Bernard Madoff, through his company Bernard L Madoff Investment Securities LLC (BLMIS) operated what appeared to be one of the most successful investment funds in history. Whilst spectacular returns were issued, many were eager to invest their money with BLMIS. Of course, once BLMIS was revealed to be the largest Ponzi scheme fraud in history, investors were rather more eager to secure the return of their investments. Fairfield Sentry (Fairfield) was a feeder fund for BLMIS, placing 95% of its assets with BLMIS for investment. Investors thus indirectly participated in BLMIS by subscribing for shares in Fairfield. The price of such shares was determined by calculating the net asset value (NAV) per share of Fairfield.

As Lord Sumption noted in judgment, one of the harsh realities of a Ponzi scheme is that those who withdraw their funds before the fraud is revealed and the fund collapses will have the return of their investment and the (potentially substantial) fictitious profits generated by the fraud. In contrast, those who do not withdraw before this point suffer the entirety of the loss caused by the deception. In the aftermath of the collapse of BLMIS, redemption of shares in Fairfield was suspended and the company was eventually wound up. Those left invested in Fairfield before the collapse of the scheme thus bore all the loss. Fairfield (by its liquidators) sought to recover the payments made to those members of Fairfield who had withdrawn their investment in time. Fairfield’s clawback claim was in unjust enrichment: it was claimed that Fairfield had paid out the sums to members who had withdrawn their investment whilst labouring under a mistake.

Prior to the unmasking of the fraud, BLMIS was of course a hugely successful fund and consequently Fairfield had a lucrative NAV.

This was of course entirely mistaken because in reality BLMIS was an empty shell and consequently the investments in Fairfield had at all times been worthless. The members who had benefitted from this mistake in withdrawing their investments were requested to give up their unjust enrichment. However, if the shareholdings were redeemed from Fairfield and monies paid out pursuant to a contractual obligation, there could be no unjust enrichment and the claim for restitution would fail. The issue therefore was whether Fairfield was bound to pay upon redemption of shares the true NAV per share or alternatively the NAV per share which had been determined by Fairfield at the time of redemption. It was in this context that the certification of the NAV per share became central. The subscription agreement of Fairfield, to which investors signed up, set out a mechanism for determining the NAV per share. Essentially, the directors were to determine the NAV according to a prescribed calculation, and NAV per share on particular days was to be taken as the “redemption price”, ie the amount which a withdrawing investor would receive. In addition it was stipulated at Art 11(1)(c) that: “Any certificate as to the Net Asset Value per Share or as to the Subscription Price or Redemption Price therefore given in good faith by or on behalf of the Directors shall be binding on all parties.”

Various statements as to NAV were issued by Fairfield’s administrators (Citco) on behalf of the directors in various contexts by various means. A core issue in the case was therefore whether any such statements constituted a “certificate” under Art 11(1)(c). If they were, the NAV could be taken to have been conclusively determined by virtue of Art 11(1)(c) and the sums paid out to withdrawing investors had been properly disbursed pursuant to the terms of the Subscription Agreement. The documents which were put forward as potentially constituting certificates were: The postings on a website by Citco of NAV. The website was accessible to members by use of a password. A monthly email sent to members which stated current NAV per share.

When a member redeemed a shareholding he received in the following month a contract note recording the transaction which included a statement as to the NAV per share. Each member also received a monthly statement of account which set out an opening and closing NAV per share.


Whilst the judge at first instance and the East Caribbean Court of Appeal held that none of the documents put forward were certificates, the Privy Council disagreed. Lord Sumption held that all of the documents constituted certificates within the meaning of Art 11(1)(c), save for the postings on the website, as to which he expressed no opinion. He explained that the word “certificate” ordinarily means: (i) a statement in writing; (ii) issued by an authoritative source; which (iii) is communicated by whatever method to a recipient or class of recipients intended to rely on it; and (iv) conveys information; (v) in a form or context which shows that it is intended to be definitive. Rejecting particular requirements of formality, he held that: “There is no reason to think that a document must satisfy any further formal requirements, unless its purpose or legal context plainly requires them. There is nothing in the context of these Articles which does.”

It was particularly important to appreciate that the purpose of the certification provision in the subscription agreement was: “to produce finality, and the scheme of the Articles, as the Board has summarised it above, shows that finality is equally important for all determinations of the NAV per share and all Subscription and Redemption Prices”. In the context of the structure of Fairfield, any other conclusion would make the scheme unworkable: NAV per share had to be definitively ascertained. Were this not the case, redemptions of shareholdings in Fairfield would always be subject to retrospective challenges and the members who had redeemed would be subject to open-ended and unknown liabilities.


The decision is of considerable importance for any fund or transaction which makes use of certification mechanisms. Several points arise from the decision, which we now consider.

What will constitute a “certificate”?

The class of statement/document which can be said to be a “certificate” is of considerable breadth. This is clear from both Lord Sumption’s wide definition, which rejected any formal requirements, and by the particular nature of the documents held by the Privy Council to be certificates. The contact notes were not described as “certificates”, neither were they signed. The notes stated that the relevant transaction had been effected “in accordance with your instructions”. The notes also included the statement: “For more information… please contact Citco.” Likewise, the monthly statements were not described as “certificates” and were unsigned. It appears that the primary function of the statements was simply to act as a summary of activities during a particular month. The monthly emails did not purport to certify anything but rather stated: “Please be advised…” before going on to set out the relevant information as to NAV.

