Economic Duress and Business Contracts

Duress is a means by which a person may be released from the obligations under a contract where unlawful threats have been made. In the commercial context this vitiating factor may be alleged where illegitimate threats have been made that would affect a person’s economic interests. The duress is of the sort that deprives the person of consent in entering the contractual arrangement, although the test at law is that the person is exposed to pressure and is deprived of choice that would otherwise be available. There must be effectively no choice other than to comply with the request or the demand to be successful in a claim for duress.

Legal Foundation

The modern law of duress stems from the foundations laid in common law, whereby persons subject to actual or threatened with physical violence were able to obtain an order that the contract subsequently entered into was void ab initio. The application of duress has since expanded, so that the duress may be economic in nature. There is established law dealing with duress over goods, where threats have been made that they may be taken, damaged or destroyed. Where money has been paid and there was no obligation to pay it, and the payee was under an urgent and pressing demand to pay the money on threats of damage, seize or retention of goods, it may be recovered. The payer would be well advised in such circumstances to make it clear that the payment was being made under protest. 

In the case of Pao On v Lau Yiu Long (1979), Lord Scarman stated that the essence of the doctrine of economic duress was that "there must be coercion of will such that there was no true consent … it must be shown that the contract entered into was not a voluntary act".

Economic Duress

A contract may also be avoided where a person enters into a contract as a result of threats or pressure that does not involve threats of bodily harm, and is recognition that there are improper forms of pressure to apply in commercial transactions. The threat must be coercive to the extent that the pressure is unlawful, and caused a serious threat to the economic interests of the party suffering the duress.

Economic duress may apply to the formation of the contract in the first place or subsequent variations of the contract. The pressure must be of a nature that is illegitimate and was a significant cause inducing the person to agree to the terms of the contract. The threats made and pressure asserted must be particularly coercive and of some significant weight or gravitas. The victim’s conduct must be affected in a significant way by the duress, and a reasonable alternative must not be available at the time to the victim of the duress.

Coercion of Will

Coercion of will depends upon the individual circumstances in each case, however Lord Scarman suggested that the following factors may also be considered:

1. Did the victim have an alternative course available to him?
2. Did the victim protest?
3. Did the victim obtain independent advice?
4. Did the victim take steps to avoid the contract?

Illegitimate threat

The pressure exerted over the other party must be illegitimate to make it improper. It is not sufficient that there is exertion of mere pressure. In the case of Universe Tankerships of Morovia v ITWF (1983), a union refused to let a tanker leave port until they had paid certain money to them. The House of Lords held that this amounted to illegitimate pressure and therefore, economic duress. Threats which are not illegitimate will not make the contract voidable. Examples of legitimate threats include a threat not to enter into a contract, a threat to institute civil proceedings or a threat to call the police.

The line which divides legitimate and illegitimate pressure is unclear. In the case of CTN Cash and Carry v Gallagher, CA (1994), it was suggested that a legitimate threat could amount to economic duress. The case of DSND Subsea Ltd v Petroleum Geo-Services ASA (2000), provides the most recent definition of ‘economic duress’ where Dyson J stated that:

"The ingredients of actionable duress are that there must be pressure, (a) whose practical effect is that there is compulsion on, or lack of practical choice for, the victim, (b) which is illegitimate, and (c) which is a significant case inducing the claimant to enter into the contract. In determining whether there has been illegitimate pressure, the court takes into account a range of factors. These include whether there has been an actual or threatened breach of contract; whether the person allegedly exerting the pressure has acted in good or bad faith; whether the victim had any realistic alternative but to submit to the pressure; whether the victim protested at the time; and whether he affirmed and sought to rely on the contract … [i]llegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining."

Duress will render a contract voidable and will entitle the other party to have any money set aside for the recovery of any money paid. However, where a contract has been affirmed, despite any illegitimate pressure, it can not be rescinded. In North Ocean Shipping Co. v Hyundai Construction Co., The Atlantic Baron (1979), the court held that even though there had been economic duress, the plaintiff was not entitled to rescind the contract as they had affirmed it.

Reasonable Alternatives

Duress is characterised by a lack of choice. Where an alternative is available to the victim the vitiating defence will not be available, however the alternative must be reasonable. Supposing a supplier under contract supplied goods under an exclusive supply arrangement. The victim company would be entitled to claim the benefit of duress in the event that the supplier refused to supply the goods unless a substantial premium was paid, provided there was not some other supplier who provided the same goods at a roughly equivalent rate.

The following descriptive examples may give rise to a claim for economic duress:

1. making threats without any legal justification;
2. threatening to commit some unlawful act;
3. threats to terminate a contract, where the threat is properly regarded as illegitimate pressure;
4. applying pressure in bad faith;
5. making threats that are calculated to seriously damage another, such as blackmail;
6. threats to prosecute where the charge is known to be false;
7. requirements for extra payments to be made over and above the original contract price; and
8. using knowledge of the affairs of the person suffering the duress to apply illegitimate pressure.