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Posted on May 10, 2012 by  | 0 Comments

It is not uncommon to compare the plight of borrowers in legal disputes with banks and other large financial institutions as a fight between little David and Goliath.

The analogy is apt when you consider the unequal bargaining power between small business owners and banks. Unfortunately all too often banks use economic pressure to compel business owners to agree to unconscionable agreements which sadly lead to their business’ demise. The pressure is largely commercial pressure but sometimes the economic pressure is illegal in the eyes of the law.

When does pressure from the banks become illegal?

Hang on, but if it’s illegal, how can the banks get away with this? Surely the law must provide business owners with a legal remedy to pursue banks for their distress and losses?

 Unfortunately the difficulty is distinguishing between the rough and tumble of legal commercial bargaining pressure and illegal economic pressure.

There is nothing illegal about cancelling negotiations at an advanced stage but if a threat is made which leaves the business owner with no practical alternative but to submit to an extortionate loan agreement for example, then that would most likely be held as illegal by a judge.

English legal transplant into Scots law to help little David?

A further difficulty for business owners in Scotland is that the legal remedy of economic duress is an English legal concept which is hardly recognised north of the border.

While there are Scottish cases going back hundreds of years where contracts have been set aside due to threats of physical violence, there are precious few cases involving economic pressure.

A pessimist might argue that it is a leap too far to go from physical threats to economic threats in order to offer a remedy to business owners in Scotland overpowered by their banks or financial institutions’ illegal demands.

However all is not lost: over the years there have been a considerable number of alien English doctrines which have been accepted into Scots law by the House of Lords, which is now the UK Supreme Court. In addition, Scottish Courts have been influenced by English legal principles, a recent example being interpretation of contract.

So there would seem to be no reason why a Scottish business owner could not raise an action against a bank under the existing Scottish common law and seek to persuade the Court to merely enlarge the scope of the concept from threats of physical violence to threats of economic ruin.

The legal recipe for economic duress

So what are the key ingredients that a Scottish business owner needs to raise court proceedings against his or her bank?

1. The bank’s pressure must leave the borrower with little practical choice i.e. the classic “take it or leave it” offer.

2. The bank’s pressure must be illegal. For example, the bank may have acted in bad faith by promising to do something such as agree a renewal of an existing overdraft and then reneging upon the promise to the business owner’s detriment. The red flag for illegality is if it can be said that the bank has breached the contract or has threatened to breach the contract.

3. The illegal pressure must have been the key factor which induced the business owner to enter into the contract or agree to amend the contract.

4. The bank’s ‘victim’ should be careful not to do anything following the  illegal economic pressure that could be construed as validating or accepting the onerous terms of the contract. It is essential that the pressured business owner takes reasonable steps to renounce the contract or ‘protest’ as soon as possible after the contract has been agreed.

Conclusion

Business owners who are pressured by large financial institutions such as the large clearing banks should be alert to the potential legal remedy of economic duress which in these difficult times could be the critical difference between the survival and demise of their business.

Has a metaphorical gun been put to your head by your lender? Do you think you may have suffered illegal economic pressure at the hands of a financial institution? If so, MBM Commercial LLP’s experienced and acclaimed banking disputes team may be able to assist you.

For more information, please contact Neil Morrison, a solicitor in the Banking Disputes team, on 0131 226 8200 or email him: neil.morrison@mbmcommercial.co.uk

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