Supreme Court sets aside arbitration award for VAT due to fundamental errors excluding evidence.

THE SUPREME COURT

Denham J. 416/2005

Hardiman J.

Geoghegan J.

Between:

CAMPUS and STADIUM IRELAND DEVELOPMENT

LIMITED

Plaintiff/Respondent

and

DUBLIN WATERWORLD LIMITED

Defendant/Appellant

JUDGMENT of Mr. Justice Hardiman delivered the 30th day of April, 2010.

This is the appeal of the defendant against the judgment and order of the High Court

(Gilligan J.). By order dated the 28th September, 2005, it was ordered that the plaintiff do

have leave pursuant to s.41 of the Arbitration Act, 1954 to enforce an arbitration award of

the 1st July, 2005 in the sum of €10,254,600 awarded by the Arbitrator in favour of the

plaintiff and against the defendant.

The plaintiff herein, Campus and Stadium Ireland Development Limited (CSI) developed

premises in Dublin known as the “National Aquatic Centre” at a cost which was agreed to

exceed €62,000,000.00 (sixty-two million euro), exclusive of VAT. The significance of this

figure will emerge below. On the 30th April, 2003, it created “a lease contract” in favour of

the defendants, Dublin Waterworld Limited (DWW), in the said premises for a period of

thirty years.

The background issue in the present proceedings is whether VAT is payable on the creation

of this interest in the premises, and if so in what amount. CSI took proceedings against the

defendant claiming the sum of €10,254,600.00 relating to this VAT on the lease. On the 3rd

June, 2005, the High Court (Kelly J.) ordered that the issue between the parties in respect of

the claim for VAT be referred to arbitration.

The Arbitrator made his award on the 5th July, 2005, whereby he awarded that the sum

mentioned above being VAT charged by CSI on the capitalised value of the lease to the

defendant was correctly charged. The plaintiff has taken proceedings seeking leave to

enforce this award. The defendant seeks to set aside the award of the Arbitrator on the

grounds discussed below.

The arbitration.

It is important to note that, according to the Arbitrator’s award:

“The arbitration was conducted by way of a review of documents furnished

by the representative of both parties and by an oral hearing held at the office

of the Arbitrator on the 28th June, 2005.”

The dispute is summarised as follows:

“The issue in dispute is whether Campus and Stadium Ireland Development

Limited was correct to charge valued added tax in the sum of

€10,254,600.00 to Dublin Waterworld Limited on the capitalised value of

the thirty year lease entered into by the parties on the 30th April, 2003.”

The Arbitrator noted that certain matters had been agreed between the parties. Due to their

importance and the role they play in netting down the issues of this appeal I set them out in

full:

“ ‘Agreed position’.

It is accepted by both parties that the lease by CSI to DWW is a lease which

would be subject to VAT at 13.5% on its capitalised value, subject to the

provisions of s.4(3A) of the VAT Act, 1972 as amended. These provisions

are commonly referred to as the “economic value test” or “EVT”.

CSI as landlord and as the person disposing of its interest in the property

submits that it was its responsibility to establish the capitalised value of the

lease for VAT purposes.

It is accepted by both parties that if the capitalised value of the lease was

less than the economic value of the lease, the lease would be exempt from

VAT. As a consequence, CSI would not be entitled to recover the VAT it

incurred on the costs of developing the property.

The economic value of the lease is the amount of money, excluding VAT,

incurred by the landlord in acquiring and developing the property. In this

case the economic value is accepted by both sides as being approximately

€62,000.000.00. The exact figure is not available to the Arbitrator, but that

fact is not critical.

In order for the lease of the National Aquatic Centre to be subject to VAT,

the capitalised value of the lease, determined in accordance with the

provisions of the Act, would have to equal or exceed the economic value.”

As noted above, the economic value of the property is agreed. The issue between the parties

therefore related to the capitalised value of the lease.

The lease and its actual terms.

The actual rent, which was negotiated at arms length and specified in the lease mentioned as

above, was €127,000.00 plus 10% of net profits. The maximum valuation of the net profits

put forward by either side was €2.7 million, a figure which would give rise to an estimated

maximum rent of €397,000.00. The lease further specified that after five years the rent was

to be simply 10% of net profits i.e. an estimated maximum rent of €270,000.00. But in the

two years preceding the arbitration, no profits were earned.

