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Contract Law

Introduction

In today’s economic climate businesses often exert commercial pressure during contract negotiation stages. This is a normal part of the process and parties to a contract generally know when pressure being exerted is lawful. Although there is a difference between commercial negotiation and illegitimate pressure, it is often difficult to distinguish between the two.

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Furthermore, because economic duress can arise from pressure that is not in itself unlawful, parties may be unaware that the pressure they are subjecting a party to a contract is actually economic duress. Despite this, if a court finds that one party to a contract has exerted illegitimate pressure on another party, the innocent party may be able to establish a claim of economic duress. Given how uncertain the economy is at present, hard bargaining is a common form of negotiation, though it is vital that businesses are aware of the risks when exerting pressure that is likely to be deemed illegitimate. It is unclear how this distinction can be made, nonetheless, which suggests that further clarity is needed within this area. This study intends to explain the developments that have taken place in the doctrine of economic duress and why the courts perceived a need for a more robust approach in light of the Williams v Roffey Brothers and Nicholls (Contractors) Ltd [1991] 1 QB 1 case.

Duress

Duress is a common law defence that allows a contract to be set aside in instances where one party has been subjected to force or pressure from the other party to enter into the contract. Duress has been defined as “making someone do something against his will, or making someone perform an illegal act, by using threats, coercion or other illicit means” (Dictionary, 2014: 1). Duress is basically the use of unlawful means to force another to perform an act by either threatening them or performing an act of violence. The party claiming duress will be required to show that they did not have a choice but to enter into the contract (Cserne, 2009: 57). Economic duress, on the other hand, is a fairly new phenomenon that is becoming an important tool for determining whether a contract that has been entered into is enforceable or not. Economic duress happens when a person’s economic interests are damaged from being forced or coerced into entering into a contract. This type of duress has been defined as the “unlawful use of economic pressure and/or threats intended to overcome the free will of a person, in order to force him or her to an involuntary agreement or to do something that he or she would not otherwise do” (Business Dictionary, 2014, 1). Economic duress is essentially a contract law defence that allows a person to dispute the formation of a binding contract by arguing that that they were forced to enter into the contract. Previously, parties to a contract could only rely on the doctrine of consideration for protection when they were being subjected to economic duress. Consideration is the price that one party will pay for another party’s promise (Card et al; 2003: 63); Collins v Godefroy (1831) 1 B&Ad 950. The doctrine of consideration does not allow parties in a contract to insist on further payments to perform tasks they are already required to perform under the contract simply because they are in a stronger bargaining position; Stilk v Myrick (1809) 2 Camp 317.

Economic Duress and Commercial Pressure

It is now widely accepted by the courts that undue commercial pressure can amount to duress. The doctrine of economic duress has evolved significantly from various trade union decisions including; Universe Tankships v International Workers Federation (“The Universe Sentinel”) [1983] 1 AC 366 and Dimskal Shipping v International Works Federation (“The Evia Luck”) [1992] 2 AC 152. In The Universe Sentinel, a trade union, which had blacklisted a ship, forced the owner to provide payment before they would remove the ship from the black list. As there would have been disastrous consequences if the ship could not sail, the owner made the payment. Because the ship owner had no other practical choice but to make the payment, he later brought a successful claim for the recovery of the money by establishing economic duress. Similarly, in The Evia Luck a trade union insisted that a ship owner signed various contractual documents so that his ship could sail, which was found by the court to be a form of economic duress. In order to make an economic duress claim, there are a number of elements the claimant will need to be established. These are; a) that the pressure was illegitimate; b) that the pressure was a significant cause that induced the claimant to enter into the contract; and c) that the practical effect of the pressures means that the claimant has no other choice but to enter into the contract (Ohrenstein, 2013: 2). The claimant will be entitled to avoid the contract and claim restitution of any monies that have been paid under it if these elements can be established. In deciding what amount to illegitimate pressure, the court will take a range of factors into account.

For example, in DSND Subsea Ltd v Petroleum Geo Services ASA [2000] EWHC 185 it was made clear that the court will be required to consider whether the breach of contract was an actual or threatened breach; whether the person whom exerts the pressure has acted in good or bad faith; whether the claimant had any real or practical alternative but to give in to the pressure; whether the claimant protested at the time; and whether the claimant sought to rely on the contract. One of the most successful forms of economic duress is a threat to breach a contract. In Siboen and The Sibotre [1976] 1 Lloyd’s Rep 293 charterers of two ships threatened to break their charterparties by refusing to pay the agreed charter rate if the rate was not lowered. The owners of the ships had been informed that the charterers had no substantial assets and that the charterers would otherwise go into liquidation if the charter rates were not lowered. This information was not actually true but it caused the owners to reduce the rates nevertheless. It was found that economic duress could apply to this situation as all of the relevant factors were present. Since this decision, the courts seem to have accepted that economic duress is coercive and therefore worthy of the same relief as duress to the person or property (Chen-Wishart, 2012: 316).

