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Cite as: [2002] ScotCS 98, 2002 SCLR 644

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    Co-operative Wholesale Society Ltd v. Ravenseft Properties Ltd & Anor [2002] ScotCS 98 (8th April, 2002)

    OUTER HOUSE, COURT OF SESSION

    CA41/00

    OPINION OF LORD MACFADYEN

    in the cause

    CO-OPERATIVE WHOLESALE SOCIETY LIMITED

    Pursuers;

    against

    (FIRST) RAVENSEFT PROPERTIES LIMITED and

    (SECOND) DOUGLAS SHELF SEVEN LIMITED

    Defenders:

    ________________

     

    Pursuers: Ferguson, Q.C., MacColl; Dundas & Wilson

    Second Defenders: Abercrombie, Q.C., Di Emidio; McClure Naismith

    8 April 2002

    Introduction

  1. In this action the pursuers seek rectification of a Minute of Variation which varied a Sub-Lease of a supermarket in Whitfield, Dundee. The Sub-Lease was dated 1 and 11 December 1972 (No. 6/8 of process). The Minute of Variation was dated 14 July and 19 August 1993 (No. 6/11 of process). At the date of the Minute of Variation the first defenders were the landlords and the pursuers were the tenants in the Sub-Lease. At present the second defenders are the landlords and the pursuers remain the tenants in the Sub-Lease. The action is defended only by the second defenders.

  2. For present purposes, three provisions of the Sub-Lease are relevant. Clause (FIFTH) provided that the premises were let "for use only for the retail trade or business of a supermarket primarily for the sale of food." Clause (SIXTH) was in inter alia the following terms:

    3. "The Tenants shall take possession of and use and occupy the premises for the foregoing purpose from [29 June 1970] and shall within three months thereafter commence trade therefrom and shall continue to so use and occupy the premises and trade therefrom throughout the whole period of this Sub-Lease."

    In Clause (TENTH) (Sixteen) the tenants bound and obliged themselves:

    "To keep the premises open for retail trade during the usual hours of business in the locality ... the shop display windows being kept dressed in a suitable manner and in keeping with a good class shopping centre".
  3. The Minute of Variation contained a number of separate alterations to the terms of the Sub-Lease (therein referred to as "the Lease"). One of these was in the following terms:

    4. "AND WHEREAS it has been further agreed between the Landlords and the Tenants that the provision of Clause (SIXTH) shall no longer apply Therefore the Landlords and Tenants DO HEREBY DECLARE that Clause (Sixth) of the said Lease shall be deleted and shall cease to have any force and effect".

    The Minute of Variation made no provision for the deletion of Clause (TENTH) (Sixteen) of the Sub-Lease. After the last substantive variation provision, it contained the following passage:

    "And save as hereby varied the whole provisions of the said Lease as varied by [certain earlier deeds] will continue in full force and effect".
  4. The rectification which the pursuers seek is the insertion into the first of the two passages quoted in paragraph [3] above of reference to Clause (TENTH) (Sixteen). The effect of that rectification, if granted, would be that the Minute of Variation deleted from the Sub-Lease not only Clause (SIXTH) but also Clause (TENTH) (Sixteen).

  5. The pursuers seek to support their conclusion for rectification with averments to the effect that in 1993 they and the first defenders were in negotiation with Shoprite Ltd ("Shoprite") with a view to the pursuers further sub-letting the supermarket to Shoprite; that Shoprite were not prepared to undertake the "keep open" obligations in the Sub-Lease; that it was therefore agreed between the pursuers and the first defenders that the entire keep open obligations would be deleted from the Sub-Lease; and that it was by oversight that the Minute of Variation failed to give effect to that common intention by referring only to Clause (SIXTH) instead of to both that clause and Clause (TENTH) (Sixteen).

  6. The second defenders dispute that it was the common intention of the pursuers and the first defenders that Clause (TENTH) (Sixteen) as well as Clause (SIXTH) should be deleted. In addition, they invoke section 9 of the Law Reform (Miscellaneous Provisions) Act 1985 ("the Act") as a defence to the pursuers' claim for rectification. Following an earlier debate, in which the matters discussed related to the relevancy of the second defenders' averments invoking section 9, a proof before answer was allowed. Thereafter the pursuers were granted leave to amend their pleadings. As a result of that amendment further issues for debate were identified. The diet of proof before answer was discharged, a fresh diet of debate was fixed, and the parties were ordered to lodge Notes of Argument.

  7. Two separate issues were identified in the Notes of Argument and were debated. One related to the relevancy of averments introduced by the pursuers invoking section 9(3) of the Act. The other related to the connected questions of (i) the relevancy of an averment that if Clause (TENTH) (Sixteen) had not formed part of the Sub-Lease at the date of a rent review arbitration in 1998 the passing rent would nevertheless have remained £20,000, and (ii) the competency of calling the rent review arbiter to give evidence on that point.

    8. The Section 9(3) Issue

    (a) The Legislation

  8. It is convenient to begin consideration of this issue by noting the relevant provisions of the Act. Section 8(1)(a) empowers the court to order rectification of a document where it is satisfied that the document, intended to express or give effect to an agreement, fails to express accurately the common intention of the parties to the agreement at the date when it was made. The power conferred by section 8(1)(a) is made subject to section 9. Section 9 applies (by virtue of subsection (2)) to a person (other than a party to the agreement) who has acted or refrained from acting in reliance on the terms of the document, with the result that his position has been affected to a material extent. Section 9(1) provides that the court shall only order rectification under section 8 where it is satisfied (a) that the interests of the person to whom section 9 applies would not be adversely affected to a material extent by the rectification, or (b) that that person has consented to the proposed rectification. No question of consent under section 9(1)(b) arises in the present case. The second defenders, however, seek to rely on section 9(1)(a) as ground for resisting the rectification sought.

  9. Following the previous debate, I held that the second defenders' averments invoking section 9(1)(a) were relevant to be admitted to inquiry before answer (see my Opinion dated 4 July 2001). At that stage, no issue under section 9(3) was raised in the pursuers' pleadings.

  10. Section 9(3) provides:

    11.  

