RICHARD SNOWDEN QC:
- This is an application by the Defendant, London & Surrey Investments Limited ("LSI") for a stay, pursuant to the Arbitration Act 1996 or the inherent jurisdiction of the Court, of a Part 8 Claim issued on 18 November 2010 by the Claimant, Wilky Property Holdings plc ("Wilky"). LSI claims that it has invoked a dispute resolution provision in an agreement between the parties which is an arbitration clause and which permits the appointed arbitrator to determine all issues arising. Wilky contends that the clause in the agreement is a provision for expert determination of a limited number of issues and that it is entitled to issue its Part 8 Claim to have the Court rule upon a variety of questions concerning the meaning and effect of the agreement and the proper scope of the expert determination.
Background
- Wilky is a property investment and development company. By an agreement dated 1 November 1996 which took the form of a letter sent by LSI which was countersigned by Wilky ("the Agreement"), LSI was appointed to provide a consultancy service to Wilky in connection with its business (defined as "the Service"). The Agreement provided, among other things, for the payment to LSI by bank standing order of a fixed monthly "Consultancy Fee". The Agreement also provided for the payment of a further fee, called a "Profit Share", whenever an "Approved Scheme" came to fruition. The definition of "Approved Scheme" covered the property consultancy and related matters entrusted to LSI as set out in the Schedule to the Agreement and as might be notified by Wilky in writing to LSI from time to time.
- For present purposes, the relevant provisions of the Agreement concerning the determination and payment of the Profit Share were as follows:-
"16. In addition to the monthly Consultancy Fee, [LSI] shall be entitled to charge a further fee (the Profit Share) whenever an Approved Scheme comes to fruition, whether by way of sale of the whole or part, or by retention, and the following paragraphs of this Letter of Appointment are intended to define, as far as possible the circumstances in which that Profit Share becomes payable, when it will become payable and the amount of that share.
(i) The Profit Share means 20% of the net profits earned consequent upon the completion of each Approved Scheme save that we [LSI] acknowledge that if any such scheme is retained as an investment, you [Wilky] have the right to elect to pay us either 20% of the Net Profit that might reasonably have been expected to be released if such scheme had been sold at arm's length in the market place or 20% of the net rents and profits you actually receive from time to time from such retained investment.
(ii) "Net Profits" means the profit which results from the completion of any Approved Scheme after the payment of all borrowings and other forms of loan or indebtedness, the deduction of all reasonable costs, interest payments, expenses, charges and other payments whether of a capital nature or otherwise and whether to third parties or otherwise including all proper overheads.
……
17. The right to receive a Profit Share shall be subject to [LSI] complying with the following obligations:
(i) The Service shall have been provided continuously from the time any scheme becomes an Approved Scheme to the date of Completion. If for any reason other than as provided for in this Clause 17 we [LSI] shall unilaterally determine this Letter of Appointment our Profit Share entitlement shall be reduced in respect of each Approved Scheme to such an amount as we shall agree between us fairly reflects on a quantum meruit basis our efforts to discharge our responsibilities hereunder up to the time of determination (the Compensatory Payment) and in the event that we cannot agree such Compensatory Payment either of us shall have the immediate right to refer the matter of calculating the amount of the Compensatory Payment to an independent expert pursuant to the terms of Clause 22 hereof."
- Clause 22, which is at the centre of the dispute between the parties on this application, was as follows:-
"22. If there is any difference or dispute as to the meaning or effect of the terms of this letter of appointment, or the calculation of the Profit Share to be paid thereunder, we agree and acknowledge that either you or we acting independently shall be at liberty to refer any such dispute to an independent expert to be appointed by either you or ourselves jointly, but in the event that you or ourselves can not agree upon such an expert, then either we or yourselves shall request the president of the Royal Institution of Chartered Surveyors to appoint an expert to determine the dispute, whose decision thereon, and the liability for the costs of the referral, shall be binding upon ourselves and yourselves."
- LSI provided services to Wilky under the Agreement, but a dispute arose between them. LSI claimed that it was entitled to the payment of various sums under the Agreement and terminated the Agreement by a letter dated 9 October 2009. Discussions then took place between the parties but no consensus was reached. On 17 August 2010 LSI's solicitors wrote a letter to Wilky's solicitors summarising LSI's complaints and claims which were said to amount to about £5.975 million. The letter sought proposals for payment, but indicated a willingness to attend a without prejudice meeting. It also purported to invoke Clause 22 of the Agreement, stating that this required the appointment of an independent expert. The letter asked Wilky to provide the name(s) of any expert(s) that it would be willing to see appointed under Clause 22.
- When Wilky responded but did not provide any suitable names as requested, on 8 October 2010 LSI requested that the President of the Royal Institution of Chartered Surveyors ("the RICS") make an appointment pursuant to Clause 22. The form upon which LSI made its request ("the RICS Form") contained a box entitled "Please state whether you require the appointment of an arbitrator or independent expert", to which LSI answered "Independent Expert".
- The RICS Form, as completed by LSI, then gave the following brief description of the nature of the dispute:
"The dispute concerns the proper settlement of development profit share and quantum meruit due to the Claimant under a 1996 Consultancy Agreement. It relates in particular to development profit share and other payments arising from a number of projects, notably a healthcare development for the NHS and MoD, agreed value in excess of £60M, and ongoing proposals for a business park project at Gatwick. Many of the costs and surpluses figures are actually agreed although some remain in dispute, including in relation to the fair proportion of the Defendant's internal overhead costs properly attributable to the projects."
- By a letter dated 15 October 2010, LSI's solicitors sent a Statement of Case running to 8 pages and 20 appendices to Wilky's solicitors, outlining LSI's claims. Depending upon how Profit Share was to be calculated, LSI's Statement of Case put its total claim at between £6.9 million and £16.9 million.
- LSI's main claim was to a Profit Share in relation to a purpose-built health centre in Aldershot which combines Army and NHS primary medical services ("the Aldershot Scheme"). That project was completed in about 2008 and leased by Wilky to the MoD and the NHS. LSI claimed a Profit Share under Clause 16 amounting to a lump sum of 20% of the Net Profit that might reasonably have been expected to be released if the Aldershot Scheme had been sold in the market place, or 20% of the net rents and profits Wilky actually receives from time to time from the scheme. LSI claimed in addition that its Profit Share should be increased to take account of what it alleged to have been mismanagement of the Aldershot Scheme by Wilky.
