Clauses relating to ‘manifest error’ (sometimes called ‘conclusive evidence’ clauses) will often appear in contracts where a decision, certificate or determination (such as the amount of a debt owed) is to be made by one of the parties unilaterally and the parties wish to avoid any scope for negotiation or argument about that decision or determination.
By way of example, the following (or a variation of it) is common in most loan agreements:“certification or determination by a Finance Party of a rate or amount under any Finance Document is, in the absence of manifest error, conclusive evidence of the matters to which it relates.”
Most people think of ‘manifest error’ as meaning something obvious. But how obvious does it need to be and obvious from what, the certificate itself or from other information the parties have? A recent decision highlights these issues and the meaning of ‘manifest error’ in detail.
Hypothetical v reality
At the crux of the case was a series of milestone certificates issued by an independent certifier under the contract. The court was asked to consider whether these could be set aside for ‘manifest error’.
Birmingham City Council (Council) entered into an agreement with Amey Birmingham Highways (Amey) that Amey would maintain and manage the Birmingham’s road and street lighting network. The contract was the largest of its kind in the UK at the time and was worth £2.7 billion.
The road network was linked to a digital system which, as both parties were aware, mainly contained hypothetical figures based on the ‘national average’ and did not contain specific data obtained through detailed observation of the road network.
Under the contract Amey was required to update the data on the system with more accurate survey data, which would have been obtained relatively easily through carrying out the work required. The maintenance of the road network would then be based on that up to date data.
A few years into the agreement the Council noticed that areas of road and footpath were being left untouched, and were falling into disrepair. Amey was challenged for failing to undertake the work required under the contract.
Amey’s understanding of the contract was that there was no requirement to update the data contained on the digital system, or to maintain sections of the road network for which no up to date data was available.
Despite this dispute the independent certifier issued the milestone certificates, which tracked the work completed by Amey, and under the contract these certificates were final and binding on the parties. Only fraud or manifest error would prevent the certificates from being binding. It was clear to the Council that the issuing of the certificates was based on the hypothetical data on the digital system and not on actual survey data.
The Council challenged the decision of the independent certifier to issue the milestone certificates.
Previous case law offered the following guidance:
- a ‘manifest error’ is one that is “obvious or easily demonstrable without extensive investigation”.
- “for a party to rely on a manifest error in a certificate does not depend upon his ability to demonstrate the error immediately and conclusively.”
- the court could consider extrinsic evidence (ie the error did not have to be obvious on the face of the certificate or other document).
In this case, if the Council’s case on the interpretation of the contract prevailed (which it did) then when the independent certifier issued the relevant milestone certificates, everyone knew those certificates would be based on erroneous calculations. The Court held that the certificates should be set aside for manifest error. They were based on information the parties knew was flawed rather than accurate survey data.
The effect of a ‘manifest error’
Manifest error clauses are certainly a useful device to minimise the scope for argument about calculations and figures specified, but they do not give the issuing party carte blanche when it comes to taking care about the accuracy of their calculations. Whilst they are generally enforceable (in the absence of any fraud, bad faith or other special circumstances) it is also worth noting for completeness that they could still be challenged under the Unfair Contract Terms Act 1977 in situations that Act applies to (particularly in standard terms or consumer contracts).
A plain and obvious error is required for any challenge based on a manifest error clause to be successful but whether this plain and obvious error has occurred will be a question of fact and it does not need to be abundantly clear from the face of the certificates that an error has occurred.
The error in issuing the certificates in this instance was only established once this contractual obligation was uncovered. Some errors only become obvious when the court reaches a particular conclusion on a point of law. It may not be possible to prove ‘immediately and conclusively’ that the errors were incorrect, but they may still be manifest errors.