The Rolls Building
7 Rolls Buildings
Fetter Lane
London EC4A 1NL
BEFORE :
HIS HONOUR JUDGE SIMON BARKER QC
Sitting as a Judge of the High Court
BETWEEN :
(1) BRENDA SUMNER
(2) NICK MAKIN
Claimants/Applicants
- and -
(1) COSTA LIMITED
(2) P A DICKINS
Defendants/Respondents
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MR J DAGNALL (instructed by Nick Makin) appeared on behalf of the Claimants
MR A ROSENTHAL (instructed by Plexus Law) appeared on behalf of the Defendants
JUDGMENT
JUDGE SIMON BARKER QC :
These proceedings concern a rent review determined by an arbitration under a lease of 35 Market Street, Falmouth in Cornwall. The claimants are the landlords, the first defendant is the tenant and the second defendant is or was the arbitrator.
35 Market Street comprises a ground floor, designated for class A1 and/or class A3 units with a connected basement; a first floor for letting as an office or residents; and the second and third floor also for letting as an office or residents. The lease was granted as from 29 September 2005 for a term of 15 years at an initial rent of £40,000 per annum. The first rent review date was 29 September 2010.
The lease provides for an upwards only rent review which, absent agreement, is to be determined by an arbitrator whose task is to determine, acting as an arbitrator not an expert, the sum at which 35 Market Street might reasonably be expected to be let in the market as at the rent review date, after making specified assumptions, which are set out in paragraph 1.1 of the second schedule of the lease, and having no regard to specific disregards, which are set out at paragraph 1.2 of the second schedule.
The second schedule also requires that the arbitrator is to be a suitably experienced chartered surveyor, who in default of agreement between the parties would be nominated by the President of the Royal Institution of Chartered Surveyors. The second defendant was nominated by the President and was appointed on 19 May 2011.
On 30 June 2011, the second defendant issued agreed directions for the conduct of the arbitration which included : (1) representation by surveyors, one for each party, who would submit reports as experts and written responses to each other's reports, again as experts; (2) there was no point of law in issues between the parties; (3) comparables were to be identified on the schedule and evidence about each comparable was to conform as far as possible with an agreed format of specific requirements; (4) the second defendant was entitled, at his self-discretion, to take the initiative in ascertaining any fact, point of law or other matter. In the event that he did exercise inquisitorial powers, the parties were to be informed and to be given an opportunity to comment on both the inquiry made and the response received; and, (5) the second defendant also observed the right to hold a hearing, if he considered it appropriate, otherwise the arbitration was to be an "on paper" exercise.
In the event Mr Richard Calder, of Calders based in Tamworth, submitted a report and response as the claimants' expert, and a Miss Katie Bapty, of Colliers International in Bristol, did the same on behalf of the first defendant.
The experts addressed three closely proximate potential comparables: (1) 37/38 Market Street, occupied by Mountain Warehouse, where the rent was agreed on a new lease commencing in October 2009 at £62,500 per annum, which equated to a Zone A Rental of £47,71 per square foot; (2) 34 Market Street, occupied by Go Mobile, where a new lease had commenced on 1 March 2010 at a rent of £20,500 per annum producing a Zone A Rental of £42,50 per square foot before certain allowances; and, (3) 33 Market Street, occupied by the Card Factory on a lease agreed in February 2011 and completed in May 2011 at an adjusted rent of £38,950 per annum equating to a Zone A Rental of £61,68 per square foot.
The second defendant's award was issued on 30 January 2012. In arriving at his valuation, the second defendant did not derive assistance from Go Mobile, as a comparable; this was principally because the Zone A Rental was much smaller and the shop had an obscure frontage.
The critical reasoning in the second defendant's Award appears at paragraphs 9.4 to 9.6 and is as follows :
Ms. Bapty states that the Card Factory letting should not be attributed any significant weight due its timing post subject review date and could not have had any secondary effect of influencing a prospective tenant bidding for the subject property at the review date. Mr. Calder contends the transaction was agreed closest to the subject review date by inference drawn from the date on which the agreement to lease was signed.
