Arenson v Arenson
|England & Wales
|THE MASTER OF THE ROLLS,LORD JUSTICE BUCKLEY,Sir SEYMOUR KARMINSKI
|22 February 1973
|Judgment citation (vLex)
| EWCA Civ J0222-1
|22 February 1973
|Court of Appeal (Civil Division)
 EWCA Civ J0222-1
The Master of The Rolls (Lord Denning),
Lord Justice Buckley and
Sir Seymour Karminski
In The Supreme Court of Judicature
Court of Appeal
Appeal by plaintiff from order of Mr. Justice Brightman on 29th March 1972
Mr. MUIR HUNTER, Q. C., and Mr. J. L. M. BOWYER instructed by Messrs. Slowes) appeared en behalf of the Appellant Plaintiff.
Mr. GEORGE DILLON, Q. C., and Mr. J. M. BURTON (instructed by Messrs. Porter, Chamberlain & Co.) appeared on behalf of the Respondent defendants, Casson Beckman Rutley & Co.
The Defendant, Mr. Arcny Arenson did not appear and was not represented.
1. THE FACTS
Archy Arenson is a furniture maker. He turned himself into a private company - A. Arenson Limited. In 1964 he took his nephew, Ivor Arenson, into the business and gave him a small number of shares. The nephew agreed that, if he ceased to be employed in the business, he would sell the shares back to his uncle at a fair value. The agreement defined "fair value" in these words:-
"'Fair Value' shall mean in relation to the Shares in A. Arenson Limited, the value thereof as determined by the Auditors for the time being of the Company whose valuation acting as experts and not as arbitrators shall be final and binding on all parties."
On 4th April, 1970, the employment of the nephew was terminated, with the result that the agreement came into operation. He and his uncle asked the auditors of the Company, Casson Beckman Rutley & Co., to value the shares. On 13th May, 1970 they wrote this letter to the Secretary of the Company:- " Valuation of Shares - I. Arenson
1. We refer to your verbal request to place a value on the shares held by Mr. I. Arenson in' your company in accordance with the letters of the 18th March, 1964, and the 1st October, 1968.
2. The shares held by Mr. I. Arenson in the company are as follows:-
1,750 Ordinary Shares of £1 each, fully paid 500 6% Non-Cumulative Preference Shares of £1 each fully paid.
3. In our view the fair value of those shares on the 4th day April, 1970, was as follows:-
(a) The 500 6% Non-Cumulative Preference Shares of £1 each, fully paid, at a valuation of £166. 13. 4.
(b) The 1,750 Ordinary Shares of £1 each, fully paid, at a valuation of £4,750.
On 11th June, 1970, in reliance on that valuation, the nephew transferred the shares to the uncle and received a cheque from the uncle for £4,916. 13. 4.
A few months later the private company went public. On 10th September, 1970, a holding company was formed, called A. Arenson (Holdings) Limited. On 14th January, 1971, the uncle transferred all his shares to the holding company, including those he had bought from his nephew. On 21st January, 1971, the holding company made an offer of its shares to the public. It set out the profits of the private company and the report of the accountants. From these the nephew then got to know all about the value of the shares which he had sold to his uncle. He says that they were worth six times as much as his uncle had paid him. They were worth £29,500, whereas the uncle had only paid him £4,916. 13. 4.
The nephew felt that he had been unfairly treated. On 18th August, 1971, he brought this action against his uncle and the auditors. He alleged that "the said valuation was misconceived and erroneous in one or more fundamental respects and was made on a wrong basis or bases." Amongst other things he said that the auditors had based their valuation on the last balance sheet for the year ended 31st July, 1969, and had failed to take into account the great increase in the profits between 31st July, 1969 and 4th April, 1970. The profits had doubled in that time. He also said that the auditors had taken the goodwill at the book figure of £30,000, which was the figure at which it had stood since 1960, whereas it was worth far more. He also said that the auditors had failed to take into account the intention to "go public" which must have been known to them at that time.
The nephew claimed, as against his uncle, that the valuation was not binding, that his shares ought to be revalued, and that he should 'be paid their worth.
