law of economic duress

THE LAWOF

ECONOMICDURESS

by

Philip Newman, Barrister

and Nitin Khandhia, Solicitor

Is it the "rough and tumble of the pressures of commercial

bargaining" or is it unlawful economic duress? When is the

line crossed where a tough stance becomes legally

illegitimate? This is what our short article is about.

This is an area of real importance to many businesses in the

UK and can be especially relevant when there is an

inequality of bargaining power - and that does not

necessarily depend on the relative sizes of the commercial

parties but much more on the factual and commercial

context that exists at the time.

Sometimes in business - as in politics - the approach

adopted may be along the lines of the famous quotation

(first attributed to President Theodore Roosevelt and later

said to have been used by President Richard Nixon):

"When you've got them by the balls,

their hearts and minds follow!"

The meaning of this phrase is painfully clear and it has to

be said is often very true in many contexts, including in

business.

However, from time to time the pressure used may be

judged as having crossed the line from strong (and possibly

even fierce) negotiation to conduct which was unlawful or

illegitimate. It is that situation that may allow the injured

party in effect to re-group and ultimately to win the day

legally and financially.

THE LAW OF ECONOMIC DURESS

“When

you've got

them by the

balls, their

hearts and

minds

follow!”

THE RELEvANT LAW

The general principles of the law relating to economic

duress were outlined by Mr Justice Dyson in DSND Subsea

Ltd v Petroleum Geo Services ASA, [2000] BLR 530 at para.

131 and repeated and clarified in his later decision in

Carillion Construction Ltd v Felix (UK) Ltd, [2001] BLR 1:

where he said:

“The ingredients of actionable duress are that there must

be pressure,

(a) whose practical effect is that there is compulsion on, or a

lack of practical choice for, the victim,

(b) which is illegitimate, and

(c) which is a significant cause inducing the claimant to

enter into the contract: see Universal Tanking of Monrovia

v. ITWF [1983] AC 336, 400 B–E, and The Evia Luck [1992]

2AC 152, 165 G. In determining whether there has been

illegitimate pressure, the court takes into account a range of

factors.

These include whether there has been an actual or

threatened breach of contract; whether the person allegedly

exerting the pressure has acted in good or bad faith;

whether the victim had any realistic practical alternative but

to submit to the pressure; whether the victim protested at

the time; and whether he affirmed and sought to rely on the

contract. These are all relevant factors. Illegitimate pressure

must be distinguished from the rough and tumble of the

pressures of normal commercial bargaining.”


“Illegitimate

pressure

must be

distinguished

from the

rough and

tumble of the

pressures of

normal

commercial

bargaining”

We will now give you the details of a case which vividly

demonstrates how a commercial party can use the law on

economic duress to obtain financial recoupment for the

consequences of an agreement made under illegitimate

economic pressure such as to have amounted to economic

duress. This was a case essentially of a sub-contractor

placing heavy pressure on to a main contractor.

Adam Opel GmbH & Anor v Mitras Automotive (UK) Ltd

[2007] EWHC 3205 (QB) (18 December 2007):

David Donaldson QC sitting as a Deputy High Court Judge

in this case said that "the list of matters to be considered in

assessing legitimacy is not exhaustive, and the weight to be

attached to each of them will depend on the facts of the

individual case. And the decision on the fundamental

question whether the pressure has crossed the line from that

which must be accepted in normal robust commercial

bargaining involves at least some element of value

judgment". That is undoubtedly correct and is often a hard

decision for the judges.

As the judge made it clear that the pressure may - and in the

case of economic duress normally does - consist of a threat

to breach a contract. That is exemplified by the decision in

the Carillion case, where a sub-contractor supplying

cladding for the construction of an office building refused

to continue supplies necessary for the completion of the

works, exposing the main contractor to liability to the

employer or substantial damages. In the present case, the

pressure alleged by GMR was a threat by Mitras to breach

the obligation owed by it to GMR to supply units to IBC.


“The

fundamental

question is

whether the

pressure has

crossed the

line from

accepted

commercial

bargaining”

THE KEy FACTS

This is a salutory tale but many will see similar situations

arising commercially and these situations are likely to

increase in the current economic climate where margins

and money are increasingly "tight".

This was a case which involved the production of a

commercial van called the "vivaro" (and also badged as the

"Trafic") and to be produced in Luton. The Claimants

were General Motors and Renault (whom we will call

"GMR" for ease of reading).

The Defendants were a company called Mitras (a subsidiary

of a German company) which manufactured and supplied

components to the automotive industry from a factory in

Winsford in Cheshire.