- LSI further claimed to be entitled to Compensatory Payments under Clause 17 in relation to a number of Approved Schemes in relation to which it had rendered consultancy services but which had not completed when the Agreement was terminated. These included a business park development adjoining Gatwick Airport ("the Gatwick Green Scheme").
- On 20 October 2010, Wilky's solicitors wrote to the RICS contending, for a variety of reasons, that LSI was not entitled to invoke Clause 22 at all and that a number of the matters contained in LSI's RICS Form and in its Statement of Case fell outside the scope of Clause 22. By way of illustration, Wilky contended that LSI was not entitled to any amount under Clause 16 in relation to the Aldershot Scheme unless and until Wilky made an election to sell or retain the scheme; and that unless and until such election was made giving rise to an entitlement to a Profit Share, there could be no reference of any dispute about the calculation of such Profit Share to any expert under Clause 22. Wilky also denied that it had mismanaged the Aldershot Scheme and claimed instead that LSI's Profit Share should be reduced on account of an alleged failure by LSI to provide financial assistance for the Aldershot Scheme.
- Notwithstanding Wilky's objections, on 29 October 2010 the President of the RICS appointed Mr. Derek Pye ("Mr. Pye") as an independent expert to determine the dispute between LSI and Wilky. Mr. Pye is a barrister practising from No.5 Chambers in London, and is a fellow of the RICS and the Chartered Institute of Arbitrators.
- On 1 November 2010 Mr. Pye sent to LSI and Wilky copies of a draft agreement for his services to carry out an expert determination. On 5 November 2010 Wilky's solicitors wrote to Mr. Pye, enclosing a copy of their earlier letter to the President of the RICS indicating that for the reasons set out therein, Wilky would not be signing Mr. Pye's draft agreement for services. Wilky's solicitors also circulated a draft of a Part 8 Claim Form by which, according to its preamble, Wilky intended to seek declaratory relief running to 22 numbered paragraphs (some of which included further sub-paragraphs) "as to the construction, meaning and effect of …the Agreement."
- Wilky's draft Part 8 Claim Form reflected its solicitors' earlier letter objecting to LSI's claims and raised a wide variety of issues said to be suitable for determination under CPR Part 8 and for the grant of declaratory relief. These included, for example,
i) a declaration that no entitlement to Profit Share under Clause 16 or any Compensatory Payment under Clause 17 arises in respect of an Approved Scheme until Completion of that Approved Scheme; and a declaration that the only Approved Scheme that had reached Completion was the Aldershot Scheme;
ii) a declaration that LSI had no entitlement to a Profit Share in respect of the Aldershot Scheme unless and until Wilky made an election whether or not to sell the project; a declaration that Wilky had made no such election; and a further declaration that there could be no expert determination of any Profit Share under Clause 22 unless and until Wilky had made such election; and
iii) a declaration that the right under Clause 22 to refer to expert determination any difference or dispute as to the "meaning or effect of the terms of [the Agreement]" is limited to determining such issues as are necessary for the calculation of "Profit Share" or "Compensatory Payment".
- By a letter to LSI and Wilky dated 15 November 2010, Mr. Pye determined that he had been "validly appointed as expert to decide a dispute within the confines of the wording of Clause 22 [of the Agreement]". Mr. Pye went on to indicate that he did not, at that stage, propose to decide whether or not all matters referred to in LSI's RICS Form or its Statement of Case were within his jurisdiction, but that he was, "nevertheless satisfied at this preliminary stage that there appears to be scope in Clause 22 to deal with at least some of the matters raised by [LSI]." Mr. Pye concluded his letter by noting that, "It appears to me that at least some of the matters raised in the [draft] Part 8 Claim are substantially matters which can be dealt with as part of the Expert Determination".
- The response from Wilky's solicitors was contained in a letter dated 18 November 2010 which reiterated Wilky's objections to any determination by Mr. Pye of his own jurisdiction or as to the scope of Clause 22. The letter also asserted that although Clause 22 referred to an expert determination being "binding", it did not state that it was "final", and so Wilky would remain entitled to challenge any determination by Mr. Pye through the courts.
- On 18 November 2010 Wilky issued its Part 8 Claim in the same form as the draft which it had previously circulated. LSI's response, by its solicitors, was to assert that the Part 8 Claim was designed to frustrate the reference to Mr. Pye and thereby delay payment of the amounts due to LSI. In further communications with Wilky and Mr. Pye dated 23 December 2010 and 4 January 2011, LSI's solicitors also contended, for the first time, that LSI's reference to Mr. Pye was a reference to arbitration and that LSI was entitled to a stay of Wilky's Part 8 Claim.
- Mr. Pye did not share LSI's view that he was conducting an arbitration. He stated that he was conducting an expert determination and by an e-mail dated 5 January 2011, he gave further directions for a preliminary meeting to take place on 13 January 2011 in relation to his determination. Among the matters which Mr. Pye indicated should be addressed at that meeting were a number of issues relating to his jurisdiction and the scope of Clause 22: these included some of the matters raised by Wilky's Part 8 Claim Form.
- Following its assertion that Clause 22 was an arbitration clause, on 5 January 2011 LSI issued an application in the Commercial Court under the Arbitration Act 1996 seeking a stay of Wilky's Part 8 Claim. On 14 January 2011 that application was itself stayed, with liberty to apply, by Mrs. Justice Gloster DBE, who directed that any application to stay Wilky's Part 8 Claim should be made by formal application to the Chancery Division in the Part 8 Claim itself. That resulted in the issue of the present application notice on 24 January 2011, following which the reference to Mr. Pye has not been progressed.
