21 August 2012

Court finds commercial pressure amounted to duress

Businesses that use commercial pressures on clients to force them to accept revised contract terms in breach of previous agreements should note a recent court ruling that such actions can amount to duress, entitling the client to compensation.

A client contracted with a shipowner to carry scrap from the USA to China, so the client could fulfil its contract with a buyer. However, the shipowner then chartered the ship it had originally proposed to use to another client so the client could not fulfil its contract to its buyer.

The shipowner admitted this was a serious breach of its contract with the first client — known in law as a ‘repudiatory’ breach. The legal test of whether there has been a repudiatory breach is whether, from the perspective of a reasonable person in the position of the innocent party, looking at all the circumstances, the party in breach of contract has shown a clear intention to abandon and altogether refuse to perform the contract.

The shipowner promised to provide an alternative ship and compensate the client. The client, quite reasonably, relied on those promises and agreed to continue to perform the contract rather than terminate it. It therefore asked its buyer for an extension of time to deliver the scrap using the new ship. The buyer said it would only agree if the client dropped the price of the scrap. However, when the client went back to the shipowner, the shipowner:

  • offered to reduce its prices, but not enough to stop the client making a loss on its contract with its buyer; and
  • said the client had to agree to waive any claim to the compensation it had originally offered.

The client felt it had no realistic alternative to accepting the shipowner’s offer in order to fulfil its contract with its buyer. It therefore accepted, but made it clear it was doing so under protest.

Subsequently, the client took the shipowner to court claiming the economic pressure asserted by the shipowner amounted to duress as it was both illegitimate and a significant inducement to enter into the contract. Duress entitles the victim to compensation. The shipowner argued its actions had to be unlawful to amount to economic duress.

The Court said although it would be unusual in a commercial context, conduct could be illegitimate for the purposes of duress, even if it was not unlawful. It said the circumstances of the current case did amount to duress because the shipowner had:

  • Created the circumstances in which the client had committed to ship the scrap for a lower price, by breaching its contract with the client and then promising the client compensation.
  • Subsequently gone back on that promise by refusing to supply an alternative ship unless the client waived its right to compensation.

The court said "the more serious the impropriety and the greater the moral obloquy which attaches to the conduct, the more likely the pressure is to be seen as illegitimate".

The court also clarified that if an act was unlawful it could still be illegitimate pressure, whether it was a past act or a threat to carry out an unlawful act in the future.

Recommendation

Parties to a contract who suspect the actions of one of them could amount to “more than the rough and tumble of the pressures of normal commercial bargaining” should seek specialist legal advice to ensure their actions do not amount to duress, entitling the other party to compensation.

For more information please contact Mark Lumley at Shulmans on 0113 297 7727 or at mlumley@shulmans.co.uk.