Three Scenarios Under Review

This paper advises Loadstar Freight Ltd (hereafter “Loadstar”) as to their contractual rights and obligations arising from the three scenarios under review. Relevant case law and authority is applied in order to sustain the following analysis. Conclusions are also drawn in the form of advice justified on the appropriate legal matrix

The lorry hire contract entered into with Benz Ltd

The most significant questions to be answered here are whether the defective nature of the lorry, which hired by Loadstar, suffices to constitute a breach of the contractual clause that the lorry hired will be “roadworthy” and whether the clause in question should be treated as a condition of the contract, as an intermediate (or innominate) term, or whether it should be treated as a mere warranty.

Firstly, It is important to determine the status of the relevant clause because different classes of contractual term give rise to different remedies in the event of breach (inter alia, note L.Schuler AG v Wickman Machine Tool Sales [1974] and Lombard North Central plc v Butterworth [1987]). In this case Loadstar is advised that breach of a condition would entitle the company to terminate its contract with Benz and claim damages (or Loadstar could affirm the contract and claim damages – although it is apparent that Loadstar does not wish to affirm on the facts because a cheaper hire is available). A breach of warranty would however only permit Loadstar to make a claim for damages, and the hire contract with Benz would be preserved and remain in force.

If the clause is deemed to constitute an intermediate term then it may be treated by a court as either a condition or a warranty subject to all the conditions of the case: Hong Kong Fir v Kawasaki Kisen Kaisha [1962]. A conclusion that the clause should be construed as an intermediate term would thus provide the court with a measure of flexibility in remedial terms (allowing breaches to be treated as less significant or more serious subject to the evidence adduced and the prevailing circumstances).

The facts presented state that: ‘the loose screws do mean that the lorry is not technically ‘roadworthy’’. Further information is requested in this regard. How has this assertion been established? Is it a matter of Loadstar’s opinion or has either expert opinion or some other authority been employed to determine that the loose screws inevitably lead to the conclusion that the vehicle is not ‘roadworthy’? In the abstract the term ‘roadworthy’ is fairly vague and it is noted that ‘there is no danger of the exhaust coming loose, and the lorry can still be driven perfectly normally’. This would seem to suggest at first sight that the vehicle, while not in mint or perfect condition, is in fact roadworthy.

One would immediately assume that the fundamental condition of any contract for the hire of a vehicle is that the vehicle in question must be fit for its purpose and ‘roadworthy’ (although as stated this term is amorphous and problematic until a reliable definition is provided). However, if it is true that there is absolutely no danger of the exhaust coming loose, that the lorry can still be driven ‘perfectly normally’, and that Benz are happy to pay for a prompt repair, it may be that the court comes to conclusion that it would be inappropriate to treat the relevant clause as a condition entitling immediate repudiation. The fact that a court will be minded to consider a wide range of factors (including those stated above) and engage in a delicate and balanced judgment is illustrated by Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976]and Maredelanto Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971].

Subject to receipt of the information requested above, Loadstar is advised that a court would, on balance, prefer to render an interpretation which preserves, rather than destroys, the contract. In Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] Roskill LJ stated:

‘I think the court should tend to prefer that construction which will ensure performance, and not encourage avoidance of contractual obligations.’

This advice is prejudiced to some extent by conflicting information in the facts. If the vehicle can be driven perfectly normally and there is no danger of the exhaust working loose then surely it is roadworthy? Yet the facts state otherwise. It is submitted that with all the information in mind, including Benz’s constructive attitude towards paying for an immediate repair, a court would construe the clause to be an intermediate term, which has been breached in a fairly trivial fashion and accordingly gives rise only to a claim for damages (for breach of warranty). This would result in Loadstar being unable to terminate the contract and the contract surviving until its pre-agreed termination date.

The Belgique Import Co contract

Loadstar may wish to argue that the contract entered into with Belgique Import Co has been frustrated by the fire in the Channel Tunnel and the severe delays at the cross-channel ferries, which prevents delivery on the due date.

Frustration occurs where an event out of the control of either party to the contract occurs after the formation of a contract and performance is rendered impossible (or in some cases radically different): J Lauritzen AS v Wijsmuller BV (‘The Super Servant Two’) [1990].

