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Economic duress: ‘illegitimate pressure’ requirement may include threats of lawful action

04 April 2012

Businesses must always pursue their own interests during commercial negotiations but there are various legal principles that operate to limit abuse of a strong position.

One of these is the law of economic duress, which enables a contracting party to avoid an agreement if illegitimate pressure has been used to induce them to enter into an agreement.

Recent case law confirms that in addition to crimes, torts and breaches of contract, ‘illegitimate pressure’ may even include threats to carry out lawful acts as well as past unlawful acts.

Case examples

In the case of Progress Bulk Carriers Ltd v Tube City IMS LLC, Tube City chartered a ship from the owners, Progress Bulk. The owners then breached their contract by chartering it to someone else: Tube City could have terminated the agreement.

Tube City suffered losses due to the delay and were likely to suffer huge losses if the shipment was further delayed. The owners promised they would provide a substitute ship and pay compensation for any losses. Tube City accepted this and did not search for an alternative carrier.

The owners then refused to provide a substitute unless Tube City waived all claims against them for damages. This was legal because no binding promise had been made. Tube City agreed under protest but later claimed for their losses and the matter went to arbitration.

The issue was whether the (lawful) threat to refuse to provide a substitute ship satisfied the ‘illegitimate pressure’ requirement for economic duress.

Arbitration

The arbitrators found that threats of lawful action could amount to ‘illegitimate pressure’. On the facts, they found that there was economic duress. They set aside the waiver and awarded damages to Tube City.

The owners applied to the High Court to have the arbitrators’ decision set aside, arguing that their threatened action was lawful and therefore did not amount to ‘illegitimate pressure’ for the purposes of economic duress.

Decision of the High Court

The High Court confirmed the arbitrators’ decision that threats of lawful action could amount to ‘illegitimate pressure’, although this would be unusual, particularly in a commercial context. It is also worth noting that past unlawful acts can also constitute ‘illegitimate pressure’.

Litigation partner Paul Gordon says:

“Businesses should be aware that their contracts may be voidable if wrongful pressure is exerted during negotiations. That said, the courts usually prefer to avoid uncertainty in commercial relations and the threat of judicial intervention in commercial agreements may remain limited. As long as you adopt a common-sense approach to commercial agreements, with luck you will not encounter this area of law.”

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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Paul Gordon LLB
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