Economic Duress Flashcards
What is Economic Duress?
A definition of economic duress which perhaps best reflects the current position was set out by Mr Justice Dyson:
The ingredients of actionable duress are that there must be pressure,
(a) whose practical effect is that there is compulsion on, or a lack of practical choice, for the victim,
(b) which is illegitimate, and
(c) which is a significant cause inducing the claimant to enter into the contract … [emphasis added]
What is the Key Case for Economic Duress?
DSND Subsea Ltd v Petroleum Geo Services ASA [2000] 7 WLUK 875
Economic Duress requires there to be a Lack of practical choice
The pressure must result in a lack of practical choice for the victim. They have no practical alternative but to acquiesce to the demand.
Which case demonstrates this?
Carillion Construction Ltd v Felix (UK) [2001] BLR 1
In Carillion Construction Ltd v Felix (UK) [2001] BLR 1, Carillion was the main contractor employed to carry out the construction of an office building. Carillion subcontracted the supply of the cladding to Felix. Felix’s work was delayed, and there was no certainty as to when it would be completed.
Although Felix’s liability to Carillion for this delay was potentially substantial, Felix was in a strong position to renegotiate with Carillion. Felix knew that a number of trades were dependent upon it completing the work in order to ensure the building was watertight. Moreover, Felix knew that it would be impossible for Carillion to find an alternative supplier in time to meet the main contract completion date.
Felix got Carillion to agree to pay substantially more money to Felix in return for Felix delivering the cladding by the original deadline in the contract. Before paying the money, Carillion wrote a letter protesting against Felix’s demand.
The court accepted that Carillion had paid this sum under duress. If Carillion were to complete the main project on time, and so avoid the heavy fees for late completion, they had no viable alternative but to agree to Felix’s demands. It was held that it would be unrealistic to expect the other party to seek a mandatory injunction because of the delay of six weeks caused if Carillion had sought such an injunction. Following the test set out in DSND Subsea Ltd v Petroleum Geo Services, Mr Justice Dyson held that there was illegitimate pressure or a threat, the practical effect of which was that Carillion had no practical choice but to enter into the agreement.
In Atlas Express v Kafco Ltd [1989] 1 All ER 641, the claimant, a firm of road hauliers, contracted with the defendants to…
(Lack of practical choice example)
…deliver cartons of basket ware to various branches of a particular store throughout the UK. A manager of the claimant’s firm fixed the contract price at a rate of £1.10 per carton, based on an estimate that each load would consist of between 400 and 600 cartons. The first load fell significantly below his estimates, comprising only 200 cartons. The manager then refused to take any further loads unless the defendant agreed to renegotiate the contract price to a minimum of £440 per load. The defendant, a small organisation, was heavily reliant on the contract with the store and unable to find another carrier, so reluctantly agreed to pay the imposed minimum charge. At a later stage, the defendant refused to pay the minimum charge and, when sued for the transport charges, lodged a claim of economic duress as a defence. It was held that, where a party has no alternative but to accept revised terms that were detrimental to its interest, this amounted to economic duress.
In B & S Contracts and Design Ltd v Victor Green Publications Ltd [1984] ICR 419, the plaintiff contracted to erect stands at Olympia for the defendant. A week before the exhibition, the…
(Lack of practical choice example)
…plaintiff’s workmen went on strike, refusing to return to work until a pay demand was met. The plaintiff told the defendant that, unless the defendant paid an additional £4,500, the contract would be cancelled. The plaintiff made it clear that the amount to be paid was to be in addition to the contract price.
The defendant paid the amount demanded by the plaintiff so as to get the contract performed: the cancellation of the contract would have caused serious damage to the defendant’s economic interests. However, the defendant then deducted this figure from the contract price paid to the plaintiff.
The plaintiff then claimed the balance. It was held by the Court of Appeal that, since the cancellation of the contract would have caused serious damage to the defendant’s economic interests, they had no practical choice but to pay the sum demanded by the plaintiff and so it was paid under duress. The plaintiff was therefore not entitled to the extra £4,500 which the defendant had paid under economic duress.
In Kolmar Group AG v Traxpo Enterprises PVT Ltd [2010] EWHC 113 (Comm) the defendants reneged on an original agreement to sell…
(Lack of practical choice example)
…sell a quantity of methanol at a specified price for shipment within a set timeframe. Knowing that the claimants needed the methanol to satisfy an order for a very important client who had an urgent requirement for it, the defendants gave the claimants a “take it or leave it” proposal resulting in delivery of a lesser quantity of methanol at an increased price.
The Court held that the claimants, in the circumstances, had no alternative but to accept the revised proposal. The defendants had made demands that they knew would cause the claimants loss that were backed by coercive and unlawful threats that they would not perform their obligations, and the claimants had complied with those demands as a result of those threats.
Concerning illegitimate pressure Dyson J stated that the following created a subset of factors to consider when assessing the legitimacy of the pressure:
- whether there has been an actual or threatened breach of contract; breach
- whether the person allegedly exerting the pressure has acted in good or bad faith; faith
- whether the victim protested at the time; protest
- whether he affirmed and sought to rely on the contract; affirmation and reliance
BF PAR
What is a threatened breach of contract? Eg?
