Court reaffirms validity of “conclusive evidence” clauses

In Ho Ming Pui Andy v Midland Realty (Strategic) Ltd [2017] 5 HKC 469, the Court was once again asked to rule on the validity of a Conclusive Evidence Clause (CEC), in a contract. Such clauses provide that a certificate produced by one party to the other party certifying the amount due to it will be conclusive evidence of that amount.

Unsurprisingly, the Court adhered to a long line of cases and reaffirmed that in the absence of manifest error or fraud, CECs are binding, because they represent a contractual bargain between the parties who should be held to their bargain. The Court dismissed the contention that CECs amount to an ouster of the Court’s jurisdiction.

Background

The Plaintiff was a former director of the Defendant company employed under a service agreement. The Plaintiff claimed that the Defendant had underpaid him $21,595,638.43 in commission.

Conclusive Evidence Clause

The Plaintiff’s service agreement contained the following clause:

“2.3 The Employee, without prior permission, shall not be allowed to inspect the Employer’s internal accounting books and records, but if there is dispute on the matter relating to the Employee’s entitlement to the amount of the commission, the Employee may request the Employer to produce a certificate to be duly signed by the Employer’s internal accountant for his inspection. The said certificate shall state the actual amount of commission received by the Employer and the amount of commission payable by the Employer to the Employee. Besides, the said certificate shall be treated as a final evidence of the aforesaid amount payable and is binding on the parties to this Service Agreement.”

The Plaintiff sought to amend his pleading to plead that Clause 2.3 of the service agreement amounted to an ouster of the Court’s jurisdiction and was therefore void as being contrary to public policy.

The amendment was allowed, but the Defendant appealed.

Issue on Appeal

The Court has a discretion to allow an amendment to a pleading, if the amendment is necessary to fairly dispose of the matter or to save costs. The sole issue for determination on appeal was whether Clause 2.3 was objectionable (because it ousted the Court’s jurisdiction), because if it was not, then the Plaintiff’s proposed amendment would not be necessary to fairly dispose of the matter and should not be allowed.

In determining the above issue, the Court considered the validity of CECs and whether they were an ouster of the Court’ jurisdiction and should therefore be void as contrary to public policy.

The Court cited the Australian case of Dobbs v National bank of Australasia Ltd [1935] ALR 360 and the English Court of Appeal case of North Shore Ventures Ltd v Anstead Holdings Inc and others [2012] Ch 31 and concluded that these cases showed that the law had long been settled – CECs were valid and binding, unless tainted by manifest error or fraud. In fact, CECs were commonly used in all manner of documentation by all manner of businesses in common law jurisdictions and they represented a contractual bargain between the parties, which should be upheld. Simply put, CECs must be upheld for commercial efficacy and party autonomy.

In this case, the Court held that Clause 2.3 was obviously intended to provide a mechanism for settling any issue or dispute arising between the parties concerning the amount of commission the Plaintiff was entitled to. Accordingly, in nature, character, substance and effect it was indistinguishable from a CEC. The objection based on ouster of jurisdiction was plainly unsustainable as a matter of law, the Court said, and the amendment could not be necessary for disposing fairly of the action and therefore should not be allowed.  

Conclusive Evidence Clauses in Construction Contracts

Clauses 32.8 and 32.9 of the Hong Kong Standard Form of Building Contract (2005 edition) read as follows:

“Issue of final Certificate

32.8 (1) The Architect shall issue the Final Certificate to each of the parties by special delivery as soon as practicable after the issue of the Defects Rectification Certificate for the whole of the Works provided that the Final Certificate shall not be issued until at least 28 days after a copy of the signed final account has been given to each of the parties under clause 32.6(5).

…

(3) The Final Certificate shall state:

(a) the Final Contract Sum;

(b) the sum of the amounts already stated as due in each Interim Certificate; and

(c) the difference between the two sums expressed as a balance due to the Contractor from the Employer or to the Employer from the Contractor as the case may be.

…

Effect of Final Certificate

32.9 (1) Subject to clauses 32.10 and 32.11 and except where any defect in or omission from the Works was not reasonably discoverable at the time of the issue of the Defects Rectification Certificate, the Final Certificate shall be conclusive evidence in any proceedings arising out of the Contract whether by arbitration or otherwise…”

Similar provisions can be found under clauses 30(6) and (7) of the Hong Kong Standard Form of Building Contract (1976 edition). 

In the U.K., similar provisions under JCT building contracts have been upheld in court, in the absence of manifest error or fraud. However, for such CECs to take effect, the certificate in question must comply with the formalities (as to timing and format etc.) such that it comes within the meaning of “Final Certificate” in the clause. (See, for example, Mr. Tracy Bennett v FML Construction Limited [2005] EWHC 1268 (TCC) and B.R. Cantrell, E.P. Cantrell v Wright & Fuller Limited [2003] EWHC 1545 (TCC).  The judgment in the Ho Ming Pui case can be relied upon as the Hong Kong authority in support of the finality of the Final Certificate in standard forms of building contract.

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Kwok Kit (KK) Cheung

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