Property Arbitration Review: Options for Dispute Resolution Efficiency

1. Non-Rent Review Property Arbitrations Graham Chase, Katie Bradford and David Holland QC Thursday 5th March 2015

2. Chartered Institute of Arbitrators London Branch PROPERTY ARBITRATION 5th March 2015 - 6 pm for 6.30 pm Hosted by Linklaters One Silk Street, London EC2Y 8HQ THE OPTIONS AND THEIR EFFICIENCIES IN THIRD PARTY/PRIVATE DISPUTE RESOLUTION OR ARBITRATION V INDEPENDENT EXPERT By Graham F Chase FRICS C.Arb FRSA FInstCPD

3. 1. COMMON OBJECTIVES • Provide Alternative Dispute resolution • A decision or series of decisions to determine a dispute • Fairness • Market friendly, relevant and proportionate • Recognised process • Speed of process • Cost effectiveness

4. 2. SHORT FORM DEFINITIONS • Independent Expert: Dispute resolution through the personal expertise and judgement of the dispute resolver in the subject matter decision. • Arbitration: Dispute resolution through a judicial process based on the case stated by the parties and only relying on the dispute resolver’s application of expertise to the decision from the evidence as submitted.

5. 3. DIFFERENCE BETWEEN ARBITRATOR AND INDEPENDENT EXPERT 3 (i) The General Approach

6. 3 (ii) Disclosure and Delegation

7. 3 (iii) Fees and costs of the reference

8. 3 (iv) Status of Decision

9. 3 (v) Notes in respect of the differences • Where the Arbitrator takes the initiative in ascertaining facts and the law the differences with an independent expert are less marked in respect of negligence. • It is critical that where the arbitrator uses their own initiative or considers their own knowledge and expertise that the Award should be based on the parties’ assessment of these factors. • Consequently, everything the Arbitrator wishes to apply in terms of facts and the law which is solely from his/her knowledge must be put to the parties for their consideration and comment and upon. • The Independent Expert is not required, nor should they address the parties on their knowledge for assessment as the Determination should incorporate that knowledge and expertise in any event and regardless of the parties’ position.

10. 4. EFFICIENCY COMPARED 4 (i) Cost – what is best?

11. 4 (ii) Speed

12. 4 (iii) Clear rules of procedure

13. 4 (iv) Thoroughness

14. 4 (v) Issues of Law and their resolution • Several recognised methods of resolving points of law in Arbitration through the courts where the parties and Arbitrator are agreed, by the securing of a legal opinion subject to the parties rights to comment and appeal on a point of law within an Award. • Determination by an Independent Expert of a point of law is inappropriate but parties can provide the Expert with the power to seek advice or a legal opinion or if no agreement a party apply to the Courts to determine a preliminary point of law but the power will be exercised sparingly - Bank of South Australia v S A Health Commission (1996) (Digest) difference between role of Expert and role of the Court. - National Grid Company v M25 Group (1999) (Digest) stay of Independent Expert determination pending Courts decision on point of law.

15. 4 (vi) Difficulty of Challenge • Arbitration Act 1996 provides areas for challenge including jurisdiction, slips, serious irregularity and points of law • Independent Expert determination challenge requires need to demonstrate process and basis of decision has departed materially from instructions • Jones v Sherwood Computer Services (1990) (Digest) • May be impossible to litigate on a determination when the decision does not show the point. This will be problem where no reasons are provided.

16. 5. WHICH OPTIONS TO ADOPT • Choice of Arbitrator or Independent Expert is identified in the contract but may allow for a default option but with alternative subject to election by one party or agreement by both at the time of the dispute with default option if no agreement • Market conditions at the time may promote preference • Availability of evidence or precedence may promote preference • Specialism or restriction of a market and subject matter may encourage selection of Independent Expert but this may also encounter conflicts of interest where there are few players but this can equally apply to Arbitrator selection • In market based disputes with limited evidence the Independent Expert route may be preferable • Technical disputes may benefit from the Independent Expert option • Widely based and broad market issues where analysis is more prone to subjective assessment may legislate in favour of Arbitration where the subject matter may more effectively be tested through process rather than expertise • Recovery through negligence claim on the Independent Expert Witness option • Put the wrong, right through Courts on the Arbitration option

17. CIArb – London Branch “Nipping it in the bud” Early dispute resolution options in Real Estate Katie Bradford, Linklaters LLP 5 March 2015

18. Topics • Early Options: • Alternatives and/or stepping stones to Litigation/Arbitration • Incorporating into Contract: • Tiered dispute resolution provisions • Enforceability – case law update • Real Estate Dispute Protocols: • Encouraging early resolution in Real Estate

19. Early Options • Mutual Co-operation/ Negotiation • At local level • Board Level/CEO’s • Neutral Assistance • Mediation • Early Neutral Evaluation Expert Determination or Adjudication • More complex/ technical disputes, valuation, construction • Binding?

