Appeal against arbitrator’s part award in lease dispute cannot be made on ground of legal error

Appeal against arbitrator’s part award in lease dispute cannot be made on ground of legal error

A lord ordinary has rejected a challenge to a part award made by an arbitrator in a commercial lease dispute after ruling that the legal error contended for by the petitioner did not arise.

The petitioner was the tenant of premises in Glasgow from which they had operated a hotel accommodation business since 2011 and had sought damages of £800,000 in arbitration. As the respondent did not agree that the error in question was made, the petitioner sought leave to advance a legal error appeal.

The appeal was heard by Lord Richardson in the Outer House of the Court of Session. Davidson Chalmers Stewart provided representation for the petitioner and Dentons for the respondent.

Scope of the wording

A dispute arose between the parties because the petitioner alleged that the respondent was not maintaining the common parts of the property, a proper system of heating, and the windows of the property in accordance with the respondent’s obligations under the lease. Accordingly, the petitioner made deductions from the rent from December 2017, and made no further rental payments since 10 March 2020.

Following service of an irritancy notice by the respondent, the petitioner served a notice of arbitration, as clause 9 of the lease obliged the parties to have issues in respect of the meaning of the lease determined by arbitration. In making the part award, the arbitrator considered that the key to resolving the dispute was the provision of the lease which required the rent to be paid “clear of any deduction, right of compensation or set-off whatsoever”.

From this point, the arbitrator concluded that the petitioner was entitled to claim for an abatement of rent but was required to pay full rent until said abatement was fixed or established. In reaching this conclusion, the arbitrator expressly rejected the petitioner’s argument that the retention of rent by the petitioner did not fall within the scope of the wording of the lease.

It was submitted for the petitioner that the arbitrator’s reasoning proceeded on the basis that the right to exercise the remedy of irritancy arises where the petitioner has failed to pay rent irrespective of whether the landlord is in material breach. The tribunal failed to consider whether the respondent was in breach of the obligations, and whether those breaches were material and prevented the respondent exercising the remedy of irritancy applying the principle of mutuality of obligations.

No defence

In his decision, Lord Richardson noted: “The arbitrator has concluded, primarily on the basis of a construction of the material terms of the lease, that the petitioner’s claims of breach of contract by the respondent could not provide a defence to the exercise by the respondent of its right to irritate the lease for non-payment of rent and other payments by the petitioner. In essence, the arbitrator held that the parties had agreed to a contractual scheme whereby the petitioner’s obligation to pay the rent and other sums as they became due under the lease was not affected by the any claims the petitioner might have arising from alleged breaches by the respondent.”

He concluded: “It follows from the arbitrator’s construction of the terms of the lease, that the obligations which the respondent is said by the petitioner to have breached are not the counter-parts of the petitioner’s obligation to make payment. Therefore, on the arbitrator’s approach, the principle of mutuality of obligations provided no defence to the respondent’s right to irritate the lease.”

Addressing whether the arbitrator’s conclusion was obviously wrong, Lord Richardson said: “The arbitrator was engaged in an exercise of contractual construction. Plainly, as it is put in the case law, respectable intellects may disagree about the results of such an exercise. In my opinion, the Part Award simply does not disclose an error of the type required by [the Scottish Arbitration Rules].”

He concluded: “As to the second limb, I am quite satisfied that the point raised by the petitioner does not raise any issue of general importance. It turns on the proper construction of the bespoke terms of a commercial lease. There is no suggestion that either the lease as a whole or the relevant clauses are standard.”

Leave to appeal on the ground relied upon by the petitioner was therefore refused. The case was put out by order to allow for addresses on an additional ground of challenge.

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