20 Feb 2019

Cine-UK Limited v Union Square Developments Limited

Background

This case concerned a lease of a premises comprising a multiplex cinema in Aberdeen (the Lease). Under the Lease the Pursuers were the tenant and the Defenders were the landlord. The parties had a dispute regarding the revised rent that was to be imposed after a rent review. The Lease provided that in such a situation where the dispute could not be resolved, the revised rent would be determined by the Independent Surveyor.

The Lease defined an Independent Surveyor as:

"a single chartered surveyor experienced in assessing rental levels of property similar to the Property in city centre locations in the United Kingdom…who shall act as an expert…and whose decision shall be final and binding on the parties hereto both in fact and law, and such chartered surveyor, who shall be entitled to seek professional advice on matters of law and other issues if he thinks fit, shall have the power to refer any matter to the Court."

The parties could not resolve their dispute, appointed an Independent Surveyor, who subsequently produced a determination regarding the revised rental figure. The Pursuers, unhappy with the revised rental figure produced by the determination, raised the Court action in question. The definition above was termed the "Finality Clause".

Arguments

The Pursuers' principal argument was to reject the final and binding nature of the Finality Clause as it related to matters law. The Pursuers contended that the terms of the Finality Clause constituted "contractual directions" that the Independent Surveyor was obliged to follow. Further, it was argued that any departure from these directions would constitute an error in law of the kind competent for the Court to correct. The Pursuers argued that in this case there had been such an error in law on the part of the Independent Surveyor in calculations used to determine the revised rental figure. As such, it was competent to ask the Court to correct this error.

The Defenders countered this argument on the ground that the action was incompetent because the Court did not have jurisdiction to hear this matter. The Defenders' argument was simple – the parties to the Lease had agreed that the decision of the Independent Surveyor was to be "final and binding on the parties…both on fact and law". This Finality Clause was not ambiguous and clearly had the effect of removing the ability of both parties to make recourse to the Court regarding any decision of an Independent Surveyor over matters in which such authority was granted by the Lease. The pleadings from the Pursuers that the Independent Surveyor erred in law were therefore incompetent.

Decision

Lady Wolffe found the action to be incompetent and it was therefore dismissed.
The decision was based primarily on the general principals of contractual construction. Lady Wolffe stated:

"The Court must ascertain the intention of the parties by determining what a person, having the background knowledge of the parties, would have understood from the language selected by them. The meaning of words must be assessed having regard to other relevant parts of the contract. In the event that there are two possible constructions, the Court is entitled to prefer one which is consistent with business common sense."

Lady Wolffe also confirmed definitively that is it is competent for contracting parties to confer upon an expert exclusive jurisdiction to determine issues of both fact and law. In all cases it is simply a question of contractual construction that will determine whether or not they parties have actually done so.

In Lady Wolffe's opinion, there was simply no ambiguity in the Finality Clause, exclusive jurisdiction for the Independent Surveyor over fact and law had been agreed between the parties, and the determination of the Independent Surveyor could not be disputed in Court. Lady Wolffe commented on three additional features of the Lease to support her decision in this case:

  1. It was clear, and undisputed, that the rationale underlying the provision conferring finality on the decisions of experts included the benefit of speed, certainty and finality - in essence, the commercial value of resolving a dispute impartially and definitively.
  2. There was no requirement in the Lease that the Independent Surveyor provide reasons for his or her determination. The lack of this requirement suggested that the parties both had the intention to simply accept the decision of the expert. Again, a commercial focus is seen here with regard to the dispute being resolved quickly and business recommencing as normal.
  3. There was no distinction between types of disputes to which the Finality Clause was to apply. Had the parties wished to retain the ability to challenge decisions of an expert on the basis proposed by the Pursuers in this case, they could have distinguished those types of disputes within the Lease itself. Instead the Finality Clause was built into the very definition of Independent Surveyor, meaning it was the parties' intention that ALL disputes remitted to Independent Surveyor were to have the benefit of finality in matters of both law and fact.

Conclusions

  • It is competent for parties to a lease to grant exclusive jurisdiction to an independent expert to resolve disputes, both in relation to fact and law.
  • Potential exceptions to the above (assuming no exception expressly provided for) can only be found after considering principles of contractual construction, and the definitions of what circumstances the independent expert has jurisdiction over.
  • When drafting independent expert clauses, it is important to consider what disputes a party will wish to be open to further scrutiny, and to ensure that these specific circumstances are carved out of the exclusive jurisdiction given to the independent expert over all other disputes.
  • One curiosity highlighted by this case centres around why parties would opt to grant an independent expert exclusive jurisdiction to decide matters of law, without a requirement to seek professional legal advice. The concern here being that this could lead to undesirable or unexpected decisions that would nonetheless be binding upon the parties. 
  • This is an important concern because there are limited circumstances where a decision of an independent expert can be challenged on matters of law, where a 'Finality Clause' is present. Lady Wolffe clarified this circumstance as being where the expert interprets the relevant provisions of the lease in such a manner that amounts to them answering the wrong question (i.e. in this case, the question of ascertaining the open market rent).
  • This exception is very limited, as Lady Wolffe also confirmed that provided the interpretation of the lease provisions remained within the question addressed, the resulting decision would be final and binding on the parties, regardless of whether the expert had erred in law. Therefore, practitioners should take great care when drafting 'Finality Clauses' as they relate to independent experts, and ensure areas of law which parties may wish to have a Court rule over are specifically carved out in the body or definitions of the lease.