Statutory provisions.

But, by virtue of the statutes and regulations considered below, the valuation of the lease is

not based on the actual rent but is to some degree an artificial process. Firstly, by s.10(9) of

the Act the value of the lease, being an interest in immovable goods, “shall be the open

market price of such interest.”

The “open market price”, is defined in the following in the subsection as the price which “the

right to receive an unencumbered rent in respect of those goods for the period of the interest

would fetch on the open market at the time that that interest is disposed of.”

Section 32(1)(t) of the Act empowers the Revenue to make regulations to give effect to the

Act in relation to “the valuation of interests in or over immovable goods”. The Revenue have

done this and Regulation 19 of the VAT Regulations of 1979 (SI No. 63 of 1979) is of central

importance. Its terms are explained, obviously without binding effect, in the Revenue

publication “VAT and property transactions”, of October, 2001.

Regulation 19 (1) provides:

“19. (1) Where—

( a ) it is necessary to value an interest in immovable goods for the purposes

of section 10 (9) of the Act,

( b ) the disposal of such interest consists of or includes the creation of an

interest,

( c ) a rent is payable in respect of the interest so created, and

( d ) the terms under which the interest is created do not provide for an

increase in the rent to take effect earlier than the end of the fifth year after

the interest was created,

the value of such rent to be included in the consideration for the purpose of

ascertaining the open market price of the interest disposed of shall, in the absence of

other evidence of the amount of that price, be—

(i) three-quarters of the annual amount of the rent multiplied by the

number of complete years for which the rent has been created, or

(ii) the annual amount of the rent multiplied by the fraction of which the

numerator is 100 and the denominator is the rate of interest (before

deduction of income tax, if any) on the security of the Government

which was issued last before the date of the creation of the rent for

subscription in the State, and which is redeemable not less than five

years after the date of issue (allowance having been made in calculating

the interest for any profit or loss which will occur on the redemption of

the security),

whichever is the lower.”

In purported reliance on the provisions of Regulation 19, CSI applied one of the formulae

which produced an open market value in the sum of just under €76 million (compared to

€35.00 million in the Valuation Office assessment, below). Applying either of the formulae

set out above means that the open market value is a function of the rent. But DWW points

out that the rental figure used to arrive at this sum of €76 million is more than eight times the

actual rent agreed at arms length by CSI and itself, (€3.376 million as opposed to €127,000

plus notional profits, if any). There was uncontradicted evidence at the arbitration that there

were no profits at all in either of the two next preceding years. Thus, the multiple would be

much higher.

Valuation history.

When a question of valuing the lease for VAT purposes first arose, CSI first had recourse to a

professional valuer from the Valuation Office. But this expert’s advice was, from the point of

view of CSI, devastating. He confirmed unencumbered rent to be €3,376,100 and the open

market price for VAT purposes to be £35 million. The report of the expert, Mr. Liam Cahill

ASCS, MRICS, MIAV is dated the 25th October, 2002. He discusses the difficulties of the

valuation, principally that there were no comparable properties in the State and therefore no

rental evidence available. He said:

“It is therefore necessary to adopt the contractors method of valuation and

to consider the return acceptable to a developer in the market. The

development cost has been supplied (by CSI), and at €63,220,950), the site

extends to 3.44 hectares and estimate the value of the site at €1.25 million

per hectare.

I have adopted 5% to reflect the annual equivalent of the capital cost of

providing the site and completed development.

In arriving at an estimate of open market price I have adopted 8% of the

gross all risk yield to reflect the quality of the income stream and

determining nature of the interest.”

Accordingly, and based on a rent of €3.376 million per annum for thirty years @ 8%, Mr.

Cahill came up with an estimated open market price for VAT purposes of €38,006,333 less

acquisition costs giving an open market price of €35,054,725 (thirty-five million, fifty-four

thousand seven hundred and twenty-five euro or “say thirty-five million”).

From CSI’s point of view the problem with this was that the open market value (€35 million)

was less than the Economic value which exceeded €60 million. Accordingly, the lease

“failed” what is referred to as the EVT (Economic Value Test). Thus the lease would be VAT

exempt. See the findings of the Arbitrator under “agreed position” at p.4 above.

