## Facts

- Pupuke Service Station Ltd (“Pupuke”) owned land at Takapuna, North Auckland, and had operated a small service station on the site.
- On 1 July 1987, Pupuke (lessor) granted a 12-year lease to North Harbour Travel and Rental Car Co Ltd (lessee).
- The lease required biennial rent reviews using a stated formula, with any disagreement over the inputs to be resolved by arbitration.
- In the summer of 1989, the first rent review increased the rent from NZ$90,000 per year to NZ$110,769 per year.
- On 20 December 1988, the original lessee assigned the lease to Caltex Oil (NZ) Ltd (“Caltex”), which became the tenant.
- By agreement dated 23 November 1990, Pupuke consented to Caltex carrying out a major redevelopment of the service station.
- By the next rent review period (1 July 1991 to 30 June 1993), the redevelopment had been completed.
- The parties disagreed on the values to be used for variables in the rent-review formula after redevelopment, including how to apply wording requiring a “minimum rate applicable.”
- The dispute was referred to arbitration. Valuers’ material supported a range of possible rentals.
- The arbitrator fixed the annual rent at NZ$122,552.62, close to the bottom of the range indicated by the material.
- Pupuke challenged the award in the New Zealand courts, alleging error of law on the face of the award and misapplication of the lease formula.
- The High Court refused to set aside the award. The New Zealand Court of Appeal held the award was not automatically immune from challenge, but found no reviewable legal error.
- Pupuke appealed to the Judicial Committee of the Privy Council.

## Issues

1. Whether the rent review wording (“minimum rate applicable”) allowed the arbitrator to select the bottom end of a reasonable range shown by the valuation material, rather than identify a single uniquely correct rate.
2. Whether the arbitrator’s use of the lease formula in a post-redevelopment rent review involved an error of law appearing on the face of the award.
3. How limited the court’s role is in reviewing a rent-review/valuation arbitration award where the complaint is, in substance, disagreement with the arbitrator’s evaluative choice within a range.

## Decision

- The Privy Council dismissed Pupuke’s appeal and left the arbitration award in place.
- The Council accepted that the “minimum rate applicable” wording contemplated that professional opinion might produce a range of defensible rates, and directed use of the bottom of the applicable (reasonable) range in the rent-review formula.
- Selecting a figure near the bottom of the range did not itself show legal error; it was consistent with the lease’s machinery.
- Where parties choose arbitration to resolve a valuation dispute, the court should not revisit the merits of the valuation. The parties are bound unless the arbitrator used a method clearly outside what the contract allowed, or a clear legal error appears on the face of the award.
- No such method error or face-of-the-award legal error was shown. The award’s discussion of competing valuers’ views did not permit the court to re-try the valuation.

## Legal Principles

- Arbitration is a contractual mechanism for resolving disputes; the contract defines the arbitrator’s task and the limits of court review.
- In rent-review valuation arbitrations, courts do not re-weigh valuation material or replace the arbitrator’s figure simply because another number could also be justified.
- A valuation-type award may be set aside only where a genuine legal error appears on the face of the award, or where the arbitrator adopted an approach or method outside the rent-review machinery agreed by the parties.
- Contract wording requiring a “minimum rate applicable” can properly be read as calling for selection of the lowest rate within the reasonable range supported by the valuation material, rather than a search for a single exact rate.
- A reasoned award often recites evidence and explains why one view was preferred; that narrative does not expand judicial review into a merits appeal.

## Conclusion

Pupuke Service Station Ltd. v. Caltex Oil (NZ) Ltd holds that, in a formula-based rent review sent to arbitration, the parties must accept the arbitrator’s valuation choice within a reasonable range unless the arbitrator applied a method outside the lease or made a clear legal error on the face of the award; the “minimum rate applicable” wording supported using the bottom of the applicable range in the formula.


Pupuke Service Station Ltd. v. Caltex Oil (NZ) Ltd, Privy Council PC 63/94 (1995)