Contracts where parties have unequal bargaining strengths are relatively common.
One party may feel under pressure to accept terms proposed by the other, because of its weaker negotiating position, even though both parties may have much to gain by entering into the contract.
This is a commercial reality which all businesses have to contend with. However, sometimes undue pressure from one party to accept certain contractual terms can lead the other party to make a claim for economic duress later.
So what is economic duress?
The case law in this area is well established and the leading case is DSND Subsea Ltd v Petroleum Geo Services ASA  BLR 530 which provided guidance as on what kind of pressure there must be:
- the practical effect of which is that there is compulsion on, or lack of practical choice for the victim
- which is illegitimate; and
- which is a significant cause inducing the party on the receiving end of the pressure to enter into the contract or agreement.
The courts do recognise that it is a commercial reality that parties do have unequal bargaining positions - and that one party may enter into a contract on seemingly unfavourable terms for commercial reasons.
In deciding whether the pressure was illegitimate, a court will take the following into account:
- Has there been an actual or threatened breach of contract?
- Is the person who is allegedly exerting the pressure acting in good or bad faith?
- Has the victim any realistic practical alternative but to submit to the pressure?
- Did the victim protest at any time?
- Did the victim affirm and indeed seek to rely on the contract?
A successful claim for economic duress will demonstrate that the pressure was not legitimate. For example, threatening to terminate the contract or asking for additional payment if these threats can be proved to be illegitimate pressures.
If economic duress can be established then the victim has the choice whether to affirm the contract or avoid it. If successfully pleaded, economic duress could enable a party to be released from their obligations under the contract.
Economic duress is not easy to establish. However, it is important that parties are aware that this could be claimed and take steps to avoid overstepping the line when dealing with a party. If economic duress is claimed this could increase the time it will take to resolve the dispute and, more significantly, costs.
It is likely in the current climate that these types of claim will increase. Parties may wish to revise terms of contracts which are not favourable, and the temptation may be to exert pressure on the other party to do so.
Claims for economic duress may be seen as a ‘get out clause’ for contracts that are no longer appealing. To avoid these claims, keep records of your contractual negotiations and avoid exerting undue pressure that maybe regarded as illegitimate.
Alastair Young is a partner at HBJ Gateley Wareing.