one-sided set-off and conclusive evidence clauses
AXA SUN LIFE SERVICES v CAMPBELL MARTIN & OTHERS (CA) Part 2 [2011]
As well as issues relating to entire agreement clauses (see Axa v Campbell Part 1), this case also demonstrated that care is required when drafting unilateral set-off clauses and so called ‘conclusive evidence’ clauses in agreements containing standard terms as both may be subject to the reasonableness test under the Unfair Contract Terms Act 1977 (“UCTA”).
facts:
- A was seeking to rely on a clause which allowed it a contractual right to ‘set off’ sums due to it against payments owing while denying the same right to the other contracting party.
- In addition, commission was to be calculated by A and that calculation was to be binding on the other party “save for manifest error” (a ‘conclusive evidence’ clause). The appointed representatives challenged the contractual effect of these clauses.
decision:
- The Court of Appeal (“CA”) found the clauses to be effective in accordance with their terms. It then considered the position under UCTA and whether the clauses satisfied the test of reasonableness.
- Conclusive evidence clause – the CA found this clause satisfied the reasonableness test because of the carve out for manifest errors (which the CA interpreted as “obvious” errors). The appointed agents should, according to the Judges, be able to keep track of their commission and demonstrate any errors. If there was a dispute as to whether an error was manifest or not, the Court would resolve it. Accordingly, it was fair to limit payment disputes in this way.
- Unilateral right of set-off – A provided no explanation as to why it should be entitled to set off sums it was due against commission and other payments owing to the appointed agents but the appointed agents could not set off A’s liabilities to the appointed agents (including any damages for misrepresentation – which would have been the effect of the clause). On that basis the provision was held unreasonable under UCTA.
points to note:
- Provided the other party can challenge a statement of financial entitlement based on manifest or obvious error, a conclusive evidence clause in standard terms should satisfy the UCTA reasonableness test.
- A one-sided set-off clause in standard terms is likely to fail the reasonableness test unless the party with the benefit of that clause can demonstrate why it is reasonable that it should have a contractual set-off right but not the other party. This may be extremely difficult to establish.