In order to avoid this CSI took certain steps which are central to the dispute. They are

blandly described in a summary of the VAT issue transmitted by CSI solicitors to the

Arbitrator under a cover of a letter dated 3rd June, 2005. This says:

“Regulation 19 of the VAT Regulations 1979 provides three methods for the

valuation (capitalised value) of leases of ten years or longer in duration. The

responsibility for determining the capitalised value of the lease rests with the

lessor. CSI obtained a valuation of the unencumbered rent from the

Valuation Office who determined the figure to be €3,376,000. The report

confirms the unencumbered rent to be €3.376 million and the open market

price for VAT purposes at €35m.”

The summary then goes on to describe the steps taken to produce a valuation which would

not involve the transaction being VAT exempt as follows:

“Using the unencumbered rent, the ‘rent formula method outlined in

Regulation 19(1)(c)(i) was used to determine the capitalised value of the

lease. The Revenue Commissioners have expressly confirmed in a booklet

entitled ‘VAT and Property Transactions’ published by them in October

2001 (paragraph 2.2.1) that ‘the price may be ascertained in any one of the

following ways and the tax payer may adopt whichever valuation he or she

wishes’.

This was restated by the Revenue Commissioners in their guidance notes for

Inspectors dated 6th June, 2002 and the Anti-Avoidance Provisions of the

Finance Act, 2002. CSI wrote to the Revenue Commissioners outlining the

methodology used in his valuing the lease and by fax dated 1 May 2003 the

Revenue Commissioners have confirmed that the methodology adopted was

satisfactory.”

In other words CSI, having received an expert report which was devastating from their point

of view, decided to use instead the first of the two formulae set out in Regulation 19 which

produced a transaction which was liable to VAT, payable by DWW in an amount exceeding

€10 million.

Unsurprisingly, the parties differed as to whether this was a legitimate tactic for CSI to adopt.

In this dispute, DWW emphasised the phrase in Regulation 19 “in the absence of other

evidence of the amount of that price” as qualifying the power to apply whichever of the two

available formulae which produces the lower valuation. They say that here there was ample

“other evidence” in the form of a report of the valuer whose expertise was unchallenged.

CSI, on the other hand, say that they, as lessors, are entitled in their own discretion to choose

whichever of the rates of the methods of valuation available under Regulation 19 which

commends itself to them. They rely on the Revenue document “VAT and Property

Transaction” (sic) already referred to and in particular on paragraph 2.2.1 thereof which

says:

“The capital value of a rent created in connection with the disposal of an

interest in property in a commercial-arms-length transaction is the price

including tax, which the right to receive the unencumbered rent would fetch

in the open market. The price may be ascertained in any one of the

following ways and the tax payer may adopt whichever valuation he or she

wishes:

(a) On a valuation made by a competent valuer (i.e. open market value) or

(b) The first fomula or

(c) The second formula

whichever is the lesser but see the follow paragraph.”

The rest of the relevant portion of the Revenue document is not important for present

purposes.

It must, of course, be noted that the Revenue document carries the disclaimer, in a prominent

place at the end of the introduction:

“Nothing in this guide should be taken as overriding the legal provisions or

requirements of the Value Added Tax Act, 1972 (as amended).

It also noteworthy that CSI contend that they, as lessors are entitled to choose the method of

valuation and that it is not open to the other party, DWW in this case, to dispute the

valuation or the VAT claim. This contention, too, appears in the summary mentioned above.

DWW emphasised that the arbitration was to be conducted on a review of the documents

and indeed CSI solicitors in writing to the Arbitrator suggested that there was no need for an

oral hearing at all: ‘we suggest that you should have sufficient documentation before you to

make a decision without calling oral evidence from either party’. DWW emphasised that the

report of Mr. Cahill was amongst the documentation supplied to the Arbitrator and say that it

was before him as ‘evidence’. Therefore, DWW say, the case was obviously not one which

featured ‘the absence of other evidence as to the amount’ of the open market price so that,

based on the wording of Regulation 19, there was no scope for CSI to invoke either of the

formulae.

