Jurisdiction - Singapore
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Singapore – Drafting Pitfalls: Payment Waterfalland Conclusive Evidence Clauses.

10 July, 2014



Payment waterfall and conclusive evidence clauses are no strangers to banking documentation. Payment waterfall clauses are used to prioritize the order of distribution of payments to various parties upon loan repayment or when a certain event occurs. 

Similarly, conclusive evidence clauses are commonly found in commercial and banking documents and have been said to be founded on, inter alia, the parties’ agreement “on the modalities to determine a matter”.1 Generally, a certificate issued under a conclusive evidence clause is, in the absence of fraud or obvious error on the face of it, “conclusive of both the liability and the amount of the debt” owed by the borrower.2 Nevertheless, because of the different ways in which conclusive evidence clauses may be drafted, “the precise effect of a … conclusive evidence clause is dependent on its specific wording and formulation”.3

This article discusses two recent English High Court cases which concerned the interpretation of payment waterfall and conclusive evidence clauses in banking documentation.  

Payment Waterfall Clause: Entity Taking On Multiple Roles 

The first caseconcerned the construction of a Facility Agreement under which the claimant banks and Bayerische Landesbank (“BLB”) were Lenders under a GBR 396m syndicated loan facility concerning the financing of the purchase of a famous London skyscraper (the Gherkin) by the Borrowers. The Borrowers comprised various entities representing a joint venture between IVG Immobilien, a German real estate group, and Evans Randall, a UK investment banking and private equity group.


Under the Facility Agreement, BLB acted in various capacities, including, amongst others, as Facility Agent and Hedging Lender. As Hedging Lender, BLB entered into a series of interest rate swaps (the “Hedging Agreements”) with the Borrowers. 

Since February 2007, interest rates fell significantly and the Borrowers were significantly “out of the money” and would be liable to pay the Hedging Lender some GBR 138m as break gains if early termination of the Hedging Agreements occurred. In view of the Borrowers’ financial difficulties, a dispute arose on how BLB as Facility Agent would be required to distribute the monies amongst the Finance Parties (defined as the Arranger, each Agent, each Lender and the Hedging Lender) which might be paid by the Borrowers if an event of default occurred. It was envisaged that the Borrowers would be unable to pay the full amount that they were liable for under the Hedging Agreements. 

Specifically, the dispute concerned the interpretation of the payment waterfall in clause 9.7 of the Facility Agreement, which stated:


Application of Moneys


If any amount paid or recovered in relation to the liabilities of an Obligor under any Finance Document is less than the amount then due, the Facility Agent shall apply that amount against amounts outstanding under the Finance Documents in the following order:


(a) first, to any unpaid fees and reimbursement of unpaid expenses or costs (including break costs and hedging break costs) of the Facility Agent;
(b) second, to any unpaid fees and reimbursement of unpaid expenses of the Lenders;
(c) third, to unpaid interest;
(d) fourth, to unpaid principal; and
(e) fifth, to other amounts due under the Finance Documents.


In each case (other than (a)), pro rata to the outstanding amounts owing to the relevant Finance Parties under the Finance Documents taking into account any applications under this clause 9.7. Any such application by the Facility Agent will override any appropriation made by an Obligor.”


BLB argued that the reference to “Facility Agent” in clause 9.7(a) was shorthand for BLB generally, including in its capacity as Hedging Lender. Unlike the other Lenders, BLB, as Hedging Lender, had a risk exposure under the Hedging Agreements and thus it was commercially sensible and reasonable that any sums paid by the Borrowers upon which there was a shortfall (and a fortiori any sum paid upon early termination of the Hedging Agreements) should inure to the benefit of BLB as Hedging Lender, in priority to the other Lenders and without BLB having to prorate any such payment with the other Lenders pursuant to the penultimate sentence of clause 9.7. 

The English High Court was, however, not persuaded of this argument for several reasons, which included:


(a) the Facility Agreement carefully distinguished between the different capacities in which BLB was acting, such that the term “Facility Agent” only meant BLB in its capacity as Facility Agent; 

(b) it would not be commercially sensible and reasonable to give priority to BLB for having taken commercial risks as Hedging Lender, when all the Lenders took “a much more substantial risk by making the loan”. If the term “Facility Agent” was given an extended meaning, BLB would be given priority over the other Lenders regarding its fees and expenses, which was inconsistent with clause 9.7(b). In addition, BLB’s recovery of its fees and expenses under clause 9.7(a) would have the advantage of not being pro-rated, in contrast to the recovery of the same by other Lenders under clause 9.7(b); and 

(c) the words in parenthesis in clause 9.7(a) “(including break costs and hedging break costs)” were not inconsistent with interpreting “Facility Agent” to only mean BLB in its capacity as Facility Agent. Although BLB argued that a Facility Agent would never enter into any hedging or other arrangement, the Court held that what mattered was that “the draftsman contemplated that there might be such agreements under which the Facility Agent might incur break costs or hedging break costs”. Interestingly, the Court noted that even if the words in parenthesis in clause 9.7(a) had no real meaning, the term “Facility Agent” should not be given an extended meaning because “[i]n lengthy commercial contracts of this kind there will often be words or phrases which are surplusage or which have no obvious meaning.” Conversely, to ascribe some meaning to the words in parenthesis so as to give an extended meaning to the term “Facility Agent” was “never a permissible approach to construction” because it “would be allowing the tail in the parenthesis to wag the dog of the clause as a whole”. 

