WHEN IS THE CONCLUSIVE EFFECT OF A CERTIFICATE NOT CONCLUSIVE?
Sometimes, a contract may say that a certificate is to be conclusive of the amounts in the certificate. Or it may say that a determination by a specified person of the amounts due is to be conclusive. But does the use of the word “conclusive” mean that it is truly conclusive? The recent United Kingdom Supreme Court case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2 (“S&H v Blacks”) shows that this issue can be complicated.
Salient facts. In gist, Blacks Outdoor Retail Ltd (“Blacks”), the tenant, leased a property from Sara & Hossein Asset Holdings Ltd (“S&H”), the landlord.
Pursuant to clause 2.3 of the lease, the tenant was required to pay rent and a “Service Charge”, which was to be calculated in accordance with Schedule 6 of the lease.
Clause 3(1)(a) of the lease provided that the tenant agreed “[t]o pay the yearly rent reserved by this lease at the times and in the manner required under clause 2.3 and not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off or counterclaim (save as required by law)”, which applied also to the Service Charge.
And, importantly, Para 3 of Schedule 6 provided as follows:
“The landlord shall on each occasion furnish to the tenant as soon as practicable after such total cost and the sum payable by the tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive.”
(emphasis added)
At first blush, this clause seems reasonably clear: the certificate is conclusive, unless there is manifest error, mathematical error, or fraud. So, what was the dispute?
The dispute. The crux of the dispute pertained to whether the landlord’s certification pursuant to para 3 of Schedule 6 was conclusive subject only to “manifest or mathematical error or fraud”, or whether the certification by the landlord was conclusive “as to the amount of costs incurred by the landlord but not as to the tenant’s service charge liability”.
The parties’ positions. Blacks, the tenant, argued the later position, saying (in gist):
Determining the correct amounts due to the tenant involved taking multiple steps to determine various services, expenses, costs, etc. During this process, disputes may arise as to whether the various items were properly incurred. None of these potential disputes fell within the “permitted defences” of “manifest or mathematical error or fraud”. ([37] – [38] S&H v Blacks).
If the landlord’s case was accepted, the landlord “will be the sole judge of such disputes. Not only will that make him “judge in his own cause” but that judgmental role is be carried out without there being any requirement to consider representations. …” ([39] S&H v Blacks).
Further, it “… makes little sense for the parties to agree a detailed mechanism for resolving such disputes whilst not allowing any means for resolving more significant disputes …”, or for the tenant to have time to “… inspect receipts, invoices and other evidence relating to the service charge …” if it was only to identify a “permitted defence”, or for the contract to provide for a mechanism to resolve disputes over the proportion adjustment. ([40] S&H v Blacks).
S&H, the landlord, argued the former position, saying (in gist):
The conclusive function of the certificate had a commercial purpose and function, and it accorded with commercial reality for the tenant to only be permitted to raise the “permitted defences” ([42] – [43] S&H v Blacks).
This interpretation also “… gives full force to that provision’s ordinary and natural meaning…”, while the tenant’s interpretation would “… (i) … render the phrase “and the sum payable by the tenant” mere surplusage; (ii) … render the certificates inconclusive as to the substantive function and purpose of the certification provision (which is to impose an obligation on the tenant to pay a particular sum by way of service charge), and (iii) … denude of meaning the saving in the certification provision for the permitted defences ….” ([44] S&H v Blacks).
The procedural history. This dispute was not as simple as it looked:
The first decision (by the master) essentially agreed with Blacks, finding that the certificate was “conclusive only as to the amount… but not as to Black’s liability“: see [26] S&H v Blacks.
The second decision (by the judge) upheld the master’s decision: see [27] S&H v Blacks.
The third decision (by the Court of Appeal) disagreed with the judge and allowed the appeal by S&H, finding that the certificate was conclusive on both amount and liability: see [28] S&H v Blacks.
And when the matter came before the United Kingdom Supreme Court, it resulted in a split decision, where the majority (as set out in the judgment of Lord Hamblen with whom Hodge, Kitchin and Sales LJJ agreed) found that neither party’s interpretation was correct.
The majority. The majority of the United Kingdom Supreme Court found for an alternative interpretation: a “pay now, argue later” mechanism, where the tenant had to pay first (giving effect to “conclusive“ nature of the certificate), while being entitled to argue later on liability ([57] S&H v Blacks). We set out [51] – [52] S&H v Blacks below:
“51. That interpretation is that the landlord’s certificate is indeed conclusive as to what is required to be paid under the Schedule 6 regime, subject only to the permitted defences. Under para 5 of Part I of Schedule 6 the balancing payment relates to the certified sum - “the sum payable by virtue of such certificate”. No set off is allowed against the sum so certified, save in relation to the permitted defences. The landlord is thereby assured of payment of the service charge without protracted delay or dispute.
52. Payment of the certified sum does not, however, preclude the tenant from thereafter disputing liability for that payment. This gives full effect to the tenant’s inspection rights under paras 8 and 11 of Part 1 of Schedule 6 and any arguable disputes identified thereby. It entitles the tenant to raise and pursue arguable claims as to out-of-scope costs or excluded costs, including claims only discoverable at a later date, consistently with the tenant’s right to bring a later claim in relation to the proportion adjustment. The burden will, however, be on the tenant to pursue and establish any such claims. The landlord’s cashflow position is therefore protected, whilst the tenant is not deprived of the possibility of pursuing arguable claims.”
According to the majority, this interpretation accorded with the language of the lease ([54] S&H v Blacks). It also provided a real benefit to the landlord ([55] S&H v Blacks) while protecting the tenant’s right to bring arguable counterclaims thereafter, being not precluded by the no set-off provision ([55] – [56] S&H v Blacks).
The dissent. So, what was the dissent? Lord Briggs stated that while the majority’s interpretation avoided “… both the Scylla and the Charybdis of the parties’ alternative constructions …” ([61] S&H v Blacks), nonetheless, there was “… no warrant for it at all in the lease. Furthermore, it is a solution which, if desired by the parties, they could so easily have provided in clear terms. …” ([62] S&H v Blacks).
Approaching the question from the ordinary meaning of the words in the lease, Lord Briggs preferred the interpretation advanced by S&H, the landlord, “… unless some other construction can be found which mitigates or removes the one-sided conferring upon the landlord of conclusive certification powers about a wide range of potential service charge disputes, subject only to narrow grounds of challenge which will not avail at all in relation to some of them.” In Lord Briggs’ view, neither the interpretation advanced by Blacks nor the “pay now, argue later” solution advanced by the majority were satisfactory based on the terms of the contract ([70] – [71] S&H v Blacks).
Not so conclusive. While S&H v Blacks is a case about the conclusiveness of a certificate in a lease, in construction contracts (or construction-related contracts), sometimes, we sometimes encounter clauses providing that a certain certificate is to be conclusive of a particular state of affairs.
S&H v Blacks is a reminder that the interpretation of such clauses may not always be so straightforward. As can be seen from the procedural history and the dissent in S&H v Blacks, various judges have reached different conclusions on what Para 3 of Schedule 6 meant, with the majority of the United Kingdom Supreme Court finding for an interpretation that was neither advanced by any of the parties nor by any of the lower courts.
Care, therefore, should be taken in the drafting of similar clauses to ensure that the clause accurately reflects what the parties intended.
If not, you may end up with an argument over whether the “conclusive effect” of the certificate is truly conclusive or not.
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