This was the nature of the dispute which went before the Arbitrator. DWW made it clear that

they were by no means happy with the estimated rent arrived at by Mr. Cahill having regard

to the actual rent agreed between the parties. He indicated that there had been no surplus in

2003 and 2004 so that the specified amount of rent was all that was payable and this was a

small fraction of the €3.376 million, being only €127,000. Moreover, DWW relied on the

enormous variations in the open market price between the €35 million from Mr. Cahill and

the €76 million figure from the Landlord. It was said that such a gap was manifestly absurd.

Notional and real rents.

If one is allowed for a moment to have regard to the real-world position of these parties, it is

clear that they agreed between themselves a rent, for the first five years of a thirty year term,

of €127,000 per annum plus 10% of the profits. In the two years preceding the arbitration

there were no profits, so that the rent entitlement was merely €127,000.00. But it is

important to bear in mind, as the Arbitrator found, that the VAT Regulations known as the

Value Added Tax (Amendment) (Property Transactions) Regulations 2002 for the first time

introduced the following provision to the valuation of interests in immovable property, by

amendment of Regulation 19 which is quoted above:

“However, where the rent payable in respect of the interests so created is

less than the unencumbered rent in respect of that interest the value of the

rent to be included in the consideration for the purpose of ascertaining the

open market price of the interest disposed of shall be calculated using the

unencumbered rent.”

The significance of this provision, for the purposes of the present case, is very considerable.

As the Arbitrator found, both the lease and the rent, are encumbered. The Arbitrator said at

p.4 of his award:

“In calculating the capitalised value of the lease, CSI considered that the

rent provided in the lease was encumbered. The lease provides an annual

rent in each of the first five years of £100,000 (or €127,000 approximately,

plus 10% of net profits). But it also provides that DWW will make available

to CSI certain facilities in the centre free of charge for 1300 hours per

annum. The lease and the rent, therefore are encumbered.”

The consequence of this, by reason of the 2002 Amendment quoted above, is that the

unencumbered rent, as opposed to the encumbered rent is to be used. But the property is in

fact significantly encumbered by obligations grounded in public policy: to value the lease in

the property as if there were no such encumberances is obviously going to give rise to an

unreal result.

CSI is an ordinary company but, according to information supplied at the arbitration, the

share holders in it are various government ministers. The Arbitrator regarded it as being a

State company. Whether for that reason or for some other reason, it created a lease which

considerably hampered, one might think, the commercial use of the premises. Basically, it

had to be used, in part, as a facility for the training and development of elite swimmers and

this use was free of charge. Obviously, a higher rent would be available if this condition did

not exist in the lease. The Court of course has no idea, and no evidence, as to precisely what

that higher rent would be.

Even making every allowance for the factor described above, there is no doubt that there is a

huge difference between the “unencumbered rent” as calculated by Mr. Cahill (which he did

on the basis of so much per hectare), and the actual rent agreed between the parties whom, it

was said without contradiction, were acting at arms length, both of them being professionally

advised. Moreover, the notional unencumbered rent is also a very large multiple of the

valuation arrived at by Messrs. Hamilton Osbourne King, who were also retained and gave

evidence before the Arbitrator of a rental value of €300,000 per annum. Indeed, of the

various figures proposed in respect of rent it is evident that only the figure produced by the

use of one of the formulae would produce an open market value which would exceed the

economic cost, thereby making the transaction vatable in the first place.

The Arbitrator’s findings.

The complaints made by DWW about the arbitration findings centre on two passages, both at

p.5 of the award. The Arbitrator, who is a recognised VAT expert (though sitting as an

arbitrator, not an expert) held:

“In my opinion, the opinion of the Valuation Office that the open market

price of the interest being disposed of by CSI is €35 million is not evidence

of the open market price. The nature of the property is unique with no close

comparison in the State. Therefore, in my opinion, the figure of €35 million

is an estimate and does not provide evidence of its open market price.

I believe, therefore, that CSI was quite entitled to use an unencumbered rent

figure to calculate the capitalised value of the lease by means of one of the

prescribed formulae in Regulation 19.”

This passage appears to me to mean that the condition precedent to the use of the one of the

formulae - that there should be an absence of other evidence of the open market value - was

in fact met in this case because the Valuation Offices valuation “is not evidence because it is

an estimate”. There was, therefore, an “absence of other evidence”, allowing a formula to be

used.

