The Law of Economic Duress

THE LAW OF ECONOMIC DURESS by Philip Newman, Barrister and Nitin Khandhia, Solicitor

THE LAW OF ECONOMIC DURESS

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.

“When you've got them by the balls, their hearts and minds follow!�

THE LAW OF ECONOMIC DURESS

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”

THE LAW OF ECONOMIC DURESS

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 LAW OF ECONOMIC DURESS

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".

THE LAW OF ECONOMIC DURESS

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 backdated 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 LAW OF ECONOMIC DURESS

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”

THE LAW OF ECONOMIC DURESS

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”

THE LAW OF ECONOMIC DURESS

“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 LAW OF ECONOMIC DURESS

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 renegotiation 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”

THE LAW OF ECONOMIC DURESS

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�

THE LAW OF ECONOMIC DURESS

(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 noncompliance 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�

THE LAW OF ECONOMIC DURESS

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 LAW OF ECONOMIC DURESS

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�

THE LAW OF ECONOMIC DURESS

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 hardheaded commercial individuals.

“Objective legal advice is essential�

THE LAW OF ECONOMIC DURESS

Philip Newman is a Barrister practising at 42 Bedford Row, London, WC1R 4LL Tel: 020 7831 0222; Fax: 020 7831 2239 email: philip.newman@42br.com website: www.42br.com

Nitin Khandhia is a Solicitor and a Partner in the firm of BTMK, solicitors email: nitin.khandhia@btmk.co.uk Tel. 01702 238542 Fax. 01702 331563 website : www.btmk.co.uk