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Supreme Court of Ireland Decisions |
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You are here: BAILII >> Databases >> Supreme Court of Ireland Decisions >> Campus & Stadium Ireland -v- Dublin Waterworld [2010] IESC 25 (30 April 2010) URL: http://www.bailii.org/ie/cases/IESC/2010/S25.html Cite as: [2010] IESC 25, [2010] 3 IR 234 |
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Judgment Title: Campus & Stadium Ireland -v- Dublin Waterworld Composition of Court: Denham J., Hardiman J., Geoghegan J. Judgment by: Hardiman J. Status of Judgment: Approved
Outcome: Allow And Set Aside | ||||||||||||||
THE SUPREME COURT Denham J. 416/2005 Hardiman J. Geoghegan J. Between: CAMPUS and STADIUM IRELAND DEVELOPMENT LIMITED and Defendant/AppellantDUBLIN WATERWORLD LIMITED JUDGMENT of Mr. Justice Hardiman delivered the 30th day of April, 2010. This is the appeal of the defendant against the judgment and order of the High Court (Gilligan J.). By order dated the 28th September, 2005, it was ordered that the plaintiff do have leave pursuant to s.41 of the Arbitration Act, 1954 to enforce an arbitration award of the 1st July, 2005 in the sum of €10,254,600 awarded by the Arbitrator in favour of the plaintiff and against the defendant. The plaintiff herein, Campus and Stadium Ireland Development Limited (CSI) developed premises in Dublin known as the “National Aquatic Centre” at a cost which was agreed to exceed €62,000,000.00 (sixty-two million euro), exclusive of VAT. The significance of this figure will emerge below. On the 30th April, 2003, it created “a lease contract” in favour of the defendants, Dublin Waterworld Limited (DWW), in the said premises for a period of thirty years. The background issue in the present proceedings is whether VAT is payable on the creation of this interest in the premises, and if so in what amount. CSI took proceedings against the defendant claiming the sum of €10,254,600.00 relating to this VAT on the lease. On the 3rd June, 2005, the High Court (Kelly J.) ordered that the issue between the parties in respect of the claim for VAT be referred to arbitration. The Arbitrator made his award on the 5th July, 2005, whereby he awarded that the sum mentioned above being VAT charged by CSI on the capitalised value of the lease to the defendant was correctly charged. The plaintiff has taken proceedings seeking leave to enforce this award. The defendant seeks to set aside the award of the Arbitrator on the grounds discussed below. The arbitration. It is important to note that, according to the Arbitrator’s award:
“ ‘Agreed position’. It is accepted by both parties that the lease by CSI to DWW is a lease which would be subject to VAT at 13.5% on its capitalised value, subject to the provisions of s.4(3A) of the VAT Act, 1972 as amended. These provisions are commonly referred to as the “economic value test” or “EVT”. CSI as landlord and as the person disposing of its interest in the property submits that it was its responsibility to establish the capitalised value of the lease for VAT purposes. It is accepted by both parties that if the capitalised value of the lease was less than the economic value of the lease, the lease would be exempt from VAT. As a consequence, CSI would not be entitled to recover the VAT it incurred on the costs of developing the property. The economic value of the lease is the amount of money, excluding VAT, incurred by the landlord in acquiring and developing the property. In this case the economic value is accepted by both sides as being approximately €62,000.000.00. The exact figure is not available to the Arbitrator, but that fact is not critical. In order for the lease of the National Aquatic Centre to be subject to VAT, the capitalised value of the lease, determined in accordance with the provisions of the Act, would have to equal or exceed the economic value.” The lease and its actual terms. The actual rent, which was negotiated at arms length and specified in the lease mentioned as above, was €127,000.00 plus 10% of net profits. The maximum valuation of the net profits put forward by either side was €2.7 million, a figure which would give rise to an estimated maximum rent of €397,000.00. The lease further specified that after five years the rent was to be simply 10% of net profits i.e. an estimated maximum rent of €270,000.00. But in the two years preceding the arbitration, no profits were earned. Statutory provisions. But, by virtue of the statutes and regulations considered below, the valuation of the lease is not based on the actual rent but is to some degree an artificial process. Firstly, by s.10(9) of the Act the value of the lease, being an interest in immovable goods, “shall be the open market price of such interest.” The “open market price”, is defined in the following in the subsection as the price which “the right to receive an unencumbered rent in respect of those goods for the period of the interest would fetch on the open market at the time that that interest is disposed of.” Section 32(1)(t) of the Act empowers the Revenue to make regulations to give effect to the Act in relation to “the valuation of interests in or over immovable goods”. The Revenue have done this and Regulation 19 of the VAT Regulations of 1979 (SI No. 63 of 1979) is of central importance. Its terms are explained, obviously without binding effect, in the Revenue publication “VAT and property transactions”, of October, 2001. Regulation 19 (1) provides: “19. (1) Where—
( b ) the disposal of such interest consists of or includes the creation of an interest,
( c ) a rent is payable in respect of the interest so created, and
