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IN ARBITRATION APPLICATION 1 OF 2013


OUTER HOUSE, COURT OF SESSION

[2014] CSOH 83

P870/13

OPINION OF LORD WOOLMAN

in Arbitration Application 1 of 2013

________________

Petitioner: Connal QC; Pinsent Masons LLP

Respondent: Reid QC and David Bartos, DWF LLP

9 May 2014

Introduction

[1] In 1969, a hotel was leased for a term of 125 years, with 'upward only' rent reviews every 14 years. The parties are the current tenant and landlord. They were unable to agree a figure for the last rent review and referred the matter to arbitration. The tenant contended that the annual rent should remain at £350,000, while the landlord argued for an increase to just over £1.1 million. The arbitrator fixed a figure of £802,500 per annum.

[2] In the present petition the tenant makes a serious irregularity appeal under rule 69 of the Scottish Arbitration Rules. It also seeks leave to bring an error of law appeal under rule 68. There is a significant degree of cross-over between the two branches of the case. The parties have sought anonymity in terms of section 15 of the Arbitration (Scotland) Act 2010. This opinion therefore does not include any details that might lead to their identification.


The arbitration

[3] The lease of the hotel provides that in the absence of agreement between the parties, the President of the Royal Institute of Chartered Surveyors in Scotland should appoint the arbitrator. That is what happened in this case. Shortly after his appointment, the arbitrator sent a letter to the parties' surveyors setting out the procedure he intended to follow. It included a timetable for the lodging of submissions and counter submissions. The surveyors had already agreed that the arbitration would be conducted as a 'desktop' exercise.

[4] In his initial letter, the arbitrator stated that the surveyors should identify any point of law that arose during the course of the proceedings. He also asked them to declare what role they intended to adopt in the arbitration. That standard query follows RICS guidance on the matter: Surveyors Acting as Advocates 2nd ed. 2009 and Surveyors Acting as Expert Witnesses 3rd ed. 2009. The guidance states that surveyors must inform a tribunal whether they intend to act as an advocate, expert witness, or (exceptionally) in a dual role. In this instance both the surveyors replied that they intended to act as advocates. That meant that they required the permission of the arbitrator before proffering their own opinion evidence.

[5] The surveyors' initial submissions adopted a similar format. Each described the layout of the hotel, the terms of the lease, and the competing means of valuation. They then explained their methodology and set out detailed calculations to show how they arrived at the proposed rental figure. As indicated above, they arrived at very different conclusions. Both surveyors acknowledged that this was a complex valuation.

[6] The landlord's surveyor preferred a valuation based upon earnings before interest, tax, depreciation and amortisation (an 'EBITDA' valuation). He also calculated the market rental value per hotel room. In arriving at his conclusions, he assumed that a new tenant would carry out a major redevelopment of the hotel to maximise its trading potential. He used comparable evidence from seven other hotels. Each of his two valuations resulted in a similar figure. The tenant's surveyor favoured a valuation based upon the hotel's trading potential, but also assessed the rental value by reference to comparable transactions, the unit of comparison being rent per room.

[7] The counter submissions exposed deep fault lines between the parties. The tenant's surveyor was highly critical of the landlord's surveyor's approach. He suggested that the opinion of the landlord's surveyor should be treated as "of no account", because he had not acted within the confines of his role as an advocate. He also stated that it was a "flight of fancy" for the landlord's surveyor to suppose that a new tenant would carry out a major redevelopment. He urged the arbitrator to reject the comparable evidence, on the basis that none of the seven hotels provided a useful comparator in terms of location or grading. In addition, he argued that the evidence relating to one hotel was inadmissible, as the trading information was confidential and would not have been available to a hypothetical tenant.

[8] The tenant's surveyor summarised his views on the landlord's valuation as follows:

"[It] has no basis in fact, disregards the terms of the lease and bears no relation or regard to the rent review assumption that the property be valued as the subject property in its 1970 configuration.

