10 January, 2016
Conclusive evidence clauses are commonly found in banking documentation. They are used by banks as a means to exclude their liability by imposing a contractual obligation on their customers to verify their bank statements for discrepancies.
In August 2014, we had examined a High Court decision concerning whether a bank’s customers were estopped by a conclusive evidence clause from challenging payments made by the bank to a third party from the customers’ bank account.
In this issue, we look at another High Court decision (ABN AMRO Clearing Bank NV v 1050 Capital Pte Ltd [2015] SGHC 271) concerning whether a bank’s customer is estopped by a conclusive evidence clause from challenging the bank’s liquidation of the customer’s trading account.
Facts
The defendant was a Singapore-incorporated company whose principal business was the trading of futures and options on various stock exchanges.
In 2010, the defendant entered into, amongst others, a standard client agreement (“SCA”) and a facility agreement (“FA”) (collectively, “the Contracts”) with the plaintiff bank to trade in futures and options under the Nikkei 225 Index. Under the Contracts, the plaintiff agreed to provide the defendant with:
- direct market access to various exchanges;
- execution, clearing and/or settlement of all trades conducted through the defendant’s client account; and
- an uncommitted multicurrency credit facility with an upper credit limit for the purpose of funding the defendant’s trades through its client account.
The plaintiff was also required to supply the defendant daily reports of the trades conducted through the client account which have been executed, settled and cleared.
Subsequently, the defendant’s portfolio with the plaintiff fell below the Risk Amount set at US$750,000 and incurred a deficit of S$663,157, which constituted an event of default under the SCA. The plaintiff then proceeded to liquidate the defendant’s entire portfolio by way of auction and sold it to a third party.
After the defendant’s trading positions were fully closed out, the cash position report issued to the defendant showed that the final net liabilities in its client account were in the sum of S$907,408.18 (“the Loan Monies”). In total, the defendant’s outstanding liabilities to the plaintiff amounted to S$935,526.39.
The plaintiff applied for summary judgment against the defendant. An Assistant Registrar (“AR”) granted the defendant conditional leave to defend the plaintiff’s claim for the Loan Monies, as the conclusive evidence clauses in the SCA and FA (reproduced below) were not sufficiently broad to preclude challenges to the plaintiff’s determination as to whether the defendant was legally liable under the Contracts.
SCA “If the Client does not notify ABN of any error within one Business Day, ABN [is] entitled to treat the report or file as having been approved by the Client.”
FA “Each confirmation or determination made or certificate issued by ABN under this Agreement of a rate or amount under any Finance Document shall, in the absence of manifest error, be conclusive and binding on the Client and shall be promptly notified to the Client provided that any failure or delay in such notification shall not in any way relieve the Client of its obligation to pay any amounts in accordance with the terms of this Agreement.”
Decision
The High Court agreed with the AR that the conclusive evidence clauses in the SCA and the FA did not estop the defendant from challenging the propriety of the plaintiff’s liquidation actions.
The High Court highlighted the following key legal principles:
- Where a bank relies on “conclusive evidence clauses” to relieve itself from liability for its own misconduct, nothing short of clear and unambiguous language to that effect would suffice.
- Under this rigorous standard, the effect of a conclusive evidence clause depends on the precise words used and is ultimately a question of construction.
- Hence, it must be “clear and unequivocal” that the plaintiff’s alleged misconduct (i.e. in liquidating the defendant’s entire portfolio) fell within the ambit of the conclusive evidence clauses.
Applying these principles, the High Court found as follows:
- The SCA’s conclusive evidence clause did not envisage a situation where the propriety of the plaintiff’s conduct was disputed. It only entitled the plaintiff to treat a report or file that is provided to the defendant as having been approved if the defendant does not notify the plaintiff “of any error”.
- An “error” contemplated by the SCA included computational or clerical errors, but did not encompass a challenge to the plaintiff’s liquidation actions as “there was certainly no mistake in the way the liquidation was conducted”. As such, the defendant was not obliged to inform the plaintiff of its objections to the way in which its portfolio was sold.
- Similarly, the FA’s conclusive evidence clause referred to a “manifest error”, which did not encompass the present case.
- The meaning of the phrases “the report or file [is treated] as having been approved by the Client” (in the SCA’s conclusive evidence clause) and “rate or amount … shall … be conclusive and binding on the Client” (in the FA’s conclusive evidence clause) was unclear. As both clauses did not expressly refer to “sums and liabilities”, it was doubtful whether they indicated that the defendant was “deemed to have assented to both liability (in the sense of the legal propriety of the liquidation actions) and quantum as set out in the relevant report/file”.
- The High Court therefore concluded that both clauses were “insufficient to bring home the significance of the duty to check and verify, as well as the sanction that arises from a failure to report”.
Nevertheless, the High Court ordered final judgment for the sum of S$935,526.39 to be entered against the defendant.
It found that the plaintiff’s liquidation actions, which was governed by the event of default clause in the SCA, were not arbitrary, capricious, perverse and irrational and/or in bad faith. Also, there was no bona fide defence to the plaintiff’s claim – the defence was a mere afterthought as the defendant and its officer, who were “seasoned and experienced traders”, had not objected to the plaintiff’s liquidation actions at the relevant time until the application for summary judgment.
Conclusion
This case affirms the well-established position in Singapore that a rigorous test must be satisfied where conclusive evidence clauses are concerned. Here, the High Court gave “a limited and restrictive interpretation” to the conclusive evidence clauses in the SCA and FA, which meant that the defendant was not precluded from challenging the method and manner in which the plaintiff took the liquidation steps.
To avoid questions of interpretation, conclusive evidence clauses must be drafted with clear and unambiguous language if banks wish to excuse themselves from liability for enforcement action such as liquidating their customers’ portfolio