In spite of this, the practical application of economic duress has been subject to much confusion and it has been questioned when, if ever, renegotiations should be enforced. It would seem, under the doctrine of consideration, that renegotiations can never be enforced on the basis that “no additional consideration supports the promise to pay more or accept less” (Chen-Wishart, 2012: 316). Under the promissory estoppel doctrine, the promise to pay the same for less can be enforced in limited circumstances, though this does not apply if illegitimate pressure has been exerted. Therefore, if it can be demonstrated that illegitimate pressure has been applied to the renegotiation of a contract, that contract will not be enforceable. Because commercial contracts are extremely competitive, it is likely to be the case that some form of pressure will always be applied. Though the question to be determined is whether the pressure that has been applied is legitimate or not. This is likely to be extremely problematic and thus cause a great deal of complexity for the courts. As exemplified in the cases above, threats to blacklist a ship and refuse its release may constitute duress. Further examples of where economic duress has occurred can be seen in the cases of North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705 and Pao On v Lau Yiu Long [1979] UKPC 17 where threats to terminate a contract in the absence of a renegotiation is also illegitimate unless it can be legally justified. What will be deemed “legally justified” is largely a matter to be determined based upon individual facts and circumstances, though there is likely to remain a lot of confliction in this area. In Williams v Roffey Brothers Ltd [1991] EWCA Civ 5 the Stilk case was severely limited by the courts. Here, the consideration requirement was extended to include “practical benefits” and thereby covered the promise to perform an existing contract.

Here, a number of contractors promised to refurbish 27 flats with a sub-contractor performing the carpentry. Before the flats were finished, the sub-contractor realised that he had under-priced the contract and was resultantly facing financial difficulty. The main contractors offered the sub-contractor a financial inducement to finish the contract on time. It is trite law that consideration is needed for a party to that contract to be able to sue on it. Since the sub-contractor was doing no more than he was already bound to do under the contract, consideration was lacking. Surprisingly, it was held by the court that because the contractors had received a benefit from the sub-contractor, in that they avoided the penalty clause of the main contract, the sub-contractors claim was successful. This did not mean that consideration was present as the benefit did not move from the promisee, although there was a clear departure from the orthodox principle of consideration principle. The doctrine of consideration maintains that a contract will not be supported by the performance of an existing duty unless that duty exists by virtue of a third party contract (Noble, 1991: 141). This decision conflicts with the decision in Stilk which demonstrated that consideration needs to be of economic value to be deemed good consideration and that it needs to move from the promise as also shown in; White v Bluett (1853) 23 LJ Ex 36; Thomas v Thomas (1842) 2 QB 851; Shadwell v Shadwell (1860) 9 CBNS 159; and Scotson v Pegg (Scotson v Pegg (1861) 6 H & N 295). It has also been argued by Cheshire et al; that; “the time has come to recognise formally the alternative definition of consideration and admit that the rationale behind the refusal to enforce some types of consideration is pure policy” (Cheshire et al; 2012; 77).

Arguably, it appears that the consideration principle is rather outmoded and in need of reform so that a more robust approach to economic duress can be taken by the courts. At present, much confusion arises as to when economic duress can be used as a defence. Judges thus need to err on the side of caution to prevent commercial pressure being mistaken for economic duress and vice versa. Still, as stressed by the court in Adam v Opel Gmbh v Mitras Automotive [2007] EWHC 3481; “the list of matters to be considered in assessing legitimacy is not exhaustive, and the weight to be attached to each of them will depend on the facts of the individual case.” Furthermore, it was also stated in the case that the decision to be made will involve some element of value judgement when considering whether the pressure that was exerted on the claimant crossed the line from that which must be accepted in normal robust commercial bargaining. It is clear from the decision in this case that the courts have made some attempts to provide clarity in this area and that each case will be decided on its own facts. In the more recent case of Kolmar Group AG v Traxpo Enterprises Pyt Ltd [2010] EWHC 113 it was evidenced that a contract variation between a supplier and a customer will unlikely amount to duress if the supplier is unable to perform a contract as a result of financial difficulties that will cause the supplier to become insolvent. Another problem that arises when it comes to economic duress is whether lawful conduct can amount to illegitimate pressure. Whilst it is possible, it is also extremely rare as shown in CTN Cash and Carry Ltd v Gallaher Ltd [1993] EWCA Civ 19; GMAC Commercial Credit Ltd v Dearden [2002] All ER (D) 440 (May) and Wright v HSBC Bank plc [2006] EWHC 930 QB.

