Economic Duress in a Contract

9 September 2016

A contract is voidable or vitiate under several situations, economic duress is one of the examples. Economic duress is a vitiating factor in a contract as it is a common law defense. When there happens to be an economic duress in a contract, the party can make the contract voidable if the requirements are fulfilled. One needs to be noted that the contract is only voidable instead of being voided completely. A contract has no legal force or effect at all if it is being voided. However, a contract that is voidable simply means that the contract is still legally binding until avoided by the party.

The affected party may cancel the contract and claim for remedies. Kerr J proposed that the contract can be set aside when there is economic duress exerting on one of the parties. Occidental Worldwide Investment Corporation v Skibs A/S Avanti, The Sibeon and The Sibotre [1976] 1 Lloyd’s Rep 293 Economic duress is a threat to a person’s financial or business interests. (Contract Law, 10th edn, Jill Poole pg564). The threat must be directed to the person’s financial standing but not to the person himself or his property. (Contract Law in Perspective, John Tillotson pg165).

There is an economic duress exerted on a party when one party threatens to breach the contract unless the other party who is being threatened complies or renegotiates with him/her. Normally, the party who is being threatened would rather to comply or renegotiate with the other party, as it would be more practical to do so. This is because the breaching of the contract might bring more disadvantages than to comply with it despite that the party is being threatened. For example, A and B entered into a contract that A would provide something to B and B would pay for it.

A then threatened to breach the contract if B did not want to pay more for the stuffs. B is in an urge to get the stuffs or else he will breach another contract with a third party and A is the only company that provides such things. B has no choice but to pay more to A. A has exerted economic duress on B as B is being forced to enter into a new contract to pay more to A. B has no other choice but to agree with it because A is the only supplier he could find. In this case, it is more practical to comply with A because the breaching of the contract will result in disastrous consequences to B.

However, the issue here is does the duress negate the consent of the party? This issue will be discussed in detailed later. Development of Economic Duress Formerly, with the absence of the doctrine of economic duress, the example mentioned above will be dealt in the light of the doctrine of consideration. Generally, there was no contract if the parties did not provide any considerations. A did not provide any consideration to B in order for B to pay A more. Hence, the promise is not legally binding and B is not contractually obliged to pay A the extra amount of money.

However, Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 has changed the position of law regarding to the doctrine of consideration. The court held that where a party agrees to pay extra in order for the other to perform his existing contractual duty, the promise is binding if the promisor obtained practical benefit or avoided a disadvantage even though there was a lack of consideration. In this case, B has to pay the extra money as he has avoided a disadvantage of breaching the contract with a third party. This leads to a question of fairness.

Is it equitable for B to pay more if he is being threatened or forced by A? Obviously, A is taking advantage of B. The doctrine of economic duress is being established to overcome the problems. Furthermore, before the doctrine of economic duress was established, duress was confined to duress to person G H Treitel, The Law of Contract (11th ed 2003), p 408 and duress to goods only. The law has expanded the concept of duress to economic duress. In the law today, a threat to the financial standing of the party can claim under economic duress.

It is inevitable to deny that all contracts are entered with some forms of pressures. Pressure is a natural part of the bargaining process. See discussion by Tipping J in Attorney-General for England and Wales v R [2002] 2 NZLR 91, para 62. However, with the changing of the society, the courts feel that there is a need to expand the doctrine to protect the victim who has a lower bargaining power. It is clearly unfair for one party to be forced to enter into a contract by an illegitimate pressure. The doctrine of economic duress was first recognized in the case of The Sibeon and The Sibotre.

Occidental Worldwide Investment Corporation v Skibs [1976] 1 Lloyds Rep 293 However, the doctrine of economic duress is still developing through case laws as this doctrine has been established for over two decades only. Hence, there are some problems in this doctrine as it is still developing. What amounts to Economic Duress? Pao On v Lau Yiu Long [1980] AC 614 is the leading case in the doctrine of economic duress. This case has technically established the doctrine of economic duress. Lord Scarman in this case has stated the requirements that amounts to economic duress.

