Distinguish Between Legitimate Commercial Pressure

Although it is a common practice for a party to subject another to high commercial pressure when negotiating a contract, there is a fine line between tough negotiations and actual economic duress. Unfortunately, there are currently no clear guidelines as to where that line is drawn. English system as a whole does not normally concern itself with the process of commercial bargaining and how the deal was reached, however, it was decided that measures had to be taken in the circumstances where that pressure was being exceeded. Economic duress is a relatively new mechanism used by the court to distinguish the difference between illegitimate pressure and orderly commercial bargaining. Prior to being able to set a contract aside where that pressure was being exceeded, the court relied on doctrine of consideration only (Stilk v Myrick [1809]). One of the cases which opened the way to the doctrine of economic duress was North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1979]. In our days, there are few indications that help the court to discern the difference. These directions come from the cases decided in the past.

The doctrine of economic duress was drawn out of the doctrine of consideration; that for an extra demand extra consideration must be given as otherwise the contact can be said to be voidable. The duty rule, which was challenged in Williams v Roffey Brothers & Nicholls (Contractors) Ltd [1991], said that the promise to pay more with a threat not to deliver in accordance with their contractual obligation (consideration) is not binding. The problem with the existing duty rule was that it ruled out a promise to pay more in all types of circumstances, even where it was absolutely reasonable and legitimate to pay.

In the case of Universe Tankships Inc of Monrovia v International Transport Workers Federation, The Universe Sentinel [1983] Lord Scarman explained that duress does not leave a party without a choice, but puts that party in a position where no other practical solution is available. He stressed that although the duress victim accepts the contract terms intentionally, their will is being coerced. Atiyah criticized this view and argued that absence of consent does not determine duress, “but the nature of the threat which has been made”.

It is important for the party claiming signing under duress to prove that there was indeed no other alternative, but to accept the conditions given under illegitimate (excessive) pressure, in which case, they must also prove that they have protested against such proposal and took all possible and necessary steps to avoid the deal. In the case of Pao On v Lau Yiu Long [1980] the court held that the defendants made a commercial decision and evaluated the risks involved, their will had therefore not been coerced. Lord Scarman stated in his judgment that, as it was decided in Maskell v Horner [1915], in order to recognize whether plaintiffs acted voluntarily or not, they must be able to prove that a true consent was never given by the party and that they were left without any other practical solution, including any suitable legal measure. Moreover, the claimants must seek independent advice and show that after entering the contract they sought ways to avoid it. In the case of Pao On v Lau Yiu Long [1980], however, the defendants have voluntarily signed the indemnity, which indicated that they have accepted the risks. The court failed their claim.

In the case of B & S Contracts & Design Ltd v Victor Green Productions Ltd [1984] the defendants were left without any alternative, but to pay the demanded sum, as they were otherwise facing significant losses and taking the plaintiffs to court for breach of contract would have been too damaging at the time. The court found that there had been duress. Lord Justice Kerr also noted that “a threat to break a contract unless money is paid by the other party can, but by no means always will, constitute duress”. Similarly in Adam Open GmbH v Mitras Automotive (UK) Ltd [2008], upon receiving a termination notice from Opel, Mitras sought ‘compensation’ and increased the supply price. As Opel only had twenty four hours of supply left, they had to agree to the terms, but later sought repayment. The judge concluded that there had been duress, as Opel was left with no alternative but to meet the demands of Mitras.

The pressure to which a party is subjected to must be illegitimate. It was confirmed in Barton v Armstrong [1976] that the illegitimate pressure must lay a cause which induced the other party to act as it did. In Williams v Roffey Brothers & Nicholls (Contractors) Ltd [1991] and Alec Lobb (Garages) Ltd v Total Oil GB Ltd [1985] there was no economic duress, as the presence of illegitimate pressure was not proven in either cases. Lord Scarman explained illegitimate pressure in the case of Universe Tankship Inc of Monrovia v International Transport Workers Federation, The Universe Sentinel [1983]: “economic pressure can in law amount to duress…the elements of the wrong of duress are (1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted. There must be pressure, the practical effect of which is compulsion or the absence of choice”.

