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High Court rules that lawful but unethical behaviour could be economic duress
Practical Law UK Legal Update Case Report 3-518-2357 (Approx. 5 pages)
High Court rules that lawful but unethical behaviour could be economic duress
by PLC Commercial
| Published on 08 Mar 2012 • England, Wales |
The High Court has considered when lawful behaviour (not itself a tort, a crime or a breach of contract) can be economic duress, so that a contract obtained by that behaviour may be voidable. (Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm)) (free access)
Speedread
The High Court has held that a party's lawful but unethical actions, following its own repudiatory breach, could be economic duress. The court relied on obiter comments by the Court of Appeal that lawful but unethical acts can, in principle, constitute illegitimate pressure, making a contract voidable in rare cases for economic duress. Each case of economic duress depends on its own facts, and here, the aggrieved party's predicament was partly caused by the other's initial breach of contract, which certainly was an unlawful act. In a case where the party applying pressure had done nothing unlawful at all, a different result might follow. However, this judgment adds weight to the view that economic duress can be found in lawful acts. In practice, tough bargaining remains a part of commercial reality, but parties should be aware, when negotiating to settle a claim for breach of contract, that misleading the other side by empty promises may mean the settlement agreement does not survive for long. A party on the receiving end of this sort of treatment should only accept under protest, reserve its rights where possible, and avoid the agreement as soon as it can afterwards. (Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm))
Background
If one party, by duress, forces the other party into making a contract, the contract is voidable if the injured party acts promptly to set it aside. One form of duress is economic duress. To prove economic duress, the injured party must show that the pressure applied by the other party was "illegitimate", and caused it to enter the contract.
In cases of economic duress, it is not clear exactly what pressure is illegitimate. Crimes, torts and breaches of contract may all qualify, but there is no absolute test to distinguish illegitimate pressure from "the rough and tumble of the pressures of normal commercial bargaining". The courts will consider a range of factors, including whether the party exerting the pressure acted in good or bad faith; how bad their behaviour was; and whether the victim had any realistic practical alternative but to submit to the pressure.
Previous case law and textbooks suggest that:
- The form the economic duress takes does not need to be a tort (Universe Tankships Inc of Monrovia v ITF [1981] UKHL 9).
- Prima facie, a threat to commit a future unlawful act will constitute an improper threat for the purposes of the law of duress (Chitty on Contracts (Sweet & Maxwell, 30th ed, 2011), paragraph 7-037).
- A past unlawful act can amount to unconscionable conduct sufficient to set aside a settlement agreement (Borrelli and others v Ting [2010] UKPC 21).
On the issue of whether a lawful act might amount to illegitimate pressure, in CTN Cash & Carry Ltd v Gallaher Ltd [1993] EWCA Civ 19, Steyn LJ said (obiter):
- Lawful acts are not necessarily beyond the scope of economic duress. Professor Birks has suggested that the courts could apply generally accepted standards of impropriety, rather than unlawfulness (An Introduction to the Law of Restitution (1989)). For example, a threat of lawful action, coupled with a demand for payment, may be illegitimate, as in the Universe Tankships case. But there is no general principle that a threat not to enter a contract can be duress.
- Extending the categories of duress to include lawful acts in pursuit of a bona fide claim, in a commercial context, would be a radical change with far-reaching implications. It would introduce undesirable uncertainty into the commercial bargaining process and allow parties who have fallen out to re-open accounts they had settled in good faith.
- The aim of English commercial law ought to be to encourage fair dealings between parties. But the law should not set its sights too high when the critical inquiry is not whether the conduct is lawful but whether it is morally or socially unacceptable.
- In commercial cases, not involving protected relationships, it might be rare, though not impossible, to establish "lawful act duress", especially if the defendant acted in good faith, believing its demand was valid.
The editors of respected textbooks, including Chitty on Contracts and Goff & Jones on the Law of Unjust Enrichment (Sweet & Maxwell, 8th ed, 2011), rely on this and other cases to argue that improper actions, as well as unlawful ones, may, in principle, be economic duress.