    "This section does not apply to a person -
       

    (a)

    who, at the time when he acted or refrained from acting as mentioned in subsection (2) above, knew, or ought in the circumstances known to him at that time to have been aware, that the document ... failed accurately to express the common intention of the parties to the agreement ...; or
       

    (b)

    whose reliance on the terms of the document ... was otherwise unreasonable."

    (b) The Pleadings

  11. In the amendment to their pleadings carried out after the previous debate the pursuers introduced averments invoking section 9(3). Those averments fall into two parts. The first part, which is founded on section 9(3)(a), is in the following terms:

    12. "Separatim, the said oversight [i.e. the failure to give effect to the alleged common intention of the pursuers and the first defenders by including in the Minute of Variation a provision deleting Clause (TENTH) (Sixteen) as well as the provision deleting Clause (SIXTH)] was patent on the face of the Sub Lease and Minute of Variation and Agreement. In particular, the deletion of Clause (SIXTH) without reference to Clause (TENTH) (Sixteen) was plainly anomalous. Any experienced landlord such as the Second Defenders or their legal advisers would have recognised this anomaly. In these circumstances, the Second Defenders ought to have known (as was obvious) that the Minute of Variation and Agreement failed accurately to express the common intention of the parties to the antecedent agreement to which it purported to give effect."

    The second part of the averments, which sets out the basis for invocation of section 9(3)(b), is in the following terms:

    "Further and in any event, esto the Second Defenders relied on the terms of the Sub Lease as varied by the Minute of Variation and Agreement (which is not known and not admitted), such reliance was not, in the whole circumstances, reasonable. The Second Defenders made no inquiry as to the reason(s) why the Minute of Variation and Amendment deleted Clause (SIXTH) and not both Clause (SIXTH) and (TENTH) (Sixteen) of the Sub Lease. In the circumstances it would have been reasonable for the Second Defenders to make such inquiry. Had they done so the oversight in the Minute of Variation and Agreement would have been identified to them."

  12. The second defenders, in their third plea-in-law, maintain that the pursuers' averments invoking section 9(3) are irrelevant, and should not be admitted to probation. In the course of the debate, counsel for the second defenders submitted that that plea should be sustained. Counsel for the pursuers, on the other hand, argued that the plea should be repelled, and the averments remitted to proof before answer. If the relevancy of the averments remained in dispute after proof, that issue could be argued under the second defenders first plea-in-law, which is a general plea to the relevancy of the pursuers' pleadings.

    13. (c) The Parties' Submissions

  13. Mr Di Emidio, for the second defenders, noted what he described as the pursuers' very bold averments (a) that the "oversight" was patent on the face of the Minute of Variation, and (b) that the deletion of Clause (SIXTH) without the deletion of Clause (TENTH) (Sixteen) constituted a plain anomaly which would have been recognised as such by any experienced landlord. He pointed out that the pursuers relied on no extrinsic circumstances for the purpose of bringing home to the second defenders imputed knowledge of the asserted fact that the Minute of Variation did not accurately express the common intention of the parties to it. All that the pursuers relied on as the basis for imputing knowledge to the second defenders were the terms of the Minute of Variation and the terms of the Sub-Lease. There was therefore, Mr Di Emidio submitted, nothing in issue beyond the construction of the two documents. That being so, there was nothing to go to proof. The issue could be resolved by the court at debate.

  14. Treating the matter as one of construction, Mr Di Emidio submitted that it was necessary, first, to give proper weight to the express declaration that, save as varied, the whole provisions of the Sub-Lease were to continue in full force and effect. That was an express declaration that inter alia Clause (TENTH) (Sixteen) was to remain in force. It stood in the way of a conclusion that it was obvious that it was intended that Clause (TENTH) (Sixteen) should be deleted. Moreover, the contents of the two clauses did not impinge on each other to such an extent that it was obvious that they required to stand or fall together. Clause (SIXTH) was concerned to impose duties, first, to take possession of the subjects, and to use and occupy them for the purpose specified in Clause (FIFTH); secondly, to commence trading within three months; and thirdly, to continue such use, occupation and trading throughout the duration of the Sub-Lease. It went on to provide for a contractual indemnity for loss occasioned by breach of the clause involving leaving the premises unoccupied for more than twenty-one days. Other remedies (including irritancy) were expressly reserved. Clause (TENTH) (Sixteen), on the other hand was a keep open clause in familiar form, obliging the tenant to keep the premises open for retail trade during the usual hours for the locality and to keep the display windows dressed to a specified standard. It could not be said that an experienced landlord, reading the Minute of Variation and the Sub-Lease, would necessarily have concluded that the intention must have been to delete Clause (TENTH) (Sixteen) as well as Clause (SIXTH), and that the Minute of Variation had failed to give effect to that intention. In these circumstances the proper conclusion was for the court to hold that, as a matter of construction of the Minute of Variation and the Sub-Lease, it could not be affirmed that the test set by section 9(3)(a) was satisfied. The averments bearing on section 9(3)(a) were therefore irrelevant.

  15. Turning to the part of the pursuers' pleadings that invokes section 9(3)(b), Mr Di Emidio emphasised that the situation contemplated in the provision was that it was "otherwise unreasonable" for the defender to rely on the document. The word "otherwise" indicated that for section 9(3)(b) something different was required from what was required for section 9(3)(a). All that the pursuers did was refer to the "whole circumstances" and assert that the second defenders were put on inquiry, but made none. This amounted to little more than a reiteration of the statutory provision. It gave no fair notice of what it was that made it unreasonable of the second defenders to rely on the deed without inquiry. The averments bearing on section 9(3)(b) were therefore lacking in specification, and should not be admitted to probation.

