Arnold v National Westminster Bank Plc

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Keith of Kinkel,Lord Griffiths,Lord Oliver of Aylmerton,Lord Jauncey of Tullichettle,Lord Lowry
Judgment Date25 April 1991
Judgment citation (vLex)[1991] UKHL J0425-1
Date25 April 1991

[1991] UKHL J0425-1

House of Lords

Lord Keith of Kinkel

Lord Griffiths

Lord Oliver of Aylmerton

Lord Jauncey of Tullichettle

Lord Lowry

Arnold and Others
National Westminster Bank plc (as Trustees for British Rail Pension Trustee Company Limited)
Lord Keith of Kinkel

My Lords,


This appeal raises an important question concerning the availability and extent of exceptions to that branch of the rule of estoppel per rem judicatam which has come to be known as issue estoppel.


The appellants are landlords of premises in Fetter Lane let to the respondents, a firm of chartered accountants, under a sub-underlease ("the lease") dated 28 October 1976. The lease demised the premises to the respondents for a term of just under 32 years from that date, the expiry being on 24 June 2008. It provided for an initial yearly rent of £800,000, subject to review on 24 June 1983, 1988, 1993, 1998 and 2004. The rent from each rent review date is whichever is the greater of a rent equal to the rent payable during the last preceding rent period and the "fair market rent" at the relevant review date, which in default of agreement is to be fixed by arbitration. The "fair market rent" is defined as meaning:

"such amount as shall represent a yearly rent at which the demised premises might reasonably be expected to be let at the relevant review date in the open market by a landlord to a tenant without a premium with vacant possession and subject to the provisions of this sub-underlease other than the rent hereby reserved there being disregarded any effect on rent of any of the matters set out in paragraphs ( a) ( b) or ( c) of section 34 of the Landlord and Tenant Act 1954 (as amended)."


When the first rent review date came up in 1983 a dispute arose and it was referred to an arbitrator. There was disputed in particular whether under the definition of "fair market rent" the rent under the hypothetical lease for the unexpired residue of the term fell to be fixed on the basis (a) that it contained the same provisions for five year rent reviews as the actual lease or (b) that it contained no provision for review. The arbitrator decided that the hypothetical lease should be treated as containing provision for five-yearly rent reviews, and on that basis fixed the rent at £1,003,000 per annum. In case he should prove to be wrong on the question of construction, he determined that if the hypothetical lease contained no provision for rent reviews the rent would be about 20 per cent higher, namely £1,209,000.


An appeal by the landlords on the point of construction came before Walton J. He held that the arbitrator was wrong and that the hypothetical lease should be treated as not containing any provision for rent review, so that the rent payable was £1,209,000: National Westminster Bank Plc. v. Arthur Young McClelland Moore & Co. [1985] 1 E.G.L.R. 61. The lessees asked Walton J. for leave to appeal and for a certificate under section 1(7)( b) of the Arbitration Act 1979 that there was a question of law of general public importance or one which for some other special reason ought to be considered by the Court of Appeal, but both were refused. The lessees then sought to appeal to the Court of Appeal against the refusal of Walton J. to grant a certificate. The Court of Appeal held that it had no jurisdiction to entertain such an appeal: National Westminster Bank Plc. v. Arthur Young McClelland Moore & Co. (Practice Note) [1985] 1 W.L.R. 1123.


In the course of his judgment, at p. 62, Walton J. said:

"The first and I think probably the main question which arises here is whether, when the arbitrator is deciding what is to be the fair market rent for the next rent period, he is to do that upon the basis that the lease contains (as, of course, we know it does in fact contain) a rent review clause or whether, on the other hand, he is to fix the fair market rent on the basis that there is no such clause in the lease. I do not think that there is a presumption one way or the other. I think that in every case that must depend upon the precise terms of the lease, because it must be very much borne in mind that there is no such thing as a fair market rent of any premises in the abstract. There is only a fair market rent upon a set of abstractions which may be actual, may be hypothetical and in most cases under rent reviews are a mixture of the one and the other. For example, here we have that the premises are expected to be let with vacant possession which is, of course, something which we know as a fact just is not the case because the tenants are actually in possession and are certainly not just going to move out for the purpose of a rent review. So the attempt by Mr. Morritt" - who was appearing for the tenants - "to poison my mind in advance to achieve the lower of the two values by defining the fair market rent as something which favours the tenant, as in fact he was attempting to do, I do not think impresses me very much."