For more information on economic duress, see Practice note, Contracts: invalidity: Duress and undue influence. For more information on voidable contracts, see Legal FAQs: What is the difference between a void and voidable contract?.
Facts
This case concerned a dispute between the owners of a cargo ship (the owners) and its hirers (the charterers). The charterers had sold a load of shredded scrap, and needed to ship it out from the Mississippi to China.
The owners, having contracted to hire the ship to the charterers for this voyage, then hired it out elsewhere and sent it off to load up, making it impossible to perform the contract. This was a repudiatory breach of contract.
When these facts emerged, the owners promised to provide another ship and to pay full compensation for any loss. They identified a substitute ship and suggested dates for its availability. The charterers, relying on these promises, made no effort to find another carrier, and persuaded their buyers to accept the deferred arrival date now offered by the owners.
Meanwhile, the price of the cargo was falling, the buyers had extracted a discount for late delivery, and the barges waiting to load the scrap in the Mississippi were charging for every day's extra delay. The charterers warned the owners that they would claim these losses, plus interest, as damages for breach of contract.
At this point, when the charterers had no other way to ship the goods, and faced "catastrophic" losses if they delayed any longer, the owners refused to supply the substitute ship unless the charterers agreed to waive all claims against them arising from the breach. The owners were legally entitled to take this stance, since their promises to supply the substitute ship and make good all losses were not contractually binding.
Since they had no practical alternative, the charterers, under protest, did as the owners asked. Afterwards, however, they did claim their losses from the owners. They argued that their agreement to waive their claim was obtained by economic duress and should be set aside.
At arbitration, the arbitrator found that the charterers' agreement had indeed been extracted from them by illegitimate pressure and should be set aside. He awarded damages against the owners.
The owners applied to the High Court to set aside the arbitrators' award. Pointing out that their behaviour in refusing to supply the substitute ship was lawful, the owners argued that lawful acts could not amount to illegitimate pressure or economic duress.
Decision
The court held that the charterer's agreement to waive its claims had been procured by economic duress, and therefore was set aside.
The judge accepted that the owners' refusal to supply a substitute ship was lawful. It was not a crime, or a tort, or a breach of contract. However, it followed their unlawful repudiatory breach of contract, and their unethical behaviour in offering help and then withdrawing it at the last minute, when there was no practical alternative to accepting their demands. In effect, the owners had "lulled the charterers' representative into a false sense of security when he was in fact being quietly manoeuvred into a corner". This amounted to illegitimate pressure for the purposes of economic duress.
The judge primarily relied on obiter comments in CTN suggesting that illegitimate pressure can include lawful conduct, although rarely in commercial cases. This was one of those rare cases. But in any event, the owners' refusal to supply a substitute ship also had to be viewed in the light of the previous repudiatory breach (a past unlawful act) and the owners' subsequent attempts to take advantage of the position created by that unlawfulness.
Comment
In this judgment, a High Court judge (of the Commercial Court) has added his support to academic texts and previous obiter dicta, that lawful but unethical acts can, in principle, be economic duress. This may not change the law, but it will help parties who have been forced into agreements by unfair pressure.
Each case of economic duress depends on its own facts. Since the charterers' predicament in this case was partly caused by the owners' initial breach of contract, which certainly was an unlawful act, a different result might follow in a case where the party applying pressure had done nothing unlawful at all.
However, when negotiating to settle a claim for breach of contract, parties should be aware that such unethical conduct and extreme demands as were applied in this case may mean the settlement agreement does not survive for long. Leading the other side on with misleading promises was risky behaviour. In this case, it led to the finding of economic duress. In another case it might have led to a binding agreement to provide a substitute ship, or to an estoppel, giving the charterer a remedy by another route.
A party on the receiving end of this sort of treatment should only accept under protest, reserve its rights where possible, and avoid the agreement as soon as it can afterwards.