20. Incorporating into Contract Tiered dispute resolution provisions • Contractual ADR procedure for escalating disputes: > Executive meeting > Mediation, Expert Determination, Adjudication > Litigation or Arbitration • Can specify: > Pre-condition to or (parallel) option to Litigate/ Arbitrate > Certain types of dispute only > Procedure: timetable, appointment, specialism of appointee, form of decisions, reasons > Binding nature, options for appeal etc. Pros and cons

21. Tiered Dispute Resolution Clauses • Enforceability – case law update

22. Tiered Dispute Resolution Clauses • English Courts reluctant to enforce agreements to negotiate/ mediate: Walford v Miles [1992] (Court of Appeal): Lockout agreement. Bare agreements to negotiate lack necessary certainty and are, therefore, unenforceable. Duty to negotiate in good faith inherently inconsistent with position of a negotiating party. See also Courtney & Fairburn v Tolaini Bros Ltd [1975]: Too uncertain to enforce. Practical difficulties of monitoring and enforcing compliance.

23. Tiered Dispute Resolution Clauses • Certainty is key: • Needs to be expressed in unqualified and mandatory terms. • Process must be set out and suitably clear.

24. Tiered Dispute Resolution Clauses • Cable & Wireless v IBM [2002] (Commercial Court): First decision where agreement to negotiate in ADR procedure held to be enforceable. IT services contract. Dispute escalation clause stated: “Parties shall attempt in good faith to resolve any dispute or claim … promptly through negotiations between the respective senior executives … [if not resolved] parties shall attempt in good faith to resolve the dispute or claim through an alternative dispute resolution procedure as recommended to the parties by CEDR...”

25. Tiered Dispute Resolution Clauses • Cable & Wireless v IBM [2002] (Commercial Court): Colman J: The obligation to mediate was expressed in unqualified and mandatory terms.Mutual intention that Litigation was last resort. Public policy reasons. Parties had identified a particular procedure which was sufficiently certain so as to make the agreement to undertake the ADR procedure enforceable. Went much further than a simple agreement to negotiate. Had the clause simply required the parties to attempt, in good faith, to resolve their differences, this would have been void for uncertainty.

26. Tiered Dispute Resolution Clauses • Holloway and another v Chancery Mead Ltd [2007](TCC) Construction contract incorporating National House-Building Council (NHBC) Buildmark scheme resolution service. Reference to NHBC pre-condition to arbitration. Ramsey J: 3 requirements for clause to be binding: The process had to be sufficiently certain, in that there should not be the need for any agreement at any stage before matters could proceed. The administrative processes for selecting a party to resolve the dispute and to pay that person had to be defined. The process or, at least, a sufficient model of the process should be set out so that the detail is sufficiently certain.

27. Tiered Dispute Resolution Clauses • Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] (Court of Appeal) Insurance policy. Undertaking that, "prior to a reference to arbitration, [parties] will seek to have the Dispute resolved amicably by mediation“.

28. Tiered Dispute Resolution Clauses • Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA and others [2012] (Court of Appeal) Cooke J: Applied Holloway The undertaking did not define parties' rights with sufficient certainty: • The clause did not impose any unequivocal commitment to mediate. • The clause did not identify any clear mediation process. • There was no provision for selection of the mediator. Not enforceable as condition precedent to the existence of a binding arbitration agreement.

29. Tiered Dispute Resolution Clauses • Wah (Aka Alan Tang) and another v Grant Thornton International Ltd and others [2012] (Chancery Division) Network agreement contained escalating ADR provisions: First - referring the matter to chief executive for amicable conciliation. Second - submission to panel in event dispute was still not resolved. Partners were expelled and brought challenge. Arbitration award given in favour of Grant Thornton. Partners challenged jurisdiction of tribunal under s67 Arbitration Act 1996.

30. Tiered Dispute Resolution Clauses Wah (Aka Alan Tang) Hildyard J: Did not take issue with the principle that dispute escalation clauses would be enforceable if their provisions were sufficiently certain. But dispute escalation clause was too equivocal (in terms of the process) and nebulous (in terms of the parties' respective obligations) to be treated as an enforceable condition precedent to arbitration. No detail as to: What form the process of conciliation should take, who was to be involved in it and what (if anything) participants were required to do. Form or process of panel resolution, nor whether such a reference should include participation by the parties. Court unable to determine or to direct the parties to comply with the relevant clause.