- The only other significant development to which I should refer is that LSI discovered that in February 2011 Wilky placed the Aldershot Scheme on the market with offers invited in the region of £80 million. That figure is higher than the estimate of £58 million upon which LSI had based its claim in October 2010. Shortly before the hearing of this application in May 2011, LSI served a witness statement of its solicitor which indicated that it had reconsidered its position and that it intended to "focus" on its claim for a Profit Share in respect of the Aldershot Scheme and a Compensatory Payment in respect of the Gatwick Green Scheme, reserving its position for the time being in respect of the other claims which it had notified. The witness statement exhibited a revised Statement of Case, but it was unclear whether that document had been sent to Mr. Pye or otherwise acted upon.
Summary of Submissions
- Mr. Matovu QC, who appeared for LSI, contended that Clause 22 is an arbitration agreement which ought, in accordance with the guidance provided by the House of Lords in Fiona Trust & Holding Corporation v. Privalov [2007] UKHL 40, [2007] 4 All ER 951, to be interpreted widely so as to cover all disputes arising in relation to the Agreement. Mr. Matovu contended that LSI is entitled to a mandatory stay of Wilky's Part 8 Claim under section 9(4) of the Arbitration Act 1996, and that it would be for Mr. Pye, as the appointed arbitrator (or any other person who might subsequently be appointed if it were to be determined that Mr. Pye's appointment was invalid), to decide any issues concerning his own jurisdiction as permitted by section 30 of the 1996 Act.
- In the alternative, Mr. Matovu submitted that even if Clause 22 was not an arbitration clause governed by the Arbitration Act 1996, it was nevertheless a valid contractual provision to refer disputes between the parties to binding resolution by an independent person. Mr. Matovu submitted that the Court in these circumstances ought to exercise its discretion to stay the Part 8 Claim so as to permit Mr. Pye to determine the matters referred to him, and that these would include any question as to the meaning and effect of the Agreement or the calculation of the Profit Share or Compensatory Payment due to LSI.
- Mr. Rainey QC, for Wilky, disputed that Clause 22 was an arbitration clause giving rise to a mandatory stay of the Part 8 Claim, or that the Court should exercise its discretion to stay the Part 8 Claim in favour of any reference to Mr. Pye. Mr. Rainey contended that Clause 22 provided for the reference of certain limited issues for determination by an expert and not an arbitrator, and that LSI was seeking to refer matters to Mr. Pye which fell outside Clause 22. He submitted that the Court ought to give directions in the Part 8 Claim which would lead to the determination by the Court of the proper basis for any expert determination under Clause 22.
- At the hearing before me, the parties were agreed that the first question which I have to determine is whether or not Clause 22 is an arbitration agreement within the meaning of the Arbitration Act 1996. My decision on that issue has fundamental consequences for the approach of the Court to the future conduct of the Part 8 Claim and the reference to Mr. Pye. To give but one example, if Clause 22 is an arbitration agreement, a stay of the Part 8 Claim would be mandatory under section 9(4) of the Arbitration Act 1996, whereas if it is an expert determination clause, the Court has a discretion whether to grant a stay. I therefore indicated at the conclusion of the hearing that I would give a reserved judgment on that point, and I adjourned the balance of LSI's application for further submissions in light of my ruling.
- After I had heard oral argument and received further short written submissions from each side on a point that had arisen during the hearing, the Court of Appeal heard argument and, on 18 July 2011, handed down its reserved judgment in Barclays Bank plc v. Nylon Capital LLP [2011] EWCA Civ 826 ("Barclays Bank v. Nylon Capital"). I had been referred in argument to the judgment of the Chancellor at first instance [2010] EWHC 1139 (Ch), and the judgments of the Court of Appeal contained observations on other cases which had been cited to me. I therefore invited, and received, short further written submissions on the case from the parties.
Is Clause 22 an Arbitration Agreement?
- Given the importance of the concept, it is perhaps surprising that the Arbitration Act 1996 does not attempt an answer to the basic question of "What is an arbitration?". The editors of the 2001 Companion Volume to the 2nd edition of Mustill and Boyd, The Law and Practice of Commercial Arbitration in England (1989) (hereafter "Mustill & Boyd") suggest (at para. 30-52) that, "In the absence of guidance, the question must in the end be answered intuitively." It is, however, clear from the commentary in the main work, that intuition is to be guided by reference to a number of factors that have been seen as material to the question of whether a particular process qualifies as an arbitration.
- The first, and obvious place to start, is the terms of the agreement between the parties. The way in which the dispute resolution process is described or labelled by the parties in their agreement is not conclusive as to the true character of that process. Nevertheless the language used by the parties may well provide an important indication of the nature of the process that they intend: see e.g. Palacath Ltd v. Flanagan [1985] 2 All ER 161 at 165f-g.
- In this case, as Mr. Rainey emphasised, Clause 22 refers not once, but three times, to the referral of disputes and differences to an "expert" for his determination. Clause 17 likewise cross-refers to determination by an "independent expert pursuant to the terms of Clause 22". Mr. Rainey observed that the Agreement does not mention "arbitration" or the Arbitration Act at all.
- In the ordinary and natural use of words, there is a clear difference between dispute resolution by "arbitration" on the one hand, and by "expert determination" on the other. In Barclays Bank v. Nylon Capital, Thomas LJ commented at para. 23 that in contradistinction to arbitration,
"expert determination is a very different form of dispute resolution to which neither the Arbitration Act 1996 nor any other statutory codes apply"
- As such, at least prima facie, parties who have, in a carefully drafted written agreement, expressly chosen to refer their disputes to an expert should not be taken to have intended a reference to arbitration.
- It is true that the dispute resolution clauses under consideration in both Palacath Ltd v. Flanagan and Barclays Bank v. Nylon Capital expressly required the person who was to be appointed to "act as an expert and not as an arbitrator", and that Clause 22 does not adopt the same formulation. I do not, however, think that this detracts from the force of Mr. Rainey's submission on the express wording of the Agreement. The "expert and not arbitrator" form of words, when used, puts it beyond doubt that the dispute resolver is not intended to be an arbitrator. In certain cases the court may be able to draw inferences from the failure to use words which are standard form in a particular industry or which have been deleted from a standard form contract. In this case, however, I cannot find anything in the Agreement as a whole or in the commercial background to suggest that the absence of the "expert and not arbitrator" wording is significant; still less can I find anything to suggest that the absence of that form of wording supports a conclusion that the reference to an "independent expert" in Clause 22 was intended to be a reference to an arbitrator.
