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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 BE, 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 GMRs 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 days 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