It is true that the fire is out of the control of either Loadstar or Belgique Import Co and that it occurred post-formation. However, it has not rendered the contract impossible to perform and Belgique Import Co has intimated that delivery on May 4 is acceptable.

Loadstar is not entitled to argue the contract has been frustrated merely because it is now more difficult or expensive to perform due to the need to tie up a driver waiting for several days. Davis Contractors Ltd v Fareham Urban District Council [1956] is authority for the fact that a contract will not be deemed frustrated merely because it has been rendered economically disadvantageous to perform and this principle is endorsed in the ruling in Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977].

Consequently Loadstar must honour the contract and cannot rely on the doctrine of frustration to relieve them of their obligations. It is advised that Loadstar investigates different routes and alternative options in order to minimise the delay and the losses they incur in having a driver tied up.

The Fayed contract

In this instance Loadstar is attempting to defend against an action for breach of contract, which is manifest and serious on the facts, by asserting that the contract was illegal and thus void ab initio. It is a long-standing principle of English contract law that illegal contracts are void, as Gibson LJ confirmed in Hall v Woolston Hall Leisure Ltd [2001].

Moreover in the case of Re Mahmud & Isaphani [1921] it was held that a contract requiring the parties to be in possession of the requisite licence would be treated a illegal and unenforceable if one party does not possess such a licence.

However, a court would be most reluctant to make such a finding on the facts before us, given the facts presented. In Archbolds (Freightage) Ltd v Spanglett Ltd [1961] the defendants were contracted by the plaintiffs to carry certain goods. The defendants did not in fact possess the correct licence for the transportation of the said goods, something of which the plaintiffs were entirely unaware (just as is the case on the facts in the present case).

Thereafter the goods were stolen en route as a result of the defendant’s negligence (again, just as is the case on the facts before us). When the plaintiffs claimed for their loss the defendants pleaded illegality because their van did not have the requisite licence. This is exactly what Loadstar has done on our facts.

It was consequently held in Archbolds (Freightage) Ltd v Spanglett Ltd that the contract was not prohibited by operation of statute and therefore that it was not illegal ab initio. In other words, the contract was not illegal from the beginning, it was merely performed by the defendants in an illegal manner. Because the plaintiffs had no knowledge of the true state of affairs and were to all intents and purposes wholly innocent parties they were found to be entitled to recover damages for breach of contract: see also St John Shipping Corporation v Joseph Rank Ltd [1957].

Accordingly, given the very close proximity of the facts before us to the clear precedent set in Archbolds (Freightage) Ltd v Spanglett Ltd, it is advised that Loadstar will be liable to Mr Fayed in damages for breach of contract and the loss of the horse.

Summary of Advice

In conclusion, it is not good news for Loadstar. Firstly, The Company probably will not be able to terminate its contract with Benz because the breach will probably not be deemed serious enough to justify that remedy (subject to receipt of further information). Secondly, The Company cannot claim the Belgique Import Co contract is frustrated and must honour that agreement too, despite the additional expense. Finally, The Company is liable to Mr. Fayed and is unable to hide behind a claim that the contract was illegal.

BIBLIOGRAPHY (Oxford protocol)

Case law as footnoted to standard citation

Beale H. (ed.), Chitty on Contracts, 29th ed., Sweet and Maxwell, London, 2004, para. 12-040

Brownsword R., ‘Retrieving reasons, retrieving rationality? A new look at the right to withdraw for breach of contract’ [1992] 5 JCL 83

Chen-Wishart M., Contract Law, 3rd ed., Oxford University Press, Oxford, 2010

Elliot C. and Quinn F., Contract Law, 7th ed., Pearson Education, Harlow, 2009

McKendrick E., Contract Law: Text, Cases and Materials, 3rd ed., Oxford University Press, Oxford 2008

Poole J., Casebook on Contract Law, 10th ed., Oxford University Press, Oxford 2010

Taylor R. and Taylor D., Contract Law, 2nd ed., Oxford University Press, Oxford 2009

PART B

In this paper, the statement provided in the title attracts qualified support. It is apparent from the case law and the authorities cited in the Bibliography that there is not great difficulty in finding a sensible boundary between economic duress and other forms of unlawful pressure or will asserted against another party to secure an economic benefit. However, the qualification is equally plain – the timing of the actions alleged to constitute economic duress is critical to the analysis. Where the purported duress is applied at the outset of contractual negotiations, such conduct is unlikely to be actionable, and more likely to be found as consistent with ‘hard bargaining’. If the parties have reached an agreement and one takes undue advantage of the other in seeking renegotiated terms, there is a stronger likelihood that such conduct may constitute economic duress. The authorities cited build on the line of appellate authorities that culminated in Universe Tankships, with subsequent enhancements identified in the later cases.