- For completeness, I should add that although there are cases in which the courts have recognised that an arbitrator may be appointed who has a general or specific expertise in a particular field - and disputes have arisen as to the extent to which such person is entitled to apply his own expertise when acting as arbitrator – those cases do not cast any doubt upon the basic distinction between the process of arbitration on the one hand and expert determination on the other hand. So, for example, in Fox v. PG Wellfair Ltd [1981] 2 Lloyd's Rep. 514 and Checkpoint Ltd v. Strathclyde Pension Fund [2003] 14 EG 124, there was no doubt on the wording of the contract in each case that the process expressly selected by the parties for the resolution of their disputes was arbitration.
- Faced with the express wording of Clause 22, Mr. Matovu urged me to have regard to what he described as "the substance" of what the decision-maker is required to do under Clause 22. He placed reliance upon (i) the role of the decision maker generally and (ii) the breadth of the matters entrusted to him under Clause 22.
- Mr. Matovu's first point was that the role of the decision maker under Clause 22 is to settle disputes that have arisen, and that this is a distinguishing feature of an agreement for arbitration. That submission was based upon a passage from the judgment of Lord Esher MR in Re Carus-Wilson and Greene (1886) 18 QBD 7 ("Re Carus-Wilson"). The case concerned a clause in a contract for sale of land which provided for sale of timber at a valuation to be agreed by two valuers, one appointed by each side, or in default of agreement, by an "umpire" appointed by them both. Lord Esher MR said, at page 9:
"The question here is, whether the umpire was merely a valuer substituted for the valuers originally appointed by the parties in a certain event, or an arbitrator. If it appears from the terms of the agreement by which a matter is submitted to a person's decision, that the intention of the parties was that he should hold an inquiry in the nature of a judicial inquiry, and hear the respective cases of the parties, and decide upon evidence laid before him, then the case is one of an arbitration. The intention in such cases is that there shall be a judicial inquiry worked out in a judicial manner. On the other hand, there are cases in which a person is appointed to ascertain some matter for the purpose of preventing differences from arising, not of settling them when they have arisen, and where the case is not one of arbitration but of a mere valuation."
- Mr. Matovu developed his submissions by reference to the ex tempore decision of the Court of Appeal in David Wilson Homes Ltd v. Survey Services Ltd [2001] 1 All ER (Comm) 449 ("David Wilson Homes"). That case concerned a condition in an insurance policy which provided that,
"any dispute or difference arising hereunder between the Assured and the Insurers shall be referred to a Queen's Counsel of the English Bar to be mutually agreed between the Insurers and the Assured on in the event of disagreement by the Chairman of the Bar Council."
- At first instance, the judge had held that this condition was not an arbitration clause, but was a clause providing for a reference to a QC either as an expert or, more probably, for the purposes of obtaining a non-binding opinion. The Court of Appeal disagreed. Longmore LJ stated, at para. 11,
"There is no need for a clause which deals with reference of disputes to say in terms that the disputes are to be referred to an 'arbitrator' or to 'arbitration'. The necessary attributes of an arbitration agreement are set out in the second edition of Mustill & Boyd, p. 41. But, for present purposes, the important thing is that there should be an agreement to refer disputes to a person other than the court who is to resolve the dispute in a manner binding on the parties to the agreement. That is what this clause in my opinion does, and it is therefore an arbitration agreement within the meaning of section 6 of the 1996 Act."
Then, after citing Re Carus-Wilson, Longmore LJ continued, at paras. 14-15,
"For my own part, it seems to me that the clause in the present case falls fairly and squarely into Lord Esher MR's first category, where the intention is that the inquiry is to be in the nature of a judicial inquiry and that the Queen's Counsel is to hear the respective cases of the parties and decide on evidence before him. That is what Queen's Counsel are normally expected to do when matters are referred to them, and all the more so if the formality of the position is such that, if there is disagreement as to the identity of the Queen's Counsel, he is to be appointed by the chairman of the Bar.
In the present case, the parties cannot, with respect to the judge, have intended a reference to a Queen's Counsel as an expert or a non-binding opinion, because in that way no finality could be achieved. They must in my judgment have wanted a binding result, and the clause thus constitutes an arbitration agreement."
- Simon Brown LJ agreed with Longmore LJ, stating, at paras. 21-22,
"The appointment of an expert, as Lord Esher MR explained in Re Carus-Wilson … is designed essentially to prevent differences arising between the parties. General condition 1 expressly postulates that a difference or dispute has already arisen.
As to the suggestion that this was some sort of non-binding alternative dispute resolution clause, that seems to me to be nothing short of absurd. The condition goes to the lengths of providing, if necessary, for the chairman of the Bar Council to appoint a Queen's Counsel to deal with the reference. That, to my mind, is quite inconsistent with any suggestion that the process required by the clause is simply an optional extra in the contract. Rather it makes business sense only if it provides for a final and binding determination of whatever dispute or difference is referred – if, in short, it is an arbitration agreement."
- As I have indicated, Mr. Matovu relied upon these decisions as deciding that a process that provided for the binding determination of a dispute that had already arisen was an arbitration rather than an expert determination. I do not, however, think that they are authority for a general proposition to that effect.
- In Re Carus-Wilson, after setting out the distinction between arbitration and "mere valuation" to which I have referred above, Lord Esher MR continued,
"There may be cases of an intermediate kind, where, though a person is appointed to settle disputes that have arisen, still it is not intended that he shall be bound to hear evidence or arguments. In such cases it may be often difficult to say whether he is intended to be an arbitrator or to exercise some function other than that of an arbitrator. Such cases must be determined each according to its particular circumstances."
- It is quite clear from the fact that Lord Esher MR postulated a third, intermediate, category of cases involving the resolution of a pre-existing dispute, that might, or might not, be an arbitration, that Lord Esher did not regard the fact that a process was designed to settle a pre-existing dispute as determinative of its status as arbitration.
