Duress and Freedom of Contract
The Doctrine of duress unjustifiably violates the basic principle of freedom of contract
Introduction
This paper will discuss the proposition that the doctrine of duress and its justification. It will examine the doctrine and critically discuss if it violates and sit uncomfortably with the principle of freedom of contact. In order to do this, the paper will discuss the basic principle of freedom of contract. Second it will discuss what duress is? Third it will discuss the tests of economic duress laid down by Dyson J in DSND and the application of the test in Carillion. Fourth this paper will examine the jurisprudence of economic duress. Fifth this paper will argue restitution is a better remedy than duress. Last this paper will conclude.
The principle of freedom of contract
In the nineteenth century the common Law of Contract saw a huge growth where due to significant commercial and industrial development, witnessed numerous contract disputes being brought to the courts. A superseding rule of freedom of contract followed which outlined that parties who were of full capacity should have full freedom to make any terms as long as they were legal. The result of this resulted in the rule of freedom of contract was the rule of sanctity of contract, where contracts that were willingly entered into by individuals that were of rational capacity should be enforced by the courts. In Printing and Numerical Registering Co v Sampson, Sir George Jessel stated:
“…men of full age and competent understanding shall have the utmost liberty in contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by Courts of Justice.”
This statement indicates that where a person is reasonable and capable then they have a choice over how they both start and complete their contracts. Nevertheless, towards the latter of the nineteenth and during the twentieth century, there were a rise in numbers of Acts of Parliament that focused on the rule of freedom of contract. This was due to it becoming more frequently recognised that the do it yourself application in regards to the rule of freedom of contract on more occasions resulted in injustice. Freedom of Contract therefore could be abused as a result of gross inequality of bargaining power between both large companies and consumers or employees; an example of this is ecominic duress or template agreements.
Potential parties to contracts should enter the market using their own thinking to ensure that they decide which bargains will work in their favour and stick to them. This freedom authorises parties to openly choose others as consensual contractual partners. Parties need to be free to express and choose their own individual terms due to each contract needing to be unique, based on the differences of people characters and what they want to expect to see from their contracts and how it can benefit them. Nevertheless the growth of both private and public sector large corporate enterprises made it almost impossible for the fragile party to exercise freedom, this is due to the pressure on for forming agreements with larger companies. Hence a party could be apprehended to the will of these more economically powerful contracting parties rather than practising their rights to an equal tender.
What is duress?
Judges have a tendency not into get involved with contracts. On the other hand parties that are entering contracts need to be able to preserve assurance in terms that the contract will be adhered to which will ensure that no other party will be exploited. An example of where intervention by the court is seen in duress. Economic duress was known under the common law in 1976 as an acceptable ground to avoid an agreement. The first case where the doctrine arose was Occidental Worldwide Investment Corp v Skibs. In this case it was insisted by charters of two ships that the cost to rent a ship must be reduced due to the fall in market rates by intimidating the owners about their assets and stated that unless costs were to be reduced then they would go into bankruptcy. The charterers were aware that if the ships were returned then given the slump they would face monetary difficulty and therefore would be unable to find substitute charterers. The result of this was that the threats that were made were false and deceitful meaning that owners were able to escape the renegotiated terms. Nevertheless Kerr J. acknowledged that in principle economic duress can be used to void the agreement.
In North Ocean Shipping Ltd v Hyundai Corporation Co, shipbuilders without any legal explanation threatened to dismiss the contract unless an increase of 10 per cent was settled by the plaintiff. The ship owners agreed to additional payment due to dreading a loss in the charter if the ship was not supplied on time. Mocatta J detailed: “compulsion may take the form of ‘economic duress’ if necessary facts are proved. A threat to break a contract may amount to such ‘economic duress”. Similarly, Lord Scarman in Pao On v Lau Yiu Long concluded: “there is nothing contrary to principle to recognising economic duress as a factor which may render a contract voidable”.
The tests of economic duress
In a number of small cases Economic duress has been applied. Two cases important cases are DSND Subsea v. Petroleum Geo-Services and Carillion Construction Ltd v Felix (UK) Ltd. Dyson J was the judge who decided both of these cases. Ecominic duress was discovered in the latter case but was not in DSND. According to Dyson J in the DSND:
“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 … 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 protested at the time; and whether he affirmed and sought to rely on the contract. These are all relevant factors”.