Firstly, it must be proven that there is an illegitimate pressure exerted by the party to the victim. Secondly, it is the illegitimate pressure that causes the victim to enter into the contract. Lastly, the victim has no practical choice other than agree with it. This case was then being affirmed in the case of DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530. In order to succeed in the claim of economic duress, one must satisfied the three conditions as mentioned. Firstly, it must be shown that the party has threatened or forced the victim to enter into a new contract with illegitimate pressure.

It must be shown that there is a pressure or threat. The injured party is being coerced into complying with the party who exerted the pressure or else it is more likely to cause damage or danger to the injured party. The victim’s financial interests are at a risk if he refused to compromise or enter into a new contract with the other party. The force or threat must be identified first in order to succeed in a claim based on economic duress. Williams v Roffey Brothers [1991] 1 QB 1 In this case, the parties did not enter into a new contract because of any threat or pressure.

The defendant had obtained a practical profit through the promise and this shows that he is not under threat or pressure when he promised to pay more. As such, there is no economic duress. This is because there must be a threat or pressure for the party to rely on this doctrine successfully. Once the existence of pressure or threat is being established, the next thing to do is to prove that the pressure or threat is illegitimate. In other words, the pressure or threat exerted by the party to the victim must be something that is not authorized by the law or something that is unlawful.

However, it is unclear whether what actually amounts to illegitimate pressure or threat. Dayson J stated that ‘illegitimate pressure must be distinguished from the rough and tumble of the pressure of normal commercial bargaining’ DSND Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530. It is normal that there happens to be some pressures in business context when both parties are negotiating with each other. The doctrine of economic duress has acted as a guideline to limit the pressure exerts by the businessman so that fairness can be seen in both parties.

This can limit the power of a party that has a stronger bargaining power from abusing his power. It is important to distinguish between a lawful and unlawful pressure because only an unlawful pressure is deemed to be one of the elements that must be proven in the doctrine of economic duress. For example, a threat in refusing to complete the task such as shipping goods which the party is contractually obliged to do so amounts to an illegitimate pressure because the party has no rights over the goods.

Vantage Navigation Corporation v Suhail and Saud Bahwan Building Materials LLC, The Alev [1989] 1 Lloyd’s Rep 138 Next, it must be shown that it is the illegitimate pressure that causes the victim to enter into the contract. The illegitimate pressure must be the contributory factor of the victim’s action to enter into a new contract. The victim would not have entered into the contract if he is not threatened or forced by the illegitimate pressure. Thirdly, it must be shown that the victim has no practical choice other than to agree with the terms or conditions offered by the other party.

This means that the party has left the victim with an only choice, that is, to agree with whatever they offer. As such, it renders the parties to enter into a new contract because the party who is exerting illegitimate pressure is trying to change the terms of the original contract. If the victim has been provided with an alternative choice, then he cannot fulfill this element of the doctrine. And so, he is not entitled to claim under economic duress. Here is an example that illustrates the situation where the victim has no practical choice other than to agree.

B&S Contractors v Victor Green Publications [1984] ICR 419 In this case, the plaintiff threatened the defendant to pay more or else he is not going to complete his work to erect the stand for exhibitions which is needed by the defendant. The defendant had no choice other to pay the plaintiff. This is because the defendant will have to bear with bad consequences if the plaintiff refused to work. The defendant then deducted the amount of money given to the plaintiff from the amount of money that the plaintiff is supposed to receive.

The plaintiff claimed for the balance. Obviously, the plaintiff’s refusal to work had left the defendant with no alternative option other than to pay the plaintiff. It can be clearly seen that the defendant is under economic duress as he had no other choice than to pay the plaintiff. Thus, if the victim’s only choice is to comply with the other party because the illegitimate pressure by the party would bring bad consequences to the victim, then it amounts to economic duress provided other elements of economic duress has been established.