On the basis of the evidence presented to me by Mr. Calder it was not until 4 months after the subject review date that the Card Factory signed a binding contract on 33 Market Street. Accordingly for this reason, having regard to the established case law on post review date evidence, I prefer Ms. Bapty's approach and have not accordingly attributed any weight to this transaction.
The transaction which I find to be most helpful based on the evidence presented to me is the Mountain Warehouse letting two doors away from the subject premises, 11 months before the subject reviewed it. I therefore feel that I can do no better than take the Zone A rate of £47,71 psf ITZA demonstrated by this letting transaction in relation to the ground floor retail unit."
The words to emphasise, in particular, from those three paragraphs containing the critical reasoning are from paragraphs 9.5: "... having regard to the established case law on post review date evidence".
The upshot was that the award reviewed rent for 35 Market Street at £36,200 per annum, the effect of which was that the rent remained the initial rent at £40,000 per annum.
By 3 February 2012, the claimants sent papers to counsel, Mr John Dagnall, to draft proceedings and on 3 February they, or the second claimant, wrote a pre-action letter to the first defendant contending that the second defendant was wrong to have attached no weight to the Card Factory and invited the first defendant to join them in a joint approach to the second defendant to reopen the arbitration. The claimant's essential line was that the relevant case law in fact supported reference being made to post review date comparable lettings.
As to case law, the second claimant's letter through his solicitor's practice, referred to the decision of Staughton J in Segama NV v Penny Le Roy (1984) 1 EGLR 109, cited from the passage of Staughton J's judgment at page 109 A-C . He also referred to Re ESC Publishing (1990) (Digest) a decision of Knox J. These authorities and the passage at page 109 of Staughton J's judgment are included in the "Handbook of Rent Review" at paragraph 7.9.6 under the heading "(e) Evidence of open market lettings and rent review agreements taking place after the review date: admissible."
Paragraph 7.9.6 of the Handbook had been expressly referred to in Miss Bapty's report where she observed at paragraph 7.2 of her report :
"...evidence of open market lettings taking place after the review date is admissible but that there remains at least one difference between pre-and post review date transactions, namely that post-review date lettings cannot have any 'secondary effect' on market sentiment at the review date."
Proceedings were issued on 24 February by the claimants against the first defendant. By their first claim, the claimants' complaint centred on the second defendant's un-particularised reference to case law on post-review date evidence and sought relief under section 68 of the Arbitration Act 1996 on the grounds of serious irregularity, alternatively under section 69 of the 1996 Act by way of an appeal of law.
The relief sought was : (1) under section 68, remitting the award to another arbitrator or to the arbitrator generally or at least on the Zone A determination and its consequences on rent review; (2) under section 69, granting leave to appeal and determination of questions of law ((a) whether a transaction agreed four months after the review date is admissible and has potential weight in relation to its primary effect, that of evidencing the state of the market at the review date; (b) this question was essentially a negative version of (a); and, (c) whether a reasonable arbitrator in a position of the second defendant could in the circumstances logically, reasonably and properly give the Card Factory letting no weight and simply derive the Zone A rent from that for Mountain Warehouse), and then remitting the award to the second defendant in whole or as to Zone A or varying the award to substitute £61.68 as the Zone A figure; and, (3) ordering costs against the first defendant following the arbitration.
Also on this date, 24 February 2012, the claimants issued a second claim pursuant to section 57 of the 1996 Act for the second defendant to clarify and set out his full reasoning and case law and for the removal of the second defendant as arbitrator and/or for relief sought in the first claim. However, these proceedings were never served and maybe ignored for present purposes.
At the same time, on 24 February 2012, agents for the claimant's solicitors wrote to the second defendant asking him (1) to set out and explain the case law to which he had regard and how he had applied it; (2) to admit that there had been irregularities in the conduct of the arbitration; and, (3) to withdraw or reconsider his award.
