REUTERS | Jason Lee

Economic duress: wrestling with the strong-arm tactics

These are tough times for the construction industry. The OECD has just announced that the UK is heading back into recession. Big deal – the construction industry has never got out of one that started in 2008 when Lehman Brothers fell over. The Chancellor’s announcement of an extra £30billion for infrastructure is obviously welcome, but it will take some time to materialise – and only then if he can convince the pension funds to stump up the cash.

So, times are tough and, sadly, they will remain so for some years. Competition for work is extremely high and the effect in the industry is palpable: contractors are going bust on a daily basis, projects continue to be bid at a loss and less scrupulous purchasers are squeezing suppliers and using ‘strong-arm’ tactics because… well, you can when it’s a buyer’s market.

The last point raises some interesting questions around the subject of economic duress. It’s a subject that rarely crops up, but it wouldn’t surprise me to see a few cases in the courts over the coming years, where a party claims to have been subjected to this type of activity.

The theory

So what is economic duress? Well, we’ve all no doubt had clients who complain that they were forced to agree unfavourable terms. In fact, we’re probably all regularly subjected to severe commercial pressure when negotiating on behalf of clients – kinda comes with the territory. However, applying commercial pressure does not necessarily constitute economic duress. In past times, the view was that where economic duress had occurred, the consent of the innocent party to enter into the contract had been vitiated. However, the modern view is that the pressure applied on the innocent party was illegitimate and so the contract is voidable.

A number of ingredients must be present in order for economic duress to be actionable (see DSDN Subsea Ltd v Petroleum Geo-Services ASA [2000] BLR 530). There must be pressure:

  • The practical effect of which is that there is compulsion on, or a lack of practical choice for, the ‘victim’;
  • Which is illegitimate; and
  • Which is a significant reason for inducing the ‘victim’ to enter into the contract.

The practice

Commercial pressure without coercion is not sufficient. The court will take into account a number of factors, such as:

  • Whether there has been an actual or threatened breach of contract.
  • Whether there was any realistic practical alternative for the ‘victim’.
  • The conduct of both parties at the time. That is, whether the ‘victim’ was independently advised or protested at the time or whether the party applying the pressure was acting in good or bad faith.

The case of Carillion Construction Ltd v Felix (UK) Ltd [2001] BLR 1 provides a valuable example of conduct amounting to illegitimate pressure. The sub-contractor pressurised Carillion into agreeing a very high settlement figure, as Carillion was dependant upon the sub-contractor’s future deliveries of cladding. The court held that the contract should be set aside as the threat, if carried out, would have been a clear breach of contract.

In a similar vein, in Adam Opel GmbH v Mitras Automotive (UK) Ltd, a car manufacturer was compelled by its supplier to make compensation payments following the supplier’s threat to stop delivery of car parts, causing the car manufacturer serious financial and logistical problems.

The court ordered repayment with interest, on the grounds that the agreement to pay was unenforceable because it was made under duress. It was held that the manufacturer would not have entered into that agreement but for the supplier’s threat.

The response

Economic duress only makes the contract voidable, as opposed to void: it is imperative not to validate the contract by an act of affirmation. A party who wishes to avoid the contract must act quickly to avoid being held to have affirmed the contract.

Conclusion

So, the tort of economic duress may provide a remedy where illegitimate commercial pressure has been applied. But don’t count on it. A claim will be difficult to substantiate, not least because of the evidential burdens, and most times commercial pressure – while severe – will be just that: commercial.

Of course, that’s assuming you’re still in business to bring a claim. And on that happy note I bid you a fond farewell.

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