Atlas Express Ltd v Kafco (Importers & Distributors) Ltd [1989] 1 All ER 641 & Adam Opel GmbH v Mitras Automotive Ltd [2007] EWHC 3205 (QB), [2008] BUS LR DIGEST D55. Does economic duress negate the existence of consent? Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. … [I]n a contractual situation commercial pressure is not enough. There must be present some factor … which could in law be regarded as a coercion of [the] will [of the person alleging duress] so as to vitiate his [or her] consent…   In determining whether there was a coercion of will such that there was no true consent, it is material to enquire whether the person alleged to have been coerced did or did not protest; whether, at the time he [or she] was allegedly coerced into making the contract, he [or she] did or did not have an alternative course open to him [or her] such as an adequate legal remedy; whether he [or she] was independently advised; and whether after entering the contract he [or she] took steps to avoid it. All these matters are … relevant in determining whether [the person alleging duress] acted voluntarily or not.

Decision of Judicial Committee of the Privy Council in Pao On v Lau Yiu Long [1979] 3 All ER 65 at 78 Economic duress merely vitiates the consent but it does not negate the existence of the consent of the victim. See The Universe Sentinal Case. The victim still has the knowledge of what is he consenting to. He intentionally agrees to the coercion to enter into a new contract. Lord Goff in Dimskal Shipping Co. SA v International Transport Workers’ Federation, The Evia Luck [1991] 4 All ER 871 at p. 878. Although what the victim has agreed to is not what he actually intended to do so, he has no other choice than to agree with it.

This however does not destroy the existence of consent. Consent simply means an agreement of someone to do something. The element of consent is still present. As such, one should not say that economic duress has the effect to negative the presence of consent. The House of Lord has been clear in saying that the defense of duress does not depend on upon the absence of a voluntary act (which means that it does not depend upon the absence of consent) but rather depends upon intentional submission in the face of no other practical alternative.

Lynch v DPP for Northern Ireland [1975] AC 653 However, one can determine whether there was a coercion of will by four points. Firstly, did the victim protest when he was being coerced to enter into a new contract? If he did protest then it was not his true consent in agreeing to enter into a new contract. Secondly, after the victim has entered into a new contract caused by the exertion of illegitimate force, did he not have other option open to him; has he received any advice or did he take actions to avoid the coercion?

If the answers are yes then one can say that he will was being coerced and it was not his true consent. If so, the doctrine of economic duress can be applied and the contract between the parties is voidable. Furthermore, there is one more requirement for establishing economic duress, that is, the victim must take action to protest at the time he was being coerced or shortly after he had been exerted with illegitimate pressure. There will be no remedy available for the victim if he fails to protest.

In the case of The Atlantic Baron, although it was held that the defendant’s action amounted to economic duress, the failure of the victim to protest after such a long time had prevented him to claim for a remedy in duress. (North Ocean Shipping Co. Ltd v Hyundai Construction Co. Ltd [1979] QB 705) The contract in this case is however voidable as there was an economic duress but the victim cannot claim for remedy. This case has clearly shows that it is crucial to protest at the time or shortly thereafter in getting a remedy. The action of disagreeing or objecting is sufficient for the victim o prove that he had protested and thus entitling him for a remedy later on. Problems in Economic Duress As mentioned above, this doctrine is still undergoing a development. There are some problems in this doctrine and the court is trying to improve it. Firstly, the meaning of illegitimate pressure is unclear. The law is unclear whether what can amount to an illegitimate pressure. This is because most of the contracts entered are due to some form of pressures. The distinction between lawful and illegitimate pressure must be made clearly.

There should be a guideline whether what amounts to an illegitimate pressure. Secondly, the remedy for economic duress is inadequate. The victim is not allowed to claim for damages. The only remedy for this doctrine is rescission, that is, the parties are allowed to go back to the position before the contract was made. It is unfair to the victim as he has to bear with the losses. The court should have allowed the victim to claim for damages. However, the existence of this doctrine has acted fairly to the person who has been forced to enter into a contract.

A contract can only be legally binding when both parties agree to the terms in the contract mutually. No one has the rights to force the other people to enter into a contract by using illegitimate pressure. It is very unfair to do so. Economic Duress in Malaysia In Malaysia, contracts can also be set aside if the parties are forced to enter in a contract. The parties must enter into an agreement by free consent and voluntarily so that the agreement could be legally enforceable. (Section 10 Contract Act 1950) The word ‘coercion’ is being used in Malaysia instead of the word ‘duress’ as in the UK under the common law.

