Conclusive Evidence Clause and Certificate of Indebtedness

It is not uncommon to find a term in an agreement granting certain banking facility that goes along the line that any statement or certificate signed by an officer of the bank shall be the conclusive proof of the amount outstanding under the facility. This term is called the conclusive evidence clause.

Such statement or certificate has a generic term – certificate of indebtedness.

The legal effect of such certificate of indebtedness is this – once the bank produces the certificate, the bank no longer has to adduce any other evidence prove the amount owed by the borrower. The certificate alone is proof enough.

Is this Term Enforceable?

A term of a contract that forces the parties and the court to accept the figures written on a piece of paper by a bank without any evaluation of the underlying documentary evidence may appears to be against public policy, and good morals (of, if you wish to pretend to be sophisticated, contra bonos mores).

On this, the eminent Lord Denning in the case of Bache & Co (London) Ltd v Banque Vernes Et Commerciale De Paris S.A. [1973] 2 Lloyd’s Law Reports 437 had these to say:

“I would only add this: this commercial practice (of inserting ‘conclusive evidence’ clauses) is only acceptable because the bankers or brokers who insert them are known to be honest and reliable men of business who are most unlikely to make a mistake. Their standing is so high that their word is to be trusted. So much so that a notice of default given by a bank or a broker must be honoured. It ranks as equivalent to, if not higher than, the certificate of an arbitrator or engineer in a building contract. As we have repeatedly held, such a certificate must be honoured, leaving any cross-claims to be settled later by an arbitrator. So if a banker or broker gives a notice of default in pursuance of a ‘conclusive evidence’ clause, the guarantor must honour it, leaving any cross-claims by the customer to be adjusted in separate proceedings.”

[I think I have not cited a case before, I beg my readers to pardon me. Let me briefly explain here why this is important.

In common law countries, the legal system adopted a principle called stare decisis. In layman term, what it does is this – court in adjudicating a case must refer to the earlier decision to derive the applicable principles and apply the same onto the current case. This is to ensure that the law is constant and uniformly applied, and does not vary based on the whim and fancy of the judge. In term of ranking, a lower court must follow the decision of a court higher than it. Fuller discussion on stare decisis will be uploaded in another article.

This position – that the bankers are so trustworthy that whatever they say goes – became entrenched not only in UK but also across the Commonwealth, including Malaysia]

If you do not agree with Lord Denning, you are in good company. The UK Court of Appeal in North Shore Ventures Ltd v Anstead Holdings, Inc & Ors [2011] EWCA Civ 230 cast doubt into the value of Lord Denning’s statement, made in 1973, in the present time. However, the Court did not rule on this issue and determined the case on another angle instead.

Thus, until such time the rational is overruled, the position remains, in Malaysia as well as in most Commonwealth countries, that conclusive evidence clause is valid.


How Do I Contest the Certificate of Indebtedness?

If one intends to contest the accuracy and veracity of the amount stated in the certificate, must show either of these:

a) Fraud; or

b) There is manifest error on the face of the certificate.

What is Manifest Error?

Manifest error generally denotes an obvious error, easily demonstrable without extensive investigation. The error need not, however, be immediately or conclusively demonstrated.

Where do We Go from Here?

I personally think that the conclusive evidence clause employed by the banks will be here to stay, at least for the foreseeable future. Law, by nature, evolves slowly. Unless something drastic happens, it is unlikely that the principles on conclusive evidence clause be disturbed anytime soon.

This article is written by our Partner, Loke Yuen Hong