Consequently, economic duress will continue to pose many problems as there will always be a debate as to whether particular circumstances may or may not give rise to a claim for economic duress. Because of the uncertainty within this area, it is evident that a more robust approach needs to be taken so that greater clarity and consistency can be provided. Economic duress has also been criticised for being causation-led, thereby meaning that a lack of causation will prevent a successful claim from being made. In Pao On v Lau Yiu Long [1979] UKPC 2 it was pointed out by Lord Scarman that in deciding whether causation was present, it will need to be considered whether the claimant; a) protested; b) had a practical alternative open to him; c) received independent advice; and d) acted promptly. This decision has been criticised for being inconclusive and failing to take into account the fact that claimants may not think that there is any point in protesting. This was recognised by Chen-Wishart when it was argued that; “these factors are inconclusive. The victim may not protest because he sees no point in it or he may not wish to antagonise the coercing party whose performance he needs” (Chen-Wishart, 2012: 318). It is clear that the facts and circumstances of each case will be the determining factor as to whether the claimant has suffered economic duress or not. Because of the uncertainty that exists in this area, however, it is often difficult for those entering into commercial contracts to acknowledge that they are exerting pressure that is considered illegitimate, especially when there is a possibility that lawful pressure will also be capable of amounting to economic duress. As a result of this, Young warns against exerting commercial pressure that the courts may possibly consider economic duress: “Abusing your upper hand can leave the strong open to claims” (Young, 2012: 23).

Conclusion

Overall, whilst the doctrine of duress is well established in English law, the doctrine of economic duress still remains largely uncertain. This generally arises from the difficulty of distinguishing between legitimate and illegitimate economic duress. As such, it is up to the courts to decide when a person’s economic interests have been damaged from being forced or coerced into entering into a contract. Hence, the court will be required to consider whether the re-negotiation of the terms of the contract were lawful and whether the person being subjected to the economic duress, should be entitled to rescind the contract that they entered into. This is an important defence in ensuring that parties to a contract have equal bargaining power. Nevertheless, the practical application of economic duress has been subject to much confusion over the years, which may result from the reasoning that has been provided by the courts. There appears to be a lack of consistency that is being provided, which highlights the need for future reform to this area. Whilst there is a difference between commercial negotiation and illegitimate pressure, it has proven extremely difficult to distinguish between the two, especially since lawful conduct can also amount to illegitimate pressure. In order to provide clarity to this area, it seems as though a more robust approach is therefore needed by the courts.

References

Business Dictionary. (2014) Economic Duress, [Online] Available: http://www.businessdictionary.com/definition/economic-duress.html [07 July 2014].

Card, R. Murdoch, J. and Murdoch, S. (2003) Estate Management Law, OUP, 6th Edition.

Carr, N. (2011) Walking the Line – The Balance Between Legitimate Negotiation and Economic Duress, Available [Online]: [07 July 2014].

Chen-Wishart, M. (2012) Contract Law, Oxford University Press.

Cserne, P. (2009) Duress in Contracts: An Economic Analysis, Contract Law and Economics, Volume 6, 2nd Edition.

Furmston, M. P. Cheshire, G C. and Fifoot, C H. (2012) Cheshire, Fifoot and Furmston’s Law of Contract, Oxford University Press: London.

Dictionary. (2014) Duress, [Online], Available: http://www.yourdictionary.com/duress [07 July 2014].

Noble, M. (1991) For Your Consideration, New Law Journal, Volume 141, Issue 1529.

Ohrenstein, D. (2013) Key Developments in Contract Law: Economic Duress, Radcliffe Chambers, [Online] Available: http://www.radcliffechambers.com/media/Misc_Articles/Key_Developments_in_Contract_Law_-_Economic_Duress_2013.pdf [07 July 2014].

Young, A. (2012) When Pressure Turns to Duress, Construction Law Journal, Volume 23, Issue 5.

Cases

Adam v Opel Gmbh v Mitras Automotive [2007] EWHC 3481

Collins v Godefroy (1831) 1 B&Ad 950

CTN Cash and Carry Ltd v Gallaher Ltd [1993] EWCA Civ 19

Dimskal Shipping v International Works Federation (“The Evia Luck”) [1992] 2 AC 152

DSND Subsea Ltd v Petroleum Geo Services ASA [2000] EWHC 185

GMAC Commercial Credit Ltd v Dearden [2002] All ER (D) 440 (May)

Kolmar Group AG v Traxpo Enterprises Pyt Ltd [2010] EWHC 113

North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705

Pao On v Lau Yiu Long [1979] UKPC 17

Scotson v Pegg (Scotson v Pegg (1861) 6 H & N 295)

Shadwell v Shadwell (1860) 9 CBNS 159

Siboen and The Sibotre [1976] 1 Lloyd’s Rep 293

Stilk v Myrick (1809) 2 Camp 317

Thomas v Thomas (1842) 2 QB 851

Universe Tankships v International Workers Federation (“The Universe Sentinel”) [1983] 1 AC 366

White v Bluett (1853) 23 LJ Ex 36

Williams v Roffey Brothers and Nicholls (Contractors) Ltd [1991] 1 QB 1

Wright v HSBC Bank plc [2006] EWHC 930 QB