Conclusive evidence clauses and failure to mitigate
30 September 2014
In ABM Amro Commercial Finance Plc v Ambrose McGinn & ors  EWHC 1674 (Comm), 23 May 2014 the court ruled that an indemnifying party cannot argue that a failure to mitigate by an indemnified party absolves the indemnifying party of liability, as a means of bypassing a conclusive evidence clause. The judgment emphasises that mitigation has no place in the context of a claim under an indemnity contract.
The claimant, a factor, had entered into an agreement with one of its clients (the Company) pursuant to which it purchased the Company's debts (the Agreement). The three defendants, each a director of the Company, subsequently entered into separate deeds of indemnity with the claimant all of which contained a conclusive evidence clause stating that the defendants would be bound by (a) an acknowledgement or admission by the Company as to its liability and (b) a certificate signed by a director of the claimant which would be "treated as conclusive evidence (except for manifest error) of the amounts so payable".
The Company later went into administration and the administrators of the Company acknowledged in writing that the Company was indebted to the claimant, specifying an exact sum. The claimant subsequently served certificates, signed by a director of the claimant, on each defendant which it claimed were conclusive as to the debt owing by virtue of the conclusive evidence clause.
The defendants denied liability under the deeds of indemnity on, inter alia, the following grounds:
the defendants' liability was secondary in nature rather than primary and was therefore discharged by "material variations" to the Agreement; and
the claimant had not taken the requisite steps to collect or enforce the debt and therefore the inclusion within the certified sum of this debt was a manifest error.
The claimant sought summary judgment to enforce the deeds of indemnity to recover the certified sum.
Primary or secondary liability
Mr Justice Flaux held that the indemnities did in fact create primary obligations because:
the inclusion of words of indemnification, such as "agree to indemnify" and "agreement to indemnify", and the description of the relevant defendant as "Indemnifier" and the agreement as an "Indemnity", indicated an assumption of primary liability;
the conclusive evidence clause stated that an acknowledgement of liability by the Company would suffice to establish the defendants' liability; and
the reference to "a reasonable estimate of contingent liability" in the conclusive evidence clause demonstrated that the liability of the defendants was not dependent upon any conclusive determination of liability of the Company to the claimant.
Conclusive evidence clause – effect of failure to mitigate
The defendants argued that there was an arguable case that the claimant had not collected all the outstanding debts that could have been collected and therefore it had either failed to mitigate its loss or, if it had suffered a loss, the cause of such loss was the claimant's decision to bring the collection process to an end prematurely. Therefore the inclusion of such debts in the certified sum was a manifest error which nullified the effect of the certificates.
In response, the claimant submitted that, even if the defendants' allegations were factually correct (which the claimant disputed), this did not amount to a defence which had any real prospect of success for the following reasons:
pursuant to the conclusive evidence clause, a certificate of indebtedness from a director of the claimant is conclusive as to the amount of the indebtedness; and
under the terms of the Agreement, there is no duty to mitigate and the collection of debts is in the claimant's absolute discretion.
A key point considered by Flaux J was what could amount to a "manifest error" for the purposes of the conclusive evidence clause so as to invalidate the certificates.
Reference was made to the definition of "manifest error" as being an error which is "obvious or easily demonstrable without extensive investigation" (IIG Capital LLC v Van Der Merwe  EWCA Civ 542;  2 Lloyd's Rep 187 and North Shore Ventures Ltd v Anstead Holdings Inc  EWCA Civ 230;  Ch 31 considered).
The defendants argued that it was not necessary for the error to be manifest at the time of the certificate. It didn't matter that the recipient of the certificate was unable to verify the existence of an error "save after the occurrence of a subsequent event" (North Shore relied on) and so, in circumstances where the defendants could demonstrate by references to reviews it had undertaken that the claimant had failed to collect the debts, there would be a manifest error in any certificate which included those debts. The defendants contended that this conclusion was unaffected by their inability to prove this conclusively at present and that they would instead require further investigation at trial. Flaux J stated that "subsequent event" could not have been intended to encompass a full trial and he agreed with the claimant that to allow such a dispute to be resolved at trial would "render the conclusive evidence clause nugatory", further stating that the "whole point of [the conclusive evidence] clause is to preclude this sort of dispute". Therefore Flaux J found that, notwithstanding the parties' disagreement as to whether the debts were in fact capable of collection, the certificates did not contain a manifest error and therefore they were not invalid.
Failure to mitigate
It was held that failure to collect debts did not give rise to a defence of failure to mitigate. Flaux J stated that "a party providing an indemnity cannot challenge his obligation to pay under the contract of indemnity which is a claim in debt, by reference to principles relating to the assessment of damages of contract which have no application to debts" (Royscott Commercial Leasing Ltd v Ismail Independent (9 July 1993) and Codemasters Software Co Ltd v Automobile Club de l'Ouest  EWHC 3194 (Ch),  FSR 13 considered). He went on to say that, in any event, arguments put forward by the defendant suggesting that the claimant had caused its own loss were precluded by the fact that (a) the administrators of the company had acknowledged the indebtedness; and (b) in the absence of manifest error (which Flaux J had already found there was not), the certificates had been correctly served on the defendants.
As a result, Flaux J granted summary judgment in favour of the claimant.
Comment: Clients operating in the finance sector should take comfort that the courts will interpret correctly drafted indemnities as creating primary obligations on the indemnifying party. Whilst including specific reference to words of indemnification will not guarantee that the courts will interpret the agreement/clause as being an indemnity, the inclusion of such words will indicate an assumption of a primary obligation. It is also good practice to include a non-exhaustive list of the specific types of loss covered by the indemnity to reduce the risk of the indemnity being too wide in scope and therefore being considered ambiguous.
Furthermore, parties seeking to circumvent conclusive evidence clauses by advocating further investigation in order to validate certified sums are unlikely to be successful and the courts will uphold conclusive evidence clauses in the face of such arguments. Where a conclusive evidence clause requires conditions to first be fulfilled (for example, in the present case, the confirmation from the Company and the serving of the certificates), parties should comply with such conditions correctly and promptly as, once they have done so, it will prove much more difficult for the surety provider to refute a claim brought under the indemnity.