Essay: Contract law and duress

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  • Contract law and duress
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Introduction:

Many contracts occur each day, ranging from minor shop transactions to more substantial commercial contracts, they are a normal element of daily life. When entering a contract, there is a basic principle voluntariness of both parties, however issues can arise when one party is pressured to enter into the contract. Denying one party from their right to voluntarily enter the contract gives rise to the defence of duress, which makes the contract voidable . One definition of duress was set out in R v Attorney general [2003] as “physical threat or other illegitimate pressure being used for an improper objective which is sufficiently serious to impair the consent of the other party.” This essay will address the issues associated with duress and discuss whether there is rational justification for the doctrine of duress and if without reason disrupts the principle of freedom of contract.

Reasons for:

(a) Lawful pressure

One question about duress is whether a threat of a lawful act would still be considered illegitimate pressure. This is problematic because essentially the contract is voidable even though all actions were lawful. This was seen in the case CTN Cash and Carry v Gallaher [1994] where the plaintiff ordered cigarettes from the defendant but through their own fault mistakenly ordered them to be sent to the wrong warehouse. The cigarettes were stolen. The defendant mistakenly believed the risk of theft was the plaintiff’s responsibility and as a result insisted the plaintiff pay for the cigarettes and if they were to refuse they threatened to withdraw credit facilities on future contracts. The claim failed in the court of appeal and was found there to be no economic duress because the threat was made in good faith and genuinely believed their claim for payment was legitimate. Steyn LJ went on to say the defendants were in law entitled to refuse to enter into any future contracts with the plaintiffs for any reason and therefore it was lawful for the defendants, for any reason to insist that they would no longer grant credit to the plaintiffs or have the right to reject any party for any reason .

Professor Birks explains, “lawful pressures can give rise to the doctrine of duress, the only viable basis for discriminating between acceptable and unacceptable pressures is not positive law but social morality.” This is significant because it shows lawful act cases complicate the doctrine because it is based on social morality rather than law, which means it may interfere with the freedom of contract and normal commercial businesses as parties are constantly having to be wary of their actions even if they are lawful due to fear of the contract being challenged or one party not liking the terms of the contract at a later date and raising a claim of duress.

This would interrupt commercial contracts since businesses threatening others to get a better deal is considered a norm, if lawful acts are included in duress it gives the opportunity for the majority commercial contracts to be voidable and therefore widens this area of law to allow for too many claims to be made which in turn may create uncertainty within the law and limit the freedom to create contracts.

(b) Voluntary

One possible line of thought is for a claim in duress to occur; a contract must have been made. A issue with duress is majority of claims are not from parties that have been physically forced to sign the contract where the other party physically forces their hand to sign it; usually the claims are made by parties that voluntarily entered into the contract. As the party entered voluntarily, it can be argued that duress violate the principle of freedom of contract if the party is able to go back on their agreement at a later date after they voluntarily entered the contract . “A contract is a promise” both parties have made this promise so going back on it is violating the contract (promise) made.

More importantly, another point of interest is in the situation where one party is threatened to enter a contract, which they would have entered into anyway. Lord Cross suggested that duress is available even if the contract would have been made without the threats. This can be seen as violating the basic principle of freedom of contract because it is effectively allowing parties to claim in duress and make the contract voidable for no reason, as they would have entered into the contract regardless to the threat made. Issues have been found with this approach, therefore Lord Scarman’s approach in Pao on v Lau Yiu Long [1980] is more adequate approach, which is part of the test of whether duress was operative is whether the claimant had any real alternative but to submit. This is more readily accepted because it implies the contract would not have been made but for the threat which keeps the doctrine of duress narrow and doesn’t allow claims to be made against contracts they would have entered anyway and avoids unjustifiable duress claims to keep the principle of freedom of contract intact.

In addition, in the case Barton v Armstrong [1976] the Privy Council seems to share a similar opinion with Lord Cross. It was held that it was sufficient to form duress if the threat was ‘a’ reason for the claimant entering into the contract and not the sole reason. They stated “their lordship think that the same rule should apply in cases of duress and that if Armstrong’s threats were ‘a’ reason for Barton’s executing the deed he is entitled to relief even though he might well have entered into the contract if Armstrong had uttered no threats to influence him to do so…” Here they are reiterating that the defendant’s threat only needs to be one reason among other reasons for the claimant’s entering the contract for a claim in duress to be raised. This evaluation indicates the doctrine of duress focuses on the defendant’s morally wrong behaviour rather than its effect on the claimant. This suggests a lack of rational foundations in the doctrine because as this case was not considered binding precedent, not all judges will share the same opinion as lord cross and the privy council, this means if another case similar to this case comes to court, the decision and reasoning could be different which creates uncertainty in the law.

 

 

(c) Illegitimate pressure

Additionally, in order for a claim in duress to be successful there must be an illegitimate pressure. Illegitimate pressure is an unlawful threat exerted by the defendant on the claimant. The issue of whether a lawful act can be considered illegitimate was discussed earlier. Prior to economic duress, duress of the person was the only duress available for parties to make a claim. When economic duress became available many issues arose.