The first defendant's position was set out by its solicitors in a letter dated 13 March 2012. In short, the first defendant did not accept that there had been a series of irregularities or that the second defendant had erred in law. However, the first defendant did not intend to oppose the claimant's application to appeal the second defendant's award decision.
By letter dated 16 March 2012, the second defendant replied that his reasons were set out in his award and he had nothing further to add, save that he stood by the award.
This prompted a further set of proceedings by the claimants joining both the first and the second defendants as defendants. The claim was issued on 13 April 2012. The relief sought by this claim is :
under sections 57, 68 and 70 of the 1996 Act that : (a) the arbitrator be required to clarify his award and set out his full reasoning and case law to which he had regard and how he regard to it; and, (b) remitting the award to a different arbitrator or to the second defendant generally or at least as to the Zone A determination and its consequences;
under sections 57, 69 and 70 of the 1996 Act : leave to appeal and determination of the three questions referred to above on an appeal. Those are the three questions that were put in the letter of 24 February from the claimants' agents to the second defendant;
under section 24 of the 1996 Act, for removal of the second defendant; and,
for an order that the first defendant, or if not the first defendant then the second defendant, pay the costs or that the costs be costs in the arbitration.
Following service of these proceedings and the supporting witness statement the second defendant made a witness statement dated 1 June 2012.
In that statement the second defendant made clear, first, that although the claimants were obliged to give him notice of the claim under section 68 and 69 of the 1996 Act, he did not intend to take part in those matters unless requested to do so by the court. Secondly, he noted that he had been joined as a party because his removal was sought under section 24 of the 1996 Act. Thirdly, he referred to and expanded upon his reasoning at paragraphs 3.18 to 3.23 and 9.4 to 9.5 of his award. At paragraph 3.23, the second defendant then expressly referred to paragraph 7.2 of Miss Bapty's report and to her citation of and summary of the Handbook of Rent Review, paragraph 7.9.6. The second defendant referred, as Mr Calder had, to Miss Bapty's classification of the Card Factory letting as an "anomaly" and to not attaching much weight to it for two reasons : uncertainty over the floor area and post-review date nature of the evidence. Fourthly, he provided, at paragraphs 11 to 13 of his witness statement, an explanation of his reasoning and application of the “case law” referred to.
By this explanation the second defendant :
conceded that the reference to “case law” was not well chosen, i.e not technical in the way that a lawyer would refer to “case law” and confirmed that nothing was relied on beyond that provided by the parties ~ I observe that this confines the references to “case law” to the commentary from the Handbook cited by Miss Bapty and correctly summarised in paragraph 7.2 of her report;
referred to volatility and falls in retail rents, as commented on by Miss Bapty, who had observed that it had been falling in the South West throughout 2009 and 2010 and that Falmouth had been consistent with the South West in that regard, and Mr Calder, who had observed that the market had been affected in 2008 and 2009 by the banking crisis but after 2009 confidence had been re-stabilised;
referred to his continued view that the letting 12 months prior to the review date with market conditions being known is a more reliable indicator of value than one concluded seven months after the review date by reference to undisclosed terms four plus months after the review date; and,
confirmed that in fact he did weigh Card Factory against the other comparables and decided to attach no weight to it for reasons including : (i) there was no independent evidence as to the date when the terms for the transactions were agreed, as to which he observed that Miss Bapty and Mr Calder disagreed; (ii) there was no evidence of 33 Market Street being openly marketed at the review date; (iii) there was no evidence as to the terms of the agreement for lease containing conditions to be fulfilled prior to grant of the lease or whether terms were varied between agreement and grant; and, (iv) there was no evidence that the previous lease, which had been to Toni and Guy and was extant at the review date, was contracted out of the Landlord Tenant Act 1954.
~ It is fair to observe that none of these considerations as to what was not in evidence were commented on in the award and that open marketing for a review date would be likely to attract rather than to deter offers and tenants.
