Pursuer: MacColl; Lindsays

Defender: Reid QC; McClure Naismith LLP

14 December 2012

Introduction
[1] Pentlandfield business park is located at Roslin, Midlothian. It was formerly owned by the firm of Robert W Ferguson & Co. The defender and his late wife were the partners and trustees of the firm. On 1 July 2002 the firm let the subjects to the pursuer for a period of five years. The lease was registered in the books of Council and Session. Clause 15 contained an option. The pursuer had the right to purchase the subjects for £5,322,000, with entry on 1 July 2007.

[2] On the same date that the lease was granted, the parties also executed a minute of agreement. Many of its terms are similar or identical to the equivalent terms in the lease. Both documents stipulated that in the event of the option being exercised, the firm would grant a renunciation of the lease. That is set out in clause 15(i) of the lease and clause 3(i) of the minute. By letter dated 1 December 2006 sent by its solicitors, the pursuer exercised the option.

[3] Prior to the date of entry, a deed of renunciation was prepared. It was signed on behalf of the parties on 29 June 2007 and 2 July 2007 respectively. The operative part reads:

"we renounce with effect from Third July Two thousand and seven in favour of the landlords the tenant's interest in the Lease subject to our rights and obligations pertaining to and interest in the sub-lease, licenses and other rights of occupation as detailed in the Schedule; And the landlords agree to the foregoing renunciation as is evidenced by their execution hereof"

[4] Despite the terms of that document, the parties' solicitors signed a joint application form on 16 August 2007. They requested the chairman of the Royal Institution of Chartered Surveyors to nominate an arbitrator. In the box headed "Nature of Dispute", each party alleged that the other had breached its repairing obligations under the lease. The pursuer estimated its loss at £455,000, while the firm estimated its loss to be £250,000.

[5] The RICS chairman appointed Mr Allan Robertson of Watts Group plc to act as the arbitrator. Since proceedings began in 2007 both parties have been legally represented. The arbitration has proceeded slowly. I understand that delay has in part been caused by the question of whether to make an expert referral. The arbitration pleadings reiterate the pursuer's claim for damages for alleged breaches of the lease. There is, however, no counterclaim.

[6] In 2011, the defender radically altered his position. For the first time, he advanced the argument that the arbitrator had no power to make any award, standing the terms of the renunciation. After a debate in February 2012, Mr Robertson rejected that argument. He held that the parties' conduct had given him the power to award damages. Subsequently, some minor procedural steps have been taken in the arbitration. On 9 March 2012 Mr Robertson issued an e-mail containing directions. On 8 May 2012, the defender's solicitor proposed a site visit as a mode of settling matters. A week later, he sent an e-mail stating that the defender is content for a hearing to be fixed as soon as possible. No substantive steps have, however, been taken pending the outcome of these proceedings. I was informed that to date, the pursuer has incurred legal fees of over £90,000 in respect of the arbitration.

The Present Action
[7] The pursuer raised the present action in late March 2012 as a protective measure. It wished to preserve its position in the event that for any reason the arbitration is found to be invalid. The sum sought (£1,205,662.95) and the grounds of action are the same in the litigation and the arbitration.

[8] The defender has lodged a counterclaim seeking "declarator that there is no arbitrable dispute between the parties in respect of the Lease". He also seeks interdict against the pursuer from "progressing or taking any step in relation to the arbitration between the pursuer and the defender before Allan Robertson, Arbiter". On 2 July 2012 the defender sought interim interdict. Lord Hodge refused the motion, holding that there was no prima facie case and that the balance of convenience did not favour the defender: [2012] CSOH 116.

The Issue
[9] The written notes of argument cover four matters: (a) jurisdiction, (b) all parties not called, (c) personal bar, and (d) mora, taciturnity and acquiescence. At the debate, both counsel focused on the central question. Does this court have jurisdiction to interfere in the arbitration?

Submissions
[10] Mr Reid submitted that on a proper construction of the deed of renunciation, no further claims could be made under the lease. Both parties had discharged their rights. That construction, he argued, made commercial sense. Both parties intended that the lease regime should come to an end. The arbitration clause itself fell. He accepted that it was unfortunate that this argument had been raised at such a late stage. However, it was always open to take a "prejudicial plea": Christison's Tr v Callendar-Brodie (1906) 8 F 928, 931-2 per Lord President Dunedin. As the arbitration had proceeded on the false premise that the arbitrator does have jurisdiction, the court should intervene to prevent further wasted expenditure.

