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Duress

A contract can be set aside if it has been entered into under duress. There are three main types of duress: duress to the person, to goods and economic duress. The latter has been slow to develop and its precise scope is not wholly certain. Duress essentially has two elements: (1) illegitimate pressure which (2) constitutes a significant cause of inducing the other party to enter the contract. The definition of 'illegitimate' has been the cause of concern in a number of cases as has the exact degree of inducement required; whether the duress is to the person it appears that it need only be 'a' cause of the party entering the contract whereas with economic duress it must be a significant cause. The courts will also consider wider factors such as whether the victim had a realistic alternative rather than submit to the pressure, whether the victim protested at the time and whether they affirmed the contract.

There seem to be two theoretical underpinnings for duress; firstly, that a person should not be permitted to benefit by their wrongdoing and, secondly, because the victim did not give real consent to terms of the contract.

 

Duress to the Person

In Barton v Armstrong [1976] Privy Council, the C and D were major shareholders in a company which was building an estate. They were locked in a power struggle which became increasingly bitter. Barton succeeding in getting rid of Armstrong as chairman and then there were discussions as to the terms on which Armstrong would sell his shares. An agreement for payment of over $400,000 (Australian dollars) was agreed but Barton later brought a claim alleging he had been coerced by threats of death from Armstrong. The trial judge found that Armstrong had in fact threatened Barton's family but held that Barton's primary purpose of entering the contract had been for commercial purpose. This was overturned by the Privy Council though they agreed that Barton might have entered the contract despite the threats. The court held that as long as the duress was 'a' reason for Barton to enter the contract, a claim could be brought. This standard is very low and in cases of economic duress the courts will invariably apply stricter causation. Another point to note from this case is that the Privy Council stated that the contract was void, not voidable. Void is where the contract is terminated whereas a voidable contract can continue until the innocent party chooses to terminate. This point is in contradiction to subsequent case law and it is possible that the court simply assumed that a contract was void without hearing argument on the point. Theoretically, to render a contract void makes sense if the basis of duress is lack of consent but not if the basis is preventing a party benefitting from its wrongdoing. The better view is that a contract will be voidable not void.

Another point to note is the illegitimacy of the threats. It was clear in Barton that threats to kill will constitute illegitimate pressure but what about where the threat is a threat to use legal redress, such as, a threat to sue someone e.g. "enter this new contract with me or I will sue you for debts you owe on a previous contract". If there was a genuine belief that a lawsuit was available such a threat cannot constitute duress. More often than not, an unjustified threat to use the law will be actionable under undue influence, if at all.

 

Duress of Goods

For many years the courts held that the withholding of another person's goods did not constitute duress. The main authority was Skeate v Beale (1841) in which C claimed that ?19 was owed by D and seized some of D's property. D agreed to pay ?3 immediately and the remainder later. When he failed to pay later C brought an action in which D replied saying that only ?3 was due and that he had been pressured into agreeing to the remaining money due to the seizure of his goods. The court held that D was not entitled to set aside the transaction for duress even though the seizure of the goods was unlawful. At the same time as this case was another case, Astley v Reynolds , which stated that it was possible to claim that a payment made in order to release goods was paid under duress. The difference between the cases seems to be that in Skeate ?3 was paid as consideration for the promise to pay the ?19 whereas in Astley there was no consideration. The distinction between the cases is weak and Skeate is no longer good law, as was made clear by Lord Goff in Dimskal Shipping v International Transport Workers' Federation [1992]. If it can be said that 'illegitimate pressure' was applied to the victim by withholding their goods, and that this was 'a' cause of the contract, the contract is voidable on the basis of duress.

 

Economic Duress

Economic duress developed after the other forms of duress and was not formally recognised until the judgment in Occidental Worldwide Investment v Skibs (The Siboen and The Sibotre) [1976]. The main difficulty with economic duress has been identifying the elements. In Pao On [1980} it was said that there needed to be a coercion of the will so that consent was vitiated but in Universe Tankship Monrovia [1983] it was said that the focus was not on the victim (and the quality of their consent) but on the pressure itself. Thus the pivotal question was whether the pressure was 'illegitimate'. In addition to illegitimacy the level of causation in these case is also different in that the pressure must be a significant cause of the contract and not simply 'a' cause. A third element was added which required that there was no realistic alternative for the innocent party: B & S Contracts and Design [1984].

