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Economic Duress notes for exam
The Law of Contract (LAWS211)
Victoria University of Wellington
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Economic Duress
Atlas Express v Kafco QB 1989 Kafco had a contract to supply a major supermarket with baskets. An agreement was formed with Atlas Express whereby they would transport the baskets for Kafco. Atlas Express realised that the bargain was costing more to deliver the goods than they expected, and Atlas sent an empty truck to Kafco with a letter saying if a higher price was not agreed to, the truck would leave empty and the baskets would not be carried.
The defendant had to pay a carrying company a higher rate for delivering goods. The defendant had no practical alternative but to submit, because if their goods were not transported they would ruin their business with the supermarket and cripple them.
Result Therefore, the agreement was voidable under economic duress. There was illegitimate pressure amounting to duress. The defendants had not appropriated the agreement, and duress vitiated their consent to be bound by the new terms. Several factors led to the conclusion of economic duress;
Reasoning First, the plaintiffs threatened not to perform what has been a freely negotiated contract without legal justification or assertion of a legal justification. The plaintiffs made no attempt to explain that the current rates were not commercially viable for them.
Secondly the defendants had no realistic alternative but to submit. For their commercial survival, they needed the deliveries to be sent on time. They did not have the time to seek an alternative transporter.
Thirdly, the plaintiffs were aware of the defendant’s reliance on them.
Fourthly and most importantly, there was bad faith in the plaintiff’s behaviour in sending the truck and threatening to drive it away empty if the variation was not agreed to. There was also a deliberate unavailability of the plaintiff’s manager to try and negotiate or discuss.
Stilk v Myrick informing Atlas Express Although the case was decided on the basis of economic duress, as an alternative ground the court held that as per Stilk v Myrick there was no consideration anyway, because the plaintiffs were already bound to carry the defendants' goods, there was no consideration for the new agreements. Modern commentary would say that there is consideration in the agreement, because there were benefits received by the promisor. However the circumstances in which the bargain was procured were improper on grounds of economic duress so would be set aside.
The defendants won on both counts of economic duress and consideration
Critique The judge in Atlas v Kafko treated this case as a straightforward case of economic duress. However this is not necessarily the case. There was a lack of analysis from the judge in relation to the legitimacy of the initial demand to vary the contract rate.
Atlas Express had made a clear miscalculation in their initial quote. They could only load into the trucks of what they thought they could. It is not analysed how badly this mistake would affect them, on whether it resulted in lower than anticipated profits, or whether it would mean Atlas was operating at a loss. Perhaps if it puts the plaintiff’s business under grave financial stress, a judge may be less convinced of clear economic duress. However Atlas Express was a large company of carriers, so this is not likely.
It is clear that the outcome of Atlas would have been different had the plaintiff not behaved so badly. If they were aware of their underquoting, and justified their situation it may be said the variation was a case of commercial pressure, not economic duress. But the bad faith nature of the agreement led to a finding of economic duress.
certain types of pressure and not by others is, both in logic, indefensible, and in practice impossible to apply. The reality is that some forms of pressure are in conformity with the social and economic system and the moral ideas of the community, and others are not. The line can only be drawn by distinguishing between different kinds of pressure, not by attempting to analyse the effect of the pressures on a man’s mind.”
Lord Scarman’s internally inconsistent reasoning Lord Scarman’s reasoning in Pao On was internally inconsistent. The judge said that “the victim must have had no alternative course open to him”. Later in his judgment, Lord Scarman said that “evidential matters to be taken into account is the effectiveness of the alternative course, you cannot have an effective remedy available”. The contradiction here is that first the judge is saying there must be no other options to the defendant, then later says there should be assessment of other remedies available to them, and there can only be a lack of effective remedies. This implies that there can be alternative courses available, they just cannot be effective in other courses.
