Commercial Contracts and Economic Duress

Duress is a means by which a person may be released from the obligations under a contract where unlawful threats have been made. In the commercial context this vitiating factor may be alleged where illegitimate threats have been made that would affect a person’s economic interests. The duress is of the sort that deprives the person of consent in entering the contractual arrangement, although the test at law is that the person is exposed to pressure and is deprived of choice that would otherwise be available. There must be effectively no choice other than to comply with the request or the demand to be successful in a claim for duress.

Legal Foundation

The modern law of duress stems from the foundations laid in common law, whereby persons subject to actual or threatened with physical violence were able to obtain an order that the contract subsequently entered into was void ab initio. The application of duress has since expanded, so that the duress may be economic in nature. There is established law dealing with duress over goods, where threats have been made that they may be taken, damaged or destroyed. Where money has been paid and there was no obligation to pay it, and the payee was under an urgent and pressing demand to pay the money on threats of damage, seize or retention of goods, it may be recovered. The payer would be well advised in such circumstances to make it clear that the payment was being made under protest.

Economic Duress

A contract may also be avoided where a person enters into a contract as a result of threats or pressure that does not involve threats of bodily harm, and is recognition that there are improper forms of pressure to apply in commercial transactions. The threat must be coercive to the extent that the pressure is unlawful, and caused a serious threat to the economic interests of the party suffering the duress.

Economic duress may apply to the formation of the contract in the first place or subsequent variations of the contract. The pressure must be of a nature that is illegitimate and was a significant cause inducing the person to agree to the terms of the contract. The threats made and pressure asserted must be particularly coercive and of some significant weight or gravitas. The victim’s conduct must be affected in a significant way by the duress, and a reasonable alternative must not be available at the time to the victim of the duress.

Reasonable Alternatives

Duress is characterised by a lack of choice. Where an alternative is available to the victim the vitiating defence will not be available, however the alternative must be reasonable. Supposing a supplier under contract supplied goods under an exclusive supply arrangement. The victim company would be entitled to claim the benefit of duress in the event that the supplier refused to supply the goods unless a substantial premium was paid, provided there was not some other supplier who provided the same goods at a roughly equivalent rate.

The following descriptive examples may give rise to a claim for economic duress:

1. making threats without any legal justification
2. threatening to commit some unlawful act
3. threats to terminate a contract, where the threat is properly regarded as illegitimate pressure
4. applying pressure in bad faith
5. making threats that are calculated to seriously damage another, such as blackmail
6. threats to prosecute where the charge is known to be false
7. requirements for extra payments to be made over and above the original contract price
8. using knowledge of the affairs of the person suffering the duress to apply illegitimate pressure.

It is prudent to ensure that the acquiescence is made under protest and without prejudice to the person’s rights.