Monday 9 April 2012

Economic duress

Traditionally, duress rendered a contract voidable only if it was physical duress (which involved a threat to the person or belongings of an individual), but following the decision of the Privy Council in Pao On v Lau Yiu Long, the concept of economic duress was also recognised. It is now fairly settled law that there are two essential ingredients for voiding a contract on grounds of economic duress: (a) there should be illegitimate pressure, and (b) the pressure should be a significant cause for the claimant entering into the contract (Per Mance J, Huyton v Cremer). However, each of these requirements gives rise to a controversial issue:
First, can a legal act by defendant ever amount to illegitimate pressure, and if so, in what circumstances?
Secondly, does the claimant also need to establish that the illegitimate pressure left him with 'no reasonable alternative' other than to enter into the contract? Or is this merely another way of satisfying the causation requirement?
The second of these issues has been the subject of much debate, with some High Court decisions (for instance,
Adam Opel v Mitras Automotive) holding 'no reasonable alternative' to be a third requirement, and several academics dismissing it as a unnecessary third wheel. However, it was with the first of the issues that the High Court in Progress Bulk Carriers Limited v Tube City IMS LLC [2012] EWHC 273 (Comm) grappled, making some interesting observations.
The facts of the case involved the proposed charter of a vessel to carry goods from the Mississipi River to China. The identity of the vessel (the "Cenk K") and the time of delivery, were significant elements of the contract between the charterer (the Claimant) and the recipient of the goods in China (the Recipient). This fact was communicated by the Claimant to the owner of the vessel proposed to be chartered (the Respondent). A week before Cenk K was to be provided, the Respondent chartered it to another charterer, without the Claimant's approval. Instead, on the date of delivery to the Claimant, the Respondent offered a substitute vessel. The Claimant objected, and stated that any substitution would be subject to approval by the Recipient. Although the act of chartering Cenk K to another party without the Claimant's consent was a repudiatory breach of the charter party, the Claimant did not terminate the charter party. Two days later, the Respondent admitted it had made a mistake, and that it would compensate the Claimant for any losses suffered due to the substitution. Based on this assurance, the Claimant did not look for other alternatives. The Claimants then communicated the revised timetable and the new vessel to the Recipient, which accepted the changes subject to a reduction in the purchase price of $6 per metric ton. This was above the market price of the commodities at that time, and hence was accepted by the charterer as a reasonable discount. However, when this was communicated to the Respondent, it refused to grant the charterer a discount of more than a $2 per metric ton. Given the lack of alternatives, the Claimant informed the Respondent that it would accept the discount, but would reserve its rights in respect of claims for damages arising out of the owner's breach of the charter party. In response, the Respondent made the Claimant a 'take it or leave it' offer, where the Claimant had the option between (a) not having any discount from the Respondent, or (b) having a $2 per metric ton discount, contingent on the waiver of all claims for loss or damages arising out of the substitution of the vessel. Given the situation, the Claimant accepted option (b) under protest.
Against this backdrop, the issue before the Court was whether this waiver could be challenged on the ground of economic duress. There were no issues of causation, and the arbitral tribunal below had found that the Claimant had no reasonable alternative to entering grating the waiver. Hence, the only question was whether the 'take it or leave it' offer amounted to illegitimate pressure.
For these purposes, the Court relied on the Court of Appeal's decision in
CTN, Cash and Carry v Gallaher. In this case, a threat to refuse to enter into future contracts was held to be legitimate because (i) the defendant was not obliged to enter into any future contracts, (ii) the defendant bona fide believed that it was entitled to the amount it was claiming and (iii) the parties were in a purely commercial relationship. Against this backdrop, Steyn LJ in CTN had held there that the key question is not whether the conduct was 'lawful', but whether it was 'morally or socially acceptable'. He went on to observe that it would only be in rare cases that the Court would conclude that in a commercial relationship, a lawful act would amount to economic duress.
On the facts here, the Court concluded that the breach of the charter party by the owner, combined with the subsequent failure to live up to the assurance given to the charterer was sufficient to make the pressure illegitimate. Thus, although the 'take it or leave it' offer was legal, and although the parties were in a purely commercial relationship, the defendant had acted in bad faith. Reliance was placed on the Privy Council's decision in
Borrelli v Ting for the proposition that an illegality in the past, which coloured the subsequent pressure, could render the pressure illegitimate. Hence, since the waiver of claims under the charter party was procured by the application of illegitimate pressure, the waiver was held to be voidable.
Although the result appears to be right, it is important to identify the real basis of the decision. The reliance on Borrelli, though persuasive, is made suspect by the fact that the impugned settlement agreement in that case required the defendant to do that which he was anyway statutorily obliged to do. On the other hand, on the facts here, the waiver merely imposed a new contractual obligation on the Respondent, to replace an earlier contractual obligation it had breached. Hence, although the similarities with Borrelli should not be understated, it is important to note that the existence of a purely commercial relationship, and the absence of a legal obligation to fulfil the assurance made following the breach, amounts to an extension of Borrelli.
The decision reiterates the highly fact-specific nature of any economic duress claim, with findings that the Respondent had 'lulled the charterer into a false sense of security' and 'driven the charterer into a corner from which it could not escape' playing an important role. However, in terms of legal principle, the notable addition is that when there is an unjustified past illegality/breach of contract which colours or leads to subsequent pressure, any subsequent unconscionable conduct by the defendant aggravating that pressure (although not amounting to the breach of a legal obligation), can be sufficient to render the pressure illegitimate.

by Shantanu Naravane
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