Mitras was the exclusive supplier (for the UK end of the

manufacturing operation) of the moulded plastic unit upon

which the front bumper was mounted.

Problems started when Opel/vauxhall decided to refresh

the look of the van and of the front bumper design and

eventually this led on to Mitras losing its role as the supplier

of the bumper mount. Mitras evidently was, to say the

least, not happy about this turn of events.

On being informed of GMR’s intention to terminate its role

as supplier in six months’ time, Mitras advanced significant

financial demands which essentially involved demanding a

new and increased price for the ongoing supply of the

product.


Situations are

likely to

increase in

the current

economic

climate

where

margins and

money are

increasingly

"tight".

In a fax dated 25 January 2007 Mr Keith Worrall, the

Managing Director of Mitras, pointed out that the

amortisation of Mitras’ development costs had been based

on the estimated supply of 863,257 units over 12 years; said

that Mitras had reduced the price during the initial

negotiations to reflect the longevity of the project/volume

of the vehicles to be built; and referred to the fact that

Mitras had given a 3% reduction of price in years 2, 3 and 4.

He then asked for the following “in recompense:

“1. Outstanding amortisation to be paid 195,146.40 GBP

(487,866 units @ 0.4 GBP/unit).

2. The 3% year-on-year cost reduction will be re-credited

giving a total outstanding of 177,410.41 GBP.

3. The 0.5 GBP given as a reduction at the commencement

of the project total of 187,695.50 GBP to be recredited.

4. A new selling price of 14.15 GBP with effect from 1st

February, 2006 until the run-out of production in July,

2006.”

Mr Worrall was accordingly looking for payment of some

£560,000 together with a price increase of over £2.00 back-

dated to 1st February 2006, being potentially over £100,000.

He concluded the letter by saying:

“In closing, we seek your urgent agreement to the above or

we reserve the right to suspend supplies until an acceptable

resolution is put in place.

I am happy to meet with you ... but stress that an urgent

resolution is required – this should take a maximum of two

to three weeks to achieve.”


The response of GMR was to offer about £20,000 as

compensation. Mitras plainly considered this to be wholly

unacceptable and said it was not willing to negotiate on its

demanded new price for the component to be supplied (in

what was effectively a run down period where Mitras would

not be the supplier in the future) - so plainly the parties

were a very long way apart.

The correspondence was degenerating into open hostility

and GMR informed Mitras that they could only interpret

what was being said by Mitras as a threat to halt supplies of

the component without notice if they did not agree to what

they called an "extortionate" price increase for the

component.

Discussions led to a slight softening of the demands by

Mitras - but the parties remained a long way apart

financially (by well over £400,000).

Mitras then set out on 9 March 2006 what it called its “final

offer” and said:

“Therefore, in the proposed conference call at 2 p.m. GMT

on Monday 13 March, 2006, GM/Renault must advise

whether they wish to accept or decline the offer.

In the event that GM/Renault decline the offer, they must

make arrangements to collect the tooling and equipment

and organise an alternative supply for this product.

The tooling/equipment will only be released when all

outstanding amounts owed to meet first by GM Renault are

cleared in full.”

So far as GMR was concerned a failure of supply would

have had catastrophic consequences.


“Correspondence

was

degenerating

into open

hostility”

On the stocks as they believed them to be, including the units

in the transport pipeline, production of the vans would have to

be halted in about 24 hours - that would give rise to losses of

over £500,000 per day and also have knock-on effects for other

component suppliers operating on a similar basis to Mitras.

Cessation of supply had, therefore, to be avoided at almost any

cost. As it seemed to the GMR (advised by its lawyers), the

choice was a stark one - between capitulation on the one hand

and on the other hand applying for an emergency injunction to

compel supply by Mitras.

GMR went to court for an urgent injunction without notice

to Mitras. The reason for not notifying Mitras was that

GMR feared an immediate cessation of production and

supply if it gave Mitras prior notice of such legal action.

However, GMR's plan failed, because the judge hearing the

application for an emergency injunction refused to give the

injunction without notice to Mitras. The judge took the

view that at least Mitras should be given short notice and be

allowed to respond to the claim for the injunction at the

outset. This was plainly a major disappointment for GMR

at the time.