Professor Atiyah critiques this approach; “it is desirable that rules should be formulated in a way that commands rational assent. A rule which declares that it only operates when a person has no choice, but then requires examination of the choices open to him, does not inspire confidence among rational beings... the overborne will theory should now be consigned to the historical scrapheap.``
Secondly, Lord Scarman says that if duress means that submission is not voluntary, the transaction is voidable and can be set aside at the election of the victim. It is voidable because an agreement has been entered into without full consent. However although the person’s will has been impacted, they still intended to enter the agreement. If duress means there is no voluntary action, the agreement as a whole should be regarded as void and have no effect at all.
Universe Tankships
Lord Scarman removed himself from his previous view that he had expressed in Pao On in Universe Tankships, taking on board commentators criticisms regarding overborne will theory; “compulsion is variously described in the authorities as coercion or the vitiation of consent. The classic case of duress is, however, not the lack of will to submit but the victim’s intentional submission arising from the realisation that there is no other practical choice open to him.” Therefore, Universe Tankships held that the pressure applied must be illegitimate, and ordinary commercial pressure cannot be seen as duress.
Rationale for economic duress Lord Diplock expressed the rationale for economic duress in Universe Tankships aptly; “is not that the party is seeking to avoid the contract... did not know the nature or the precise terms of the contract at the time when he entered into it or did not understand the purpose for which the payment was demanded. The rational is that his apparent consent was induced by pressure exercised upon him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind.”
McHugh J in the Australian case of Crescendo Management set out that “in my opinion the overbearing of the will theory of duress should be rejected. A person who is the subject of economic duress usually knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take the alternative course of action. The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate.”
It is clear from Universe Tankships and Crescendo that it is necessary but certainly not sufficient for economic duress that one party has been compelled or coerced into entering into
The Universe Tankships approach was thus adopted, with acknowledgement given to Professor Atiyah’s submissions that duress should be concerned with the “permissible limits of coercion”, and the degree to which society can require people to “stand up to threats”.
O’Regan J highlighted that if there was a reasonable alternative, a reasonable alternative will depend on all circumstances, including the characteristics of the victim, the relation to the parties, and the availability of professional advice to the victim.
Therefore the consideration of whether there was coercion in fact focuses on the availability of alternatives. Other factors that are relevant to the analysis include; 1. If the person protested 2. If they were independently advised 3. After entering the contract, they took steps to avoid the contract.
Critique of the factors of coercion. However these additional factors to finding coercion are problematic because none of them tend to preclude a finding of economic duress. A victim protesting economic duress can be often fruitless, as there will be no point in protesting a contract. The issues with independent advice are similarly not useful; a solicitor is likely to advise what is obvious that the business may be ruined if they do not submit to the contract. Taking steps to avoid the contract after it had been entered into is contingent on whether the pressure exerted was continual. This assessment should take place after the pressure has been lifted from the improper behaviour where steps ought to be taken to avoid the transaction.
Taken individually, these factors will not be persuasive as adverse to a finding of economic duress. There have been no cases of illegitimate pressure where the victim was faced with economic duress, and the court rejected their claim on the basis that they did not protest, or go to a lawyer. This is because there is often a good reason for not doing any of these things.
NAV Canada
NAV Canada held that consideration was not required at all for a variation. NAV Canada is unlikely to be followed in New Zealand.
Facts There was a dispute between NAV Canada (aviation equipment supplier) and Fredericton Airport. There was an Aviation and Service Facilities Agreement wherein NAV agreed to supply the airport with aviation services and equipment, and they had an exclusive right to supply this.
The airport chose to extend a runway, and asked NAV to relocate its landing system to the runway under extension. NAV Canada decided it would make better sense to replace an old part of the system with a new navigational aid, a distance measuring equipment (DME), which was to cost 223k.
A dispute rose as to who is to bear the cost of this. NAV refused to provide that equipment unless the airport agreed to pay the 223k.
On proper construction of the contract, the airport was not bound to pay this price. The airport was concerned for the airport to be operational and to ensure it was paid, agreed under protest to pay the amount demanded.