31. Tiered Dispute Resolution Clauses • A shift away? • Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] (Commercial Court) Agreement to purchase iron ore. Clause 11.1 "In case of any dispute or claim … the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at in between the parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.“ Emirates failed to purchase required amount. Number of meetings between Jan-April 2009. Settlement negotiations failed. Prime sought to refer to arbitration. Emirates challenged jurisdiction of tribunal under s67 Arbitration Act 1996.

32. Tiered Dispute Resolution Clauses • Emirates Trading Emirates’ submissions: Clause 11.1 constituted a binding condition precedent. Although friendly, meetings were not discussions for the purposes of Clause 11.1 and/or did not last for a continuous period of four weeks. Prime’s submissions: Clause 11.1 not enforceable- mere "agreement to agree“ (relying on Walford v Miles). Alternatively, if condition precedent was enforceable, had been satisfied by the meetings which took place.

33. Tiered Dispute Resolution Clauses • Emirates Trading • Teare J: Clause 11.1 constituted an enforceable condition precedent to engage in "friendly discussion”. …"an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute”... “Word “shall” indicated a mandatory, legally binding condition. Time limitation (4 weeks) also crucial. Made commercial sense and consistent with public policy - resolve disputes before resorting to arbitration or litigation. Clause 11.1 was satisfied. Did not require continuous discussions to take place for the entire 4 week period. 4 weeks should elapse between first discussions and commencement of legal proceedings.

34. Tiered Dispute Resolution Clauses • Emirates Trading • Extends the concept of what is enforceable further than previous judgments. Appears inconsistent with Wah: Query whether content of the "friendly discussion" was any more clearly defined than the dispute escalation steps contemplated in the Wah agreement. Number of uncertainties remain on basis of drafting: Discussions in person, phone or writing? Conducted by parties or legal reps? Supervised by neutral party? Confidential and/or without prejudice? Is concession needed to satisfy requirement to participate? But In line with public policy on ADR and Court’s desire to give effect to provisions of commercial agreements. Court will strain to imply criteria/supply machinery to clarify the process required, and how determined to succeed/fail/end.

35. Tiered Dispute Resolution Clauses Emirates Trading A controversial decision. Teare J distinguished previous English authority on the basis that: The obligation to seek to resolve disputes by friendly discussions was said to import an obligation to seek to do so in good faith. An identifiable standard. Preferred the reasoning of the courts of Australia and various ICSID tribunals, which have held such clauses to be enforceable.

36. Real Estate Dispute Protocols • Encouraging ADR in Real Estate

37. Real Estate Dispute Protocols • Pre-Action Protocol for Claims for Damages in Relation to the Physical State of Commercial Property at Termination of a Tenancy (“the Dilapidations Protocol”): • Encourages early resolution of dilapidation disputes, without recourse to litigation. • Adopts Property Litigation Association (“PLA”) protocol – widely used by practitioners. • Expected behaviour: Process and timetable for the exchange of information relevant to a dispute; standards for the content and quality of schedules/ landlord’s claims and conduct of pre-action negotiations. Sets out stages the parties are expected to undertake before the commencement of proceedings. • Encourages: • the exchange of early and full information about the dispute; • Avoidance of litigation by agreeing a settlement of the dispute before proceedings are commenced; and • efficient management of proceedings where litigation cannot be avoided.

38. Real Estate Dispute Protocols • The Dilapidations Protocol • Incorporated into CPR (from January 2012): • PRACTICE DIRECTION ON PRE-ACTION CONDUCT, Para 5. • PLA and RICS initiative. • Costs sanctions for non compliance: • Pre-action PD Para 5: When considering compliance, the court will take account of the relevant pre-action protocols. • Pre-action PD Para 4.6 and CPR 44.2:Costs sanctions for non-compliance with practice direction/ or because of conduct.

39. Real Estate Dispute Protocols • Protocol for Applications for Consent to Assign or Sublet • www.propertyprotocols.co.uk: Guy Fetherstonhaugh QC, Jonathan Karas QC (Falcon Chambers), Nicholas Cheffings and Mathew Ditchburn (Hogan Lovells). • The Landlord and Tenant Act 1988 imposes obligations on a landlord who receives an application for consent to assign or sublet, where such consent is not to be unreasonably withheld. • Provides guidance on form and content of application to assist landlord in considering application. • Recommends enforceable undertaking (preferably from solicitor) to meet Landlord’s reasonable and proper costs  or for appropriate amount. Avoids Landlords using costs as an excuse to defer dealing with application. • Timeline for acknowledgement and request for further information (5 days), and landlord decision (21 days). • Encourages agreement on ADR in event that Tenant believes landlord has unreasonably withheld or delayed its consent.