Before addressing this proposition it is convenient to consider the other passage which has

given rise to complaint. The Arbitrator said:

“… It (CSI) engaged the input of professional valuers who, it is clear to me,

understood fully the nature of the assignment in giving an opinion as to the

value of an unencumbered rent of the property. I believe that CSI were

entitled to rely on that opinion. It would be absurd to expect a non-qualified

person to question the professional judgement of a qualified valuer. The

VAT system could not function effectively if a supplier’s VAT charge was

subject to review by his customer.

The fact that an alternative valuation may be put on the rent of the property

by another valuer is in my opinion of no relevance. CSI has fulfilled its

responsibilities under the VAT legislation by calculating the capitalised

value of the lease at an open market price using an unencumbered rent on

which it is entitled to rely…”.

The only professional valuer retained by CSI before the reference to arbitration, on the

evidence, is the Valuation Office. The opinion of that office, acting through Mr. Cahill,

emerges clearly from his report:

“In my opinion the unencumbered rent is €3.376 million and the open

market price for VAT is €35 million.”

The methods whereby Mr. Cahill arrived at this valuation are clearly set out in his report and

are quoted earlier in this judgment. Mr. Cahill addressed the precise point raised by the

Arbitrator, that there were no close comparators in the State. The Arbitrator did not dissent

or differ from Mr. Cahill’s valuation in a reasoned way. Instead, he seemed to find that it was

not evidence at all because it was an estimate.

In my view, any opinion on the value of a property and especially one which purports to

value, not the actual market value of the actual interest created subject to the specific terms

and conditions that actually exist, but a theoretical, notional unencumbered value, is of

necessity in the nature of an estimate. Any professional valuer who expressed his view in

terms of a precise figure and made no allowance for any variation at all would in my view be

wholly lacking in credibility. Mr. Cahill’s opinion is that of a Chartered Surveyor whose

expertise has not been challenged and who is a district valuer in the Valuation Office. In my

view, having regard to the documentary basis on which the arbitration was to be conducted,

and on the basis on which Mr. Cahill’s report was sent to the Arbitrator, it constituted

evidence before him. The Arbitrator was entitled to dissent from it in a reasoned way but he

was not entitled to disregard on the basis that it was not evidence.

The Arbitrator might, perhaps, have taken issue with the “contractors’ methods” of valuation

or with the 8% figure adopted in the portion quoted earlier in this judgment. But he did

neither, nor did he differ from the valuation on any reasoned basis: he simply asserted that

the valuation was not evidence at all.

Speaking of the second passage to which exception is taken, the learned trial judge said, at

p.14 of his judgment:

“I am satisfied that the arbitrator made an incorrect statement of the law

when he indicated that the VAT system could not function effectively if a

supplier’s VAT charge was subject to review by his customer, having regard

to the judgment of the Supreme Court in Forbes v. Tobin (unreported,

Supreme Court, 17 July 2002)...”.

Neither side has appealed from this statement and, to judge by the recent submissions of the

parties, it appears to be accepted on both sides. However, the learned trial judge continued:

“… But in my view this statement cannot be regarded as a fundamental

error of law on the face of the award, or of having any significant impact on

the decision of the arbitrator.”

Forbes v. Tobin was a case where the High Court had declined to make an order of specific

performance in relation to a contract for the sale of land. A special condition provided as

follows:

“(7) In addition to the purchase price the purchaser shall pay to the vendor

an amount equivalent to such value added tax as shall be exigible in relation

to the sale, same to be calculated in accordance with the provisions of the

Value Added Tax Act 1972 and to be paid on completion of the sale

forthwith upon receipt by the purchaser of an appropriate invoice…”.

In reversing the High Court’s refusal to grant specific performance the Supreme Court, per

Murphy J. said:

“In my view the learned trial judge erred in concluding that the purchaser

refused to pay value added tax. His only refusal was to pay value added tax,

first, on the erroneous basis that the contract was one for the sale of a

business and, secondly, on the basis that the property had been developed

by the vendors or their predecessors in title, without being given adequate

evidence to support that contention. The purchaser expressed and

demonstrated his willingness to pay the value added tax if the same was

payable and for that purpose sought evidence - as opposed to opinions or

rulings - to enable a conclusion to be reached by the purchaser in that

regard.”