Finally, at paragraph 18 of his witness statement, the second defendant addressed an alternative approach to valuation on the hypothesis that weight was to be attached to the Card Factory letting. He explained that he would not have disregarded Mountain Warehouse altogether and given weight only to the Card Factory, and he concluded that he would have made a small adjustment and then split the difference between the letting adopted (that of Mountain Warehouse) and the letting of the Card Factory for Zone A purposes. He observed that the relevant rent would, even then, still have fallen short of £40,000 per annum.
Against this background the claimants now apply for an order entitling them to cross-examine the second defendant. Unsurprisingly, this is opposed on his behalf by his counsel, Mr Rosenthal.
Mr Dagnall submits that cross-examination is essential in order to understand or be clear as to the second defendant's reasoning. Mr Dagnall points to the original reasons at section 9 of the award; the confirmation of those reasons with a statement that the second defendant had nothing to add; and then, three months later, a witness statement explaining the reasons already given and supplementing those reasons by four matters about 33 Market Street, noted above, as to which there was no evidence.
What has emerged is that no reliance, as such, is placed on “case law” and that that was a non-lawyer’s term of art intended to refer to the summary from the Handbook of Rent Review, paragraph 7.9.6, cited by Miss Bapty. That the second defendant appears to have, or may be criticised as apparently having, misunderstood the substance of the note in paragraph 7.9.6 is not a ground for cross-examination, although it may be a ground for permission to appeal, which is a matter for later consideration.
As to the four matters about which there was no evidence before the second defendant, Mr Dagnall submits that: (a) is correct but adds nothing; (b) was not raised at the time and logically does not make sense because marketing only leads to higher offers; (c) a variation in terms was not raised by either party and, again logically, could not have been part of the second defendant's reasoning or, if it was, he should have raised the point for responses from the parties; and, as to (d), the first sentence is correct but again no one raised the point about contracting out of the Landlord and Tenant Act 1954 and, therefore, the same point applies as was made in relation to (c).
Mr Dagnall submits that the second defendant's evidence at paragraphs 11, 12 and 18 is inconsistent with his award and his letter of 16 March 2012. Mr Dagnall criticises paragraph 18 as a form of pre-emptive strike, whereby the second defendant is setting out the likely outcome of a remittance. Mr Dagnall criticises this as an indication of partiality based on the outcome being conveniently less than £40,000 and premature.
As to the ambit of cross-examination, Mr Dagnall observes that the court will be astute to ensure that it is limited; and, that the real area is confined to ascertaining with certainty the second defendant's reasons for his award.
Mr Dagnall points to section 52 of the 1996 Act and, absent agreement to the contrary, an arbitrator's duty to give reasons as an essential element of an award. Mr Dagnall accepts that negative reasons may be omitted, with rejection being implied or inferred, but submits that positive reasons must be stated so as to be discernable.
Mr Dagnall also challenges the second defendant's bona fides on the basis that the claimants have serious doubts about the second defendant's version of events as to what he actually did take into account, and adds that the arbitrator is actually before the court.
Mr Dagnall also makes submissions as to the consequences of a refusal of permission to cross-examine the arbitrator, specifically : (1) the claimants want to be able to submit that inferences must be drawn enabling them to succeed on their substantive challenges to the award; and, (2) this includes whether there may be any point in doubt. Although recognising that in reality no court would put itself in such a situation, Mr Dagnall submits that contemplation of the consequences of refusing this application reveals the problems that will or may well flow.
