Economic duress: remedies against illegitimate pressure

Andrew Rawstron looks at this evolving area and considers where commercial bargaining might found a claim for economic duress

It is a well-established principle of English common law that making threats to somebody's well being can amount to duress. A contract executed on this basis is voidable, although arguments may still arise as to whether the contract in question has, as a matter of fact, been affirmed.

The same is also true of wrongful threats to a person's property, goods, and, perhaps most interestingly, economic interests. The recognition of "economic duress" as a distinct concept is, however, relatively new and has rarely been raised in the context of building or civil engineering projects.

That is, until now. Most recently His Honour Judge Humphrey LLoyd QC noted in Shepherd Construction Ltd v Mecright Ltd (27 July 2000) that there had been a plea of economic duress, based on which Mecright sought to avoid the consequences of a settlement agreement. The plea of economic duress was of only peripheral interest to the principal issues in dispute, but it was of central importance to the parties in DSND Subsea Ltd v Petroleum GeoServices ASA (PGS) and Another (28 July 2000). But before turning to Mr Justice Dyson's assessment of the current state of the law in that case, it is worth putting the current state of the law in context.

The absence of free will

Many of the older authorities in this area state that to establish the existence of duress it is necessary to show that the agreement in question was not been made "voluntarily" or was without "free will". So:

"Duress, whatever form it takes, is a coercion of the will so as to vitiate consent ... in a contractual situation commercial pressure is not enough. There must be present some factor "which could in law be regarded as a coercion of his will so as to vitiate his contract"" per Lord Scarman in Pao On v Lau Yiu Long [1980] AC 614.

In Pao it was therefore suggested that to establish duress it was necessary to show that a person has not entered into a contract willingly.

This approach is no longer followed. Indeed, in Lynch v DPP of Northern Ireland [1975] AC 653, a case in which the defence of duress was raised by a Defendant charged with aiding and abetting murder by driving a car carrying IRA gunmen, Lord Simon held that duress:

"... deflects, without destroying, the will of one of the contracting parties. There is still an intention on his part to contract in the apparently consentual terms: but there is coactus volui on his side. The contrast is with non est factum. The contract procured by duress is therefore not void: it is voidable - at the discretion of the party subject to duress."

That approach was subsequently followed by Lord Scarman, presumably reflecting on his judgment in Pao, in Universe Tank Ships of Monrovia v International Transport Workers Federation [1983] AC 336. In Universe Tank Ships payments were made to a Union' welfare fund to obtain the release of a vessel which was "blacked". In finding that the owners had been subject to economic duress Lord Scarman held that:

"The classic case of duress is, however, not the lack of will to submit but the victim's intentional submission arising from the realisation that there isno other practical choice (our emphasis) open to him."

The form of pressure

So what form of pressure is required to show duress? In Dimekal Shipping Co Ltd v ITF (1992) 2 AC 152, which also concerned a trade dispute between the owner of a vessel and a union, Lord Goff said that it is necessary to show economic pressure which was:

• illegitimate; and
• which was a significant cause of the victim's decision to enter into a contract.

The legitimacy (or not) of one party's conduct can only be established in the context of the matters in dispute and caution should be exercised in this respect. Lord Griffiths, in B&S Contracts and Design Ltd v VG Publications [1984] 1 CR 419 at 425 noted that:

"The law on economic pressure creating a situation which will be recognised as duress is in the course of development and it is clear that many difficult decisions lie ahead of the courts. Many commercial contracts are varied during their currency because the parties are faced with changing circumstances during the performance of the contract and it is certainly not on every occasion when one of the parties unwillingly agrees to a variation that the law would consider that he had acted by reason of duress. The cases will have to be examined in the light of their particular circumstances. But two recent decision of the highest authority - the decision of the Privy Council in Pao On v Lau Yiu Long [1980] AC 614 and Universe Tank Ships Inc. of Monrovia v International Transport Workers Federation [1982] 1 C.R. 262 - established that a threatened breach of contract may impose such economic pressure that the law will recognise that the payment made as a result of the threatened breach is recoverable on the grounds of duress."

These authorities formed the framework for Mr Justice Dyson's decision in DSND. By way of background, DSND and PGS entered into an EPIC contract for the design and installation of various subsea works associated with the Banff Oil Field. That contract was subsequently varied by execution of a memorandum of understanding. Leading Counsel for PGS argued that the memorandum of understanding had been executed in circumstances which amounted to economic duress and that it was therefore voidable.

In particular, PGS contended that DSND had wrongfully suspended performance of its existing obligations under the original contract, and that (further) DSND had also threatened not to carry out future obligations unless the agreement was varied.

Mr Justice Dyson reviewed the authorities and concluded that:

"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: see Universal Tank Ships of Monrovia – ITWF [1983] AC 336, 400B-E, and The Evia Luck [1992] 2AC, 165G. 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 threatened breach of contract; whether the person allegedly exerting the pressure has acted in good or bad faith; whether the victim had any realistic practical 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. These are all relevant factors. Illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining."

It is interesting to note that, in Mr Justice Dyson's view, the pressure needed need not be the only cause inducing the claimant to enter into the contract. It must, however, be a "significant factor". This is clearly some way from the position in the earlier authorities that to show duress it was necessary to establish an absence of will. Nevertheless, it is still necessary to show the absence of any practical alternative.

It is clear that the factors which a court will to take into account when determining whether there has been illegitimate pressure are broad. There must, however, be a risk that the scope of enquiry now represents something of a lucky dip to parties seeking to avoid the commercial consequences of otherwise binding agreements which have been struck. It is surely right that the rough and tumble of commercial negotiations is distinguished from illegitimate pressure. The current state of the law however, creates some difficulty in seeing the wood for the trees.

For further information, please contact Andrew Rawstron on andrew.rawstron@cms-cmck.com or on +44 (0)20 7367 2519.