Some contracts, such as the NYPE Form, make provision for repayment of sums that are not due. Others do not, and it is these that give rise to problems when an overpayment is made, regardless of whether it is made under protest or with a reservation of rights.
English law does not recognise an action for the recovery of money which has been paid simply on the ground that it was not due. Instead it only recognises an action for unjust enrichment, which requires the claimant to demonstrate a ground of restitution. This means establishing that the money was paid under a mistake of fact or law, or under certain forms of compulsion; a party that makes an overpayment cannot simply demand it back.
This article examines the High court decision in Marine Trade SA v (1) Pioneer Freight Futures Co Limited BVI; and (2) Armada (Singapore) Pte Limited. Whilst the case was primarily concerned with issues of insolvency and derivative finance, it is also important for the law of restitution. It addresses the question of when a party, who pays money to another despite doubts as to whether that money is due, can recover that money in a claim for unjust enrichment. This has been a contentious issue for some time. It will be seen that relying on mistake as the unjust factor is unlikely to help.
The Marine Trade case
Marine Trade and Pioneer were parties to 14 freight forwarding agreements (FFAs) and an (International Swaps and Derivatives Association) ISDA Master Agreement. The FFAs were all on standard terms and were cash settled contracts for differences. Each month, a “Settlement Sum” was calculated for each FFA. In January 2009 the Settlement Sums under the FFAs were as follows:
1. US$ 7 million due to Marine Trade from Pioneer; and
2. US$ 12 million due to Pioneer from Marine Trade.
These sums would usually be set off against each other, but Marine Trade took the view that Pioneer were in default (within the meaning of the Master Agreement) and were therefore not entitled to a net balance of US$ 5 million. Marine Trade invoiced Pioneer for US$ 7 million. Pioneer invoiced Marine Trade for just US$ 5 million. Payment was due on 6 February 2009 and neither party made a payment on this date.
Pioneer served a notice of failure to pay (under the Master Agreement) which amounted to a default. Marine Trade feared that this would lead to Pioneer terminating the Master Agreement, which would have been disastrous; all liabilities under the FFAs would have been crystallised making Marine Trade liable for a sum much larger than US$ 5 million.
After an application for an injunction was refused, Marine Trade paid the US$ 5 million under protest.
In the High Court proceedings Marine Trade sought (in addition to payment of US$ 7 million from Pioneer) repayment of the US$ 5 million which it paid under protest. Flaux J held that Marine Trade was unable to recover the US$5 million by way of restitution. There was no operative mistake on the facts and therefore no ground for unjust enrichment.
Flaux J addressed the circumstances in which amounts paid under protest by a non-defaulting party may be recovered. To be entitled to restitution, a party must bring themselves within one of the established categories, specifically, to prove that the money was paid by mistake. In this case, Marine Trade made the payment thinking it was probably not due. This is no mistake. While some level of doubt might be compatible with mistake, if a party makes a payment thinking that they were not liable (or, more likely than not, that they were not liable), there is no operative mistake.
It follows that the more certain a party is that he does not have to pay the less likely he is to be mistaken and, therefore, less likely to be able to recover the money.
Marine Trade, arguably, followed the most sensible course of action available at the time; paying money, wrongfully demanded, under protest in order to avoid the possibility of a larger liability it could not meet, and as a last resort, having failed to get an injunction. The alternative case of a charterer who enters into a COA with a shipowner for a series of shipments can be easily imagined. The charterer has cargo ready to load but receives a bill under the COA which seems too large. He thinks he has been overcharged but after failing to reach agreement with the shipowner on the matter, the charterer pays under protest to avoid the possibility of the shipowner terminating the entire COA. Here, again, it would seem that the charterer has taken the most sensible route open to him.
However, the decision in Marine Trade is a sensible one; where a claimant thinks it is more likely than not that money is not owed, it would be wrong to say that payment was made on the basis of a mistake as to liability. The real cause of such payments is some other (commercial) pressure of the possible consequences of a failure to pay.
The question remains whether Marine Trade could have argued successfully that any threat of termination of the FFAs by Pioneer amounted to duress. The courts have recognised economic duress as an unjust factor in a number of cases. The case law indicates that there must be illegitimate pressure that amounts to a “coercion of the will”. And the claimant must, of course, satisfy the test of causation. There is also a suggestion that the claimant needs to demonstrate that there was no reasonable alternative available other than to make the payment. Arguably, Marine Trade satisfied these requirements: the threat of termination of the Master Agreement coerced their will, they would not have paid but for this, and it was the only option available, having failed to get an injunction. That said, the law of economic duress remains uncertain and it is difficult to say whether it would have been applied in a case such as this.
What can be done to recover money overpaid under protest?
It is clear that mistake is unable to help a claimant in Marine Trade’s position and economic duress is not sufficiently developed.
Unless the original contract has includes a provision for overpayments to be returned, where there is doubt as to whether a payment is due a separate agreement will be required to provide for that money to be returned if it is subsequently found that it was not, in fact, due.
It is an error to make a payment that is not due. Of course, there may be commercial reasons why such a payment is made, but that is a different issue. As a matter of English law, there are very limited grounds for the recovery of money paid, regardless of whether or not payment is made under protest.
Article by Faye Doherty
