In Sara & Hossein Asset Holdings Limited v. Blacks Outdoor Retail Limited, the UK Supreme Court confirmed that the term “manifest error” should be construed narrowly. The case concerns a “conclusive certification” clause in leases of commercial premises, but the reasoning of the Court is more generally applicable.
The dispute concerned the non-payment of a commercial service charge owed by the tenant, Blacks Outdoor Retail Limited (Blacks), to the landlord, Sara & Hossein Asset Holdings Limited (S&H). Blacks previously paid £55,000 ($68,524) by way of service charge, whereas the service charge certificate issued in January 2019 requested payment of £400,000 ($498,498).
The relevant clause of the lease stated that S&H should provide Blacks with “a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive” (emphasis added).
S&H contended that the certificate was conclusive in terms of the amount payable (subject to manifest or mathematical error or fraud). Blacks contended that the certificate was conclusive as to the amount of costs incurred by S&H under the service charge provisions, but not as to whether Blacks was liable to pay.
The majority judgment of the Supreme Court (in a judgment delivered by Lord Hamblen) held that neither party’s interpretation was satisfactory. Instead, “the certification provision should be interpreted as being conclusive as to the service charge “sum payable by the tenant” but not as to the underlying liability for the service charge” (paragraph 57). This provision is described as a form of “pay now, argue later” provision, enabling Blacks to bring a claim at a later stage for the repayment of a cost which it contends had been improperly charged.
In reaching its conclusion, the Supreme Court considered that “the narrowness of the permitted defences” (i.e., manifest or mathematical error or fraud) was relevant to the landlord’s position that the certificate was conclusive subject only to those defences (paragraph 30). The Supreme Court prefaced its discussion on manifest error by noting that the precise meaning of the term will depend on the context and the contract in question.
In IIG Capital LLC v. Van Der Merwe, Lewison J defined the term “manifest error” as “one that is obvious or easily demonstrable without extensive investigation.” [1] That test was approved by the Court of Appeal in IIG Capital [2] as well as in later cases such as North Shore Ventures Ltd v. Anstead Holdings Inc [3] and Amey Birmingham Highways Ltd v. Birmingham City Council. [4]
The Supreme Court cited the test set out in Veba Oil Supply & Trading GmbH v. Petrotrade Inc as guidance for what is meant by being “obvious or reasonably demonstrable”: manifest errors were “oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion.” [5] That test was applied in the recent case of Flowgroup plc (In Liquidation) v. Co-operative Energy Ltd. [6] In that case, the Court found that a manifest error must be more than merely a wrong answer—it must reach the threshold of being a clear “howler” as so described in Veba Oil Supply. In the Court’s view, a lower threshold would only provide dissatisfied parties with an alternative forum (the English courts) to air their grievances, without any real filter.
The “howler” threshold, once again approved by the Supreme Court in Sara, reflects the willingness of English courts to only offer recourse to the effect of parties’ express agreement in necessarily confined circumstances.
Lord Hamblen then stated that what is meant by being demonstrable “without extensive investigation” may depend on the specific context. Consistent with the guidance set out in Amey, [7] extrinsic evidence will be admissible “[u]nless the contract makes it clear that only the certificate can be considered.” Although immediate demonstration of the error in question may not be necessary, in most cases, this will need to be done “readily” by an investigation limited in “both time and extent.” Lord Hamblen agreed with Flaux J’s observation in ABN Amro Commercial Finance plc v. McGinn that it cannot depend on “a full blown trial.” [8]
Sara therefore reaffirms that, in the view of the English courts, the defense of manifest error is a narrow one: “[a]n arguable error will not suffice, however well founded the allegation of error may ultimately prove to be.”
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[1] [2007] EWHC 2631 (Ch), at [52].
[2] [2008] EWCA Civ 542, per Waller LJ at [33] – [35].
[3] [2011] EWCA Civ 230, at [51].
[4] [2018] EWCA Civ 264, per Jackson LJ at [83] – [87].
[5] [2001] EWCA Civ 1832, per Brown LJ at [33].
[6] [2021] EWHC 344 (Comm).
[7] At [87].
[8] [2014] EWHC 1674 (Comm), at [51] - ]52].