The valuation approach is so fundamentally flawed, ill-founded and wrong that I respectfully request that it should be disregarded in its entirety."

[9] Subsequently, the arbitrator issued his determination. It is a very short document that sets out the essential facts, the procedural history, and the submissions. He indicated the valuation methodology he adopted and produced a table setting out the elements of his valuation and the conclusion he reached.

General principles

[10] The 2010 Act is modelled on the Arbitration Act 1996. Much of the wording is similar or identical. I agree with Lord Glennie's observations in Arbitration Appeal number 3 of 2011 2012 SLT 150 that English decisions provide helpful guidance in this area. The founding principles set out in section 1 of the 2010 Act underpin all questions of arbitration in Scotland. They are (i) the object of arbitration is to resolve disputes fairly, impartially and without unnecessary delay or expense; (ii) the parties should be free to agree how to resolve disputes, subject only to such safeguards as are necessary in the public interest; and (iii) the court should not intervene except as provided by the Act.

[11] Those principles reflect and restate a long line of authority. For example, in Zermalt Holdings v Nu-Life Upholstery Repairs [1985] 2 EGLR 14, Bingham J 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."

[12] More recently, Lord Clarke stated in Hashwani v Jivraj [2011] 1 WLR 1872, at para 61:

"One of the distinguishing features of arbitration that sets it apart from proceedings in national courts is the breadth of discretion left to the parties and the arbitrator to structure the process for resolution of the dispute."

The serious irregularity appeal

The grounds founded upon

[13] Mr Connal submitted that there had been serious irregularity in the arbitration because: (a) the landlord's surveyor had acted not only as an advocate, but also as an expert; (b) the arbitrator had himself acted as an expert; (c) his reasoning was deficient or absent; and (d) he wrongly took into account inadmissible material. Mr Connal contended that a fresh arbitration should take place before a new arbitrator.

Competency

[14] On behalf of the landlord, Mr Reid took a preliminary point. He submitted that the appeal was incompetent, because the tenant had failed to exhaust its rights of appeal or review within the arbitral process: rule 71(2). On Mr Reid's analysis, the main thrust of the tenant's challenge concerned inadequate reasons. It should therefore have asked the arbitrator to clarify or remove any ambiguity in his determination within 28 days of the award being issued: rule 58. If a problem remained, the tenant could have asked the court to direct the arbitrator to give further reasons: rule 71 (8).

[15] I agree with Mr Connal that rule 58 does not allow an arbitrator to rewrite a determination. I disagree with his submission, however, that it only concerns minor matters, such as typographical errors. In my view, the rule does provide significant corrective powers. That implements the philosophy that arbitration is intended to be a stand-alone process, with its own remedial mechanisms.

[16] In this instance, however, if the tenant had made an application under rule 58, it would not have disposed of the whole challenge. There would still have remained the questions of acting as an expert and taking account of inadmissible evidence. I am reluctant to introduce another stage into the process which would only result in further expenses. I therefore decline to uphold the competency challenge, particularly in the light of the fuller reasons set out below.

Was there serious irregularity?

[17] So far as material, rule 68 states:

"(2) 'Serious irregularity' means an irregularity of any of the following kinds which has caused, or will cause, substantial injustice to the appellant-

(a) the tribunal failing to conduct the arbitration in accordance with-

(i) the arbitration agreement,

(ii) these rules (in so far as they apply), or

(iii) any other agreement by the parties relating to conduct of the arbitration ...

(c) the tribunal failing to deal with all the issues that were put to it, ...

(h) an arbitrator having not treated the parties fairly"

[18] Three general points can be made about serious irregularity appeals. First, they are designed as "a long stop available only in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected": Departmental Advisory Committee on Arbitration Report on the Arbitration Bill 1996. That passage has been quoted with approval in several cases, see for example Walsall Metropolitan Borough Council v Beechdale Community Housing Association Ltd [2005] EWHC 2715. Second, the court will not intervene on the basis that it might have done things differently, or expressed its conclusions on the essential issues at greater length. Third, such an appeal can only succeed if there has been substantial injustice. If the result of the arbitration would have been likely to be the same or very similar, then there is no basis for overturning the award: Checkpoint Ltd v Strathclyde Pension Fund [2003] EWCA Civ 84. Accordingly a dissatisfied party has to meet a high test.

