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Duress: a zero return policy

LAW

Forcing a company into an agreement when it has no practical alternative is not a legitimate strategy, writes Lindy Patterson

FREEDOM of contract - that is, the ability to contract on any terms and conditions you might wish to agree to - is a principle that underlies much of western commercial philosophy.

Accordingly, the courts are usually reluctant to interfere in agreements reached between two commercial entities. And just because one company is bigger and stronger than another does not normally make agreements reached between the two unenforceable.

Nevertheless there is a fine line between 'the rough and tumble of the pressures of normal commercial bargaining' and illegitimate pressure being brought to bear by one party to force an agreement on the other.

This is called 'economic duress', and in these situations the conduct and relative economic strength of one of the par ties can result in agreements being struck down.

The law in this area was summarised by Mr Justice Dyson six years ago in the case of DSND Subsea v Petroleum Geo-Services. Judge Dyson identified three elements that need to be present for a contract to have been entered into under economic duress.

The first is pressure brought to bear on the 'victim', compelling it to accept a contract or leaving it with no other practical choice but to do so.

The second element is that the pressure must be illegitimate.

The third is that the pressure is one of the significant reasons why the victim agreed to enter into the contract.

Other factors the courts will consider include whether the party alleged to have exerted the duress was acting in good or bad faith; whether the victim objected at the time; and whether they had any other real alternative course of action. If, when the duress has ended, the victim carries on with the contract, they may lose their right to argue illegitimate pressure as they are taken to have affirmed the contract.

The case of Carillion Construction v Felix (UK) (Technology and Construction Court, November 2000) provides a useful example of what constitutes economic duress in a construction context.

Carillion was building an office block at 16-17 Old Bailey, London, and had subcontracted the design, manufacture and supply of the cladding to Felix.

Felix fell behind schedule which caused problems for Carillion - the ability to progress the main contract works was dependent upon Felix completing its works.

Furthermore, if Carillion failed to meet its completion date it was going to be hit with hefty liquidated damages.

Many months before it was due to complete its works, Felix suggested negotiations begin on its final account. Felix had written to Carillion stating: 'Without this figure being agreed, I cannot predict when the project will be complete.' Carillion saw this as a threat that Felix would not progress the works unless the figure suited Felix. In the weeks that followed, panels were ready for delivery to site, but Felix refused to do so until the final account was settled.

Against this backdrop, Carillion did explore the possibility of having others complete Felix's works but this led nowhere.

In addition, Carillion explored with its in-house legal advisers whether there were any steps it could take, other than agreeing to Felix's demands, to protect itself.

The answer was that there were no other steps it could take, although it was advised that if it were compelled to agree the final account it could thereafter have it set aside for duress.

At a meeting with Carillion, Felix indicated that the only way to progress matters was for Carillion to agree the final account to Felix's satisfaction.

Carillion therefore felt it had no choice but to do so, in order to secure the project's completion, and agreed a final account figure of £3.2 million - some £500,000 more than Carillion's figure.

A few days later, Carillion wrote to Felix stating that it believed the agreement had been made under duress.

Felix did not respond.

Felix subsequently went on to complete its works, but as soon as Felix had made its last delivery, Carillion effectively abandoned the settlement agreement and returned to the terms of the subcontract.

Shortly afterwards, Carillion started proceedings to set aside the agreement due to duress.

Felix argued that Carillion was under no duress; it had made no threats and the agreement was a normal commercial bargain. In any event, there were other practical options open to Carillion.

But the court found in favour of Carillion and the agreement was set aside.

The elements required for duress - illegitimate pressure and no real practical alternative but to agree to Felix's demands - had been present and Carillion was entitled to recover money paid on the basis of that agreement.

The latest example is the case of Capital Structures v Time & Tide Construction (March 2006). This concerned a steelwork subcontractor which had taken a main contractor successfully to adjudication. The main contractor sought to resist the adjudicator's award because, it said, the agreement upon which the award had been made had been entered into under economic duress.

Although the court did not need to decide whether this was the case or not, it refused to allow the adjudicators' award to be enforced until the arguments about this had been heard.

Significantly, there was also the question of whether or not the main contractor had lost its right to argue economic duress by making payments under the agreement and by doing nothing after the alleged duress had ended.

For those who consider they may have suffered such duress, it pays to act immediately once the duress has ended.

Key points

Economic duress is the bringing to bear of illegit imate pressure to compel another to enter into an agreement on particular terms.

There is a fine line between duress and normal commercial negotiations - the facts and circumstances of each individual case need to be considered.

Agreements entered into under duress may be set aside and any money paid pursuant to such agreements recovered.

Law Report is a weekly column covering legal issues of all kinds - including contractual, employment and industrial relations. To help us provide a steady f low of quality, readable legal articles, we have created a panel of expert advisers. They are: ¦ Daniel Atkinson, executive director of Atkinson Law; ¦ James Bell, partner with London law firm Christian Khan; ¦ Guy Cottam, a conciliator, arbitrator and former chairman of the arbitration advisory panel of the Institution of Civil Engineers;

¦ Catriona Dodsworth, a partner with law firm Pinsent Masons; ¦ Rudi Klein, visiting professor of construction law at the University of Wolverhampton and chief executive of the Specialist Engineering Contractors' Group; ¦ Lindy Patterson, partner and head of construction group with Dundas & Wilson; and ¦ Jeremy Winter, a partner with law firm Baker & McKenzie.