  16. Mr MacColl for the pursuers explained the two strands of the case under section 9(3) as follows. Section 9(3)(a) was concerned with the situation where the circumstances showed that the defender either knew, or ought in the circumstances known to him to have been aware, that the deed did not accurately express the common intention of the parties to the agreement. In such a situation it was unreasonable of the defender to rely on the deed, and he was therefore deprived of the opportunity of relying on section 9(1)(a) as a defence to the rectification. Section 9(3(b) was concerned with the situation where the circumstances did not go so far as to bring home to the defender actual or imputed knowledge of the fact that the deed did not express the common intention of the parties, but nevertheless in some other way did go far enough to make it unreasonable for him to rely on the deed. In that situation too he was deprived of the section 9(1)(a) defence. One way of invoking section 9(3)(b) was to point to circumstances in which the defender must have realised that something was amiss, without actually being made aware that the deed did not accurately express the common intention. In such circumstances, the defender was put on inquiry, and acted unreasonably if he relied on the deed without inquiring as to its accuracy. The pursuers' position was that they offered to prove that in the circumstances the deletion of one keep open clause, Clause (SIXTH), leaving the other, Clause (TENTH) (Sixteen), standing was plainly anomalous, and would have been appreciated as such by an informed reader, such as an experienced landlord like the second defenders. In that situation the pursuers' primary contention was that the first defenders must have been aware that the true intention had been to remove all keep open obligations from the Sub-Lease. If that was so, they succeeded under section 9(3)(a). Alternatively, they relied on section 9(3)(b), pointing to the same circumstances and arguing that, if they fell short of bringing home to the second defenders knowledge that the common intention was to delete both clauses, they at least put them on inquiry as to whether it was really intended that only one of two keep open clauses should be deleted. That was particularly so given the second defenders' averment that it was a matter of materiality to them, in making their decision to take on the landlord's interest in the Sub-Lease, that Clause (TENTH) (Sixteen) was in place: "The Second Defenders would not have acquired said interest in said Lease if said Clause had not been part of the obligations in the Sub-Lease". In these circumstances, given that both branches of the pursuers' case under section 9(3) were founded on the same circumstances, there was no merit in the second defenders' complaint of lack of specification of the section 9(3)(b) case.

  17. Mr MacColl further submitted that both branches of the pursuers' case under section 9(3) depended on the proposition that the anomaly patent on the face of the Minute of Variation and the Sub-Lease was one which "[a]ny experienced landlord such as the second defenders or their legal advisers would have recognised". It was not, as Mr Di Emidio contended, a mere matter of construing the two deeds to see if the survival of Clause (TENTH) (Sixteen) was inconsistent with the deletion of Clause (SIXTH). On the contrary, the question was whether the effect of the Minute of Variation on the Sub-Lease would have been perceived by an experienced landlord as anomalous, and whether that perception would have led the experienced landlord either to conclude that Clause (TENTH) (Sixteen) had been left in operation by mistake, or alternatively to make inquiry as to whether what had been done was what had been intended. That question could not be answered by the court at debate, but only after proof in light of evidence. The question could not be answered conclusively, as the second defenders sought to do, by pointing to the declaration that so far as not varied the terms of the Sub-Lease remained in effect. That provision was merely formulaic, and could not, as Mr MacColl put it, "oust the operation of the statute". Nor was it destructive of the pursuers' case if the second defenders could find separate content in the two clauses. The pursuers' argument did not depend on the two clauses being to the same effect. It was enough that they were sufficiently related in content to make the informed reader perceive an anomaly in the deletion of one and the preservation of the other. The pursuers' averments in respect of section 9(3) were relevant for inquiry, and the issue could not be determined against them at debate.

  18. Mr Abercrombie, senior counsel for the second defenders, adopted Mr Di Emidio's submissions on both aspects of the section 9(3) issue. In respect of section 9(3)(b) he maintained the submission that the pursuers' averments were lacking in specification. Even if, as explained by Mr MacColl, the case under section 9(3)(b) was intended to be founded on the same circumstances as the case under section 9(3)(a), namely the "patent anomaly" of deleting Clause (SIXTH) while leaving Clause (TENTH) (Sixteen) standing, the second defenders were entitled to a clearer explanation in averment of what it was that the circumstances should have put them on inquiry about. So far as the section 9(3)(a) case was concerned, it was noteworthy that the pursuers' averment was that the anomaly would have been recognised by any experienced landlord "or their legal advisers". That underlined the fact that the point was one of law, which could be resolved by the court at debate. The court could say whether the "anomaly" was patent on the face of the documents. If the matter were made the subject of evidence, the issue would be distorted, because any witness who had been precognosed would be alerted to where the "anomaly" was supposed to lie. The only true test of the point would be to refer the matter to an experienced landlord "blind", i.e. by simply laying before him the Sub-Lease and the Minute of Variation and asking him to peruse them and comment. Mr Abercrombie indicated that, if the matter were not determined by the court at debate, the second defenders would be willing to submit to a blind test of that sort.

  19. Mr Ferguson, senior counsel for the pursuers, reiterated Mr MacColl's explanation of the difference between the cases which the pursuers make under section 9(3)(a) and (b). Both depended on the proposition that it was anomalous to delete one keep open clause and leave another standing. Under paragraph (a) the contention was that the anomaly would be understood as indicating that there had been a mistake in giving effect to what was intended by the parties. Under paragraph (b) the contention was that the same anomaly would at least have demanded inquiry before it was reasonable to rely on the terms of the Sub-Lease as varied. Both branches of the case depended on more than a mere reading of the language of the deeds. What mattered was the way in which the terms of the deeds would have been perceived by experienced landlords and their legal advisers. The averment was not just that there was a patent anomaly, but that the patent anomaly would have been recognised as obvious by experienced landlords and their legal advisers. Such informed readers would bring to their perception matters such as their understanding of the practical and economic significance of the inclusion in or exclusion from the lease of keep open clauses variously expressed. That went beyond what the court could take into account at debate. The issue therefore required to be resolved after proof.

    1. Discussion
  20. In addressing the section 9(3) issue it is in my view necessary to keep in mind the place which that provision occupies in the scheme of the legislation regulating the remedy of rectification. Section 8(1) allows rectification where, in effect, it is shown that there has been a mistake in the document in question, in respect that it fails to express accurately the common intention of the parties to it which it was meant to express. Rectification is not to be allowed, however, where it would adversely affect to a material extent the interests of a person whose position has been affected to a material extent by reliance on the terms of the document (section 9(1)(a) and (2)). The protection afforded to third parties by section 9(1)(a) is not, however, extended to persons whose reliance on the document was unreasonable (section 9(3)). A person will fall into that category if he knew or ought to have known that the mistake in expression had been made (section 9(3)(a)). The second kind of person who will fall into that category is more broadly expressed, namely any person whose reliance is otherwise (i.e. on a basis other than that identified in section 9(3)(a)) unreasonable (section 9(3)(b)). There are, no doubt, many ways in which a person may come within the scope of section 9(3)(b). I am, however, satisfied that the pursuers are correct in their submission that one way in which a person may do so is if circumstances which fall short of bringing home to him actual or imputed knowledge of the mistake in expression in the document nevertheless raise a sufficient doubt as to whether it is correctly expressed to make it unreasonable to rely on it without further inquiry. If such is the case, a person who makes no inquiry may be held to have acted unreasonably in relying on the document.