The emails also included an “unsubscribe” link if the recipient no longer wished to receive them.

Accordingly, none of the documents were of any particular formality. It was this that led the Eastern Caribbean Court of Appeal to conclude that they were not certificates, holding that: “It must be a document which contains some formal stamp to the truth of the matter in issue.”

Nevertheless, the contrary conclusion of the Privy Council makes clear that no such additional requirements are necessary. Lord Sumption expressed no opinion as to statements made on a website, but this was due to a lack of evidence adduced on the nature of the website referred to. In accordance with his general definition there appears to be nothing to prevent a posting on a website constituting a “certificate”. As he noted, whether this is the case will depend on factors such as the permanence of any statement and what members are told about the kind of information they will find there. In circumstances where it is known that the management of a fund will set out important information on a website to which members will have access and rely upon, the postings on such a website are likely to constitute certificates.

Communication of a certificate

Subject to the rules of the scheme, the way in which a certificate is communicated is probably less important than its form. One of Lord Sumption’s criteria was that a certificate must be “communicated by whatever method to a recipient or class of recipients intended to rely on it”, but it is clear that (at least in the context of investment schemes) it is availability of the certificate, not its communication, which is critical. A “certificate” mis-delivered by the post office is unlikely to cease to be a “certificate” nor does this document become a “certificate” only once it reaches the investor: the commercial purpose of the certificate is to serve as a record of value, binding upon management. Although there are good reasons for sending certificates to investors, it is the fact of certification and the objectively verifiable status of the certificate which matters. Given appropriate wording, the managers of a scheme could lodge certificates in the local bank, provided that they could always be inspected. Contrast this with the position of certificates which communicate a change in the parties’ rights (for example, the termination of a lease); to have commercial purpose this kind of certificate must not just be available, it must be actually communicated.

Advantages and disadvantages of formal requirements

The terms of the subscription agreement did not provide for any specific formal requirements in relation to any certificates issued. However, Lord Sumption expressly acknowledged that further formal requirements could be demanded if the context so required. Finance parties may be tempted to stipulate in the articles of a fund or in transaction documents that specific requirements are required for a statement to constitute a certificate, for example that it is specifically described as such or signed by a director. If by the nature of a fund a large volume of data is required to be passed on to the members in a short space of time, the management may wish to distinguish between that which is passed on simply by way of information and that which they particularly certify for the benefit of their members. The risk of allowing for many different documents to act as certificates is that they may contain contradictory information; that defeats the commercial purpose of certification which is to provide a point of certainty.

But stipulating strict requirements brings with it a widened scope for unintended breaches; this not only undermines certainty but may place management in breach of contract. Thus, whilst it may seem attractive to provide that “no certificate shall be valid unless headed ‘Certificate of Value’”, what happens if an intended certificate is sent out entitled “Official Certificate of Value”?

Is that document still a certificate? The scheme rules may be unclear as to what is a mandatory requirement and what is merely administrative. Thus, sensible requirements as to the formality of a certificate may be accompanied by the statement that any certificate must be sent to the member by first class post. Is a document which complies with all requirements other than that it was sent by second class post still a certificate? As Lord Goff observed in Mannai Ltd v Eagle Start Ass Co Ltd [1997] AC 749 (HL), one way of looking at certificates is that they are like keys to a lock: the key must match exactly in order to fit, otherwise it is of absolutely no use. That kind of strictness may be appropriate in contractual schemes (such as leases) where certificates fundamentally alter the rights of the parties; it may be less appropriate in a commercial context (such as an investment scheme) where the certificate is merely intended to provide an indisputable record. (It will be noted that the common law approach to certificates in construction contracts, where certification both records and alters the rights of the parties, is that the more important the certificate the more formality is required.)

Of course the English courts have shown a willingness to disregard strict formality when the merits demand it: an architect’s certificate which is technically defective will not be void simply on the basis that it contains minor immaterial errors if the recipient is not misled as to its meaning: Emson Contractors v Protea Estates (1988) 39 BLR 126 (CA); a notice to terminate a lease which gave the incorrect termination date by one day was held to be effective because a reasonable recipient would have been left in no doubt that the notice was intended to terminate the lease in accordance with its terms: Mannai. But these decisions are no guarantee that the same approach will be followed on different facts and in any event the object of a well-drafted scheme is to prevent such disputes arising in the first place. It is dangerous to be prescriptive in this area. Appropriate certification will vary from scheme to scheme. That said, it seems to us that as a generality: (i) if a class of documents is intended to constitute a certificate it is good practice to head it “certificate” or use words such as “we certify”, if only so that such documents can be easily distinguished from documents which are not intended to serve this purpose: (ii) whilst the scheme rules will provide for certification they should usually avoid being prescriptive as to what a certificate is; and (iii) whilst it is good practice (and commercially obvious) that certificates should be sent to investors it is not the communication which is paramount: it is the fact that the certificates are made available in an objectively verifiable fashion.