Under this contractual variation, NAV Canada went ahead and installed the new equipment, but the airport refused to pay the new amount.
Legal Questions There were four questions for resolve in Nav Canada for the New Brunswick Court of Appeal to resolve. 1. Was the airport’s undertaking to pay the 223k supported by consideration moving from NAV Canada?
Gilbert Steel was referenced in NAV Canada which was a case that argued that the rule in Stilk v Myrick resulted in an inappropriate refusal to enforce or modify contracts. This case angered many academic commentators.
The court refers to techniques for avoiding the rule in Stilk v Myrick .In para 24 of NAV Canada the court highlighted that in recent times, there has been an unwillingness on the part of the Canadian courts to take the rigid or classic approach in holding that there has to be fresh consideration. NAV Canada endorses the Williams v Roffey approach, that there are valid policy reasons for refining the consideration doctrine to the extent that a variation will be recognised even if unsupported by consideration if not procured under economic duress.
“I offer several reasons for this incremental change in the law. First, the rule in Stilk v Myrick is an unsatisfactory way of dealing with the enforceability of post-contractual modifications. First, the rule in Stilk v Myrick is an unsatisfactory way of dealing with the enforceability of post-contractual modifications. As Professor McCamus points out, the rule is both overinclusive and underinclusive. It is overinclusive because it captures renegotiations induced by coercion so long as there is consideration for the modification. It is underinclusive in cases where there is no consideration because it excludes voluntary agreements that do not offend the tenets of the economic duress doctrine (see pp. 381-382 of his text).
Critique The judge has gotten the reasoning the wrong way around. The rule in Stilk was under- inclusive because it failed to capture renegotiations induced by coercion so long as there is consideration. The rule was a "clumsy instrument" for dealing with the problem of coercion. So long as there was consideration under one of these techniques, the rule would not apply, making it under-inclusive.
The rule would be over inclusive because it would capture cases where there is no consideration but no element of economic duress, such as a commercially reasonable contractual variation. This makes more sense for why Stilk is over and under inclusive.
Stilk not overruled Robertson J stated that; “In my view the modernisation of the consideration doctrine as it tied to the rule in Stilk v Myrick qualifies as an incremental change. It relieves the courts of the embarrassing task of offering unconvincing reasons why a contractual variation should be enforced. Again having regard to the Supreme Court’s admonition, I wish to emphasise that I am not advocating the abrogation of the rule in Stilk v Myrick. Simple, the rule should not be regarded as determinative as to whether a gratuitous promise is enforceable.”
However this does not make any sense. The judge is saying that the rules do not apply and consideration is not required. The judge is making it clear the pre-existing duty rule is not a requirement at all, which is clearly abrogating the rule in Stilk v Myrick.
NAV Canada on promissory estoppel The judges in NAV Canada referred to the doctrine of promissory estoppel to illustrate the argument that not enforcing a commercially fair contract variation can be unjust.
The third reasoning given for limiting the doctrine of consideration given by the judges in NAV Canada was that the modern and evolving doctrine of economic duress has meant that the law has progressed and there are better ways of balancing parties rights.
Consideration informs whether or not there is economic duress Robertson J went onto saying; “Nor am I suggesting that the doctrine of consideration is irrelevant when it comes to deciding whether a contractual variation was procured under economic duress. There will be cases where the post-contractual modification is in fact and in law supported by valid or fresh consideration. In my view, that type of evidence is important when it comes to deciding whether the contractual variation was procured with the consent of the promisor. After all, why would anyone agree to pay or do more than is required under an existing contract in return for nothing? But if the contractual variation was supported by fresh consideration, the argument that the variation was procured under economic duress appears,
The judge in NAV Canada was fairly categorical in saying that as soon as the duress or pressure is off, the promisee must say they want to recover the payment or repudiate the contract. Whereas the common law would say that a delay is not necessarily an affirmation, they want to go ahead with the deal.