- Moreover, in David Wilson Homes, Longmore LJ expressly referred to the commentary at page 41 of Mustill & Boyd. That commentary makes clear that there is no one way of defining an arbitration, but simply a number of factors which are material to the question of whether a process qualifies as an arbitration. The authors list a number of factors, some of which "are necessary, although not in themselves sufficient", and others which "are relevant to the question, although not conclusive upon it". A decision which (i) is binding on the parties and (ii) which resolves a dispute which is already formulated, are two of the factors listed as "necessary, although not in themselves sufficient", for a process to be considered to be an arbitration.
- The reference in Mustill & Boyd to arbitration requiring a dispute which is already formulated derives from the dictum of Lord Wheatley in Arenson v. Casson Beckman Rutley & Co. [1977] AC 405 at 428E-F. In their commentary on this factor, at page 47, the editors of Mustill & Boyd observe,
"It is often said that the distinction between an arbitration on the one hand and valuation and kindred proceedings on the other is that the object of one is to resolve disputes, and of the other to prevent disputes from arising.
This formulation is neat, but unhelpful. In many instances where the reference undoubtedly constitutes a valuation, a third person is appointed to fix the value precisely because the parties foresee that they may be unable to agree; and if in fact they do agree, it will be the agreement, not the decision of the valuer, which prevents the dispute arising."
- In these circumstances, I think that the dicta of the members of the Court of Appeal in David Wilson Homes do not carry the weight which Mr. Matovu places upon them. They were made in a case in which the agreement in question was silent as to the type of dispute resolution process which was envisaged. The members of the Court of Appeal were required to infer which type of process the parties had chosen. The main factors influencing both members of the Court of Appeal were the nature of the decision maker who had been selected (a QC), the requirement for an appointment by the Chairman of the Bar in default of agreement, and the perceived commercial requirements of the parties for a final and binding decision. In rejecting the possibility of an expert determination, Longmore LJ placed most reliance upon the judicial nature of the inquiry to be expected from a QC; it was only Simon Brown LJ who relied upon the observations of Lord Esher MR in Re Carus-Wilson about the significance of a pre-existing dispute.
- In short, I do not think that either member of the Court of Appeal was intending to establish any prescriptive rule of general application as to the distinction between arbitrations and expert determinations, and the case contains no ratio decidendi to that effect. In particular, I do not think that the members of the Court of Appeal can be taken to have established a general proposition that a clause providing for the binding resolution of a pre-existing dispute is necessarily an arbitration clause.
- Accordingly, I do not accept Mr. Matovu's submission to the effect that because Clauses 17 and 22 of the Agreement are aimed at the settlement of an existing dispute, that they necessarily provide for arbitration rather than expert determination.
- Mr. Matovu's second line of argument on the "substance" of Clause 22 focussed on the breadth of the process which it envisaged. In this regard he first submitted that Clause 22 provided for the referral of two separate classes of dispute, namely (i) "any dispute or difference as to the meaning or effect of the terms of [the Agreement]", and (ii) "any dispute or difference as to … the calculation of the Profit Share".
- Mr. Matovu submitted that the reference to disputes as to the meaning or effect of the terms of the Agreement was free-standing. He suggested that if it had been intended that the dispute resolver should only be able to determine issues concerning the meaning or effect of the Agreement insofar as those issues were necessary for the calculation of Profit Share or Compensatory Payment, then Clause 22 would have been drafted differently. In that case, he submitted, Clause 22 would have commenced with a reference to determination of disputes concerning the Profit Share, and then followed with words indicating that the jurisdiction to determine the meaning and effect of the terms of the Agreement was merely an ancillary power.
- To illustrate his point, Mr. Matovu contrasted the structure of Clause 22 with the clause in issue in Barclays Bank v. Nylon Capital which, after identifying the subject matter of the dispute to be resolved by an independent accountant, provided, in the next following sub-clause,
"Such accountant shall act as an expert and not as arbitrator and shall determine the matter or matters in dispute (which may include any dispute concerning the interpretation of any provision of this Agreement or his jurisdiction to determine the dispute or the content or interpretation of his terms of reference) and his decision shall be final and binding on the parties hereto."
(emphasis added)
Such a structure would make it clear that the expert's jurisdiction to determine disputes over interpretation would arise only if he was validly appointed to determine the main dispute under the preceding clause, and would only exist in conjunction therewith.
- Mr. Matovu then submitted that the words "meaning or effect" in Clause 22 were disjunctive and covered both the interpretation of the Agreement and also how its terms took effect in any particular circumstance. Under the latter heading he argued that the dispute resolver was intended to be able to decide any and all issues relating to the performance, breach or termination of the Agreement.
- Pulling these points together, Mr. Matovu submitted that Clause 22 was drafted so as to cover a wide variety of disputes relating to the Agreement and that it could not have been envisaged that these should all be resolved in a binding fashion by an expert. He submitted that the breadth of issues and the manner in which they would have to be resolved envisaged a wider process of a judicial nature. This submission drew upon the point made by Lord Esher MR in Re Carus-Wilson and expanded in subsequent cases such as Arenson v. Casson Beckman Rutley & Co. [1977] AC 405 at 428 per Lord Wheatley and Palacath Ltd v. Flanagan [1985] 2 All ER 161 at 165g-166c per Mars-Jones J., that a key feature of an arbitration is that it is "an inquiry in the nature of a judicial inquiry" and that this ordinarily requires the parties to be given the opportunity to present evidence and submissions in support of their respective cases. In this regard, Mr. Matovu also suggested that the power expressly given to the dispute resolver appointed under Clause 22 to determine liability for the costs of the referral was consistent with the exercise of a judicial function.
- Taking these points in a different order, I do not accept Mr. Matovu's argument that the reference in Clause 22 to differences or disputes "as to the meaning or effect of the terms of [the Agreement]" has the very extended scope that Mr. Matovu ascribed to it. I think that this clause is limited by its reference to "the terms of the Agreement" and is intended only to include what might be described as disputes or differences as to the interpretation of the Agreement. I do not think that the expression was intended to include disputes and differences as to whether, in the events that have occurred, the Agreement has been properly performed, breached or terminated, so that, for example, claims for damages for breach of the Agreement could be made and resolved under Clause 22. To read it in that way would be to adopt an unnaturally expansive reading that would, in effect make it an "any disputes" clause. Had that truly been intended, it could easily have been done more directly. And unless one has already reached the conclusion that the clause is an arbitration clause, it is not permissible to apply the Fiona Trust presumption of a wide interpretation: see Barclays Bank v. Nylon Capital at paras. 25-28 per Thomas LJ.
