The Risks in Making 'Payments under Protest'

The Risks in Making ‘Payments under Protest’

The Risks in Making 'Payments under Protest'

08/03/2010

It is not unusual for a situation to arise where it is disputed that monies claimed are properly due but the potential consequences of not making payment are such that consideration is given to making the payment ‘under protest’ and seeking to recover it from the recipient at a later date. There is however a very real risk that even if it is established in due course that the monies paid were indeed not due, they may not be recoverable.

The reason is that in English law there is no general principle that there is a right of action for recovery of money on the ground that it was not due. The claimant has to prove that the circumstances in which the payment was made come within one of the categories which the law recognises as sufficient to make retention by the recipient unjust, as for example where the payment was made under a mistake or under compulsion.

This was highlighted in the recent case of Marine Trade S.A. v Pioneer Freight Futures Co Ltd BVI [2009] EWHC 2656 (Comm). The parties had entered into a number of freight forward agreements under the terms of a master agreement. Marine Trade thought that it 'probably was not liable to pay' an invoiced amount of just over $5 million. However, non-payment might result in Pioneer terminating early under the master agreement, crystallising a liability to pay all outstanding sums under the freight forward agreements which Marine Trade could not afford to pay. Another factor was that, even if not justified, an early termination would severely damage Marine Trade's reputation. To avoid these outcomes, Marine Trade made payment 'under protest' and then claimed restitution of the amount so paid.

Although the court accepted that Marine Trade had indeed not been liable to pay the $5 million, the claim for restitution failed. Marine Trade had argued that the payment had been made under a mistake, but the court disagreed.

The question was whether a person who pays in doubt could be said to be paying by mistake. There may be cases where this might be so, but on the current state of the law, the judge said that this could only be where the payer had concluded that it was more likely than not that he was liable to pay. This was not the situation in this case – Marine Trade in fact thought it more likely than not that they were not liable to pay.

Even if there had been a mistake, Marine Trade would have failed to establish that the mistake had caused the payment. The payment had been made to avoid the risk of an early termination and its adverse consequences.

There will be other situations where a payment under protest of a disputed amount may be considered to avoid the other party actioning default provisions under the contract. Or, for example, the question may arise whether to pay a disputed amount of rent to ensure termination of a lease under a break clause which is conditional on the payment of outstanding rent . However, it should be taken on board that if such a payment is made, the court may not order repayment even if it is found that the recipient was not entitled to the payment, unless recovery can be based on other grounds, such as duress or a total failure of consideration, which however will often not be applicable.

Alternative steps such as applying for an injunction to stave off adverse consequences may be considered, but as in the Marine Trade case might not be successful. An attempt may be made to secure the other party’s agreement to payment being made into an escrow account pending a determination by the court or to repay if the court decides that there was no liability to pay. Legal advice should be taken on the best way forward.

For further information please email Nick Bates or Janice McMullen.