The decision in Universe Tankships represents a comprehensive effort by the House of Lords to bring cohesion to a previously difficult aspect of contract law and related negotiations. Where the parties to a contract are competent to engage in negotiations, there is a presumption that what they determine as the contract terms cannot be later overridden by a court, subject to the traditional provisos for illegality, a failure to disclose a particular material circumstance, or similar matters going to the integrity of the negotiations. ‘Hard bargaining’ is an accepted aspect of all commercial dealings; where parties insist on particular terms to a contract, even where there is inequality of bargaining power, a court will not be inclined to set aside the agreement so much as the terms will likely be construed more strictly against the powerful party that as against their evidently weaker opponent. The related principles that govern part performance of contracts as determined in Williams v Roffey are also relevant to this analysis.

One might argue that prior to 1976, economic duress had no official status in England and Wales contract law; in The Sibeon the House of Lords recognised that certain forms of commercial pressure in contractual relations could amount to economic duress. Its 1979 decision in North Ocean Shipping served to confirm the status of economic duress; the speeches in 1982 decision in Pan On that the duress had to be so significant that the victim’s will and ability to freely consent had utterly overborne: “…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”. This position was further modified in Universe Tankships to solidify the rule as one where the pressure applied by one party to the other is “illegitimate” so as to render the pressure exerted against the other party improper; mere pressure, no matter how intense will not permit a party to a contract to escape its consequences. In Universe Tankships, a shipping union refused to let the claimant’s vessel leave port until they had paid a particular fee to them. The House of Lords determined that this demand constituted illegitimate pressure that amounted to economic duress; the remedy is the contract is voidable at the instance of the claimant.

The English rule can be summarized in this way, subject to the qualifications that are explored below: Where a party to a contract entered into the arrangement as a result of threats or significant pressure form the other party that did not involve physical threats, the law will permit the party to avoid the contract if the threat made was so coercive that the pressure was unlawful. The threat must also cause a serious threat, as opposed to simply a threat to the economic interests of the party against whom the duress was applied. An important element in the legal determination of whether the duress was illegitimate is that no reasonable alternative existed for the other party at the time the pressure was applied and the contract made.

Whilst it is possible for economic duress to be applied by one party against another during contract formation, it is a more common occurrence in the case law during subsequent contract variations. In assessing how to evaluate the requisite “coercion of will” that is the outcome of the duress applied in the negotiations, the House of Lords set out this general four part test that would be varied in accordance with the individual circumstances in each case:

(i) Did the duress victim have an alternative contractual course available?

(ii) Did the victim protest about the conduct of the opposite party at the time that the duress was applied?

(iii) Did the victim seek or obtain independent legal of business advice concerning the contract?

(iv) Did the victim take any measures to avoid the contract?

In contrast to the illegitimate threats noted in Universe Tankships, there are numerous threats that can be made (and made forcefully) in a commercial context that are not actionable. Where a party threatens that they will not enter into an agreement, or where there are threats such as the institutions of civil proceedings or that contact will be made to the police. The point that raises difficulty in the demarcation between ‘illegitimate’ duress and legitimate threat is when a contract is renegotiated prior to the completion of the original terms.

Dorimex is a Court of Appeal decision that illustrates the demarcation difficulty. In a circumstance where a commercial contract was renegotiated to reflect a demand by the buyer of certain clothing that the shipping date would be fixed on an earlier date than what the manufacturer / shipper contended was possible. The manufacturer / shipper argued economic duress imposed by the purchaser was the reason for the earlier date, one that the manufacturer / shipper could not meet. The Court of Appeal confirmed that the onus of proof for a duress claim will be a significant one, with the implicit requirement of clear evidence that is tantamount to a ‘but for’ test in tort causation claims, that the contract would not have been negotiated in any other circumstances except for the illegitimate duress.

Economic duress is a contract law concept that may be difficult to ascertain in some instances, but the cases confirm that it is not likely to disappear from the legal landscape in the near future.