Onus of proving economic duress In NAV Canada; “It should also follow that the party seeking to enforce the variation must establish that it was not procured under economic duress or that the other party is precluded from raising the duress doctrine for having subsequently affirmed the variation. Hence, the onus is on NAV Canada to establish that the post contractual modification was not procured under economic duress”
However this is contrary to a conventional understanding that if there is a prima facie binding contract, whether you say it is supported by consideration or not, the onus is on the allegedly coerced party to show it was obtained under economic duress.
Here the court is saying the onus is on the promisee to show that is was not the result of economic duress. It also goes on to say that the onus is on NAV Canada to show that the agreement was subsequently affirmed, which would bar a claim for avoiding the contract on the grounds of economic duress. In this respect it has always been the position to show the promisee shows they affirmed the contract and elected to go ahead with the transaction. As a defence, the onus would be with the promisee.
The position would be that the promisor has to show that the agreement is voidable due to economic duress. If that plea is unsuccessful, the onus shifts to the promisee to show they affirmed the contract and didn't take steps to have the agreement set aside.
The judge in NAV Canada may have had in mind that the subsequent failure to affirm the contract is subsequent conduct for evidence of no consent when the agreement was entered
into. The onus is on NAV to show that the agreement, the post-contractual modification, was not induced by economic duress, an approach that is at odds with the common law position.
In a summary of case law in NAV Canada it was stressed that all the cases require illegitimate pressure for a finding of economic duress.
The judge in NAV Canada argued; “Like Professor Ogilvie, I am not convinced that the doctrine of economic duress should incorporate a criterion of illegitimate pressure when it comes to cases involving a variation to an existing contract. If we apply Lord Scarman’s approach it should follow that most contractual variations will be classified as having been procured through the exercise of legitimate commercial pressure.”
However, this statement is incorrect. It may be that a promisee engages in opportunistic and exploitative conduct, but there is no presumption that the pressure would be legitimate at all. A promiseee knowing the promisor is in desperate need of goods and without any good reason takes advantage of this situation, this is not something that should be enforced.
The judge in NAV Canada puts the onus of proving there is no economic duress on the alleged coercing party, the promisor. This is contrary to the common law position, where the position would be that the onus is on the allegedly coerced party to show there is economic duress.
The rule that is laid down is that a variation is binding if there is no economic duress. Therefore it is logical for the plaintiff to show there is no economic duress, just as under the old law the onus would be on the promise to show that there was a variation agreed to and that there was consideration.
Instead of the plaintiff having to prove consideration, the plaintiff has to show that they did not engage in economic duress.
NAV Canada model of economic duress
In order for a finding of economic duress, there must be pressure, as a result of an express or implied threat to break the contract.
Application to the facts The judge applied the facts to their proposed framework. The threshold requirements were met- there was at least an implied threat to break the contract by withholding the new piece of equipment.
The airport had no practical alternative but to submit because NAV Canada had a monopoly, and were threatening to hold up the use of the extended runway for at least another year.
There was no fresh consideration, the airport had protested and after the equipment was installed the airport immediately protested, meaning that when the pressure was off, they disavowed the variation.
Consideration as pointing towards economic duress If there is no consideration in the classical sense, then the courts will be more sympathetic to a finding of economic duress. But if there is fresh consideration as per the NAV Canada test, this lends support to the argument that the promise was only the product of commercial pressure, not economic duress. This is relevant because if there was no consideration, it would be odd for someone to agree to do more, or pay more in return for nothing. However this can and does happen often.
Consideration is spoken about in a classical sense and does not include a nominal consideration. A nominal consideration would not be adverse to a finding of economic duress. However some academics argue that a nominal consideration is a classic aspect to the doctrine, namely that courts will not measure the adaquxy of consideration.