In The Atlantic Baron [1979] the D agreed to construct a tanker for the C. By the time for payment the dollar had devalued and D demanded that they be paid an extra amount to make up for the devaluation (the contract did permit extra payments but not in that situation). C refused and suggested that the case be referred for arbitration. D refused and threatened to terminate the contract. C needed the tanker because of an advantageous contract it had entered with a third party and so paid the extra money. The court held that there was duress but that the C had affirmed the contract by making the final payments without protest. The significance of the case is that a threatened breach of contract can be duress. The court did not ask whether D had acted in bad faith, which suggests that bad faith is irrelevant. However, there is no reason why the court would not consider such a factor if it was relevant. In this case it is arguable that there was no bad faith as D was not acting to harm C but simply to cover their own loss caused by the devaluation of the dollar. The second important point from The Atlantic Baron is the need to act quickly. If a party suffers illegitimate pressure it seems reasonable that they would object to it. The third point from this case is that the court treated the contract as voidable and not void.

In Pao On v Lau Yiu Long [1980], the claimants were owners of shares in a company and the defendants were shareholders in a different company. The D wanted to buy a building owned by C. C and D agreed to exchange shares with each other as long as the C could not sell more than half of the shares before a certain period. The problem was that C would lose money if the shares dropped in value before that date as they could only sell them later at a reduced price. In order to compensate for this it was agreed that D could buy the shares back at $2.50, which was the same price as they were bought for. C later realised that this meant that D could make a profit if the shares dropped below $2.50 and D bought them back at $2.50 and C told D that they would not perform the share for share transfer unless the buyback term was changed. D agreed to amend the buyback term so that there was a guarantee against a fall in share price. The shares did go down in value and C sought to enforce the agreement but D argued that there was no consideration for the new amendment and that the amendment was obtained through duress. The Privy Council rejected the claim on the basis that there was no duress as the Defendant's consent had not been vitiated through duress. The importance of this case is in this test.

In Universe Tankships of Monrovia [1983], the C's vessel was boycotted by the defendant trade union of dock workers. As such the tugmen refused to tug the boat into the dock which was a breach of the tugmen's employment contracts. The D ordered the C to pay $80,000 in back-pay and a further $7000 to the dock workers welfare fund. C paid the money in order to have their ship released. C then sued to reclaim the welfare money (but not the back-pay). The court held that there was economic duress and that the money should be paid back. The importance of this case is that the focus shifts from 'coercion of the will' to the legitimacy of the pressure. Coercion of the will still plays a role in the analysis of a case but more as a theoretical concept than a concrete test. The court held that duress arises from the C having no choice and not from a lack of reality in their consent. When considering how legitimate the pressure is it is important to look at the context. The HL placed a lot of emphasis on the legislation governing industrial action and held that the strike was not legal. Another important point was that the contract was held to be voidable and not void.

In B & S Contracts and Design [1984], C agreed to erect stands for the D. C had problems with their workforce who refused to erect the stand until they received ?9000 severance pay. C offered to pay ?4,500 but it was rejected. C told D that the workforce would not work without the full amount and so D paid ?4,500 to c so they could pay the workforce. The contract was completed and D then deducted ?4,500 from the bill at the end but C sued for the whole amount. The trial judge held that the ?4,500 above the contract price had been paid under duress. The Court of Appeal agreed. The judges based their decision on the lack of options available to the D as if they had not paid the extra sum to the C they would have suffered heavy losses through the contracts they had with the people who wanted to use the exhibition hall where the stands were erected. However, the role of the 'reasonable alternative' factor cannot be taken too far; it is simply one factor for consideration and its main importance is in assessing causation: if the party did have alternatives it makes it much more likely that the duress was not a significant cause of their entering the contract. There will be many situations where it can be said that an individual has no reasonable alternative but this does not mean that the contract was entered under duress. For example a person who sells their house because they have to pay debts to a third party should not be allowed to claim duress.

The court in B & S Contracts held that there was in fact illegitimate pressure even though the problem experienced by C was caused by their workforce. According to the court there was in fact a threat to breach the contract. However, does this mean that every time a party has difficulty performing the contract, and they approach the counterparty saying this, they will be threatening to breach and therefore applying illegitimate pressure? The answer will depend on the facts while not forgetting that a party who is unable to perform and tells the counterparty ahead of time does the counterparty a favour by allowing them to find a new individual who can provide the goods or service they require.

In CTN Cash and Carry [1994], D accidentally delivered cigarettes to the Claimant's wrong warehouse. D agreed to collect them and deliver them to the correct warehouse but they were stolen before this could happen. D insisted that C pay for the cigarettes claiming that they were at the Claimant's risk at the time (though there was no legal basis for this belief). In later negotiations D made clear that they would withdraw credit facilities voluntarily offered to the Claimant unless they paid. C paid and then claimed that it had been under duress but their claim failed. The court held that refusing to enter a contract does not constitute illegitimate pressure. However, the court did place a lot of emphasis on the fact that Defendant's honestly believed that the cigarettes were at the Claimant's risk. If, perhaps, D had known that they had no right to demand the payment but had done so anyway the case may have been decided differently.

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