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Economic duress: driving a hard bargain or illegitimate pressure?

7 June 2012
It is well established that an agreement procured by duress is voidable and can be set aside by the victim of the duress. But when does negotiating hard cross the line and become illegitimate pressure? In Progress Bulk Carriers Limited v Tube City IMS LLC, the Commercial Court confirmed that the doctrine of economic duress can be invoked even where the pressure applied doesn't actually consist of an unlawful act.

This case was an appeal from a ruling in an arbitration between the owners of a cargo vessel and its charterers. The owners concluded a charter for the carriage of shredded scrap from the Mississippi River to China on a particular vessel, the Cenk K. The identity of the vessel was important to the charterers (and to the buyer of the scrap) and the charterparty did not give the owners any right to substitute an alternative vessel.

The ink on the charterparty was barely dry before the owners indicated that they would like to substitute another vessel. Without the charterers' approval, the owners chartered the Cenk K to a third party – putting themselves in repudiatory breach of the original charter. When this came to the charterers' attention, the Cenk K was already loading, so there was no realistic chance of the original charterparty being fulfilled.

Attention then turned to finding an alternative vessel. The owners found a substitute and said that they would pay compensation for all damages that resulted from their failure to provide the Cenk K. The third party to whom the charterer had contracted to sell the cargo was prepared to accept a revised delivery date, subject to a reduction in the purchase price. Relying heavily on the owners' assurances, the charterers were willing to accept the alternative vessel, assuming that they would be fully compensated by the owners for the losses they had incurred.

The charterers informed the owners of the new sale terms with the buyer of the cargo, only to be informed by the owners that they would only compensate a fraction of the price reduction. The charterers, with no other viable option at this point, accepted the alternative vessel but reserved all their rights in respect of claims arising out of the original breach of the charterparty.

The owner rejected this and, withdrawing the reassurance that they would compensate the charterers for all their losses, presented the charterers with what the Judge described as a "take it or leave it" offer – they would provide the alternative vessel if the charterers waived all rights to claim for losses or damages arising from the original breach. The charterers had been backed into a corner. If they were still to meet the revised delivery date under the sale contract, they had no time to do anything other than accept the offer. They accepted under protest.

The key issue before the Court was this: was the waiver of the charterers' claim for breach of the charterparty procured by economic duress by the owners?

The owners said not – they argued that they were entitled to take this stance as the reassurances they had given weren’t contractually binding. The charterers argued that their agreement to waive their claim was procured by economic duress and should therefore be set aside.

Looking at the negotiations preceding the waiver of the charterers' claim in isolation, the owners were right to say that they had not entered into any binding agreement to ship the goods on the alternative vessel, so there was no threatened breach of contract in saying that they would not do so without the charterers waiving their claim.

However, the Judge found that the original breach of contract by the owners – not providing the Cenk K in accordance with the charterparty – was the root cause of the problem. The owners' subsequent conduct was designed to put the charterers into a position where they had no option but to waive their claim so they could ship the cargo on the alternative vessel and avoid the substantial losses they would have suffered had they not been able to fulfil their onward sale contact.

The Judge found that the owners had put the charterers under "illegitimate pressure" to waive their claim through the combination of their original breach of the charterparty and then withdrawing their reassurances that the charterers would be compensated for any loss incurred due to that breach.

The Judge referred to CTN Cash & Carry Ltd v Gallaher Ltd [1994] 4 AER 714 where the Court of Appeal had accepted in principle that the "illegitimate pressure" need not be unlawful conduct, indicating that the appropriate test is "not whether the conduct is lawful but whether it is morally or socially unacceptable". What sort of conduct will meet this threshold?

The Judge rejected the owners' argument that it required conduct that provoked "such a sense of moral outrage and which appeared so unconscionable or so manifestly beyond the norms of ordinary commercial practice that it could be considered on a par with conduct that the law does expressly recognise as illegal or criminal". It is not surprising that this was rejected – this sort of test would have left very limited flexibility in future cases.

Unfortunately this decision doesn’t give any general guidance on what constitutes "morally or socially unacceptable" conduct. It will depend on the circumstances of each case: what is acceptable between two commercial parties may be unacceptable elsewhere. It is understandable that the Judge did not seek to lay down a prescriptive test - this would have been an invitation to adopt negotiating strategies that just fall on the right side of the line. This creates a dilemma for those negotiating contracts: how far can they exploit a strong bargaining position without straying into the territory of economic duress? And when the contract has been concluded, a party that has negotiated hard then faces the risk that the other party will try to avoid the contract on the ground that the negotiations overstepped the mark.

It would be wrong for the law to become a weapon to enable parties to extricate themselves from bad bargains. It was no doubt with this in mind that the Judge, echoing comments previously made by the Court of Appeal, stressed that it might be a relatively rare case in which economic duress would be based on lawful acts, particularly in the commercial context.

So, what sort of conduct will set a case apart from the cut and thrust of normal commercial negotiations and raise issues of economic duress?

A key factor in Progress Bulk Carriers was the conduct of the vessel owners: having created the problem by not making the Cenk K available, they then put the charterers in a position where they had no realistic alternative but to waive their claim.

Although each case will depend on its facts, it is not difficult to envisage other contexts in which similar issues might arise.

For example, a supplier who refuses to supply critical goods (or threatens to do so) will often find itself in breach of contract and on the receiving end of an application for an injunction. But if the supplier has no existing contractual obligation to supply the goods, it cannot be in breach of contract by refusing to do so. But what if it gives misleading assurances that it is willing to supply the goods and then, at the last minute when it is too late for the purchaser to go elsewhere, it refuses to do so unless the purchaser accepts onerous ongoing obligations?

The supplier may well say that it is just making the most of a strong bargaining position. The lesson from Progress Bulk Carriers is that whether the supplier has acted lawfully is not the end of the matter. Although the court will be wary of upsetting contracts between commercial parties, if it takes a particularly dim view of conduct that has created a situation where the purchaser is left with no real alternative but to accept the supplier's demands, the purchaser may be able to avoid the contract. What initially looked like a very favourable outcome for the supplier could be at risk once the immediate pressure has lifted.

The purchaser who enters into an onerous contract under this sort of pressure would be well advised to follow the charterers' example: contract under protest, ensure its rights are preserved and avoid the contract as soon as possible – before the right to do so is lost.

In the current challenging economic conditions, it is not surprising that contracting parties are seeking to drive hard bargains where they can, nor that parties are exploring whether they can avoid what may have turned out to be bad bargains. This case reflects that contracts should generally be upheld and that economic duress should not be an easy way out of onerous contracts, whilst recognising that even between commercial parties there needs to be a workable solution in those limited cases where a contract is procured by lawful but "morally or socially unacceptable" behaviour.

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