The definition of coercion is provided for under Section 15 of Contract Act 1950. Coercion is the committing or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. According to Section 15 of Contract Act 1950, Ian Chin J stated that coercion can be committed by either the threatening of an act forbidden by the Penal Code and or unlawful of detention of any property or the threat to the prejudice of any person. Teck Guan Trading Sdn Bhd v Hydrotek Engineering (S) Sdn Bhd [1996] 4 MLJ 331; [1996] BLJ 163) The concept of coercion in s15 and the cocept of duress in the English common law are different in some ways. Firstly, under the s15 of the Contract Act 1950, the victim who is seeking to set aside the contract must show that the act committed is a threat to commit an act forbidden by the Penal Code. Furthermore, the victim must also identify the section which the forbidden act falls in the Penal Code.

A failure to establish that the act is forbidden under the Penal Code would prevent the court from deciding whether such an offence had been committed or not. This would result in no coercion and thus the victim could not rely on s15 of Contract Act 1950. The court held that there was no coercion of the will in the cases of Teck Guan Trading Sdn Bhd v Hydrotek Engineering (S) Sdn Bhd and Asbir, Hira Sigh &Co v Supramaniam a/l Pitchaimuthu & Ors [2000] 1 MLJ 83 because the parties failed to prove the elements under s15 of the Contract Act 1950.

This is very different to the duress under the English common law. In order to rely on coercion successfully, the threat or the act committed must be of the offences under the Penal Code. S15 of the Contract Act 1950 has limited the scope of coercion to crimes under the Penal Code only. Any offences outside the Penal Code or which are merely civil wrongs do not amount to coercion. It makes coercion to be obsolete and it also does not meet the objective to the use of illegitimate pressure. Contract Law in Malaysia by Cheong May Fong 2010 pg 217.

Secondly, the concept of coercion is wider as it covers the unlawful detention of property if compared to the concept of duress which recognizes only duress to person where threats to property seem to be insufficient to amount to duress in most of the cases. See Barton v Armstrong [1975] 2 WLR 1050, PC (Appeal from Australia). In addition, s15 provides that it does not matter whether or not the Penal Code is enforceable in the place where the coercion is exerted. See the illustration provides under s15

Although there are differences between the concept of coercion and the concept of duress, the judges in Malaysia still apply English cases regarding to economic duress. James Foong J in Mohd Fariq Subramaniam v Naza Motor Trading Sdn Bhd [1997] 3 CLJ Supp 249 referred to the criterion as stated in Pao On v Lau Yiu Long. See also Third World Development & Anor v Atang Latief & Anor (1990) 1 SCR 533 However, VC George J stated that economic duress under the English common law does not apply in Malaysia because economic duress in Malaysia are confined to situations stated under s14 and s15 only.

Perlis Plantations Berhad v Mohammad Abdullah Ang [1988] 1 CLJ 670 In the English common law, it is very important for the victim to protest. It is also the same in the Malaysia law. Although both doctrines do not require the element of protest, it is essential to do so as it is more likely to show that the parties are under coercion or duress if they do protest. In Mohd Fariq Subramaniam v Naza Motor Trading Sdn Bhd, although it was proven that there was economic duress, the court held that there was no coercion because the plaintiff made no protest either before or after the contract was made.

The English court would also come out with the same decision if the victim fails to protest. See North Ocean Shipping Co Ltd v Hyundai Construction Co Conclusion http://www. willans. co. uk/news/article/economic_duress_illegitimate_pressure_requirement_may_include_threats_of_la/ http://books. google. com. my/books? id=-sr5oUyjhVEC&pg=PA166&lpg=PA166&dq=economic+duress+negate+the+existence+of+consent&source=bl&ots=K07_YMpY2_&sig=qoDHDkDJ6DgqCXekjUk3Y-D_U1k&hl=en&sa=X&ei=OkB5UJHHOszirAebq4GICQ&ved=0CDgQ6AEwAw#v=onepage&q=economic%20duress%20negate%20the%20existence%20of%20consent&f=false

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