  21. In light of that analysis of the scheme of the legislation, I turn to the pursuers' pleadings. I accept as a fair reading of those pleadings the analysis of them put forward by Mr MacColl. The pursuers rely, for the purpose of both section 9(3)(a) and section 9(3)(b), on the proposition that it was patent on the face of the Sub-Lease and the Minute of Variation that it was anomalous to delete Clause (SIXTH) but leave Clause (TENTH) (Sixteen) standing. Their primary contention is that that anomaly would have brought home to an experienced landlord a realisation that the common intention of the parties must have been to delete not only Clause (SIXTH) but also Clause (TENTH) (Sixteen). They maintain that that contention, if made out, brings the second defenders within the scope of section 9(3)(a). Their alternative contention is that the same anomaly, if it did not go so far as to bring home to the second defenders such knowledge that the document did not accurately express the common intention of the parties, at least went so far as to make it unreasonable to rely on the document without further inquiry. No such inquiry was made. On that basis, the pursuers contend, the second defenders are brought within the scope of section 9(3)(b). On that reading of the pursuers' pleadings, which, as I have said, I accept as a fair one, there is in my view no lack of specification of the basis on which they found on section 9(3)(b). I reject the submission made by the second defenders that the phrase "otherwise unreasonable" in section 9(3)(b) means that a case under that provision must be founded on circumstances different from those founded on for the purpose of section 9(3)(a). Reliance on the document may be unreasonable either because the party relying on it knew or ought to have known that the mistake in expression had taken place, or because the circumstances otherwise made reliance unreasonable. The same circumstances may, in my view, legitimately be relied on (i) as establishing the actual or imputed knowledge required by section 9(3)(a) or, alternatively (ii) as in some other way making reliance unreasonable.

  22. I come next to the question whether I can hold, as a matter of relevancy, that there is no such anomaly in the deletion of Clause (SIXTH) while Clause (TENTH) (Sixteen) was left in place as to support a case under section 9(3). The second defenders rely on the averments that the oversight was "patent", that the deletion of one clause but not both was "plainly anomalous", and that it was "obvious" that the Minute of Variation failed accurately to express the common intention, all as demonstrating that the matter involves no more than an examination and construction of the Minute of Variation and the relevant clauses of the Sub-Lease. They therefore contend that the question in issue is a matter of construction which the court can address without evidence. The pursuers on the other hand rely heavily on the averment: "Any experienced landlord such as the Second Defenders or their legal advisers would have recognised this anomaly". They thus rely not simply on the terms of the documents, but on what they contend the reaction to the terms of the documents on the part of a particular class of person would be. In my opinion the pursuers are in principle entitled to lead evidence on that issue before asking the court to reach a conclusion on the application of section 9(3). Whether, and if so to what extent, the effect of the Minute of Variation on the Sub-Lease is anomalous, and indicative of a mistake in expression of the common intention of the parties to it, is something on which light may well be shed by an understanding of the practical and economic significance of the presence in or absence from the Sub-Lease of one or both of the clauses in question. It would in my view be wrong to suppose that the court, uninformed by evidence as to the view which would be taken by experienced landlords, is adequately placed to determine the issue at debate. I am therefore of opinion that the appropriate course is to allow the averments invoking section 9(3) to be admitted to proof before answer.

  23. Since that is the course which I propose to follow, it is not appropriate that I express any concluded view on how I would have regarded the matter if, as proposed by the second defenders, I had regarded it as one that could be decided simply by reference to the terms of the documents. I would, however, offer two observations. The first is that I do not find it helpful to characterise the issue as whether it is anomalous to delete one keep open clause and leave another keep open clause standing. It is, to my mind, tendentious to formulate the issue in terms that apply the label "keep open clause" to both Clause (SIXTH) and Clause (TENTH) (Sixteen). "Keep open clause" is not a term of art. Clauses to which that description is applied vary considerably in their form and content. Clause (TENTH) (Sixteen) is perhaps of the more common form, laying down compulsory opening hours and a standard of window dressing. Clause (SIXTH) at least in part serves a different purpose, and so far as trading is concerned is no more specific than to require the tenant to continue to trade from the premises throughout the whole period of the Sub-Lease. It also expressly provides a contractual indemnity for loss caused by failure to occupy the premises. That, to my mind, tends to indicate a different emphasis from a true keep open clause where, at least in modern usage, the objective from the landlord's point of view is to provide a basis for holding the tenant to performance of the primary obligation. The approach of the courts to keep open clauses has, of course, developed over the period of the Sub-Lease. At all events, it seems to me that the issue is scarcely concluded by identifying the two clauses as both being forms of keep open clause. Without evidence of the view that would be taken by an experienced landlord I would find it difficult to conclude that the deletion of Clause (SIXTH) was a clear indication that the intention was to remove all keep open provisions from the Sub-Lease. On the other hand, I can see that it may be difficult, without speculation, to detect what the point of deleting Clause (SIXTH) alone was. The express provision in the Minute of Variation that, save as varied, the whole provisions of the Sub-Lease were to continue in full force and effect requires to be taken into account, but cannot in my view be regarded as decisive.

  24. My second observation is that I see some force in Mr Abercrombie's submission that it may be difficult to replicate in evidence the position of the hypothetical reasonable and experienced landlord considering the implications of the Minute of Variation. The question is not whether an experienced landlord, with his attention focused on the fact that Clause (SIXTH) was deleted and Clause (TENTH) (Sixteen) left standing, would have regarded that as indicative of a mistake in the expression of the common intention of the parties or at least as a matter calling for further inquiry before the varied Sub-Lease could reasonably be relied upon. Rather the question is whether such a landlord, without his attention being called to the point in any way, would have noticed it for himself and regarded it in one or other of those ways. That is, however, a matter which the parties must address in preparing for the proof. I should not be taken as having expressed at this stage any view for or against the sort of "blind testing" on the point that was mentioned in the course of the debate.