[11] Mr MacColl advanced two arguments. First, it is for the arbitrator and not the court to determine the substantive issues in dispute between the parties. If the defender wishes to argue that the renunciation document provides him with a defence to the claim, he should make that argument within the arbitration process. Secondly, having regard to the whole background circumstances, the renunciation should not be construed as discharging all prior claims that have arisen under the lease. Mr McCall pointed out that neither party had adopted that position when the arbitration began.

Discussion
[12] The decision in this case turns on the answer to two questions: (a) what is the proper construction of the deed of renunciation? (b) what is the effect of the reference to arbitration?

What is the proper construction of the deed of renunciation?
[13] The general rule is clear. The acceptance by a landlord of a renunciation of the lease by a tenant "implies a discharge of all claims against him": Lyons v Anderson (1886) 13R 1020, 1024 per Lord Justice Clerk Moncreiff. Lord McLaren has explained the rationale underlying the rule: "the landlord, who makes the concession of discharging the tenant from all further liability under the lease, is not to be presumed to have done this without getting some consideration in the shape of the discharge of such claims as the present": ibid at p.1025.

[14] Accordingly, from 3 July 2007 neither side could have sued the other under the lease. But that proposition is subject to two exceptions. Certain matters relating for example to the sub-lease were expressly reserved. In addition, the renunciation was potentially subject to any further agreement made by the parties.

What is the effect of the reference to arbitration?
[15] Scots law has always "permitted private parties to exclude the merits of any dispute between them from the consideration of the Court by simply naming their arbiter": Hamlyn & Co v Talisker Distillery (1894) 21R (HL) 21, 27 per Lord Watson. As Lord Dunedin succinctly put it "If the parties have contracted to arbitrate, to arbitration they must go": Sanderson & Son v Armour & Co 1922 SC (HL) 117, at p.126.

[16] Once the matter has been referred to arbitration, the arbitrator must "decide that he has jurisdiction before proceeding to consider the matters referred to him": Christison's Tr per Lord Dunedin. The scope for the court to intervene is strictly limited. Various formulae have been used. It must be "perfectly plain" that an arbitrator is being called on to exercise powers which he does not possess, which will "depend on the nature of the case, and whether the anticipated excess of power is clear ... upon the agreement": Dumbarton Water Commissioners v Lord Blantyre (1884) 12 R 115, 119 per Lord President Inglis. In the same case (at p.120) Lord Shand suggested the test of "very exceptional circumstances" before the Court will interfere and interrupt the progress of an arbitration. That might occur if the arbitrator entertained claims "which were in law demonstrably out with the reference": Wemyss v Ardrossan Harbour Co (1893) 20R 500, 504 per Lord President Robertson.

[17] Before turning to the reference in this case, I make these preliminary observations. Given the timing, it seems likely that the renunciation was in the parties' minds at the time that they made the RICS application. At that stage each sought to make a claim against the other. This is not a unilateral attempt to revive rights which had been discharged: Walker's Trs v Manson (1886) 13R 1198. At least until 2011 the defender's conduct implied that he consented to the arbitration. Not only did he participate in the process, he secured an award of expenses against the pursuer.

[18] In my view, this case can be decided on a short point. The parties had freedom of contract. They were entitled to agree not only that they had a dispute arising out of the lease, but also that they wished to resolve it by means of arbitration. There was no prohibition upon them conferring jurisdiction upon Mr Robertson.

[19] Mr Reid argued that the RICS application form was merely an administrative document. He maintained that in order to revive the pursuer's rights, the parties had to enter into another formal agreement which expressly referred to the renunciation and reconstituted the discharged rights. I disagree. In my view the RICS form expressed the parties' clear intention. It is consistent with what has happened since then.

Conclusion
[20] I conclude that the parties have properly referred their dispute to arbitration. Those proceedings are now taking place before the arbitrator. In my view Mr Robertson does have jurisdiction. This court should not interrupt that process. The arbitration should proceed to a conclusion. I shall dismiss the counterclaim.