This decision, in which Denham J. and Murray J. (as he then was) concurred, plainly

supports the proposition that a person from whom value added tax is demanded, at least on

the sale of immovable property, is entitled to some evidence that such tax is actually due,

and due in the amount claimed. This, in turn, seems quite inconsistent with the statement of

the Arbitrator and in any event, as noted above, his proposition was not stood over on the

hearing of this appeal.

The respondent’s position on the hearing of this appeal was that it did not need to rely on the

statement by the Arbitrator that “the VAT system could not function effectively if a

supplier’s VAT charge was subject to review by his customer… the fact that an alternative

valuation may be put forward on the rent of the property by another valuer is in my opinion

of no relevance”.

This, indeed, is a rather strange statement. If taken literally it would mean that the supplier of

goods or services could decide the amount of the VAT in an un-reviewable fashion. Viewed

in this light, it would undermine the basis of the arbitration itself which sought to review the

Landlord’s determination as to whether this transaction was vatable and in what amount.

However, on the hearing of this appeal CSI made two points about it:

(1) It does not form part of the ratio of the award at all and

(2) It did not have a significant impact on the award.

I cannot agree with the learned trial judge’s finding, quoted above, or with the submissions

just summarised. This was a dispute as to whether the charge to VAT raised, in a sum

exceeding €10 million, by CSI on DWW was correct. This, in turn, clearly raised the question

of whether the transaction was subject to VAT, and if so in what amount.

It was against this background that the Arbitrator made the statements which he did and

which have been agreed, and held by the High Court, to be incorrect. If a customer could not

review his supplier’s VAT charge then the whole basis of the dispute between the parties,

and thus of the reference to arbitration, would be undermined. If, in the Arbitrator’s view the

customer (here DWW) could not review CSI’s VAT charge, so that any evidence which it

might adduce on that question was simply irrelevant, then it is hard to see what the Arbitrator

was doing in arbitrating between the parties. It is hard to see why he dismissed Mr. Cahill’s

opinion as not constituting evidence at all if the true position was (as they seem to think) that

it was simply entirely irrelevant.

In my opinion this is a serious misstatement of the law appearing on the face of the award. I

am of the same view in relation to the finding that Mr. Cahill’s opinion was not evidence,

because it was an estimate, for the reasons given above. Each of these errors supports the

view, which I hold, that Mr. O’Brien simply did not give any consideration to the case

advanced by DWW but decided that CSI were entitled to have recourse to the formula and

that that concluded the matter.

I am further of the view that the Arbitrator gravely misled himself on the law in determining

that CSI were, entirely at their own option, entitled to rely on the formula. Regulation 19,

insofar as relevant, has been quoted above. One thing that is clear from it, and from the

Guidance Publications issued by the Revenue Commissioners, is that one may establish the

appropriate value by the evidence of a qualified valuer. But neither the Arbitrator nor the

Revenue in issuing their guidance paid sufficient attention to the presence, in Regulation 19

and specifically in introducing the two formulae of the phrase “in the absence of other

evidence of the amount of that price”.

Quite simply, there was not an absence of other evidence in this case. Furthermore, it is clear

from the Revenue document of October 2001 itself that it does not purport to amend the

1979 Regulations, which have the force of law.

The Court had opened to it on the hearing of this appeal a considerable volume of case law

on the topic of arbitrations and attempts to set them aside which, in general, do not raise any

contentious issue. In general, as this Court said in Doyle v. Kildare County Council [1995]

2 IR 424, the Court has no statutory jurisdiction to set aside the award of an Arbitrator in the

absence of a finding that he has misconducted himself, or misconducted the proceedings,

pursuant to s.38(1) of the Arbitration Act, 1954 as amended. In McCarthy v. Keane and

Ors. (Supreme Court, unreported 16th December, 2004), Fennelly J. had this to say about

the meaning of the term “misconduct” which is a term of art:

“Real cases of misconduct may arise in the conduct of the arbitration, where

the arbitrator acts unfairly either by clear acts of favouritism towards a party

or adopts procedures which place one or the other party (or perhaps even

both) at a clear disadvantage.”