Dyson J ended this test by placing a proviso, which has famously made economic duress very hard to argue:
“Illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining.”
DSND
DSND were hired by Petroleum Geo-Services (PGS) to work under the sea as part of developing oil rig sites and drilling platforms in the North Sea. The original contract had been altered by succeeding agreements. These had changed the payment terms for aspects of the work. Having made these agreements, PGS wanted to have them struck down in court because of economic duress. The court held that PGS could have pursued alternative kinds of action that would have clearly allowed for them to avoid this situation, therefore they could not claim for duress. Dyson J relating the test to the evidence, said:
“ [a] suspension of the work on the RTIAS pending resolution of the insurance/indemnity question, even if it was a breach of contract, and even if it amounted to pressure, did not amount to illegitimate pressure. It was reasonable behaviour by a contractor acting bona fide in a very difficult situation”.
Carillion
In Carillion, the test for economic duress was awarded. Carillion was the core contractor asked to build an office building. Carillion delegated the supply, manufacture and design of the cladding to Felix. If the office was to be completed late then a charge of £75,000 per week would have to be made by Carillion to the developer for liquidated ascertained damages. Knowing Felix had fallen behind with completion, it asserted that Carillion sign the contract in relation to the monetary account which at the time was being disputed, prior to Felix completing the delivery of the cladding. Dyson J referred to his test for economic duress laid down in DSND and applied it to the facts of Carillion. Unless an agreement was made Felix threatened not to complete any more deliveries, which would result in a breach of contract.
Carillion needed to complete the job and were unable to do so without the cladding from Felix. The cladding was an important part of the task and Carillion were frantic for the cladding to be completed. Unless the cladding was to be completed the other trades would be unable to begin their tasks and would result in the whole project being delayed. Felix provided bespoke cladding and there were no other options for Carillion. There was no opportunity for settlement as it would have still taken a further six weeks to gain a decision and there were major complications in gaining a mandatory injunction. Felix had no power when asking for their final account to be paid before the completion of work nor did Felix have the right to stop deliveries until payment was made as this was not stated in the contract. In addition to this, Felix was claiming in excess of what they were contractually entitled to were mindful that Carillion had no other substitute and therefore would have no other option but to concede to their demands for the sum. Based on the facts Carillion would have never entered the commercial settlement agreement if Felix had threatened not to deliver the cladding. Additionally, Carillion indicated in their correspondence at the “extreme displeasure at being required to enter into such an agreement”.
The jurisprudence of economic duress
Due to the broad nature of Dyson J’s test judges are now not willing to break the parties’ bargain. The main ideology operating in this area seemed to be market individualism. This involved two principles one being the market philosophy and the other individualistic philosophy. Market philosophy views the operation of the law of contract as the result of competitive exchange. Individualism is about “freedom of contract” and “sanctity of contract”. It is fundamental to ensure that individuals have full licence in making the terms of their agreements, but also to ensure that parties are held to their contracts. Indications of this can be seen in Pao On, where Lord Scarman stated:
“Where businessmen are negotiating at arm's length it is unnecessary for the achievement of justice, and unhelpful in the development of the law to invoke such a rule of public policy. It would also create unacceptable anomaly. It is unnecessary because justice requires that men, who have negotiated at arm's length, be held to their bargains, unless it can be shown that their consent was vitiated by fraud, mistake or duress”.
In addition, in CTN Cash and Carry v Gallagher Ltd, Steyn L.J. was extremely cautious when arguing out the significance of commercial certainty:
“[allowing lawful act duress] would introduce a substantial and undesirable element of uncertainty in the commercial bargaining process. Moreover it will often enable bona fide settled accounts to be reopened when parties to commercial dealings fall out”.
