varied prior to the appointment of the arbitrator "in order to include a revised arbitration mechanism" (emphasis added).  Once again, the repeated use of he word "mechanism" demonstrates that the parties were discussing and agreeing a variation of the first part of clause 24 (dealing with the appointment of the arbitral tribunal), not with the latter part (dealing with the binding and unappealable effect of any award). 

28.      Appleby replied by email on the 4^th May 2011.  We would draw particular attention to the following passages in that email:-

(i)        In §1 they said they were pleased that the Lessee had agreed to "the arbitration provisions in the lease being varied to provide for a single arbitrator ... That is plainly more efficient in terms of costs and time" (emphasis added).  This again underlines the fact that (i) what was happening is properly to be regarded as a variation of the regime laid down in the Lease, not as a free-standing arbitration agreement, and (ii) that variation was dealing only with the "mechanism" to be adopted in arriving at an arbitral award - i.e. the variation of clause 24 was limited only to the agreed appointment of a single arbitrator, and did not include the deletion of the exclusion provision:  the introduction of a right of appeal could not properly have been welcomed as involving any reduction "in terms of costs or time".

(ii)       In §3 they said that no variation of the Lease was required:  instead, "where there is to be a departure from the arbitration provisions in the lease" the parties could sign a separate agreement which could be shown to the arbitrator "so that ... he can be satisfied that his appointment is valid".  Accordingly, it is apparent that Appleby considered that (i) what was being proposed was an implementation of the arbitration regime under the Lease, but subject to an agreed variation, (ii) the only specified variation was the appointment of a single arbitrator, instead of two or three, and (iii) the only necessary element of formality was an agreement capable of satisfying the arbitrator as to the parties' agreement to his appointment.  No suggestion was being made that any other term altering the provisions of the Lease was being proposed or had been agreed.

29.      Mourant Ozannes replied by email dated the 27^th May 2011.  In response to §1 of the Appleby email, they simply said "This is agreed".  In response to §3, Mourant Ozannes indicated that the Lessee was content to proceed "with a written agreement" and without a formal variation of the Lease. 

30.      In the event, as already noted, no separate written agreement was ever made.  As a result, the only agreement to vary the terms of the Lease is contained in the correspondence summarised above.  For the reasons we have given, in our judgment the true effect of that agreement was to vary the dispute resolution mechanism under the Lease solely by providing for the appointment of a single arbitrator.  That aside, the terms of the Lease, including the exclusion provision in clause 24, remained in place. 

31.      The Lessor points out (as did the learned Deputy Bailiff) that clause 24 refers on its face to the binding and unappealable nature of the decision of "arbitrators" (in the plural) and as such its language is inapplicable to an award made by a single arbitrator.  However, that linguistic point (relying on words used in the agreement made in the 1960s) cannot be allowed to dictate the answer to the question as to the true content of the parties' bargain made in 2011.  The content of that later bargain is to be derived from an examination of the relevant correspondence.  Once that exercise has been undertaken, and once it has been clearly established that the parties intended to vary one part of clause 24 but not the other, the words "the decision of the said arbitrators or the majority of them" can and should be read (as amended by necessary implication in light of the 2011 Agreement) as applying to the decision of the single arbitrator. 

32.      The Lessor also drew attention to the fact that the parties agreed a two-stage process, and suggested that this involved a further departure for the regime laid down under the Lease.  We disagree.  The adoption of a two-stage process was nothing more than an agreement as to the order in which the relevant issues for arbitration would be resolved, and the identity (and qualifications) of the relevant arbitrators.  It did not touch on the question whether the arbitral awards could be appealed to the court.  The Lessor's argument can be tested in this way.  Let us assume that no agreement was made to appoint a single arbitrator, but the parties nevertheless agreed to resolve the dispute in two stages.  On that assumption, each side would have duly appointed a lawyer to resolve the first stage, and if those two appointees had disagreed they would have appointed a third under clause 24.  In that situation, it could not possibly have been suggested that the sequential disposal of the issues under arbitration could have resulted in the disapplication of the exclusion provision in clause 24.  In our judgment, this demonstrates the irrelevance of the two-stage process to the issue we have to decide. 

33.      Both sides also tried to bolster their arguments by reference to certain correspondence which post-dated the 2011 Agreement.  On the one hand, the Lessee sought to rely on the joint letter of appointment from Appleby and Mourant Ozannes to Mr Dowding QC, dated the 31^st August 2011, which stated that "the parties have agreed to a variation of clause 24 so that their current dispute may be submitted to a single arbitrator for adjudication" (emphasis added): it may fairly be said that that is entirely consistent with the analysis we have set out above.  On the other hand, the Lessor sought to rely on certain correspondence in August 2012 passing between the parties' legal representatives after the 1^st Award had been made, in which they were discussing when time would start to run for the purposes of any appeal:  that may be said to be entirely consistent with the Lessor's argument in this appeal.  However, we do not derive any assistance from either set of correspondence.  We are concerned in this appeal only with the correct interpretation of the relevant arbitration agreement itself, which had been formed under the terms of the Lease, as varied by the correspondence in April/May 2011.  The letter of appointment in August 2011 and the correspondence in August 2012 long post-dated the conclusion of the relevant agreement, and as such none of it is admissible as an aid to interpretation. 

Conclusion

34.      For the reasons set out in this judgment we would allow the appeal and dismiss the Respondent's Notice.

Authorities

Arbitration (Jersey) Law 1998.

Jersey Sports Stadium Ltd v Barclays Private Clients International Ltd [2013] (1) JLR 190.

Pioneer Shipping v BTP Tioxide Ltd, 'The Nema' [1982] AC 724.

Hyams v Russell [1970-1971] JJ 1891.

Mark Amy Ltd v Olcottt Investments Ltd [1996] JLR 333 & [1998] JLR 62.

Essex County Council v Premier Recycling Ltd [2006] EWHC 3594.

Arnold v Britton [2015] AC 1619.