He continued:

“It seems to me that the standard or test of misconduct of such a nature

would be something substantial, something that smacks of injustice or

unfairness. One of the cited examples is of an arbitrator inspecting the farm

he was to value in the presence of one party and in the absence of the

other… there is a sharp distinction between acts committed in the course of

the arbitration and its result. Mere error is not misconduct. Parties submit

disputes, including disputes as to the law to arbitration. They expect the

arbitrator to rule in all matters in dispute but they do not have a guarantee

that the arbitrator will reach the correct result. An arbitrator may err in his

interpretation of the law or of the facts, without being guilty of misconduct.”

On the topic of error of law on the face of the record, I would gratefully adopt what was said

by O’Donnell J. in this Court in Galway City Council v. Samuel Kingston Construction

Limited (Supreme Court, unreported, 25th March, 2010) as follows:

“Thirdly, the court has a common law jurisdiction to set aside or remit an

award for an error of law on the face of the record. In Church & General

Insurance Co. v. Connolly & McLoughlin (Unreported, High Court, 7th

May, 1981), Costello J. stated that ‘there is no doubt that at common law

the Court can either remit or set aside an award if there is an error of law on

its face’. This jurisdiction, according to McCarthy J. in Keenan at p. 96, is

limited to ‘an error of law so fundamental that the courts cannot stand aside

and allow it to remain unchallenged’. In McStay v. Assicurazioni Generali

SPA & Anor [1991] 2 I.L.R.M. 237, Finlay C.J. stated at p. 243 that, where

an arbitrator decides a question of law in respect of which the general issue

in dispute, but not the precise question of law, is submitted to him, the court

‘may in its discretion and in particular cases where the decision so expressed

is clearly wrong on its face, intervene by way of remitting the matter or

otherwise in the interests of justice. Thus, as noted by Clarke J. in Limerick

City Council v. Uniform Construction Ltd. [2007] 1 I.R. 30 at p.43, the

jurisdiction is “limited and arises only where the error is ‘so fundamental’

that it cannot be allowed to stand (Keenan v. Shield Insurance Company

Ltd.) or ‘clearly wrong’ (McStay v. Assicurazione Generali SPA & Anor)”.

Nature of the Arbitrator’s errors.

In my view, the errors identified above which afflicted the arbitration are of a nature “so

fundamental that the Courts cannot stand aside and allow [them] to remain unchallenged”.

It is interesting to note that they are all of a cognate nature. The Arbitrator expressed the

view that the VAT system could not work if a customer was allowed to challenge or review

his suppliers charged to VAT. This is legally incorrect for the reasons set out above. Although

(as CSI point out) it occurs towards the end of the Arbitrator’s finding I am not convinced

that for that or any other reason it had no input into that finding. The other errors were, first,

to find that CSI were entitled to use the formulae. But these formulae do not produce any

binding result unless there is an absence of other evidence of the price. There plainly was

such evidence in the form of Mr. Cahill’s report. But the Arbitrator held that this was merely

“an estimate” and not “evidence”.

One of the attractions of arbitration as a means of solving disputes is that it can, with the

agreement of both parties, proceed with relative informality. Where, as in this case, it was

envisaged that the arbitration would consist of a review of the documents, I believe the

documents sent to the Arbitrator are in the nature of evidence, without formal proof. In any

event Mr. Tobin went and gave evidence before the Arbitrator, viva voce in which he stood

over his valuation. There is no conceivable basis, in my view, on which this material can be

excluded from the category of “evidence” in the context of the arbitration.

I have no doubt that these are significant and fundamental errors on the face of the award.

They enabled CSI not so much to succeed at the arbitration, as to register a walkover. The

most substantial part of their evidence was quite wrongly excluded from consideration, and

on that basis a formula which is plainly adverse to Dublin Waterworld’s interests was used.

This was on the basis that their evidence was not in fact “evidence” at all and the Arbitrator

indicated that the Landlord’s determination as to VAT could not be reviewed by the tenant.

These are all grave and significant matters in the context of this arbitration and I would set

aside the award.

If desired by the parties, the Court will hear submissions as to the precise form of the order

that should be made in light of the foregoing judgment.