Accordingly, the Court held that if there was a shortfall in the amount paid or recovered, BLB as Facility Agent was obliged to apply that amount to unpaid interest and principal due to the Lenders under the Facility Agreement in priority to sums due to BLB as Hedging Lender.


Conclusive Evidence Clause: Primary Vs. Secondary Obligation


The second case5concerned, inter alia, the construction of a deed of indemnity in a summary judgment application. The claimant was a factor which purchased the debts of its client (“the Company”) pursuant to an agreement (“the Agreement”). The defendants were the directors of the Company and each of them entered into a deed of indemnity with the claimant. Clause 3 of each deed of indemnity stated:


“For the purpose of determining my liability under this Indemnity I shall be bound by any acknowledgement or admission by the Company and by any judgment in your favour against the Company. For such purpose and for determining either the amount payable to you by the Company or the amount of any losses, costs, damages claims (whether prospective or actual and whether as claimant or defendant) interests and expenses (“Losses”) I shall accept and be bound by a certificate signed by any of your directors. In any proceedings such certificate shall be treated as conclusive evidence (except for manifest error) of the amounts so payable or of any Losses. In arriving at the amount payable to you by the Company you shall be entitled to take into account all liabilities (whether actual or contingent) and to make a reasonable estimate of any contingent liability.”


Subsequently, the Company entered into administration and many debts were disputed. About two years later, the administrators of the Company acknowledged in writing to the claimant that the Company was indebted to the claimant in the sum of GBR 8,924,783. The claimant then commenced proceedings to recover that sum from the defendants under the deeds of indemnity and served certificates of indebtedness on the defendants which the claimant contended was conclusive against the defendants based on Clause 3 of each of the deeds of indemnity. In other words, the claimant’s case was that Clause 3 was a conclusive evidence clause and each defendant’s liability under the deed of indemnity was independent of the Company’s liability. 

The defendants denied liability on, inter alia, the ground that their liability was secondary, and not primary, because the deed of indemnity was a performance bond, and not a contract of indemnity. If the defendants’ liability under the deed of indemnity was secondary, their defence was that they were discharged from the deeds of indemnity because of material variations made to the Agreement. 

The English High Court, however, held that this defence had no real prospect of success at trial because Clause 3 imposed primary, rather than secondary, obligations. Besides the words of indemnification used in each deed of indemnity which suggested “the assumption of a primary liability”, the words “I shall be bound by any acknowledgement or admission by the Company and by any judgment in your favour against the Company” indicated “that an acknowledgement or admission of liability by the [C]ompany will suffice to establish liability, even if, on detailed examination, there was no liability”. 

Moreover, the reference in Clause 3 to a reasonable estimate of contingent liability showed that the defendants’ liability under the deeds of indemnity was “not dependent upon any conclusive determination of liability of the [C]ompany to the claimant”. This reference was a “compelling indication” that the defendants’ liability was primary, rather than secondary. 

As for the defendants’ claim that the claimant failed to collect all outstanding debts and the certificates of indebtedness therefore contained a manifest error, the Court held that there was no such error and the defendants had no real prospect of successfully establishing that there was. Hence, Clause 3 precluded the defendants’ dispute as to quantum and the Court granted summary judgment to the claimant.




As the Singapore Court of Appeal observed in the landmark decision on Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR(R) 1029, interpreting contractual clauses is an “[intricate] and [complex] … task confronting the court each time it approaches a contractual document”. The court must “give effect to the parties’ intentions objectively in the face of conflicting subjective interpretations advanced by ingenious counsel”, “a task further complicated by the inherent richness and nuances of the English language and, unfortunately, sometimes by deficient drafting”.


Rather than go through the uncertainties of the court process to obtain a decision on how a contractual clause should be interpreted, it would be far more cost-effective for parties to look out for drafting pitfalls and pay closer attention to the wordings before signing the contract. Legal advice should be sought, as early as possible, on the crafting of contractual clauses, including words in parenthesis which may have an impact on the interpretation of other terms in the contract. Parties should also obtain advice from their lawyers on the extent of their liability regarding contractual provisions which seek to impose liability on them, before putting their pen on the dotted line.


End Notes:


1 Standard Chartered Bank v Neocorp International Ltd [2005] 2 SLR(R) 345 at [19]. 

2 Bangkok Bank Ltd v Cheng Lip Kwong [1989] 2 SLR(R) 660 at [19]. However, conclusive evidence clauses do “not preclude a legal review by the court into the propriety of the demand itself”: see e.g. RBS Coutts Bank Ltd v Shishir Tarachand Kothari [2009] SGHC 273 at [9]. 

3 RBS Coutts Bank Ltd v Shishir Tarachand Kothari [2009] SGHC 273 at [10]. 

4 Landesbank Hessen-Thuringen Girozentrale and others v Bayerische Landesbank, London Branch and Bayerische Landesbank [2014] EWHC 1404 (Comm).


5 ABM AMRO Commercial Finance PLC v Ambrose McGinn and others [2014] EWHC 1674 (Comm).




For further information, please contact:


Chong Huat Tan, Partner, RHTLaw Taylor Wessing

[email protected]


Kaylee Kwok, Partner, RHTLaw Taylor Wessing
[email protected]


Tom Chou, RHTLaw Taylor Wessing
[email protected]


RHTLaw Taylor Wessing Banking & Finance Practice Profile in Singapore


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