As to jurisdiction, Mr Dagnall submits :
the application for cross-examination is only partly about the arbitrator being required to give reasons; it is also a matter within the court's province, or inherent power, to control its own process in order to ensure that matters before it are dealt with justly. In this context, the general principle set out at section 1(c) of the 1996 Act, that the court should not intervene except as provided by the 1996 Act, should be understood as not inhibiting the court’s general power over its own process;
section 70(4) of the 1996 Act provides for the court to order a tribunal which has given either no reasons or inadequate reasons, with the result that the matter in issue on an application or under appeal cannot be considered properly, to state the reasons in sufficient detail for that purpose;
in principle there is no jurisdictional objection to an order for cross-examination;
authority, Lendon v Keen [1916] 1 KB 294, exists for the proposition that an arbitrator may be compelled to appear before a court by subpoena, albeit that it is not clear from the report itself whether that subpoena was confined to the production of documents;
the instant hearing, apart from this application and the question of whether or not permission should be given to appeal, is a final hearing. It is accepted that for the purposes of an appeal or an application it would be a rare and special case for oral evidence to be taken, but even then the jurisdiction exists (see CPR, Part 32.7 in relation to cross-examination of a witness on an application or hearing other than a trial);
in this case the court may be satisfied that the claims are not ‘fishing’, there are material inconsistencies crying out for explanation : (a) as to what were the full reasons for the award, and (b) in order to reconcile the apparent inconsistencies between the award and the letter of 16 March, on the one hand, and the second defendant's statement, on the other hand; and,
the position of an arbitrator is quite different from that of a judge, and the policy reasons for ‘protecting’ a judge in cross-examination about his or her determinations are not applicable.
In response, Mr Rosenthal submits that :
as to the law, the jurisdiction is at best questionable, and he submits that, in the light of section 1(c) of the 1996 Act, the limits of the court's power to require reasoning is that set out at section 70(4);
that power is a power to state, not a power to be examined upon, reasons. Logically, it envisages only written material being ordered;
although a final hearing, these proceedings are not a trial, they are applications under section 68 and, subject to permission to appeal being granted, section 69 and section 24 (for removal);
accordingly, the relevant Part in the CPR is Part 32.7(2), and the notes thereto make clear that, whilst no guidelines are given in relation to cross-examination, it will only be in an exceptional case where such an order is made;
there is no escaping that an order would be equivalent to an order for cross-examination of a judge on his or her judgment, which would be improper;
the court has appropriate powers to correct inadequacy in an award and/or in arbitrators under sections 68 (serious irregularity) 69 and 24 (removal) of the 1996 Act. Cross-examination is not usual, even on an application for removal;
as to the circumstances of the case, it is clear from the second claimants third statement and Mr Dagnall's skeleton argument that the purpose of cross-examination is or includes to attack the second defendant's professional character, going beyond partiality and embracing dishonesty. There is no or no sufficient basis for any such concerns to be harboured and cross-examination would be speculative and ‘fishing’ to attempt to make good a case put too high;
the claimants have been driving at this high level of attack on the second defendant since their letter of 24 February 2012 which sought an explanation as to “case law”, required an admission of irregularity, and sought the second defendant's agreement to withdraw and reconsider hisaward. Mr Rosenthal accepts that the second defendant should have answered the first request and explained the reference to “case law” by stating that in fact no reliance had been placed on case law. He submits that the second defendant correctly refused to admit irregularity; and, in relation to the third point, that there is no jurisdiction for an arbitrator to withdraw his or her award. Thus, properly understood, the second defendant’s letter of 16 March 2012 states that he will not respond to either the required admission of irregularity or the request to withdraw his award;
the second defendant's witness statement is not a response to a request for clarification under section 57(3) of the 1996 Act, but is an answer to the three questions raised in the letter of 24 February 2012 and pursued in the third action to which the second defendant is joined as a party;
responding by way of written evidence was and is the appropriate course for an arbitrator in such a situation; requiring an arbitrator to give oral evidence goes too far;
the context of the award is a dispute conducted and decided on paper only by non-lawyers who are all specialists in valuation. Accordingly their awards are not to be expected to be to the standard of a judgment, nor are they expected to give rise to oral evidence;
paragraph 18 of the second defendant's statement addressing how weight would have been given is included only in the context of the second and third points raised under the letter of 24 February 2012, the latter of which specifically asks the second defendant to reconsider his award, and the claim under section 24 for his removal in the third action, from which it is clear that all the second defendant was doing was stating what would or might have been the result had it been necessary or appropriate for him to take into account the Card Factory, without in any way undermining his decision to attach no weight to that letting in arriving at his decision in his award;
the key criteria by which an award is to be judged are those identified or referred to by Morgan J in the recent case of Compton v Spence [2013] EWHC 1101 (Ch) citing from speeches of Lord Phillips, then Master of the Rolls, in English v Emery Reimbold & Strick Ltd [2002] EWCA Civ 605, and Lord Brown in South Bucks District Council v Porter (No 2) [2004] 1 WLR 1953, and in particular Lord Phillips' observation that the award must identify the issues vital to the conclusion and explain their resolution but need not be comprehensive, and Lord Brown's observation that the reasoning must give rise to substantial doubt as to whether there has been an error in law;
what the claimants are really seeking are further reasons sufficient to undermine the award. That that is an approach and purpose which is improper because ‘further reasons’ are addressed by Parliament through the provisions of section 70(4) of 1996 Act, under which a court may compel the statement of further reasons where those given are not sufficient for the court to consider the matter before it; and,
finally, there is no basis for the attack made on the second defendant's integrity.