- I also think that the reference in Clause 22 to the costs of any referral is, at best, neutral so far as Mr. Matovu's thesis is concerned. If Clause 22 was an arbitration clause, then it would be unnecessary for this power to be conferred expressly, because the power to award costs would be implied by statute: see section 61 of the Arbitration Act 1996. As Mr. Rainey submitted, if anything the presence of this provision points to Clause 22 being an expert determination clause, because experts cannot award costs of the reference unless the agreement specifically so provides. The provision therefore serves a useful purpose if Clause 22 is an expert determination clause.
- I do, however, accept Mr. Matovu's argument that Clause 22 envisages that the expert would be able to resolve disputes relating to interpretation of the Agreement independently of disputes relating to the calculation of a Profit Share or a Compensatory Payment. As Mr. Matovu submitted, that is the plain reading of Clause 22. Although Mr. Rainey suggested that the clause should be read as a composite whole, to interpret it so that the power to determine the meaning or effect of a term of the Agreement was only given to the expert if and in so far as it was necessary for the calculation of a Profit Share or Compensatory Payment would involve a very significant re-writing - and in particular a re-arrangement of the order - of Clause 22 that is not justified by any other terms of the Agreement or its context.
- Given the clear structure of the wording of Clause 22, such an interpretation could only be adopted, I think, if it was commercially nonsensical for the parties to have intended that general questions of interpretation of the meaning of their Agreement should be determined under Clause 22. I do not think that this is so. There is no restriction on the type of person who could be appointed as the independent expert under Clause 22, either by agreement or by the President of the RICS. It seems to me to be entirely realistic to suppose that the contracting parties envisaged that if a dispute arose over the interpretation of the Agreement, they would be able to agree, or, in default, the President of the RICS would appoint, a person with appropriate legal expertise and qualifications to determine the issue.
- Whilst that finding assists LSI's contentions, it does not resolve the main issue as to the nature of Clause 22. As I have indicated, the thrust of Mr. Matovu's submission was that notwithstanding the express reference to determination by an independent expert in Clause 22, the Court should find that the parties could not have intended to entrust the resolution of the matters covered by Clause 22 to an expert, but must have intended them to be resolved by an arbitrator who would be expected to take evidence, hear argument and approach matters in a judicial fashion.
- I do not accept this argument. Clause 22 applies expressly to disputes over the calculation of a Profit Share or, by reason of the cross-reference in Clause 17, to the calculation of the amount of a Compensatory Payment. As indicated above, the definition of Profit Share is 20% of the Net Profits resulting from Completion (defined as the later of legal completion and payment of all monies due on completion) of an Approved Scheme, or, if the Approved Scheme is retained, 20% of the Net Profits "that might reasonably have been expected to be released if such scheme had been sold at arm's length in the market place" or of the "net rents and profits … actually received from time to time". The definition of a Compensatory Payment payable under Clause 17 after termination of the Agreement by LSI requires an assessment of an amount which "fairly reflects on a quantum meruit basis [LSI's] efforts to discharge [its] responsibilities hereunder".
- It seems to me that the contracting parties might well have thought that calculation of these amounts would primarily be matters of computation, coupled perhaps with some elements of valuation, which would be entirely suitable to be determined quickly and efficiently by an expert. I see no reason to think that the contracting parties would have regarded it as appropriate, still less necessary, that any dispute over the Profit Share payable on Completion of an Approved Scheme arising during the life of their Agreement should be resolved by something in the nature of a judicial inquiry. Likewise for the computation of a Compensatory Payment following termination of the Agreement by LSI: the parties might well have preferred to go their separate ways on the basis of a relatively quick and informal independent determination of a fair price for the work that LSI had done. There would, of course, be nothing to preclude such an expert from receiving evidence and submissions from the parties if he thought fit, but there is no obvious reason that the parties should have insisted upon it as part of a more formal process.
- On the interpretation of Clause 22 that I have reached above, general questions of the meaning or effect of the terms of the Agreement are also potentially within the remit of an appointed expert. I acknowledge that this raises different questions than are raised by the calculation of a Profit Share or Compensatory Payment. It is less obvious that expert determination is an appropriate mechanism for the resolution of disputes as to the general meaning of an agreement in its commercial context. Indeed, in Barclays Bank v. Nylon Capital, at para. 54, one of the reasons given by Thomas LJ for his decision to limit the scope of the expert determination clause was that the parties, as "rational and sensible businessmen", would not have thought it appropriate to entrust general issues of interpretation of their agreement to expert determination by an accountant rather than determination by a judge of the Chancery Division or Commercial Court.
- The point cannot, however, be pushed too far. Barclays Bank v. Nylon Capital did not concern the question of whether a dispute resolution clause provided for expert determination or arbitration: it was accepted that it required the appointment of an accountant as expert. The observations by Thomas LJ to which I have referred were primarily addressed to the question of why it would not be appropriate to interpret a clause to permit an accountant to resolve legal issues. Thomas LJ was not dealing with a clause under which it was possible for a lawyer to be appointed as the expert; nor did he suggest that expert determination was necessarily inappropriate for the resolution of general questions of interpretation.
- Instead, Thomas LJ emphasised that the parties should be held to their contractual choice of dispute resolution, even though the court might regard the choice as inappropriate. Thomas LJ stated, at paras 36-38;
"36. It was next submitted by Mr Tozzi QC that a court has to take into account the speed and informality of expert determination as important considerations to which the parties agreed by selecting that form of procedure. As the expert determination would be carried out quickly without recourse to the formalities of court or arbitration, a court should not deprive the parties of that upon which they had agreed, even if the process was not, on an objective basis, suitable for the dispute which had arisen.
