The High Court recently considered the substance and scope of a conclusive evidence clause – a clause which provides that a certificate provided under a contract by one party to the other party, certifying the amount due to it, will be conclusive evidence of that amount in the absence of a "manifest error".(1)
The court examined the scope of what constitutes a 'manifest error' and adopted a more limited definition than that sought by the defendants, recognising that the commercial reality was such that if the recipient of a certificate were able to argue that a full trial was required to determine if the certificate in question contained a manifest error, the conclusive evidence clause would be rendered meaningless.
In addition, although common in both guarantees and indemnities, the court found that the drafting of the conclusive evidence clause in this particular case was indicative of a primary obligation and the agreement in which it was contained was therefore an indemnity, not a guarantee.
ABN Amro Commercial Finance PLC entered into an invoice discounting agreement with a company. The defendants, who were directors of the company, entered into deeds of indemnity with ABN Amro, under which the defendants agreed to indemnify ABN Amro against certain losses which it might suffer in connection with the agreement.
The deeds contained a 'conclusive evidence' clause which provided that, for the purpose of determining the amount payable to ABN Amro by the company or the amount of losses suffered by ABN Amro under the agreement, the defendants would be bound by a certificate from ABN Amro specifying such amount or loss. The certificate would – in the absence of a manifest error – be conclusive evidence of such amounts.
The company entered into administration owing certain amounts to ABN Amro under the agreement and, consequently, ABN Amro commenced proceedings against the defendants to recover such amount under the deeds. ABN Amro delivered certificates to the defendants stating the amounts owed to it, which it contended were conclusive against the defendants on the basis of the conclusive evidence clause contained in the deeds.
The directors sought to deny liability, arguing that:
- the 'indemnities' contained in the deeds were in fact guarantees, and as such had been released as a consequence of material amendments made to the agreement without their consent; and
- ABN Amro had not taken proper steps to collect and enforce the company's debts, and therefore the inclusion of such amounts in the certificate of indebtedness was a manifest error.
Deeds: guarantees or indemnities?
The court held that the obligations contained in the deeds were primary obligations, and therefore were not discharged by the amendments to the agreement. In particular, the court noted that:
- while not conclusive by itself, the use of indemnification terminology in the deeds was indicative of the assumption of a primary liability; and
- the language used in the conclusive evidence clause was significant for two reasons:
- the language "I shall be bound by any acknowledgement or admission by the Company and by any judgment in your [ABN Amro's] favour against the Company" indicated that an acknowledgment of liability by the company would have been sufficient to establish liability, even if, on detailed examination, there was no liability; and
- the fact that ABN Amro was entitled to include a reasonable estimate of contingent liability demonstrated that the defendants' liability under the deeds was not dependent on any conclusive determination of the company's liability to ABN Amro. The court held that this was a "compelling indication" that the defendants' liability under the deeds was primary and not a secondary liability capable of being released as a consequence of the amendments made to the primary obligations in the agreement.
Conclusive evidence clause
The validity of conclusive evidence clauses has been established by the English courts and the defendants' argument was not aimed at challenging the enforceability of conclusive evidence clauses; instead, the defendants argued that ABN Amro had included potentially collectable debts in calculating the company's indebtedness and that this was a "manifest error".
The court noted the definition of a 'manifest error' in IIG Capital llc v Van der Merwe (2007) as an error which is "obvious or easily demonstrable without extensive investigation". Subsequently, in North Shore Ventures Ltd v Anstead Holdings Inc (2011) the Court of Appeal stated that a manifest error does not have to be demonstrated immediately and conclusively, but may be demonstrated only after the occurrence of a "subsequent event". The defendants argued that although they could not conclusively prove that the certificate contained a manifest error at this time, a 'subsequent event' in the form of a full trial could prove the manifest error.
The court rejected the defendants' argument on the basis that:
- resolving the dispute as to collectability of the debts could not be resolved in the present summary judgment hearing and would require a full trial; allowing such a trial would completely negate the substance of the conclusive evidence clause because the central purpose of such a clause is to avoid such disputes; and
- a 'subsequent event' as referred to by the Court of Appeal in North Shore could not cover a full trial to determine the collectability of debts. In any event, this part of the Court of Appeal's judgment was, in the court's opinion, obiter.
This case is interesting for a number of reasons:
- It highlights the important distinction between the primary obligations under an indemnity and the secondary obligations under a guarantee; in particular, if material amendments are made to guaranteed obligations without the consent of the guarantor, there is a danger that the guarantee will become void. It is an important reminder that if material amendments are made to an underlying agreement in respect of which a guarantee has been given, either the consent of the relevant guarantor should be obtained or a new guarantee should be entered into.
- It emphasises the importance of careful drafting – it is not sufficient that a document purports to contain an indemnity (rather than a guarantee); the language itself must demonstrate that an indemnity is being given.
- It shows the willingness of English courts to adopt a commercial approach, by taking into account the commercial purpose of particular clauses and seeking to give effect to that purpose.
Gary Bellingham and Emma Menzies
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