One of the decisive factors in the case of North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1979] was that the buyer of the tanker unwillingly agreed to pay the demanded extra money but under protest. This protest, as noted by Lord Justice Mocatta was one of the components amounting to duress. The claim failed because of the timing – the buyer left 8 months before demanding the paid excess sum back, which was crucial in their claim in the court. As mentioned above in the quote of Lord Justice Kerr, in this case it was also concluded that a threat to break a contract does not automatically constitute economic duress, but does generally amount to unacceptable commercial pressure.

Very similarly to the doctrine of economic duress, which can be defined by the use of illegitimate pressure, I would like to briefly mention the doctrine of undue influence. In Bank of Credit and Commerce International SA v Aboody [1990], the Court of Appeal classified this doctrine into two types: actual and presumed. Under actual undue influence the claimant must prove that he was induced to sign a contract or agree to a transaction under applied undue influence; whereas in presumed undue influence the claimant only has to prove that there was enough trust and reliance in between the parties that the side committing the wrong abused that relationship by exerting undue influence and inducing them to enter an ambiguous transaction. However, in Royal Bank of Scotland plc v Etridge (No. 2) [2001], the House of Lords concluded that the definition of ‘presumed undue influence’ is not accurate; as there can be no presumption of influence and that it is undue at the same time. The presumption indicates that influence was applied, but does not automatically mean that it was undue. Presumed influence can only be said to be undue, if there is evidence of the circumstances being suspicious, such as the nature of the transaction. The main difference between duress and undue influence is that a party enters a contract willingly but under undue influence, where as in duress a party signs reluctantly but has no other practical choice available to them. These two types of contracts signed under illegitimate pressure are not to be confused.

Economic duress is one of the most complicated and an unclear area in law, as it is difficult for the judges to establish some of the important factors which amount to duress. Apart from those given above, these factors also include questions such as: what sort of environment was the agreement signed in; was the contract affirmed by the victim party; did the victim party rely on these terms; did the victim seek an independent legal advice; did a negotiation take place; did the respondent party act in good or bad faith? All of these issues were discussed by the courts in The Atlantic Baron [1979], in Pao On v Lau Yiu Long [1980], in B & S Contractors v Victor Green Publications [1984], in Atlan Express v Kafco [1989] and a number of other cases of economic duress. It is also important for the victim party to show that they tried to avoid the agreement they entered into because of the pressure. As such, the House of Lords found that under the English Law the agreement in The Evia Luck [1991] was voidable, as it was obtained under illegitimate pressure (blacking the ship) and awarded the plaintiff the appeal.

In CTN Cash & Carry v Gallagher [1994] a concept of a ‘lawful act duress’ was discussed, but the Court of Appeal was reluctant to introduce and accept it. Lord Justice Steyn explained: “Can lawful pressure count? This is a difficult question, because…the judges must say what pressures…are improper as contrary to prevailing standards. That makes the judges…the arbiters of social evaluation.” His statement shows just how uncomfortable the court was in accepting the idea of introducing the definition of a ‘lawful pressure’. On that basis, being unwilling to grant the defender the money they weren’t entitled to, it was considered by Sir Donald Nicholls that “in such circumstances the money might be reclaimed in restitution on the basis that the defendant had been unjustly enriched”.

I would like to conclude by saying that, despite the difficulties and reluctances from the judges in courts, economic duress is an active and fully recognised doctrine. It is a necessary piece of legislation which helps protect the rights of more vulnerable parties in contracts and is able, taking into account all of the above factors given, to identify and differentiate between illegitimate pressure and legitimate, tough commercial bargaining.

Finally, in the words of a great American legal scholar and a philosopher:

“To protect certain kinds of freedom and to suppress other kinds, is one of the principal functions of a legal system…”