(a) Did the landlord's surveyor act as an expert witness?

[19] In the course of his submissions, the landlord's surveyor used the expression "in my opinion" and similar expressions. I do not regard that wording as converting him from being an advocate to being an expert. This was a desk-top exercise in which neither party relied on expert witnesses. Instead the surveyors advanced their most persuasive arguments to try to achieve the best result for their respective clients. Almost inevitably there was some blurring of the lines between the role of advocate and expert witness. But the arbitrator was made aware of this issue before making his award. The tenant's surveyor highlighted it in his counter submission and invited the arbitrator to disregard the landlord's approach. It was then a matter within the province of the arbitrator. He required to determine "Sthe admissibility, relevance, materiality and weight of any evidence": rule 28. Accordingly, I am not satisfied that this ground of challenge is made out. It would only fall within rule 68 if it could be established that the arbitrator himself acted irregularly in consequence of the conduct of the landlord's surveyor.

(b) Did the arbitrator act as an expert?

[20] This point is crystallised in the following way in the petition:

"On a proper reading of the Arbitrator's Decision, given his reasoning (or lack of reasoning) on the key issues, his selection of figures and his approach generally, the Arbitrator has departed from his appointed role and instead issued what is in fact his own view on the matter. In so doing he is in breach of rule 68 (1)."

[21] I see no force in this point. The lease envisages that the parties intended any rent review arbitration to be a practical exercise carried out quickly by an experienced surveyor. That is the natural inference from the fact that, in the absence of agreement, the president of the RICS in Scotland will appoint the arbitrator, and that the arbitration should be completed within one month (although that did not occur here). The arbitrator would be expected to deploy his knowledge in arriving at his decision. My conclusion is reinforced by the parties' submissions. They are couched in language designed to speak to another professional with expertise in the field. I see nothing within the award to indicate that the arbitrator stepped beyond his role.

(c) Failure to give reasons

[22] The failure to give reasons lies at the heart of the tenant's case. Mr Connal argued that his client was entitled to proper reasons and that the arbitrator's reasoning was "in many cases obscure, not apparent to the parties or, in some instances, non-existent". He contended that the conclusion emerged out of nowhere.

[23] The nature and length of the reasons to be given in an individual case will depend upon the whole context within which the decision is given. An arbitrator is only required to deal with the essential issues, not every point that is raised: Fidelity Management SA v Myriad International Holdings BV [2005] EWCH 1193 (Comm.) at para 9. Further, an award may be upheld, even if the reasoning is poor and unimpressive: Compton Beauchamp Estates Ltd v Spence [2013] EWCH 1101 (Ch) at para 79.

[24] One approach is to ask whether the award makes sense. I conclude that the answer in this case is 'yes'. Even although the arbitrator's reasoning is very brief, it is sufficient to explain the conclusion he reached. The fact that in some instances he 'averaged' the figures presented by the respective surveyors is not surprising and does not require elaborate analysis. An exercise of professional judgment of this type is not readily susceptible to elaborate reasons. For that reason I shall not make a direction in terms of rule 71 (8), asking for further reasons.

(d) Comparative materials

[25] The rent review clause calls for an open market valuation. Accordingly, the only relevant information was that available to the hypothetical tenant: Cornwall Coast Country Club v Cardgrange Ltd [1987] 1 EGLR 146. The tenant argues that it was a serious irregularity for the landlord's surveyor to refer to confidential information about a particular hotel. I find it difficult to characterise the matter in that way. It was only one out of the seven hotels relied upon as comparators. Moreover, the tenant's surveyor apprised the arbitrator of the point in his counter submission. He continued by stating that "if you are inclined to accept it [the trading information] then I respectfully suggest the following should be taken into account in the way that you apply it". He went on to make five points about that trading information. I reject this ground on the basis that it is truly a point of law, not a serious irregularity.