In my judgment, the starting point must be to consider the court's jurisdiction. Mr Rosenthal for the second defendant does not submit that there is no jurisdiction; albeit that he submits that it is doubtful that there is jurisdiction. I accept the force of Mr Rosenthal's submissions that in sections 1(c) and 70(4) in the 1996 Act discourage intervention by the court, but they do not prohibit or point against the existence of jurisdiction to direct cross-examination. Section 1(c) is not mandatory, "must not", but is discouraging, "should not". I accept that section 70(4) is aimed at putting the court in a position to resolve an application rather than providing a portal through which a party may call for an arbitrator to pass and to speak to his or her award. Section 1(c) and section 70(4) do not go so far, on their natural and ordinary meaning, as to impose anything approaching an absolute bar an arbitrator being required to state his reasons orally under cross-examination; nor does the section go so far as to require the court alone to set out what is to be stated.
In short, I do not rely on the possibility of an order for an arbitrator to speak orally to the reasons for an award.
The question is, should that happen in this case? In my judgment it should not.
The arbitratral process selected by the parties was written, leaving it to the arbitrator to call for oral participation if he thought fit. The process was to involve only experienced surveyors who had relevant valuation experience, it was not to involve lawyers. The key requirement was that an expert decision should be made by someone experienced in the field upon considering the expert evidence of experienced professionals selected by the parties. The sole issue – the market rent at the review date - was a factual and subject to assumptions and disregards familiar to the three professionals involved.
The second defendant was engaged to and has produced a written award. By his, and his own counsel's, concession it is not flawless, the reference to “case law” is inapposite or wrong. Further questioning about this will not assist the determination pending final applications : Should there be a remission for serious irregularity? Should there be permission to appeal and an appeal the same result? Should the arbitrator be removed? Either the challenges can be made good by considering, comparing and contrasting the award and the 16th March letter, on the one hand, and the second defendant's statement, on the other, or they cannot.
As to partiality and dishonesty, this is obviously a very serious matter but not of itself a ground for permitting cross-examination, not least because Parliament could easily have included such a provision in the 1996 Act had it considered that the arbitrators should be so exposed when their integrity is under challenge.
As to the question of drawing adverse influences, it is clearly open to the claimants to seek to have such inferences drawn but it would be wrong in principle to accede at this stage to a submission that such inferences could not be refuted. That would be an affront of the rules of natural justice because the second defendant would be denied the opportunity to answer an assertion that an adverse inference should be drawn.
For my own part, I view the application to the cross-examination as unnecessary and inappropriate in this case. If the reasons given in the award can be shown on the face of what the second defendant has written to be not good enough or worse then the claimants will succeed.
Further interrogation of the arbitrator would be contrary to the principles which underpin the process of arbitration, both generally and as deliberately selected by the parties in this case, namely a relatively inexpensive and swift mechanism for obtaining an expert final decision to resolve the commercial dispute.
That is my judgment.