Steyn L.J. was unhappy about the courts delving to see if the contracts where socially or morally unacceptable. Part of market individualism contains reducing or completely eradicating any moral or legal factors that as a result could lead to uncertainty. Freedom of contract theory can explain the decisions in Atlas Express Ltd v Kafco and North Ocean Shipping. It is argued whilst the difference between economic duress and legitimate commercial pressure may in some ways be unclear; the courts will usually find ecominic duress where the facts are captivating. An example of this would be in Atlas, where the plaintiff carriers under-priced a contract where they were to transport basket-ware to numerous retail outlets which commanded that costs should be modified upwards. The plaintiffs further developed a new agreement and gave drivers strict directions stating that unless the defendants signed the agreement they were to drive away with the defendant’s goods. The defendants had no other choice but to sign this agreement as it was so close to Christmas and as a result they could not make any further substitute provisions nor could they let down retail outlets.
It is argued duress is fact specific. If facts do not appear captivating then as a result may not fall within the test for economic duress. It is said that decisions of the court based upon market-individualism show us the test of economic duress is hard to satisfy for those involved in the rough and tumble of commercial business, but who have in turn been unfairly exploited. It is advised that’s victims should look elsewhere for remedy. The remedy of restitution is not dependent on making contracts void and so the “freedom of contract” theory should not present a hurdle.
Restitution to the rescue
The law of restitution dictates that a claimant is able to recover a benefit rather than receive compensation for breach of contract. Lord Wright stated in 1943 that:
“It is clear that any civilised system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is, to prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep”.
Restitutionary remedies are widely different from remedies in the law of both contract and tort and have been recognised under English law by the House of Lords. It is said in the present situation that victims should, rather than seeking a rescission should seek restitution. In the present case, “unjust enrichment” is the main theory based for restitution required by the victim. Unfair restitutionary remedies are only accessible where the defendant has been unfairly enriched at the cost of the victim. This is the presumption upon which the victim is looking for redress because the obstacle of avoiding the contract is impossible to overcome or deal with successfully. Lord Hoffmann said that the ingredients of restitution are:
“First, whether the defendant would be enriched at the plaintiff's expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy”.
Conclusion
In conclusion, it is shown that the test for ecominic duress is broad ranging. The idea of Freedom of Contract puts courts under pressure therefore leaving them unwilling to get involved with commercial contracts. Only when accurate circumstances are presented then there is a possibility that they may thrive to avoid the contract, although affirmation still remains. It may be more useful for victims to instead depend on restitution. There are categories of unfair enrichment that may be held open. It may be easier to bring an action in unjust enrichment than it is to satisfy the requirements of duress. The reason behind this is that the court is happy to set aside market-individualism theory in protecting unjust enrichment. The court justifies this because it is not voiding a contract rather neutralising opportunistic commercial behaviour. Restitution seems to be the way to go.
Bibliography
Cases
Atlas Express Ltd v Kafco Ltd [1989] Q.B. 333
Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 A.C. 221
Barton v Armstrong [1976] AC 104
B&S Contracts v Victor Green Publications [1984] I.C.R. 419
Carillion Construction Limited v. Felix (UK) Limited [2001] BLR 1
CTN Cash and Carry v Gallagher Ltd, [1994] 4 All E.R. 714
DSND Subsea v. Petroleum Geo-Services [2000] BLR 531
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour [1943] A.C. 32 at 61
Lipkin Gorman Ltd v Karpnale Ltd [1991] 2 A.C. 548
Occidental Worldwide Investment Corp v Skibs [1976] 1 Lloyd's Rep. 293
Pao On v Lau Yiu Long [1980] A.C. 614
Printing and Numerical Registering Co v Sampson (1875) 19 Eq 462
Books
Chitty on Contracts (29th ed., Sweet & Maxwell, London, 2004)
Adams, J. N. and Brownsword, R. Understanding Contract Law (4th ed., Sweet & Maxwell, London, 2004)
Journals
Atiyah “ Economic Duress and the ‘ Overborne Will” ’ (1982) 98 L.Q.R. 197
Halson, “ Opportunism, Economic Duress and Contractual Modifications” (1991) 107 L.Q.R. 649-678
Tan, “ Constructing a Doctrine of Economic Duress” (2002) 18 Const. L.J. 87
Virgo, The Principles of the Law of Restitution (Clarendon Press, Oxford, 1999)