Summary

[26] I hold that taken individually and collectively, there was no serious irregularity and this branch of the case fails.

The error of law appeal

The basis of the challenge

[27] The tenant alleges that the arbitrator failed:

i. to determine the relevance and admissibility of opinion evidence proffered by the landlord's surveyor

ii. to act as an arbitrator and instead used his own judgement

iii. to analyse the evidence placed before him

iv. to reject evidence relating to one hotel relied upon as a comparator by the landlord as being inadmissible or irrelevant

v. to carry out a proper calculation and instead "averaged" the submissions of the parties

vi. to analyse the parties' submissions on gross and net operating profit

Identifying the point of Scots law

[28] I find it surprising that the tenant relies upon the same factors for both branches of its case. If something is an error of law, it cannot also be an irregularity. In my view, the grounds relied upon by the tenant are not truly points of law. Essentially, it criticises the arbitrator for not providing fuller reasoning. It is a cliché to state that valuation is more of an art than a science, but in my view it is worth repeating here. The arbitrator's task was to exercise his professional judgement to arrive at the correct figure. Indeed he might find it startling to be told that the task he undertook bristled with so many legal problems. It follows that I hold that the threshold test for making a legal error appeal is not made in terms of rule 70 (4) and rule of court 100.8(2). Although that is enough to refuse leave to appeal, I shall consider the other applicable criteria.

The court's decision on the point will substantially affect the tenant's rights

[29] I accept that the court's decision will substantially affect the tenant's rights. Over the course of the rent review period, the difference between the rent proposed by the tenant and that fixed by the arbitrator involves a seven figure sum. Mr Connal explained that this decision was of the utmost importance to the tenant. I do not accept Mr Reid's argument that the tenant must aver that another arbitrator will award a lower rent figure. To my mind that would present an insuperable hurdle.

The arbitrator was asked to decide the point

[30] In determining whether the arbitrator was asked to decide the point of law, the test is whether it was fairly and squarely placed before him: Safeway Stores plc v Legal & General Insurance Society [2005] 1 P & CR 9. Because I hold that there is no discernible point of law, this is a highly artificial exercise to undertake. But I would in any event hold that the matters now relied upon were not put to the arbitrator as points of law. The parties were clearly aware of the necessity to identify such points. They did raise a separate point relating to the proper interpretation of the lease, upon which the arbitrator sought the advice of senior counsel. Neither party identified any other point of law.

Is the arbitrator's decision obviously wrong?

[31] The tenant submits that the arbitrator was obviously wrong, because he failed:

"to adequately consider, accept or reject and thereafter explain to the parties his rulings on all matters of substance placed before him, particularly in the context of a cumulative calculation in which each general ruling has a general impact but each individual ruling had a cumulative impact in the context of the total result."

[32] For a decision to be obviously wrong, it must involve something in the nature of a major intellectual aberration, or "making a false leap in logic or reaching a result for which there was no reasonable explanation": HMV UK Ltd v Propinvest Friar Ltd Partnership [2012] 1 Lloyd's Rep 416. In my view no such finding can be made here. The arbitrator used his professional judgment to arrive at the rental figure on the basis of the submissions presented to him.

Is the point one of general importance, and is it open to serious doubt?

[33] In my opinion this is not a case of general importance. The arbitration concerned a bespoke lease and any decision in relation to this rent review clause will have no wider resonance. I do not accept Mr Connal's submission that the test is satisfied, because there is dearth of authority on (a) the interpretation of rent review provisions in leases and (b) the proper approach of arbitrators in dealing with such matters. In any event, for the reasons given above, I hold that the arbitrator's decision is not open to serious doubt.

Conclusion

[34] For the reasons I have set out I shall refuse leave to appeal and dismiss the petition.