One issue is which threats are considered illegitimate in economic duress. In the case of Pao On v Lau Yiu Long [1980] , the claimants threatened they would not complete the main contract unless the defendant agreed to a guarantee to buy the shares back from the claimant at the price of $2.50 per share at the end of April 1974. After April 1974, the claimants sought for the defendant to buy the shares back, however the defendant refused and claimed they were under duress when entering the contract. Lord Scarman, giving judgement on behalf of him and others, stated duress is coercion off the will so as to vitiate consent. He focused more on the coercion of the will than the illegitimate pressure, which makes one wonder whether illegitimacy of pressure is less relevant than the coercion of the will in a claim for duress. The lordships agreed that in a contractual situation commercial pressure is not enough, raising the question, what is enough pressure in economic duress for it to be considered illegitimate. This shows the doctrine of duress has a lack of rational foundation because although illegitimate pressure is one of the main features in a claim of duress, it is implied it is less important than the coercion of the will in this case which shows there is no strong basic principles in the doctrine of duress which would help judges decide, instead it is left to the opinion of the judges.

Reasons against:

(a) Fairness

It can be argued the purpose of the doctrine of duress is to provide some fairness for contracting parties. In the case of Atlas Express Ltd v Kafco (importers and Distributors) ltd [1989] , Atlas threatened Kafco that if they do not sign the document, they would not deliver the goods. Kafco signed the contract because the goods were crucial to Kafco’s commercial success and would have been unable to find an alternative provider for the goods at short notice. However later when Atlas sought to collect the money agreed on under the new contract, Kafco refused arguing the new agreement has been made under economic duress. This claim was held to be successful. Tucker J stated Kafco signed the agreement under compulsion and unwillingly, and had no bargaining power. Therefore as Kafco had no bargaining power and was forced into the new agreement it would be fair to make the contract voidable.

Similarly in the case Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] where two companies made an agreement that one of the party’s would provide a cargo ship to the other. However the ship was given to another company and in order for the contract to not be terminated the owners offered another ship and to cover the cost of any losses incurred. But later the ship owners said they would only provide the substitute ship if the charters agreed to waive all their rights to damages for the breach in contract. The charters protested but then agreed. It was found the waiver agreement was voidable for economic duress. In this case the charters were clearly in an unfair situation, a claim in duress would have righted the wrong the owners created and in doing so made the outcome of the contract fairer for all parties.

Looking back at the examples it is clear the doctrine of duress does provide a rational foundation, and that it creates a principle of fairness. It can be argued it also provides justification for violating the basic principle of freedom of contract, which is to not allow parties in a contract to intimidate the other party to get their way.

Further more, forcing another party into the contract violates the basic principle of freedom of contract itself; therefore duress can be thought as simply enforcing the principle and attempting to put the losing party in a position they were prior to the contract if it is decided the contract is void because of duress, the contract has essentially not occurred due to there not being consent. This was seen in the case of Halpern v Halpern [2007] where the parties had been in a dispute over an inheritance, which was settled. The claimant sought damages for breach of this agreement but the defendant argued they entered under duress. Court of appeal adopted a more flexible approach to the issue and referred back to the House of Lord’s decision in Erlanger v new sombrero phosphate co [1873] which held the courts may do ‘what is practically just, though it cannot restore the parties precisely to the state they were in before the contract’ . This indicates there are difficulties in making the law completely fair; there may always be a party, which is in a disadvantaged situation in every duress claim that cannot be fixed by the courts.

(b) Limited use

It is clear from many previous cases in contract law that judges are reluctant to decide in favour of duress claims. An example of this stems from the case of R v Attorney General [2003] . The judges in order to define the limits of duress; decided the decision in the case was only of persuasive authority for future cases. This is done to encourage English courts to adopt the same approach, reluctance to define the doctrine of duress, in the future cases. It is proposed; the reason for the judge’s reluctance to decide in favour of duress claim is in order to preserve the principle of freedom of contract. Judges recognise duress does violate the principle of freedom of contract, however, they would argue it is not without justification when they do decide in favour of the duress claim.

In an attempt to control the claims made for duress, the judges added a time lapse for when a party, which entered into the contract under duress, can claim. If the claim were not made in time, they would not decide in favour of the duress. An example of this is seen in the case North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1979] where a claim in duress was made against the waiver signed by the claimant which signed away their rights to make a claim in court for losses., they claimed they signed it under economic duress. However, although it was found that it was economic duress and it did make the contract voidable, it was not made void because the claimant failed to take faster steps to avoid the contract and in doing so had affirmed the arrangement. It is suggested this is an unfair decision, however it can be seen as justified because judges are attempting to protect the contract and by limiting the time period, it limits the chance of claimants only claiming because they later did not like the terms of the contract after they had already agreed to them.

Conclusion:

To conclude, referring back to the issues relating to the doctrine of duress previously discussed in this essay, it is evident there are many criticisms and limitations of the doctrine. However, there is a justification for having the doctrine and that is providing a degree of fairness for all contracting parties. The essay also acknowledges that judges recognise the doctrine does violate the basic principle of freedom of contract, however judges avoid deciding in favour unless it is right to do so. Therefore even though there are many issues associated with having the doctrine of duress, the benefits of having it outweigh the criticisms, without it, it would be worse for all contracting parties.

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