    25. The Evidence of the Rent Review Arbiter

    (a) The Issues

  25. In order to understand the context in which this issue arises it is necessary to note part of the second defenders' pleadings in relation to their reliance on section 9(1)(a). In answer 5 they aver:

    26. "Furthermore, the Second Defenders acted in reliance on the terms of the said Clause (TENTH) (Sixteen) at the Rent Review Arbitration which took place in about 1998 in accordance with the Sub-Lease. In said arbitration the Second Defenders argued that the said Clause (TENTH) (Sixteen) was valid and binding on the Pursuers. In his determination the Arbiter in said review accepted the Second Defenders' argument and fixed the rent on the basis that said Clause (TENTH) (Sixteen) was an onerous obligation on the pursuers. ... The Arbiter refused to increase the rent due for the premises inter alia on account of the existence of an onerous keep open obligation on the Pursuers as tenants. The rectification proposed by the Pursuers would enable it (sic) as Tenant to benefit from a lower rent while at the same time releasing it from its obligations to keep said premises open. On the other hand the proposed rectification would give the Second Defenders a lower rent without the benefit of the Pursuers being obliged to keep open. Accordingly the Second Defenders have been, and would be adversely affected to a material extent by this action."
  26. In response to those averments, the pursuers aver:

    27. "The passing rent would have remained at £20,000 per annum following the rent review arbitration irrespective of whether or not Clause (TENTH) (Sixteen) was an obligation incumbent on the Pursuers."

    The pursuers propose to call the arbiter, Mr James Merry, FRICS, as a witness, and to seek to elicit from him evidence in support of that averment.

  27. The second defenders, by their second plea-in-law, seek to have the averment quoted in paragraph [26] above excluded from probation as irrelevant. In addition, they seek to argue that it would be incompetent to call the arbiter as a witness on that matter. Although strictly it is premature to address the objection to the competency of the arbiter as a witness at this stage, it was a matter of agreement between counsel that, since the point required to be argued at some length, it was convenient to deal with it at debate rather than in the course of the proof. I accepted that that was so, and accordingly heard submissions on the point in the course of the debate. That was done on the understanding that at proof the parties would regard themselves as bound by my ruling on the objection given at this stage.

    1. The Arbiter's Award
    2. It is convenient, before examining the submissions which counsel made on these issues, to note the terms of the relevant parts of the arbiter's award (No. 6/50 of process). The award itself is in formal terms, and the passages on which reliance was placed are in fact to be found in the Notes appended to the award. At page 3 of the Notes the arbiter records that he took legal advice in relation to the keep open provision in the Sub-Lease. At page 13, towards the end of his discussion of the evidence relating to comparable subjects, he said:

      3. "The evidence also shows that new leases are of much shorter duration (25 years) and those with longer periods appear to reflect lesser rentals. Although some of the evidence has absolute user conditions applicable, none have 'keep open' clauses such as the Subjects and I feel sure the existence of this condition, and known legal position in this regard at the rent review date, would materially affect the hypothetical tenant's bid. Particularly I consider this to be the case at Whitfield where such a history of unsuccessful marketing of the vacant unit since 1995 exists.

      In essence, therefore, I do consider that the cumulo effect of the length of lease term, the possible implementation of the 'keep open' provisions of the lease, the evidence of a market transaction in 1993, together with the unsuccessful marketing campaign over a considerable period of time, leads me to the conclusion that the hypothetical tenant ... would be aware of the whole circumstances surrounding the Subjects and would not be prepared to bid more than the passing rental of £20,000.

      Accordingly, I Award that the 'fair yearly rent' as at Whitsunday (28th May) 1998 shall be the 'annual rent payable in immediate preceding period', i.e. TWENTY THOUSAND POUNDS STERLING PER ANNUM (say £20,000 per annum)."

    3. The Parties' Submissions
    4. In presenting the second defenders' submission on the competency of calling the arbiter as a witness in the circumstances in which the pursuers proposed to do so, Mr Di Emidio began by submitting, first, that there was a general rule that an arbiter's award must be construed by reference to its terms, that once his award had been issued an arbiter was functus officii, and that it was incompetent to lead the evidence of the arbiter to explain, modify, vary or contradict the terms of his award; and secondly, that that general rule applied to exclude the evidence which the pursuers sought to lead from Mr Merry.

    5. In support of those submissions, Mr Di Emidio first cited the article by Lord Hope of Craighead on "Arbitration" in the Stair Memorial Encyclopaedia of the Laws of Scotland (1999 Re-issue). He founded in particular on the following passage (paragraph 91):

      6. "Where an action for the reduction of an award depends on facts which are not agreed, a proof will be required. The normal rules apply in such cases in order to determine what evidence is admissible and by what method disputed facts may be proved. The arbiter himself, however, is in a special position, because once he has issued his award it is not competent for him to modify or explain it in any way. He may be examined as a witness for certain purposes, particularly as to his actings in the course of the submission where it is suggested that some irregularity has occurred. It has also been held to be competent to examine him as to what matters he took into account in arriving at his award when it was alleged that he had proceeded ultra fines compromissi in a way which was not apparent from the face of the award. An arbiter should be allowed the opportunity to protect himself against an allegation of misconduct, such as that he failed to determine a matter which was properly before him, by giving evidence as to what he did decide. The general rule, however, is that the award must speak for itself, and that the evidence of the arbiter is not admissible to explain, add [to] or contradict what is to be found on the face of the written instrument."

      Mr Di Emidio also cited paragraph 98:

      "The general rule is that an arbiter is not a competent witness regarding his award. Accordingly he may not be called as a witness to explain or control his award when action is being taken to put it into effect. His written decree arbitral is the only evidence of his decision which is admissible, and the normal rules as to the exclusion of extrinsic evidence apply. Furthermore, since he is functus as soon as he has issued his award he is unable to do anything to alter or modify its terms. ...

      Both the arbiter and his clerk may, however, be called as witnesses to the res gestae of the arbitration, that is to say to the actings of the parties, the clerk or the arbiter himself, in so far as these may be relevant to the points at issue in any subsequent litigation. They are in no different position, when dealing with their actings and other matters of procedure, than any other witness who speaks to facts which are within his own knowledge. It may also be noted that a person is not disqualified from giving evidence on matters of substance, such as the condition of heritable subjects when he inspected them, merely because he was acting as an arbiter at the time. While he may not be asked questions which are directed to the terms of his award, he is under no such restriction should his evidence on these matters become relevant for other purposes."