( d ) the terms under which the interest is created do not provide for an increase in the rent to take effect earlier than the end of the fifth year after the interest was created,
(ii) the annual amount of the rent multiplied by the fraction of which the numerator is 100 and the denominator is the rate of interest (before deduction of income tax, if any) on the security of the Government which was issued last before the date of the creation of the rent for subscription in the State, and which is redeemable not less than five years after the date of issue (allowance having been made in calculating the interest for any profit or loss which will occur on the redemption of the security),
I have adopted 5% to reflect the annual equivalent of the capital cost of providing the site and completed development. In arriving at an estimate of open market price I have adopted 8% of the gross all risk yield to reflect the quality of the income stream and determining nature of the interest.” From CSI’s point of view the problem with this was that the open market value (€35 million) was less than the Economic value which exceeded €60 million. Accordingly, the lease “failed” what is referred to as the EVT (Economic Value Test). Thus the lease would be VAT exempt. See the findings of the Arbitrator under “agreed position” at p.4 above. In order to avoid this CSI took certain steps which are central to the dispute. They are blandly described in a summary of the VAT issue transmitted by CSI solicitors to the Arbitrator under a cover of a letter dated 3rd June, 2005. This says:
This was restated by the Revenue Commissioners in their guidance notes for Inspectors dated 6th June, 2002 and the Anti-Avoidance Provisions of the Finance Act, 2002. CSI wrote to the Revenue Commissioners outlining the methodology used in his valuing the lease and by fax dated 1 May 2003 the Revenue Commissioners have confirmed that the methodology adopted was satisfactory.” Unsurprisingly, the parties differed as to whether this was a legitimate tactic for CSI to adopt. In this dispute, DWW emphasised the phrase in Regulation 19 “in the absence of other evidence of the amount of that price” as qualifying the power to apply whichever of the two available formulae which produces the lower valuation. They say that here there was ample “other evidence” in the form of a report of the valuer whose expertise was unchallenged. CSI, on the other hand, say that they, as lessors, are entitled in their own discretion to choose whichever of the rates of the methods of valuation available under Regulation 19 which commends itself to them. They rely on the Revenue document “VAT and Property Transaction” (sic) already referred to and in particular on paragraph 2.2.1 thereof which says:
(a) On a valuation made by a competent valuer (i.e. open market value) or (b) The first fomula or (c) The second formula The rest of the relevant portion of the Revenue document is not important for present purposes. It must, of course, be noted that the Revenue document carries the disclaimer, in a prominent place at the end of the introduction:
DWW emphasised that the arbitration was to be conducted on a review of the documents and indeed CSI solicitors in writing to the Arbitrator suggested that there was no need for an oral hearing at all: ‘we suggest that you should have sufficient documentation before you to make a decision without calling oral evidence from either party’. DWW emphasised that the report of Mr. Cahill was amongst the documentation supplied to the Arbitrator and say that it was before him as ‘evidence’. Therefore, DWW say, the case was obviously not one which featured ‘the absence of other evidence as to the amount’ of the open market price so that, based on the wording of Regulation 19, there was no scope for CSI to invoke either of the formulae. This was the nature of the dispute which went before the Arbitrator. DWW made it clear that they were by no means happy with the estimated rent arrived at by Mr. Cahill having regard to the actual rent agreed between the parties. He indicated that there had been no surplus in 2003 and 2004 so that the specified amount of rent was all that was payable and this was a small fraction of the €3.376 million, being only €127,000. Moreover, DWW relied on the enormous variations in the open market price between the €35 million from Mr. Cahill and the €76 million figure from the Landlord. It was said that such a gap was manifestly absurd. Notional and real rents. If one is allowed for a moment to have regard to the real-world position of these parties, it is clear that they agreed between themselves a rent, for the first five years of a thirty year term, of €127,000 per annum plus 10% of the profits. In the two years preceding the arbitration there were no profits, so that the rent entitlement was merely €127,000.00. But it is important to bear in mind, as the Arbitrator found, that the VAT Regulations known as the Value Added Tax (Amendment) (Property Transactions) Regulations 2002 for the first time introduced the following provision to the valuation of interests in immovable property, by amendment of Regulation 19 which is quoted above:
The significance of this provision, for the purposes of the present case, is very considerable. As the Arbitrator found, both the lease and the rent, are encumbered. The Arbitrator said at p.4 of his award:
The consequence of this, by reason of the 2002 Amendment quoted above, is that the unencumbered rent, as opposed to the encumbered rent is to be used. But the property is in fact significantly encumbered by obligations grounded in public policy: to value the lease in the property as if there were no such encumberances is obviously going to give rise to an unreal result. CSI is an ordinary company but, according to information supplied at the arbitration, the share holders in it are various government ministers. The Arbitrator regarded it as being a State company. Whether for that reason or for some other reason, it created a lease which considerably hampered, one might think, the commercial use of the premises. Basically, it had to be used, in part, as a facility for the training and development of elite swimmers and this use was free of charge. Obviously, a higher rent would be available if this condition did not exist in the lease. The Court of course has no idea, and no evidence, as to precisely what that higher rent would be. Even making every allowance for the factor described above, there is no doubt that there is a huge difference between the “unencumbered rent” as calculated by Mr. Cahill (which he did on the basis of so much per hectare), and the actual rent agreed between the parties whom, it was said without contradiction, were acting at arms length, both of them being professionally advised. Moreover, the notional unencumbered rent is also a very large multiple of the valuation arrived at by Messrs. Hamilton Osbourne King, who were also retained and gave evidence before the Arbitrator of a rental value of €300,000 per annum. Indeed, of the various figures proposed in respect of rent it is evident that only the figure produced by the use of one of the formulae would produce an open market value which would exceed the economic cost, thereby making the transaction vatable in the first place. The Arbitrator’s findings. The complaints made by DWW about the arbitration findings centre on two passages, both at p.5 of the award. The Arbitrator, who is a recognised VAT expert (though sitting as an arbitrator, not an expert) held:
I believe, therefore, that CSI was quite entitled to use an unencumbered rent figure to calculate the capitalised value of the lease by means of one of the prescribed formulae in Regulation 19.” Before addressing this proposition it is convenient to consider the other passage which has given rise to complaint. The Arbitrator said:
The fact that an alternative valuation may be put on the rent of the property by another valuer is in my opinion of no relevance. CSI has fulfilled its responsibilities under the VAT legislation by calculating the capitalised value of the lease at an open market price using an unencumbered rent on which it is entitled to rely…”.
In my view, any opinion on the value of a property and especially one which purports to value, not the actual market value of the actual interest created subject to the specific terms and conditions that actually exist, but a theoretical, notional unencumbered value, is of necessity in the nature of an estimate. Any professional valuer who expressed his view in terms of a precise figure and made no allowance for any variation at all would in my view be wholly lacking in credibility. Mr. Cahill’s opinion is that of a Chartered Surveyor whose expertise has not been challenged and who is a district valuer in the Valuation Office. In my view, having regard to the documentary basis on which the arbitration was to be conducted, and on the basis on which Mr. Cahill’s report was sent to the Arbitrator, it constituted evidence before him. The Arbitrator was entitled to dissent from it in a reasoned way but he was not entitled to disregard on the basis that it was not evidence. The Arbitrator might, perhaps, have taken issue with the “contractors’ methods” of valuation or with the 8% figure adopted in the portion quoted earlier in this judgment. But he did neither, nor did he differ from the valuation on any reasoned basis: he simply asserted that the valuation was not evidence at all. Speaking of the second passage to which exception is taken, the learned trial judge said, at p.14 of his judgment:
In reversing the High Court’s refusal to grant specific performance the Supreme Court, per Murphy J. said:
This decision, in which Denham J. and Murray J. (as he then was) concurred, plainly supports the proposition that a person from whom value added tax is demanded, at least on the sale of immovable property, is entitled to some evidence that such tax is actually due, and due in the amount claimed. This, in turn, seems quite inconsistent with the statement of the Arbitrator and in any event, as noted above, his proposition was not stood over on the hearing of this appeal. The respondent’s position on the hearing of this appeal was that it did not need to rely on the statement by the Arbitrator that “the VAT system could not function effectively if a supplier’s VAT charge was subject to review by his customer… the fact that an alternative valuation may be put forward on the rent of the property by another valuer is in my opinion of no relevance”. This, indeed, is a rather strange statement. If taken literally it would mean that the supplier of goods or services could decide the amount of the VAT in an un-reviewable fashion. Viewed in this light, it would undermine the basis of the arbitration itself which sought to review the Landlord’s determination as to whether this transaction was vatable and in what amount. However, on the hearing of this appeal CSI made two points about it: (1) It does not form part of the ratio of the award at all and (2) It did not have a significant impact on the award. I cannot agree with the learned trial judge’s finding, quoted above, or with the submissions just summarised. This was a dispute as to whether the charge to VAT raised, in