37. As I have said, there is no procedural code for expert determination, in contradistinction to arbitration. The activities of an expert are subject to little control by the court, save as to jurisdiction or departure from the mandate given. Unless the parties specify the procedure, the expert determines how he will proceed; it is rare for what might be perceived as procedural unfairness in an arbitration to give rise to a ground for challenge to the procedure adopted by an expert. (See Expert Determination (4th Edition 2008) by Kendall, Freedman and Farrell, chapter 16.)
38. I therefore accept that if the parties have chosen such a process and the dispute falls within the jurisdiction of the expert, then they must be held to it, whatever view might be taken as to the appropriateness of the procedure for the matters submitted to the expert."
- Lord Neuberger MR also addressed similar issues in para. 70:
"70. I appreciate that, in cases of this sort, the advantage of leaving all points of law to the final determination of the expert is that it results in a relatively quick and cheap process for the parties. However, it must be questionable whether the parties would have intended an accountant, surveyor or other professional with no legal qualification, to determine a point of law, without any recourse to the courts, even if it has a very substantial effect on their rights and obligations. It would, I suggest, be surprising if that were the effect of an expert determination agreement, when the Arbitration Act 1996 gives a right (albeit a limited and prescribed right) to the parties to refer points of law to the court. That Act applies where the parties have entered into an arbitration agreement, which gives them a much greater ability, in law and in practice, to make representations and to involve lawyers in connection with the arbitration, than parties enjoy in connection with the great majority of contractual expert determinations."
- It is notable that Lord Neuberger MR limited his remarks to cases in which questions of law were to be determined by an expert "with no legal qualification". Moreover, Lord Neuberger MR did not suggest that a solution to the problems that this might cause might be found in a different approach to the interpretation of contracts, so as more readily to find that the parties had selected arbitration rather than expert determination. Instead, he suggested that the solution might be found in a reassessment or restatement of the approach of the courts to the possibility of review of an expert's determination.
- I therefore return to the express wording of Clause 22. I think that the references to determination by an expert are clear, and their ordinary meaning is not displaced by any contra-indications from the Agreement or the surrounding circumstances. In my judgment, Clause 22 provides that in relation to the disputes and differences specified therein, the parties were at liberty to refer the matter to an independent expert for determination, rather than arbitration. That, indeed, is what LSI chose to do when it invoked Clause 22 and sought the appointment of an independent expert by the President of the RICS in August and October 2010.
- In the result, I do not think that LSI is entitled to a stay of any part of Wilky's Part 8 Claim under the Arbitration Act 1996.
Ought the Court to exercise its discretion to stay the Part 8 Claim?
- My decision that Clause 22 is not an arbitration agreement within the meaning of the 1996 Act is not, of course, the end of the matter. LSI's application for a stay is also made under the inherent jurisdiction – which is now encapsulated in the court's express case management powers under CPR Part 3.1(2)(f).
- In his written submissions, Mr. Rainey contended that LSI's application for a stay under the inherent jurisdiction was out of time because LSI had not applied under CPR Part 11(1) for an order that the court should not exercise its jurisdiction within 14 days after filing an acknowledgement of service of the Part 8 Claim Form as required by CPR Part 11(4). He relied upon Hoddinott v. Persimmon Homes (Wessex) Ltd [2008] 1 WLR 806 in support of his contention that CPR Part 11(1)(b) was engaged and that LSI's failure to make an application meant that it was to be treated as having accepted that the court should exercise its jurisdiction to try the Part 8 Claim: see CPR Part 11(5).
- Having raised the matter in writing, Mr. Rainey did not push it strongly in his oral submissions. I think he was right not to do so. Assuming that CPR Part 11(1) was engaged, (a) this is a case in which LSI had made known its objection to Wilky's Part 8 Claim in correspondence before it was issued; (b) LSI's acknowledgment of service was filed on 22 December 2010 and indicated its intention to dispute the court's jurisdiction to try the Part 8 Claim; (c) LSI issued an application for a stay of the Part 8 Claim on 5 January 2011, which was 14 days after its acknowledgment of service; and (d) although LSI's application was issued under the Arbitration Act 1996 in the Commercial Court, LSI notified the Chancery Division that it had been issued at the time. In these circumstances, I think that CPR Part 11(4) has been complied with or substantially complied with. Moreover, since Wilky did not suggest that it had suffered any prejudice by any failure by LSI to issue an application in the Chancery Division invoking the inherent jurisdiction of the court until 24 January 2011, were it necessary to do so, I would unhesitatingly extend LSI's time for the making of such an application.
- The questions (i) whether a court should intervene to correct a determination by an expert, and (ii) whether the court should determine questions relevant to an expert determination in advance of that determination, have been discussed in a number of authorities. Some of them were referred to at the hearing. To the list of cases, one now needs to add the decision of the Court of Appeal in Barclays Bank v. Nylon Capital, which conducted a review of the earlier authorities.
- At the risk of over-simplification, the members of the Court of Appeal in Barclays Bank v. Nylon Capital appear to have accepted that the current law was correctly stated by Hoffmann LJ in his dissenting judgment in the Court of Appeal in Mercury Communications v. The Director General of Telecommunications [1994] CLC 1,125 (CA). Hoffmann LJ said, at pages 1,140-1,141:
"So in questions in which the parties have entrusted the power of decision to a valuer or other decision-maker, the courts will not interfere either before or after the decision. This is because the court's views about the right answer to the question are irrelevant. On the other hand the court will intervene if the decision-maker has gone outside the limits of his decision- making authority.
One must be careful about what is meant by 'the decision-making authority'. By 'a decision-making authority' I mean the power to make the wrong decision, in the sense of a decision different from that which the court would have made. Where the decision-maker is asked to decide in accordance with certain principles, he must obviously inform himself of those principles and this may mean having, in a trivial sense, to 'decide' what they mean. It does not follow that the question of what the principles mean is a matter within his decision-making authority in the sense that the parties have agreed to be bound by his views. Even if the language used by the parties is ambiguous, it must (unless void for uncertainty) have a meaning. The parties have agreed to a decision in accordance with this meaning and no other. Accordingly, if the decision-maker has acted upon what in the court's view was the wrong meaning, he has gone outside his decision-making authority. Ambiguity in this sense is different from conceptual imprecision which leaves to the judgment of the decision-maker the question of whether given facts fall within the specified criterion….