In the alternative, the nephew claimed as against the auditors that they "were negligent in making the said valuation by reason whereof the plaintiff has suffered damage".
The auditors now seek to strike out the statement of claim as against them. Let it be assumed, they say, that their valuation was wholly erroneous - in that it was only one sixth of what it should have been - let it be assumed, they add, that they themselves were negligent, even grossly negligent - nevertheless there is no cause of action against them. What is more, they say, it is perfectly plain and obvious. So much so that the action against them should be thrown out straightaway without a trial.
The Judge accepted that proposition. He was ready to assume that every word of the statement of claim was true, but nevertheless he said that, short of fraud, the auditors were not liable. He dismissed the action as against them. But, in coming to that conclusion, he seems to have thought that the nephew would have a remedy against the uncle (see 1972 1 W. L. R. at page 1207A). Indeed before us Mr. Dillon put the following proposition in the forefront of his argument: He asserted that the nephew could set aside the valuation - as against the uncle - if the auditors "made a mistake of a substantial character or materially misdirected themselves in the course of the valuation." Any mistake would suffice, he said, which affected the outcome. Mr. Dillon quoted for this purpose the judgment of Sir John Romills, aster of the Rolls, in ; of Sir Raymond Evershed, Master of the Rolls, in ; and of Mr. Justice Roskill in .
Is that proposition of Mr. Dillon correct? I am myself very doubtful of it. I am not prepared to say that the nephew could, as against the uncle, set aside that valuation simply because the auditors made a mistake, even a serious mistake. That is not; a matter which I would propose to decide in the absence of the uncle. I should have thought that, despite the mistake, the uncle would have good ground for submitting' that the valuation was binding as between him and the nephew. If it was binding, then it would seem only fair and just that the nephew should have a remedy against the auditors.
I feel this so strongly that I do not think we should strike out the claim against the auditors before we hear the uncle's side of it. Otherwise you might get this intolerable position: Assume, as we must, that the valuation was made on an entirely wrong basis due to the gross negligence of the auditors. The action would be struck out against the auditors on the ground that the remedy was against the uncle: and then afterwards, on hearing the uncle, the Court might feel compelled to dismiss the claim against the uncle on the ground that, as between nephew and uncle, the valuation was binding.
My brethren are, I gather, proposing to put on one side the question whether the nephew has any remedy against the uncle. They do not deal with it. But both Counsel went into it before us, and I propose to deal with it: because I think it is vital to form a view about it before striking out the claim against the auditors. Moreover, it is of general importance in the law: and my researches may shorten the task of those who have to argue the matter in this, or other cases, or to write about it.
2. THE BINDING FORCE OF THE VALUATION
On reading all the cases, it seems to me that there is one dominant theme running through them. It is this:- Whenever two persons agree together to refer a matter to a third person for decision, and further agree that his decision is to be final and binding upon them, then, so long as he arrives at his decision honestly and in good faith, the two parties are bound by it. They cannot reopen it for mistake or error on his part or for any reason other than for fraud or collusion. The question has been considered in three spheres which are closely related.
Take first arbitration. Two parties agree to submit their differences to an arbitrator, saying that his award is to be final and binding upon them. The Courts of common law always refused to upset an award on the ground that the arbitrator made a mistale. In , Baron Parke said: "Although we may possibly do some injustice in particular cases, I think it better to adhere to the principle of not allowing awards to be set aside for mistakes and not to open a door to inquire into the merits or we shall have to do so in almost every case." The only exception is when the award contains an error of law on the face of it, and this has often been regretted. The position was well stated by Mr. Justice Williams in :
"The law has for many years been settled, and remains so at this day, that, where a cause or matters in difference are referred to an arbitrator, whether a lawyer or layman, he is constituted the sole and final judge of all questions both of law and of fact. Many cases have fully established that position where awards have been attempted to be set aside…. The Court has invariably met those applications by saying: 'You have constituted your own tribunal; you are bound by its decision…." The only exceptions to that rule are cases where the award is the result of corruptionor fraud, and one other, which though it is to be regretted, is now, I think, firmly established: viz. where the...
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