Duress in banking contracts under the microscope at the UK Supreme Court

December 2020 | SPOTLIGHT | BANKING & FINANCE

Financier Worldwide Magazine

December 2020 Issue

On 2 November 2020, the UK Supreme Court will hear Times Travel v Pakistan International Airlines Corp, the first ever Supreme Court appeal on economic duress. The doctrine of economic duress decides when contracts can be voided because they were induced by illegitimate pressure.

While Times Travel itself does not concern financial services, parties from the banking sector, including the All Party Parliamentary Group on Fair Business Banking (APPG) and Law Debenture Trust Corp (the Trustee) are intervening to make submissions.

The APPG’s intervention focuses on its experience of small and medium-sized enterprise (SME) customers being placed under pressure by lenders to compromise claims. That includes evidence relating to RBS’ Global Restructuring Group’s practice of ‘leveraging’ and ‘ratcheting’ to put pressure on customers to enter settlements and renew facilities on more onerous terms, as described in Promontory Financial Group’s report under section 166 of the Financial Services and Markets Act 2000.

The High Court judgment earlier this year obtained by the Royal Bank of Scotland (RBS) against property developer Oliver Morley is an example of a borrower placed into the Global Restructuring Group (GRG) unsuccessfully pleading duress, albeit Mr Morley has received permission to appeal. The APPG also put forward evidence relating to the settlements of claims of victims of the HBOS Reading fraud, with whom Lloyds is still discussing compensation.

Heather Buchanan, executive director of the APPG, states: “We see the scope of the duress doctrine, particularly the need to prove subjective bad faith by the defendant, as unduly restrictive. That is especially the case where, as our stakeholders have regularly experienced, borrowers are placed under systematic pressure to settle complaints.”

The two other interveners in Times Travel, the Trustee and the State of Ukraine, have their own proceedings before the Supreme Court, in which they are awaiting judgment. The Trustee is trustee of notes with a nominal value of $3bn issued by Ukraine. The sole subscriber of the notes was the Russian Federation.

The principal amount of the notes fell due for payment on 21 December 2015. However, Ukraine has resisted making payment, on the basis inter alia that it is entitled to avoid the notes for duress arising from allegedly unlawful threats made by the Russian Federation against Ukraine. Those include alleged threats to Ukraine’s territorial integrity and alleged threats of the use of unlawful force, and the application of allegedly unlawful trade measures and economic pressure.

While the litigation between the Trustee and Ukraine raised several different issues, including sovereign immunity, which were argued before the Supreme Court last year, judgment was delayed pending Times Travel, so that the Supreme Court can consider both duress arguments together.

The judgment should therefore be a legal landmark, setting the law relating both to economic or ‘lawful act’ duress, which is typically the scenario where a bank exerts pressure on a defaulting borrower by threatening to do something legal, such as enforce security, and also ‘unlawful act’ duress, where the threat was to commit a crime.

The juxtaposition of SME owners being threated with the enforcement of personal guarantees on the one hand, and state financing being induced by Russian tanks on the Ukrainian border on the other, is striking. However, what ties the scenarios together is the pressure under which borrowers of all types can feel when contracting with financial institutions.

The Supreme Court has a difficult task, because the protection of parties suffering from inequality of bargaining power has to be balanced with the preservation of contractual certainty and predictability. Whatever the outcome, the judgment will be significant both to parties looking backwards at contracts and facilities that one party wishes to unwind, and also looking forward, to ensure that they stay on the right side of the law in commercial negotiations.

Given an economic climate in which lenders and borrowers are likely to face difficult discussions about the future of facilities, the Supreme Court’s restatement of the law of duress will be timely for the banking sector.

Ned Beale is a litigation partner at Trowers & Hamlins LLP. He can be contacted on +44 (0)7812 994 450 or by email: nbeale@trowers.com.

Ned Beale

Trowers & Hamlins LLP