GMR thereupon urgently considered the consequences of

its set back at Court. The result after consultation with its

lawyers, was that it decided to capitulate in the face of the

pressure; this was rather than giving Mitras any notice of a

hearing for an injunction as GMR feared that any notice

could have disastrous consequences in the shape of a halt

of production and supply when its stocks of the component

were very low. In the event, GMR faxed a letter to Mitras

which said:


“It was

decided to

capitulate in

the face of

the pressure”

“We refer to previous correspondence and discussions

between us, culminating in your requirement for a yes or no

answer in writing by noon today.

As you know we continue strongly to refute your analysis of

the contractual position. We also feel very strongly that we

do not have any liability to pay Mitras the capital sums and

enhanced piece prices. On the other hand, as you probably

know, our stock of these parts is down to one days supply.

As we mentioned in our fax yesterday, you have placed us in

an impossible position. We have therefore decided to deal

favourably with your demands.

We therefore confirm that we will make the payment sought

in your second fax of 9th March, on the dates you specify on

account of such liability as we have. This is strictly

conditional upon continued supply.”

The practical effect was that that very afternoon the haulier

was permitted to load that day’s consignment of the

components from Mitras to GMR and subsequent

collections proceeded as normal.

At this point it would doubtless have seemed to Mitras that

it had won the day ... but this proved not to be the case and

any opening of champagne by the Mitras management

would have been sorely premature as will now become clear.

Having made the payments demanded by Mitras, GMR

then (through its solicitors) wrote seeking repayment of

sums totalling £451,021.80, with interest on the basis that

they had been obtained by economic duress and without

any contractual consideration.


“The opening

of the

Champagne

was

premature!”

The result was that judgment was given to GMR for

£451,021.80, save only for a sum of £19,118 conceded by

GMR and which was consistent with its early offer to

Mitras. The costs to payable by Mitras will doubtless have

been very large for this sort of heavy duty litigation.

This case certainly shows the dangers of going over the top

in negotiations when one party views the other as being over

a barrel and then makes unrealistic demands coupled with

unlawful or illegitimate threats. It is the critical combination

of demands coupled with unlawful or illegitimate threats,

which lies at the heart of the concept of economic duress.

We now turn to a more recent case decided in the High

Court which gives a further practical example of how the

remedy of economic duress (and also the tort of

intimidation) works.

Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2010]

EWHC 113 (Comm) (01 February 2010).

In the current economic situation (and that of the last few

years) contracts which at one point had been financially

rewarding have become less so and sometimes loss-making.

So parties will try to secure a commercial benefit by re-

negotiation usually in the face of resistance by the party

who had the commercial advantage.

In the Kolmar case a party called Traxpo refused to abide by

its contractual obligations to a party called Kolmar, unless

the terms were changed so as to be more favourable to it.


“This case

shows the

dangers of

going over

the top

during

negotiations”

Traxpo had agreed to supply Kolmar with methanol and

had agreed the quantity and the price.

However the market price then worked against Traxpo as

the market price of methanol steeply increased and so at its

agreed price of supply to Kolmar turned into a heavy

financial burden. Kolmar got to hear that a third party was

being provided with cargo (which ought to have been

destined for Kolmar) to other customers - albeit that Kolmar

needed the methanol to comply with a contractual

obligation to an important customer based in the USA. In

other words Kolmar realised that it was being "played".

The judge (Mr Justice Christopher Clarke) held that the

principles to be derived from this case in connection with

economic duress were:

(i) Economic pressure can amount to duress, provided it

may be characterised as illegitimate and has constituted a

"but for" cause inducing the claimant to enter into the

relevant contract or to make a payment. See Mance J in S.L.

Huyton S.A. v Peter Cremer GmbH & Co [1999] 1 Lloyds

Rep 620;

(ii) a threat to break a contract will generally be regarded as

illegitimate, particularly where the defendant must know

that it would be in breach of contract if the threat were

implemented;

(iii) it is relevant to consider whether the claimant had a

"real choice" or "realistic alternative" and could, if it had

wished, equally well have resisted the pressure and, for

example, pursued practical and effective legal redress. If

there was no reasonable alternative, that may be very strong

evidence in support of a conclusion that the victim of the

duress was in fact influenced by the threat.


“They

realised they

were being

played”

(iv) the presence, or absence, of protest, may be of some

relevance when considering whether the threat had coercive

effect. But, even the total absence of protest does not mean

that the payment was voluntary.

The judge found on the facts of the case:

"If a full cargo was not loaded Kolmar faced a very large

claim for deadfreight. If the vessel had sailed on 5th

October the deadfreight would have been about $ 1,075,000.

