Laura O'Gorman KC

Overview

In Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2, [2023] 1 WLR 575 the UK Supreme Court considered the effect of contractual provisions providing one party with the power to certify "conclusively" amounts payable by the other. On the facts, the majority construed the power narrowly, equivalent to a "pay now, argue later" clause. In other words, as a matter of timing the other party was contractually obliged to pay (subject to the narrow manifest error or fraud defences), but could still dispute the underlying liability in a claim seeking reimbursement.

Facts and procedure

The terms of a commercial lease for properties in Liverpool provided for the landlord to issue a certificate as to the amount of service charges payable by the tenant. A dispute arose when the tenant refused to pay service charges that had been certified by the landlord as owing for the 2017-18 and 2018-19 years, when the lease was nearing its end. The tenant (Blacks) contended that the charges were excessive because some charges were outside the scope of the repair covenant, or unnecessary in the context of the lease ending.  The landlord applied for summary judgment, and the tenant counterclaimed that the sums were not properly due.

At first instance, the Court dismissed the application for summary judgment, but ordered the tenant to pay the disputed amount into court. The Court of Appeal allowed the landlord's appeal and granted summary judgment, but remitted the matter to the Chancery Division to determine what, if any, issues remained to be determined on the counterclaim.

The Supreme Court (by a majority) agreed with the Court of Appeal that granting summary judgment was appropriate, but held that this did not preclude Blacks pursuing its counterclaim.

In a separate dissenting judgment, Lord Briggs interpreted the clause as precluding the tenant from pursuing a substantive challenge to liability, unless it could bring those within the narrow scope of the permitted defences (manifest error or fraud).

Legal analysis

Delivering the majority judgment, Lord Hamblen JSC outlined ordinary principles of contractual interpretation. He then considered cases demonstrating the narrowness of "manifest or mathematical error or fraud". These cases made it clear that a mere arguable error will not suffice, however well-founded the allegation of error may ultimately prove to be.

If a landlord could certify liability and only be challenged on such narrow grounds, then this would make it judge in its own cause, without any requirement to consider representations from the affected party. Subject to the permitted defences, it would be a "pay now, argue never" regime.  This would be unbalanced and uncommercial, and inconsistent with other contractual provisions (such as the tenant's right to inspect receipts, invoices and other evidence relating to the service charge).

On the other hand, the tenant's arguments for an "argue now, pay later" regime were inconsistent with the landlord's need for reimbursement with minimal delay and dispute (cashflow issues).  

The majority preferred an alternative, construing the clause as "pay now, argue later".  Certification about "the sum payable by the tenant" could be construed as being conclusive as to what is required to be paid on a particular date under the Schedule 6 regime, subject only to permitted defences.  But this did not preclude the tenant from thereafter disputing liability for that payment.  The no set-off provision was of similar effect.

In dissent on the counterclaim issue, Lord Briggs JSC acknowledged the attraction of finding a solution that could reconcile the interests of the two parties. However, this was constrained by the well-settled principle that the prima facie meaning of contractual words only yields to a more commercial alternative if there is some basis in the language of the contract as a peg upon which the alternative can properly be hung. A court must choose between genuinely available constructions, rather than mending the bargain.  In his view, the solution adopted by the majority was not properly available on the wording of the lease.

Conclusion

There was nothing contentious in the legal principles of this case, which apply equally in New Zealand.  It is noteworthy because the Court adopted an interpretation not advanced by either party, and because it represents somewhat of a high water mark about how pro-active a court can be in construing meaning  to achieve a commercial result.  

It will be relied on by paying parties wishing to minimise the significance of conclusive evidence clauses, but ultimately its applicability will very much depend on the particular clauses in question and the factual matrix.  For banks and landlords who might rely on clauses of this type, this case provides a reason to review the wording of such clauses and how they reconcile with the balance of the contract (particularly clauses about dispute resolution and information entitlements).