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Lawful acts can constitute economic duress

19 April 2012

A party’s lawful, but unethical, actions, following its own repudiatory breach, could constitute economic duress in certain circumstances.

The decision in Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm), 17 February 2012 represents the first judgment directly confirming this point, although Cooke J was keen to stress that it will only be in very rare cases that lawful acts constitute economic duress.

The tort of economic duress is generally difficult to establish and requires a victim to prove that:

  • "illegitimate pressure" was applied on the victim by the perpetrator; and
  • such pressure ‘caused’ the victim to enter into the relevant agreement.

It is generally accepted that crimes, torts and breaches of contract are, prima facie, "illegitimate pressure". Prior to this case, there had been obiter dictum and there was a general consensus between the key textbook writers that lawful actions could, in some circumstances, constitute "illegitimate pressure". However, this issue had never been directly decided by a court.

There is no absolute test to be taken into account when determining if pressure is illegitimate in the circumstances. The courts instead consider a range of factors, including whether: (1)

  • the person allegedly exerting the pressure has acted in good or bad faith;
  • the victim had any realistic or practical alternative but to submit to the pressure;
  • the victim protested at the time; or
  • the victim affirmed and sought to rely on the contract.

Facts

The case was an appeal under s69 of the Arbitration Act 1996 from an award issued by a London tribunal. The claimants, who hired out vessels (the Owners), concluded a charter for carriage by a specified vessel (the Named Vessel) of a cargo of shredded scrap from Mississippi to China with the defendant (the Charterers). The contract of hire, governed by English law, did not entitle the Owners to provide a substitute vessel. However, the Owners subsequently allocated the Named Vessel to the performance of another contract and then sought to allocate a substitute vessel to the charter with the Charterers. The Owners acknowledged that their allocation of the Named Vessel to another contract was a mistake and initially assured the Charterers that they would find a substitute vessel and would compensate the Charterers for any loss suffered as a result of their failure to provide the Named Vessel. The Charterers relied on these assurances and did not seek to find an alternative vessel.

When the buyers of the cargo from the Charterers were made aware of the change in vessel, they stated that they would agree to the change only if the purchase price for the cargo was reduced by USD 8 per metric ton (to reflect the prevailing market rates which had since dropped). The Charterers passed this information on to the Owners and held them responsible for that loss. However, the Owners were only willing to offer a discount of USD 2 per metric ton to the Charterers. The Charterers were prepared to accept this offer on the basis of a reservation of their rights in relation to the loss caused to them by the Owners’ breach. The Owners stated that the latter stipulation was not acceptable and that they would only enter into the new agreement on the basis that the Charterers waived all claims arising out of the nomination of the substitute vessel. This "take it or leave it offer" from the Owners was accepted by the Charterers under protest.

Is there a third limb to economic duress?

The parties agreed that the first two limbs mentioned above needed to be proven in a claim for economic duress (ie illegitimate pressure and causation). However, they disagreed about whether there was a third standalone element requiring the victim to show that he had no reasonable alternative but to agree to the contract, or whether this was merely a causative link between the illegitimate pressure and the contract in question. Cooke J accepted the arbitrators’ reliance on Huyton SA V Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620 in deciding that the victim probably did not have to establish "no reasonable alternative" as an ingredient of economic duress.

Must the illegitimate pressure be unlawful?

The Owners submitted that economic duress only operated if the victim was subjected to pressure by unlawful action on the part of the perpetrator and, as their action was lawful, it did not constitute economic duress.

Cooke J, having reviewed the key authorities on economic duress, held that it was clear that illegitimate pressure did not have to be unlawful. He placed particular reliance on the following obiter dictum from Lord Steyn in CTN Cash & Carry Ltd v Gallaher Ltd [1993] EWCA Civ 19:

"The aim of our commercial law ought to be to encourage fair dealing between parties. But it is a mistake for the law to set its sights too highly when the critical inquiry is not whether the conduct is lawful but whether it is morally or socially acceptable… Outside the field of protected relationships, and in a purely commercial context, it might be a relatively rare case in which "lawful acts duress" can be established. And it might be particularly difficult to establish duress if the defendant bona fide considered that his demand was valid. In this complex and changing branch of law I deliberately refrain from saying "never"."

Decision

Cooke J held that "illegitimate pressure can involve the doing of acts which are not unlawful in themselves, albeit unusually in commercial cases, but in any event, the refusal to…[provide a substitute vessel for the Named Vessel] unless the Charterers agreed to waive their prior breach, has to be seen both in the light of that prior repudiatory breach which was unlawful and the Owner’s subsequent attempts to take advantage of the position created by that unlawfulness."

The Owners’ appeal therefore failed and the court held that the agreement was set aside.

Comment

Cooke J’s decision provides support to the various textbooks and obiter dicta which have previously considered that a lawful act can constitute "illegitimate pressure" for the purposes of economic duress. However, Cooke J was keen to stress that each case turns on its own facts. The decisive facts in this case seem to have been that the Owners’ repudiatory breach was the root cause of the problem and that their continuing conduct thereafter was designed to put the Charterers in a position where they had no option but to accept the Owners’ offer in order to ship the cargo to China and avoid further huge losses on the sale contract to the buyers.

Whilst Cooke J appears to have reached a fair decision on the specific facts, in practice it is likely to be difficult to establish whether a court would classify aggressive negotiation tactics as economic duress rather than just part of the accepted "rough and tumble" of normal commercial bargaining. The courts increasingly have to determine what falls the right side of "tough but fair" in the context of global commercial negotiations, often between companies and individuals with contrasting cultures, perhaps meaning that this decision will only be followed in the most extreme cases.

Footnotes

(1) DSND Subsea Ltd v Petroleum Geo-services ASA [2000] BLR 530 at [131]. Dyson J.’s statement was accepted as correct by both sides in the later case of Carillion Construction Ltd v Felix (UK) Ltd [2001] BLR 1, also before Dyson J.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.