    6. Mr Di Emidio turned then to certain authorities, beginning with Duke of Buccleuch v Metropolitan Board of Works (1872) LR 5 HL 418. There the House of Lords consulted the Exchequer judges and one of them, Cleasby B, gave his opinion in inter alia the following terms (at 432-433):

      7.  

      "1.

      That the umpire was a competent witness, like any other person, to prove matters material to the issues.
       

      2.

      That questions might properly be put to him for the purpose of proving the proceedings before him, so as to arrive at what was the subject-matter of adjudication when the proceedings closed, and he was about to make his award.
       

      3.

      That as regards the effect of the award no questions could properly be put to the umpire for the purpose of proving how it was arrived at, or what items it included, or what was the meaning which he intended at the time to be given to it."

      In expansion of the third point, Cleasby B added (at 434):

      "As soon as the award is made it must speak for itself. It must be applied, as in other cases, by extrinsic evidence to the subject matter, - it cannot be explained or varied or extended by extrinsic evidence of the intention of the person making it."

      Lord Cairns LC agreed with Cleasby B, and added (at 462):

      "It appears to me that upon every point which may be considered to be a matter of fact with reference to the making of the award, the evidence of the arbitrator or umpire was properly admissible. ... [But the] award is a document which must speak for itself, and the evidence of the umpire is not admissible to explain or to aid, much less to attempt to contradict (if any such attempt should be made) what is to be found upon the face of that written instrument."

    7. Mr Di Emidio also cited two Scottish cases. The first was Donald v Shiell's Executrix 1937 SC 52 in which Lord Justice-Clerk Aitchison, following Duke of Buccleuch v Metropolitan Board of Works, said (at 64):

      8. "The arbiter's award must speak for itself, and it cannot be aided or eked out by extrinsic evidence of what the arbiter has in fact decided."

      The second was Johnson v Lamb 1981 SLT 300 in which Lord Maxwell held himself bound by the two last-mentioned cases to hold that the arbiter could not be heard as a witness as to the matters on which he reached a decision in arriving at an award where the question at issue was exhaustion of the reference. Reference was also made to Land Securities plc v Westminster City Council [1993] 4 All ER 124.

    8. In light of those authorities, Mr Di Emidio submitted that the evidence which the pursuers sought to lead from Mr Merry fell within the scope of the general rule that such evidence was inadmissible. The Notes to the arbiter's award (at page 13) made it clear that he had decided that the rental value of the subjects was depressed by the existence of the keep open obligation in Clause (TENTH) (Sixteen). In seeking to establish through the evidence of the arbiter their averment that the passing rent would have remained the same irrespective of whether that obligation was incumbent on them, the pursuers were seeking to rely on the arbiter's evidence to explain and contradict what he had said in his award. That offended against the general rule. That was so even although the effect of the evidence would not be to alter the outcome of the arbitration.

    9. So far as the relevancy of the averment quoted in paragraph [26] above was concerned, Mr Di Emidio submitted that it was clear that the arbiter had reached his decision in the light inter alia of the view that the keep open obligation imposed by Clause (TENTH) (Sixteen) was incumbent on the pursuers. For present purposes that was simply part of the factual background. The averment sought to put in issue what the reviewed rent would have been in an alternative factual situation. It was, however, irrelevant to consider what the decision would have been if Clause (TENTH) (Sixteen) had not formed part of the Sub-Lease.

    10. In responding for the pursuers to those submissions, Mr MacColl began with the question of the relevancy of the averment quoted in paragraph [26] above. He pointed out that it came as a response to the second defenders' averments quoted in paragraph [25] . The second defenders were saying that they were entitled to resist rectification by relying on section 9(1)(a) because inter alia if rectification were granted they would be left in receipt of a rent reduced on account of Clause (TENTH) (Sixteen) while the pursuers would gain the benefit of not being subject to the obligation imposed by Clause (TENTH) (Sixteen). It was a relevant response to that contention to maintain that, even if Clause (TENTH) (Sixteen) had not been in operation at the time of the arbitration and had not been taken into account by the arbiter, the result would have been the same. If that were established, that element of the second defenders' case that their interests would be adversely affected to a material extent by the rectification would be undermined.

    11. Mr MacColl then drew attention to the fact that the rent review clause in the Sub-Lease provided for upward-only review. Clause (THIRD) of the Sub-Lease provides that:

      12. "The Tenants bind and oblige themselves to pay to the Landlords in name of rent ... (5) during the remainder of this Sub-Lease [i.e. after the first fourteen years] the higher of (a) the annual rent payable in the immediate preceding period and (b) such rate as shall represent the fair yearly rent for the premises at ... [the relevant term] having regard to the rental values then current for similar property let with vacant possession without a premium and on terms similar to the provisions of this Sub-Lease".

      The arbiter's award had to be construed in light of that provision. £20,000 was the passing rent, i.e. the rent mentioned in Clause (THIRD) (5) (a). The arbiter held that "the existence of the [keep open clause] would materially affect the hypothetical tenant's bid". The pursuers did not seek to contradict that. The arbiter went on to hold that the "cumulo effect" of four considerations, including the existence of the keep open clause, was that the hypothetical tenant "would not be prepared to bid more than the passing rental of £20,000". Given the upward-only nature of the rent review provision, that was all that was required to determine the matter. Clause (THIRD) (5) (a) took effect to keep the existing rent in force. The arbiter had not, however, expressed any view as to what the hypothetical tenant's bid would have been (except that it would not have been more than £20,000), or what part each of the four factors relied upon played in his decision. To seek from him evidence of whether the absence of Clause (TENTH) (Sixteen) would have made a difference to the reviewed rent involved putting to him a hypothetical question that he had not addressed in the arbitration. It did not involve contradicting, varying or even explaining his award.

    12. In these circumstances, the averment quoted in paragraph [26] above was clearly relevant in this action. One means of seeking to prove the truth of that averment was to lead the arbiter as a witness and to ask him to address the hypothetical question of what his decision would have been if Clause (TENTH) (Sixteen) had not formed part of the Sub-Lease at the review date. There was, Mr MacColl submitted, no rule rendering it incompetent to ask the arbiter such a question.