Kolmar desperately needed the cargo in order to supply

Methanex, and, if it failed to do so, would not merely suffer

a severe loss of reputation with a client of great potential

importance but would in all probability be exposed to very

large claims. The price under the Methanex contract was

$394 CIF Houston. The market price was $ 520. So the

claim would be for over $ 2 million. If Kolmar did not

procure the cargo from Traxpo the only alternative would be

to try to purchase an alternative in the open market. If this

had been possible at all, which, in the then state of the

market was doubtful, it would have been at a very high

price. The prospect of speedy legal redress was remote and

any obligation of Traxpo was unsecured.

Kolmar, through Ms John, made contemporaneous protests

which fell on deaf ears. On 5th October Kolmar provided

amendments to the letter of credit on the basis that it "had

no other alternative but to accept". Ms John protested

verbally to Mr Tapuriah about Traxpo's threatened non-

compliance in her discussions with him. There was,

however, a practical limit to the extent that Kolmar could

protest having regard to the possibility that Traxpo would

walk away from the contract completely, which it had

threatened to do.


“There was

no alternative

but to

accept”

Mr Tapuriah cannot have thought that there was any legal

or moral justification in the stance that he was taking. He

must have sensed Kolmar 's increasing desperation. So

soon as the cargo was finally secured, Kolmar promptly

asserted its legal rights and began these proceedings."

It was in the above circumstances that the judge decided

that Kolmar was entitled to restitution of the increased

payment which it has been forced to pay by the economic

duress constituted by Traxpo's illegitimate threat of breach

of contract. The sum was not inconsiderable: $1,405,566.61.

This was also a case where the tort of intimidation was

established and damages were awarded. The judge

summarised that for the tort of intimidation, the following

was required:

(i) the defendant makes a demand backed by a coercive and

unlawful threat;

(ii) the claimant complies with that demand because of the

coercive and unlawful threat;

(iii) the defendant knows or should have known that

compliance with its demand will cause loss and damage to

the claimant and

(iv) the defendant intends its demand to cause loss and

damage to the defendant.

The essential difference between economic duress and the

tort of intimidation is that economic duress is what is called

a restitutionary remedy entitling a party to avoid the

agreement entered into and to obtain recoupment of all the

monies paid, whereas the tort of intimidation allows a party

to make a claim for damages.


“He cannot

have thought

there was any

legal or moral

justitfication

in the stance

he took”

The requirements for establishing the tort of intimidation

(as set out above) are more extensive than for establishing

economic duress but the current case law including that of

Berezovsky v Abramovich [2011] EWCA Civ 153 (23

February 2011) (a Court of Appeal decision) indicates that

there is significant overlap between the necessary

ingredients to establish economic duress and what is

needed to establish a case under the tort of intimidation.

So there are twin remedies available - one being

restitutionary for the return of monies paid over and the

other being a claim for damages suffered - for instance

compensation for a breach of contract caused with a third

party.


“It shows

there are

remedies

available”

SUMMARy

This area of the law whilst providing a useful tool to right

wrongs - requires considerable care in its handling and any

party wishing to play this card needs to take objective and

legally well-informed view of the situation in its full factual

context. This is where lawyers come in. The position for

the commercial or business client is that often it cannot take

its own objective and dispassionate view of events that have

occurred. It may have been at loggerheads with the other

commercial party for weeks or months. Relations may be

very strained or may have broken down between key

individuals. Everyone on both sides of the dispute, may

consider they are in wholly in the right and the other party

is wholly in the wrong. So the position is that objective legal

advice is essential and a commercial party faced with what

it may consider to be economic duress or intimidation (or a

party being accused of exerting such duress or

intimidation) will need lawyers who are able to give

objective and commercially astute legal advice ... and to do

so speedily.

Earlier in this short article we have given you details of

cases where the economic duress was successfully

established - but it is important to appreciate that there are

plenty of cases where it has failed to be established.

Ultimately, it is a relatively easy allegation to make - but a

very hard one to prove. It is wise to understand that the

courts work solely on evidence so that they must be satisfied

on that it is more likely than not that economic duress has

established such that it went beyond the "rough and

tumble" of tough commercial negotiations between hard-

headed commercial individuals.


“Objective

legal advice is

essential”

Philip Newman is a Barrister practising at

42 Bedford Row, London, WC1R 4LL

Tel: 020 7831 0222; Fax: 020 7831 2239

email: [email protected]

website: www.42br.com

Nitin Khandhia is a Solicitor and a Partner in the firm of

BTMK, solicitors

email: [email protected]

Tel. 01702 238542

Fax. 01702 331563

website : www.btmk.co.uk


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