a sum exceeding €10 million, by CSI on DWW was correct. This, in turn, clearly raised the question of whether the transaction was subject to VAT, and if so in what amount. It was against this background that the Arbitrator made the statements which he did and which have been agreed, and held by the High Court, to be incorrect. If a customer could not review his supplier’s VAT charge then the whole basis of the dispute between the parties, and thus of the reference to arbitration, would be undermined. If, in the Arbitrator’s view the customer (here DWW) could not review CSI’s VAT charge, so that any evidence which it might adduce on that question was simply irrelevant, then it is hard to see what the Arbitrator was doing in arbitrating between the parties. It is hard to see why he dismissed Mr. Tobin’s opinion as not constituting evidence at all if the true position was (as they seem to think) that it was simply entirely irrelevant. In my opinion this is a serious misstatement of the law appearing on the face of the award. I am of the same view in relation to the finding that Mr. Tobin’s opinion was not evidence, because it was an estimate, for the reasons given above. Each of these errors supports the view, which I hold, that Mr. Tobin simply did not give any consideration to the case advanced by DWW but decided that CSI were entitled to have recourse to the formula and that that concluded the matter. I am further of the view that the Arbitrator gravely misled himself on the law in determining that CSI were, entirely at their own option, entitled to rely on the formula. Regulation 19, insofar as relevant, has been quoted above. One thing that is clear from it, and from the Guidance Publications issued by the Revenue Commissioners, is that one may establish the appropriate value by the evidence of a qualified valuer. But neither the Arbitrator nor the Revenue in issuing their guidance paid sufficient attention to the presence, in Regulation 19 and specifically in introducing the two formulae of the phrase “in the absence of other evidence of the amount of that price”. Quite simply, there was not an absence of other evidence in this case. Furthermore, it is clear from the Revenue document of October 2001 itself that it does not purport to amend the 1979 Regulations, which have the force of law. The Court had opened to it on the hearing of this appeal a considerable volume of case law on the topic of arbitrations and attempts to set them aside which, in general, do not raise any contentious issue. In general, as this Court said in Doyle v. Kildare County Council [1995] 2 IR 424, the Court has no statutory jurisdiction to set aside the award of an Arbitrator in the absence of a finding that he has misconducted himself, or misconducted the proceedings, pursuant to s.38(1) of the Arbitration Act, 1954 as amended. In McCarthy v. Keane and Ors. (Supreme Court, unreported 16th December, 2004), Fennelly J. had this to say about the meaning of the term “misconduct” which is a term of art:
On the topic of error of law on the face of the record, I would gratefully adopt what was said by O’Donnell J. in this Court in Galway City Council v. Samuel Kingston Construction Limited (Supreme Court, unreported, 25th March, 2010) as follows:
In my view, the errors identified above which afflicted the arbitration are of a nature “so fundamental that the Courts cannot stand aside and allow [them] to remain unchallenged”. It is interesting to note that they are all of a cognate nature. The Arbitrator expressed the view that the VAT system could not work if a customer was allowed to challenge or review his suppliers charged to VAT. This is legally incorrect for the reasons set out above. Although (as CSI point out) it occurs towards the end of the Arbitrator’s finding I am not convinced that for that or any other reason it had no input into that finding. The other errors were, first, to find that CSI were entitled to use the formulae. But these formulae do not produce any binding result unless there is an absence of other evidence of the price. There plainly was such evidence in the form of Mr. Cahill’s report. But the Arbitrator held that this was merely “an estimate” and not “evidence”. One of the attractions of arbitration as a means of solving disputes is that it can, with the agreement of both parties, proceed with relative informality. Where, as in this case, it was envisaged that the arbitration would consist of a review of the documents, I believe the documents sent to the Arbitrator are in the nature of evidence, without formal proof. In any event Mr. Tobin went and gave evidence before the Arbitrator, viva voce in which he stood over his valuation. There is no conceivable basis, in my view, on which this material can be excluded from the category of “evidence” in the context of the arbitration. I have no doubt that these are significant and fundamental errors on the face of the award. They enabled CSI not so much to succeed at the arbitration, as to register a walkover. The most substantial part of their evidence was quite wrongly excluded from consideration, and on that basis a formula which is plainly adverse to their interests was used. This was on the basis that their evidence was not in fact “evidence” at all and the Arbitrator indicated that the Landlord’s determination as to VAT could not be reviewed by the tenant. These are all grave and significant matters in the context of this arbitration and I would set aside the award. If desired by the parties, the Court will hear submissions as to the precise form of the order that should be made in light of the foregoing judgment. | ||||||||||||||