    13. Mr MacColl accepted that there was a general rule against the admissibility of the evidence of an arbiter to explain, vary, modify or contradict his award. The rule stemmed from the wider rule against the admissibility of extrinsic parole evidence to contradict, modify or explain the terms of a writ. In the context of arbitration, it also took support from the rule that an arbiter was functus once he had issued his award. The proper scope of the rule, however, was that it applied in proceedings which were directly concerned with the arbitral award, whether in the form of proceedings to enforce the award or proceedings to set it aside. The present proceedings were not of that nature, and the rule therefore had no application to the competency of the arbiter's evidence on the issue focused in the averment quoted in paragraph [26]. Alternatively, if the general rule fell to be formulated more widely, it ought nevertheless to admit of an exception in the circumstances of the present case.

    14. In making those submissions, Mr MacColl pointed out first that paragraph 91 of the article in the Stair Memorial Encyclopaedia came in a section dealing with challenge and reduction of the award, and that that limitation of its scope was reiterated in the first sentence of the paragraph. Secondly, paragraph 98 touched on the application of the rule in actions to put the award into effect, and referred back to paragraph 91 for the application of the rule in the context of reduction. The last sentence of paragraph 98 made the point that the arbiter "is under no such restriction should his evidence on these matters become relevant for other purposes". Mr MacColl also referred to Dickson on Evidence, paragraph 1023; Walkers on Evidence, second edition, paragraph 13.20.4; Macphail on Evidence, paragraph 3-15; Bankton's Institute, I, xxiii, 22; Bell on Arbitration, paragraphs 476-479, 693-695, 703; Irons and Melville on Arbitration, 236; and Davidson on Arbitration, paragraph 18.18. All of those were, he submitted, consistent with his contention that the general rule applied only in the context of proceedings for enforcement or reduction of the arbitral award. No case had been found applying the rule beyond that context. Reference was made to Woddrop v Finlay (1794) M 628; Arthur v Callin and Smith (1773) M 667; Alexander v Bridge of Allan Water Company (1869) 7 M 492, per Lord Kinloch at 499; Glasgow City and District Railway Company v McGeorge, Cowan & Galloway (1886) 13 R 609, per Lord President Inglis at 615; Clippens Oil Co Ltd v Edinburgh & District Water Trustees (1901) 3 F 1113, per Lord Kinnear at 1128; Donald v Shiell's Executrix, per Lord Wark at 67-68; and Johnson v Lamb. The proper scope of the rule was that it excluded the evidence of the arbiter in explanation of his award in proceedings concerned with enforcement or reduction of the award. To that extent it was an aspect of the wider rule against contradicting a writ by parole evidence. It was also a consequence of the rule that the arbiter was functus when he had issued his award. So understood, the rule had no application to proceedings of which the arbitral award was not the subject matter. Still less did the rule operate to exclude, in such proceedings, the evidence of the arbiter on a question, relevant for the purpose of those proceedings, as to what, hypothetically, his award would have been if certain specified circumstances had been different. Alternatively, if the general rule was truly of broader scope than that, it should nevertheless be held to be subject to an exception rendering the arbiter's evidence admissible in circumstances such as those of the present case. The line of authority should be narrowly rather than broadly construed, given the criticism expressed in the two most recent Scottish cases, Donald v Shiell's Executrix (per Lord Justice-Clerk Aitchison at 65) and Johnson v Lamb (per Lord Maxwell at 307).

    15. Mr Abercrombie submitted that it was not surprising that the Scottish cases dealing with the competency of the arbiter's evidence all dealt with enforcement or reduction of the arbitral award; that was the most likely context in which the point might arise. It was not surprising that there was no authority dealing with the context of a claim for rectification, given that remedy's relatively short history. There was, he submitted, no express authority for restricting the scope of the general rule in the way sought by the pursuers. Paragraph 98 of Lord Hope's article came in a context not limited to enforcement and reduction. It was, he submitted, illogical if the rule applied only to actions for enforcement or reduction of the arbiter's award. If the considerations of finality and certainty relied upon by Cleasby B in Duke of Buccleuch at 434 were valuable considerations, it was difficult to see why they should be of relevance only in certain types of action. Although in Land Securities v Westminster City Council Hoffmann J had said (at 127g):

      16. "... The Duke of Buccleuch's case can have no relevance when the award does not constitute a res judicata between the parties but is relied upon as evidence in other proceedings between strangers",

      that was of no application in the present case, where the parties represented the same interests as those who had been involved in the rent review arbitration; this was not a case between strangers. The observations of Lord Justice-Clerk Aitchison in Donald v Shiell's Executrix and Lord Maxwell in Johnson v Lamb did not warrant a restrictive reading of the general rule.

    16. What the pursuers were seeking to do, Mr Abercrombie submitted, was to "unpick" the arbiter's award in a related action. In seeking to lead the evidence of the arbiter on the point made in the averment quoted at paragraph [26] above, they were attempting to have him say, in face of his express finding that the keep open clause had a material effect on the hypothetical tenant's bid, that the absence of the keep open clause would have made no difference to his decision. Although the rent review clause provided for upward-only review, there was nothing in the Notes to the award to indicate that the cumulo effect of the factors which the arbiter relied on would have been to reduce the hypothetical tenant's bid below £20,000. Thus, what the pursuers were seeking to do was have the arbiter contradict his own reasoning in proceedings between the same parties, namely the landlord and the tenant for the time being in the Sub-Lease. That was contrary to the general rule.