These are the principles upon which a court will decline as a matter of substantive law from interfering in a matter which the parties have agreed to submit to the decision of a third party. It does not follow, however, that because the court will intervene to correct a decision-maker who has gone outside his authority, it will declare in advance what the limits of that authority are. The reason for this reluctance is not one of substantive law but procedural convenience. It is because in advance of the decision, the true meaning of the principles upon which he has to decide is usually a hypothetical question. It is hypothetical because it will only become a live issue if one of the parties think that the decision-maker has got it wrong. It is always possible that he may get it right and therefore wasteful and premature to come to the court until he has made his decision. The practice of the courts is not to decide hypothetical questions: see Re Barnato [1949] Ch 258."
- An appeal in the Mercury Communications case was allowed by the House of Lords: see [1996] 1 WLR 48. Lord Slynn's speech appeared to adopt the same approach as Hoffmann LJ. In particular, on the issue of whether a court would decide a point going to the authority of the expert prior to the expert's own determination, Lord Slynn stated, at page 59C:
"The defendants under this head are entitled to say that the court normally will not give a ruling as to the meaning of words to be applied by another decision-maker before he has had a chance to express his own views about it and that the courts will not answer questions which are wholly academic and hypothetical"
- In Barclays Bank v. Nylon Capital, Thomas LJ adopted these dicta and concluded, at para 42,
"In my view it is not necessary to go further than the statement of principle by Hoffmann LJ in Mercury Communications; it does not assist to describe the circumstances in which a court will intervene as "exceptional". The court has to determine first whether it is faced with a dispute which is real and not hypothetical and then if it is real, whether it is in the interests of justice and convenience to determine the matter in issue itself rather than allowing the expert to determine it first."
- On the facts of the case, Thomas LJ pointed out that the dispute between the parties concerned what he described as "the jurisdiction of the expert" - i.e. the question of whether, under the contract, the expert had a mandate to enter into a determination of any part of the dispute between the parties at all. Thomas LJ distinguished that from the different question of the extent and limits of the expert's mandate (including the principles on which he was to determine a dispute) once he had entered into the determination of the dispute. Thomas LJ held that the interests of justice and convenience required the court to decide the question of whether the expert had any jurisdiction to enter upon his determination. In para. 44 he explained the reason for his decision in this way:
"The position is very different to the other cases to which I have referred where a party has sought the intervention of the court. First, whatever the expert decides on jurisdiction, his decision is not final. It can always be challenged, unlike his determination of a matter within his jurisdiction. This is the principle applicable to arbitrations. It would be wasteful and contrary to principle to have any different rule applicable to expert determinations. It would be wasteful because if the expert determined he had no jurisdiction and that was challenged, then the court would have to determine it. If the expert determined he had jurisdiction but in fact the court held he was wrong, then nothing could be more wasteful than the expert entering into a determination of the substance of the dispute when he had no jurisdiction to do so."
- Lord Neuberger MR also gave some general guidance on the approach that might be adopted where points of law arose. In para. 71 he said,
"After a point of law has arisen, the parties may often be well advised to consider whether to refer it to court as a preliminary issue. If they do not, they may also think it sensible to try and agree whether the expert's decision on the point will be treated as final and binding or whether the disappointed party should have the right to refer the issue to the court. If the latter, then the expert should indicate whether, and in precisely what way, his determination would have been different if he had decided the point the other way: that may help the disappointed party decide whether it is worth challenging the decision, and it may also assist the parties in arriving at a settlement."
- I have mentioned these dicta briefly because, although Mercury Communications was not cited to me by either side, they appear to me to be relevant to the instant case. The principles and guidance given by the Court of Appeal in Barclays Bank v. Nylon Capital may assist the parties in agreeing how to proceed; or at least to narrow the issues between them ahead of the adjourned hearing at which I will hear further argument as to whether to exercise my discretion to stay the Part 8 Claim in whole or in part.
- The further hearing of LSI's application was made necessary because the time available at the first hearing proved inadequate. However, I also think it provides an opportunity for the parties to reassess their respective positions in light of changes in the surrounding circumstances. As I have indicated, shortly before the hearing, LSI had indicated, in light of its discovery that Wilky had placed the Aldershot Scheme on the market, that it did not intend to proceed, at least for the time being, with its longer form Statement of Case, and to proceed only with more limited claims in relation to the Aldershot Scheme and the Gatwick Green Scheme. I indicated at the hearing that LSI should clarify its intentions in relation to the balance of its claims: although Mr. Matovu gave some indication in the course of the hearing, I think that this should be done formally in writing. For its part, Wilky's Part 8 Claim was formulated on the basis that in the Autumn of 2010 it had made no decision to sell the Aldershot Scheme and that it was faced with the longer version of LSI's Statement of Case: those circumstances seem now to have changed.
- There is therefore the prospect that, depending upon how each side now puts its case, that a number of the points raised for decision in the Part 8 Claim may have been overtaken by events and be unnecessary. In any event, the parties must reassess whether there is a real dispute about each of the points raised in the Part 8 Claim, and, if there is, whether it is in the interests of justice and convenience to ask the Court to determine the point before Mr. Pye has the opportunity to do so.
- I do not think that it is necessary or appropriate for me to go beyond those preliminary observations at this stage. I do, however, think that the parties' choice of expert determination to resolve their disputes carries with it an expectation that such resolution should take place expeditiously. Accordingly I believe that I should now conclude the hearing of LSI's application, and if any issues in the Part 8 Claim are to be entertained by the court at this stage, I should give directions for them to be resolved as soon as reasonably practicable.
- Subject to any observations either party may make in writing, I therefore intend that the parties should have a short period of time from the handing down of this judgment to consider and make clear their positions in correspondence and to liaise with Mr. Pye if that is thought appropriate. Arrangements should then be made between clerks for the balance of LSI's application to be listed for a further hearing, together with the Part 8 Claim, before the end of September, with the parties to agree a list of the outstanding issues and to exchange and file skeleton arguments two working days before the hearing.