Economics approach; breach of contract is a right
Taking Lord Scarman’s dissenting judgment from Universe Tankships said that there was economic duress when a trade union demanded a contribution to a welfare fund, they were entitled to make such a demand. This is as a result of assessing the nature of the demand as being lawful because it was intimately connected to the furtherance of a trade dispute. This is to say that there can be otherwise unlawful demands legitimised through legislation.
NAV Canada interpreted this to mean that “a threatened breach of contract is not only lawful but in fact constitutes a right which can be exercised subject to the obligation to pay damages and possibly to an order for specific performance.”
In NAV Canada, it is expressed that a threatened breach of contract is a threat of lawful action because you have the right to breach a contract provided you pay damages in the ordinary case.
This view is promoted by economic scholars and has been consistently and rightly reviled by senior commonwealth courts. A contract gives rise to performance, and breaking a contract is a legal wrong, just like a tort. It is not just an option to perform, you have an entitlement to performance.
Internal Contradictions in NAV Canada The judge in NAV Canada contradicts himself at [63] when discussing the relevance of good faith. Earlier in the judgement, the victim could have no contractual right for damages for a breach; “the supposed good faith of a coercer should not impact on the victim’s contractual right and expectation to receive performance in accordance with the original terms of the contract”.
There is irony in that in doing away with Stilk v Myrick, NAV Canada provides a basis for getting out of a promise by having a fairly liberal criteria for finding economic duress.
If the buyer had no practical alternatives because he needs the goods to complete their projects, and the seller has said they cannot sell in the absence of the variation, this satisfies the threshold requirements for economic duress.
Assuming the buyer had no practical alternatives, and there is no additional consideration, and the buyer protests, and after the goods are supplied they immediately repudiate the contract, according to NAV Canada there is economic duress, and the variation is not enforceable.
How would any common law court outside of Canada decide on economic duress? There is no question of economic duress, and it would be decided on the basis of consideration in terms of Gloria Jeans practical benefits, as it is almost certain that the buyer would obtain practical benefits.
Let’s say the seller has not faced increased costs, but knows the buyer desperately needs the goods to complete a major contract, and sets out to take advantage of its serious bargaining initiative by demanding a further 10k. Exploitative behaviour; unconscionable dealing. We have conduct that is illegitimate pressure because it's not the sort of conduct our society would allow anyone to get away with. Not commercial pressure, a hard bargain, its unconscionable behaviour that the law should not countenance. What if the seller said as some fresh consideration, I will lend you a couple of the employers to help you install the goods. Something they are not obliged to do?
Suppose the buyer does not protest, just accepts it as they cannot do much about it, which many people would do, as to avoid losing the deal. Thirdly suppose that the buyer some months after receiving the goods, says I am claiming the money back; the variation you extracted from me is voidable on the grounds of your economic duress.
How would Nav Canada deal with these facts?
The threshold requirements are satisfied. There is pressure and no practical alternatives, but the buyer has consented. The seller has provided fresh consideration, but the buyer has not protested and the buyer has not acted promptly. Therefore, according to NAV Canada there is no economic duress.
How would a court in New Zealand deal with these facts? A court in New Zealand would apply the principles of Nemesis v Mcintrye in holding that there was economic duress. According to Professor Atiyah “the reality is that some forms of pressure are in conformity with the social and economic system and the moral ideas of the community, while others are not.”
- Fresh consideration
- No protest
- Does not immediately protest
Where there is opportunistic and exploitative behaviour, a court in New Zealand and Australia would say there is economic duress. The emphasis would be on the nature of the conduct and whether there was good or bad faith, and whether it was induced by commercial pressure, or outright bad faith.
Economic Duress
In Antons Trawling it was suggested that Stilk can no longer govern cases where there is a variation to pre-existing contracts. As per Williams v Roffey where there is no duress and no policy factors suggesting that an agreement properly performed should not attract the legal circumstances that both parties expect.
Economic Duress notes for exam
Course: The Law of Contract (LAWS211)
University: Victoria University of Wellington
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