    17. Addressing the two questions of the relevancy of the averment and the competency of the arbiter's evidence together, Mr Ferguson made in effect two points. The first was that the second defenders' position involved a misunderstanding of what the arbiter had decided, and thus a mistaken view that the pursuers sought to have him contradict, modify or explain his decision. The misunderstanding stemmed from a failure to take proper account of the fact that the rent review clause provided for upward-only review. If at review the current rental value was not more than the passing rent, the passing rent would become the reviewed rent. In saying that the "hypothetical tenant ... would not be prepared to bid more than the passing rental of £20,000", all that the arbiter was doing was holding that the case for an increased rent had not been made out. He was not expressing any view as to the amount of the bid which the hypothetical tenant would have made. Although the arbiter had regarded the existence of the keep open clause (as well as each of the three other factors to which he made reference) as having a depressing effect on the hypothetical tenant's bid, it did not follow that the elimination of one of those factors, namely Clause (TENTH) (Sixteen), would have brought the hypothetical tenant's bid up to a figure in excess of £20,000. The arbiter's award was conclusive as to the amount of the reviewed rent on the basis on which it was actually assessed. It did not, however, provide an answer to the hypothetical question as to what the reviewed rent would have been if Clause (TENTH) (Sixteen) had not formed part of the Sub-Lease. The existence of the arbiter's award did not preclude the leading of his evidence on that hypothetical question. Leading his evidence on that point did not involve explanation, modification or contradiction of his award.

    18. Mr Ferguson's second point was that on a sound view of the authorities, the general rule against explanation, modification or contradiction of an arbiter's award by the parole evidence of the arbiter was an aspect of the general rule against explanation, modification or contradiction of a writ by parole evidence. That rule applied, on a proper view of the authorities, to actions in which the arbiter's award was the subject matter of the litigation, whether in proceedings for enforcement of the award, or in proceedings to set it aside. There was no authority that the rule precluded leading the parole evidence of the arbiter in proceedings where the award was not the subject matter. The ratio of the rule did not apply in such a case.

    19. Discussion
  28. In my opinion, the averment quoted in paragraph [26] above is relevant, and ought to be admitted to probation. One important aspect of the second defenders' case under section 9(1)(a) is the assertion that they would be adversely affected to a material extent by the proposed rectification, because the existence of Clause (TENTH) (Sixteen) has depressed the level of the reviewed rent, yet in the event of rectification the pursuers will be freed of the obligation that had that effect on the rent. It is, in my view, plainly relevant, as an answer to that proposition, to aver that the reviewed rent would have been the same, irrespective of whether or not the Sub-Lease contained Clause (TENTH) (Sixteen).

  29. On a proper understanding of the rent review clause in the Sub-Lease, the pursuers' averment, in my view, involves no contradiction of the arbiter's decision or his reasoning. By virtue of Clause (THIRD) (5) (a), the reviewed rent is to be the passing rent if the current rental value is not in excess of the passing rent. The arbiter acknowledged that Clause (TENTH) (Sixteen) would have a depressing effect on rental value. He did not, however, assess that effect in money terms. He merely said that the cumulo effect of the keep open clause and three other considerations was that the rental value was not more than the passing rent. That, without further analysis or calculation, was enough to secure that the reviewed rent was the passing rent of £20,000. Mr Abercrombie sought to argue that the arbiter's Note should be construed as a finding that the four factors taken into account brought the rental value to £20,000, but as giving no indication that the rental value was less than £20,000. That may be a conceivable reading of the arbiter's words, but it does not seem to me to be the natural one. In my view the arbiter's language leaves open a real possibility that, if one or other of the four factors relied upon had been left out of account, the rental value would still not have been more than £20,000. It is the possibility that that would have been the result of leaving Clause (TENTH) (Sixteen) out of account that the pursuers seek to put in issue. In doing so they are not, in my opinion, seeking to contradict the arbiter's award. They are, on the contrary, asking the only person who may be in a position to do so to express a view on the hypothetical question of what the reviewed rent would have been if Clause (TENTH) (Sixteen) had not been in force, but all other considerations had remained the same and had been assessed in the same way.

  30. I do not consider that the so-called "general rule" on which the second defenders founded renders incompetent the evidence of the arbiter on the point which the pursuers seek to put in issue. It is, in my view, clear that, where proceedings are concerned with the arbitral award as their subject matter, the award speaks for itself, and it is incompetent to lead the evidence of the arbiter to explain his decision, still less to modify or contradict it. That much is clear from the Duke of Buccleuch's case, which has been followed in Scotland. The ratio of the rule has been variously expressed. It seems to me that there are two recurrent themes in its explanation. One is that it is an application of the general rule against the explanation or modification of a writ by extrinsic parole evidence. The other is that it is a corollary of the rule that the arbiter is functus as soon as he has issued his award. It seems to me that it follows that the proper scope of the rule is in proceedings concerned with the arbitral award as their subject matter. The most obvious examples of proceedings in which the rule does apply are proceedings for the enforcement or for reduction of the award. It seems to me that, having regard to its rationale, the rule has no application in proceedings in which the arbitral award is not itself in issue, and will remain wholly unaffected by any evidence the arbiter may give. That seems to me to be the position in the present case.

  31. Apart from a consideration of the rationale of the rule, I find support for the view which I have taken of it in the treatment of it by Lord Hope in the Stair Memorial Encyclopaedia, "Arbitration", paragraphs 91 and 98, and in Land Securities v Westminster City Council, per Hoffmann J at 127f-g. Although Hoffmann J there referred to res judicata and "other proceedings between strangers", it is to be remembered that the plea of res judicata will be defeated not only where the parties are different, but also where the subject matter is different.

  32. In the result, I am of opinion that the second defenders' anticipatory objection to the competency of the evidence of Mr Merry as a witness on the issue raised by the pursuers in the averment quoted at paragraph [26] above is ill-founded and should be repelled. It will be open to the pursuers to call Mr Merry as a witness and to ask him questions designed to ascertain whether, if Clause (TENTH) (Sixteen) had not formed part of the Sub-Lease, the reviewed rent would have been the same. That is, in my view, a hypothetical question, the answer to which leaves unmodified the arbiter's decision. It is, however, a question the answer to which is relevant to the issue between the parties under section 9(1)(a). The competency of the line of evidence will not, in my view, be adversely affected if, in order to pursue it properly, either party sees fit to ask the arbiter questions going to the weight and value which he attributed to the various factors which he saw as having a depressing influence on rental value. The purpose of such questions, if they came to be asked, would be to explore fully the hypothetical question in issue, and not to explain the arbiter's actual award.

    33. Result

  33. I accordingly repel the second defenders' second and third pleas-in-law and, of new, allow a proof before answer. I repel the second defenders' objection to the competency of the evidence of Mr James Merry, FRICS. I shall put the matter out By Order with a view to fixing a diet for the proof before answer and making such other arrangements for future procedure as may seem appropriate. I shall reserve the expenses of the debate.

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