In the subsequent case of British Gas Corporation v. Universities Superannuation Scheme Ltd. [1986] 1 W.L.R. 398 Sir Nicolas Browne-Wilkinson V.-C. had to consider a somewhat similar rent review clause. The hypothetical lease there was to be one "containing the same provisions (other than as to the yearly rent)" as the actual lease. The Vice-Chancellor held that the hypothetical lease fell to be treated as including the rent review clause. He said, at p. 403:

"In these circumstances, there are in my judgment conflicting decisions as to the correct approach to the construction of these clauses. I am accordingly free to adopt the approach I prefer. In my judgment the correct approach is as follows: (a) words in a rent exclusion provision which require all provisions as to rent to be disregarded produce a result so manifestly contrary to commercial common sense that they cannot be given literal effect; (b) other clear words which require the rent review provisions (as opposed to all provisions as to rent) to be disregarded (such as those in Pugh case, ( 1982) 264 E.G. 823) must be given effect to however wayward the result; (c) subject to (b), in the absence of special circumstances it is proper to give effect to the underlying commercial purpose of a rent review clause and to construe the words so as to give effect to that purpose by requiring future rent reviews to be taken into account in fixing the open market rental under the hypothetical letting."


In Equity and Law Life Assurance Society Plc. v. Bodfield Ltd. [1987] 1 E.G.L.R. 124 Dillon L.J., in the course of a judgment concurred in by Fox and Russell L.JJ., expressed himself, at p. 125, as welcoming and approving the guidelines so laid down by the Vice-Chancellor. The Vice-Chancellor's approach was again approved by the Court of Appeal in Basingstoke and Deane Borough Council v. Host Group Ltd. [1988] 1 W.L.R. 348 at pp. 353, 355. It may also be noted that in Amax International Ltd. v. Custodian Holdings Ltd. (1986) 279 E.G. 762 Hoffmann J. construed a rent review clause in terms similar to the present one in the opposite sense to that favoured by Walton J.


It therefore appears that there are powerful grounds for the view that Walton J. wrongly construed the rent review clause in the parties' lease, and that he did so by virtue of an approach to the question of construction which was wholly incorrect in law.


In these circumstances, when the second rent review date occurred in 1988 the respondents sought to reopen the question of construction. They brought an action by writ claiming rectification of the lease so as to produce the result that the rent review clause is not left out of account and also a determination as to the true construction of the clause. The appellants applied to strike out the claim for a declaration on construction on the ground that the respondents were barred by issue estoppel from re-litigating the very point decided by Walton J. That matter, as a preliminary issue, came before Sir Nicolas Browne-Wilkinson V.-C., who on 1 July 1988 gave judgment holding that the respondents were not so barred [1989] Ch. 63. He took the view that the law admitted of special circumstances which could prevent an issue estoppel from arising, that such special circumstances included the situation where relevant new material, not available at the time of the first decision, had since come to light, and that such new material might include not only the discovery of new facts but also a change in the law. He said at p. 70:

"The question therefore is whether, given subsequent change in the law indicating that the earlier decision was wrong, the injustice of holding the plaintiff in the second action bound by the erroneous decision in law in the first action outweighs the hardship to the other party in having to re-litigate the matter and the public interest in the finality of legal proceedings."


As regards the circumstances of the instant case, he expressed himself as having no doubt that justice did require the matter to be re-litigated. The relevant factors were these (p.71):

"1. There is a continuing contractual relationship of landlord and tenant under which, if there is an issue estoppel, the decision of Walton J. will regulate four further rent reviews and thereby affect the rent payable until the end of the term.

2. Because of the peculiarities of the procedure applicable to appeals from arbitrators, unlike the ordinary case of a prior decision by a judge, the decision of Walton J. was not subject to appeal. Therefore a matter of a very great financial importance involving millions of pounds will, if an issue estoppel applies, be decided on a point of law which the lessees have never had the opportunity to test in the higher courts.

3. The decision whether or not to permit an appeal was the decision of Walton J. himself and there...

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