40. Real Estate Dispute Protocols • RICS Code of Practice: Service Charges in Commercial Property, 3rd edition • Good practice guidance in relation to service charges: transparency of costs, timely communication, standards of management etc. • Aims to: Improve general standards and promote best practice, uniformity, fairness and transparency; Ensure the timely issue of budgets and year end certificates; Reduce the causes of disputes; Provide guidance to solicitors. • Promotes ADR as more cost effective way of resolving service charge disputes than court. • Recommends that ADR is used even when leases do not expressly provide for it. • Highlights Court encouragement of ADR and potential costs sanctions for failing to consider ADR. • Suggests the following forms of ADR as appropriate to service charge disputes: • Early neutral evaluation; • Mediation; • Independent expert determination; • Arbitration

41. Real Estate Dispute Protocols • PACT: LTA 1954 Lease Renewals • The Landlord and Tenant Act 1954 (“LTA 1954”): • Terms of a renewal lease to be determined by the courts. • Professional Arbitration on Court Terms (“PACT”): • RICS and Law Society Scheme. • Form of ADR for lease renewal disputes.Voluntary process to determination by an arbitrator or independent expert. • Binding. • Guidance on instigating the procedure, identifying issues, appointing arbitrator/expert, process, the award, costs and producing the lease documents (including model consent orders). • Surveyor or solicitor acting as either an arbitrator or independent expert. • Previously, only available with approval of Court (‘in Court PACT’). • Now, available without involvement of Court (‘out of Court PACT’).

42. Real Estate Dispute Protocols • PACT: LTA 1954 Lease Renewals • Issues suitable for determination under PACT include: • Duration of the new lease • Other terms (e.g. repair, decoration, alienation, service charge, rent reviews, break clauses, etc.) • Rent/ Interim rent • Issues perhaps less suitable (require Court determination) include: • Validity of notices • Extent of premises to be comprised in the new lease • Currently, mainly used in unopposed renewals under the LTA1954 where a determination is required to settle the terms of the lease, or the rent, or both. • In future, may be used for opposed renewals, service charges, breach of repairing covenants, insurance, construction contracts and other matters arising out of leases or contracts for sale, including the application of the Landlord and Tenant (Covenants) Act 1995.

43. Real Estate Dispute Protocols • PACT: LTA 1954 Lease Renewals • Benefits: • Specialist Knowledge • Flexibility • Speed • Costs

44. The Future • ADR • In Court proceedings: • CPR endorses and encourages ADR: CPR 1.4 (1) The court must further the overriding objective by actively managing cases. (2) Active case management includes – …(e) encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure… • But parties are not compelled: Halsey v Milton Keynes General NHS Trust [2004] – breach of article 6 of the ECHR

45. The Future • ADR • However, strong pressure to consider ADR • CPR provides power to make costs sanctions: PRE-ACTION CONDUCTPRACTICE DIRECTION Pre-action PD Para 4.4  The court may decide that there has been a failure of compliance by a party because, for example, that party has – …(3) unreasonably refused to consider ADR… Pre-action PD Para 4.6 and CPR 44.2 Costs sanctions for non-compliance with practice direction/ or because of conduct. Fitzroy Robinson Ltd v Mentmore Towers Ltd [2010] • Failure to mediate was part of unreasonable course of conduct. Indemnity costs award. • Power to stay proceedings and order arbitration where an Arbitration Agreement is in place • s 9 Arbitration Act 1996

46. The Future • ADR • Whether arbitrators have similar powers arguable: • Arguments against: • Tribunal mandated under Arbitration Agreement to proceed to an Award. • Should not shirk responsibility/delegate to mediator. • Arguments for: • Duties, powers and obligations not only from Arbitration Agreement but also Statute: • S33 (1)(b) of Arbitration Act: General duty of the tribunal (1) The tribunal shall— (b) adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined. • Parallels with ‘overriding objective’ of CPR. • International context – more supportive – ICC, SIAC.

47. The Future • Protocols • Best practice to resolve disputes without Litigation/Arbitration. • To be used as indicator of reasonable behaviour. • To be incorporated into leases and other binding documents as a code which the parties agree to follow. • To be taken into account by the Courts when assessing whether parties have complied with their contractual and statutory obligations and the CPR.

48. DocExplorer number: A19525517

49. A MISCELLANY OF ARBITRATION CASES by David Holland QC Landmark Chambers

50. DILAPIDATIONS CASE: FACTS • substantial Georgian house in Gloucester-built in 1780 and extended in 1795. • tenanted since 1980s. • lease dated 31st October 1994. • term of five years from 3rd November 1995. • expired on 2nd November 1999. • First Defendant company the tenant by way of assignment in May 1997. • The Second and Third Defendants husband and wife, occupiers, directors of the First Defendant and guarantors