A threat to breach a contract is an unlawful threat.
A breach of contract is a failure to comply with the terms of the contract, and it will normally give rise to a right of the innocent party to claim damages.
A threat to breach a contract will therefore usually amount to illegitimate pressure. The cases of Carillion and Atlas mentioned earlier in this element are examples of this. In Carillion, Felix’s late completion of works was a breach of contract, as was Atlas’ refusal to carry further loads of goods in Atlas.
When is pressure applied in good or bad faith? Eg? Contrast this with DSND.
A threat to breach a contract is an unlawful threat. If this unlawful threat is made for illegitimate ends, then this threat is made in bad faith and will almost inevitably lead to a finding of duress. In both Carillion and Atlas, the party exerting the pressure was threatening to breach its contract.
This threat was made in order to extort money from the other contracting party that they were not entitled to. There was no legitimate basis for the demand; it was a claim in bad faith amounting to duress.
Contrast this with DSND where the pressure was found to be exerted in good faith. In this case, DSND threatened to suspend its work under the contract until Petroleum Geo’s provision of insurance and indemnities covering the safety of the deep sea divers under the contract was clarified. In the face of that threat, Petroleum Geo (PGS) entered into an agreement to make further payments and provide further reassurances to DSND. PGS later argued that this was entered into under duress. The court held that this was not illegitimate pressure,
Mr Justice Dyson concluding that the pressure exerted by DSND was reasonable behaviour by a contractor acting bona fide in a very difficult situation.
In practice the dividing line between legitimate commercial pressure exerted in good faith and unconscionable illegitimate pressure amounting to duress may be quite a fine one.
If Part A increases the price of its services midway due to increased logistical costs can this be economic duress?
Yes. Consider a contract by which Party A agrees to transport goods for Party B at an agreed price. If the cost of petrol rises, it may become difficult for Party A to continue to transport the goods at that price.
But on the analysis set out above, if Party A seeks to renegotiate the contract under threat of breaching it, it risks the contract being unenforceable due to duress.
You might consider that this is harsh, and that Party A’s conduct should not amount to illegitimate pressure. However, the commercial reality is that contracting parties are expected to consider risks (such as changes in the cost of material / labour) when entering into a contract. Part of the bargain is that Party A accepts this risk (note that if the cost of petrol falls rather than rises, Party A effectively gets a boost in the profit earned under the contract).
What if Party A does not want to take this risk? It can enter into a shorter contract (which reduces the risk), or none at all. Or alternatively, it can include a ‘price escalation’ clause in the contract, which would provide for the price payable by B to rise in stated circumstances – such as if the cost of petrol rises.
In the context of illegitimate pressure how does the victim protesting work? Eg?
The victim should demonstrate evidence of protest at the time the alleged duress was exerted.
In Carillion, before paying the money Carillion wrote a letter protesting against Felix’s demand. Carillion’s registering of their dissatisfaction was material in their claim succeeding. This can be contrasted with North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd and Another (The Atlantic Baron) [1979] QB 705. Hyundai (shipbuilders) agreed to build a tanker for North Ocean (a shipping company), but refused to deliver the ship unless North Ocean agreed to pay 10% more than the contract price. The court readily concluded that this threat to breach a contract was illegitimate but ultimately North Ocean Shipping’s claim failed because they failed to protest at the threatened breach (in addition, as explained further below, it was not until some eight months later that they claimed the return of the extra 10 per cent).
The cases highlight the difficulty of the party in the position of the victim of economic duress. Very often they are caught between a rock and a hard place. If they protest too loudly during the performance of the contract, the threatened breach may materialise. If, however, they fail to protest, that failure may be taken as acquiescence in the changed circumstance.
In the context of illegitimate pressure, how does the victim affirm? Eg?
One of the principal reasons the claimants in North Ocean Shipping Co were unable to get relief for the alleged duress was that they delayed in taking action to set aside the contract.
It was not until some eight months later that the owners claimed the return of the extra 10 per cent. It was suggested that they did not seek the return of the money sooner because they were concerned about the delivery of a sister ship also being built for them. However, the arbitrators found that this fear was groundless. It was held that, although the agreement to pay the extra money might initially have been voidable for economic duress, the fact that the shipping company waited eight months before taking steps to avoid the contract meant they lost their right to have the new contract for the increased payments set aside. They had, in effect, affirmed a variation to the contract.
Economic duress results when one party has a lack of…
…practical choice as to whether to enter / vary the contract, and this has been caused by illegitimate pressure.
succeed in establishing economic duress it must be shown that the agreement…
…would not have been entered into but for the duress.
To succeed in establishing economic duress it must be shown that the agreement would not have been entered into if there had not been the duress. After reviewing the authorities, Mance J (as he then was) stated in the case of Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620:
“The minimum basic test of subjective causation in economic duress ought, it appears to me, to be a “but for” test. The illegitimate pressure must have been such as actually caused the making of the agreement, in the sense that it would not otherwise have been made either at all or, at least, in the terms in which it was made. In that sense, the pressure must have been decisive or clinching (at p. 636)”
This ‘causation’ aspect can be contrasted with the situation in relation to duress to the person, where duress will be established if the duress is one factor influencing the wronged party’s behaviour (it need not be a decisive factor).
