UK: Duress In Commercial Contracts - Crossing The Rubicon Of Illegitimate Pressure

Last Updated: 17 April 2012
Article by John Simpson and Aurora Villacellino

Progress Bulk Carriers Limited v. Tube City IMS LLC (Cenk K) [2012] EWHC 273 [Comm]

This was an appeal to the High Court from an arbitration, in which the tribunal had been asked to consider whether a settlement agreement was voidable for duress. The court gave particular consideration to whether or not the owner's conduct amounted to "illegitimate pressure", which, coupled with a prior (unaccepted) repudiatory breach, might establish duress in law. Mr Justice Cooke held that the arbitrators had applied the correct test.

The background facts

The claimant was the disponent owner of Cenk K and concluded a voyage charter with the defendant charterer on 2 April 2009 to carry shredded scrap from the USA to China. The charterer was shipping the cargo to fulfil its obligations under a sale contract.

On 7 April, the owner fixed Cenk K to another charterer (Daewoo) without informing the charterer. The charterer discovered that the owner had done this on 16 April. The owner did not dispute that it had acted in repudiatory breach of the charterparty, but the charterer did not accept that breach as terminating the contract, which therefore remained alive, although the named vessel could no longer be made available to meet the agreed laycan. On 18 April, the owner said that it would find an alternative vessel to load between 27 and 30 April and that it would compensate the charterer for damages resulting from its failure to provide Cenk K.

The arbitrators found that the charterer reasonably relied upon the owner's assurances. Eventually, the owner put forward Agia to perform the voyage. The charterer passed on the details of Agia to its buyers and sought an extension of time for shipment. The receiver agreed to extend the shipment date to 15 May but only on condition that the purchase price was reduced. The charterer explained that this deal with the receiver was the best that could be done in the circumstances, since the market had moved down in the interim by more than the differential sought by the receiver.

On 27 April the owner replied stating that it would grant a $1-2 per mt discount on the freight rate. The charterer protested as this was far less than the loss it would suffer under the sale contract.

On 28 April, the owner made a "take it or leave it" offer. It required acceptance of the Agia clean, with a $2 reduction per metric ton on the freight and the charterer's agreement to waive its claims for damages arising from the nomination of Agia outside the contractual laycan and/or the vessel's late arrival. This was plainly inconsistent with the owner's earlier assurances that it would find a substitute vessel and compensate the charterer for the losses caused by the owner's repudiatory breach of the charterparty. The charterer eventually replied accepting the owner's terms under protest.

The Commercial Court decision

Since Huyton v. Cremer [1999] 1 LLR 620, it has been clear that economic pressure can amount to duress provided that it can be characterised as illegitimate and that it is a significant inducement to the claimant to enter into the contract.

The owner's primary submission in this case was that pressure was only illegitimate if it was unlawful; i.e. economic duress operated only if the victim was subject to pressure as a result of unlawful action by the perpetrator.

However, Mr Justice Cooke held that "illegitimate pressure" could be constituted by conduct which was not in itself unlawful, although it would be an unusual case where that was so, particularly in the commercial context. He went on to say that a past unlawful act, as well as a threat of a future unlawful act could, in appropriate circumstances, amount to illegitimate pressure.

The owner's refusal to supply a substitute vessel, unless the charterer waived its right to full damages in circumstances which the owner had created by its breach and its subsequent misleading actions (refusing to comply with previous assurances), could validly be found by the arbitrators to amount to illegitimate pressure. By way of guidance, the judge said that "the more serious the impropriety and the greater the moral obloquy which attaches to the conduct, the more likely the pressure is to be seen as illegitimate".

Comment

It has been said in DSND Subsea v. Petroleum Geo-Services [2000] BLR 530 and Carillion Constructions Ltd v. Felix (UK) Ltd [2001] BLR 1 that the court will look at a range of factors when considering the legitimacy/illegitimacy of the economic pressure exerted, namely: (i) whether there has been an actual or threatened breach of contract; (ii) whether the person allegedly exerting pressure has acted in good or bad faith; (iii) whether the victim had any realistic practical alternative but to submit to the pressure; (iv) whether the victim protested at the time; and (v) whether he affirmed and sought to rely on the contract. However, in Adam Opel GmbH v. Mitras Automotive (UK) Ltd [2007] EWHC 3205 (QB), it was said that "illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining."

It will be necessary in each case to carry out a detailed assessment of the pertinent facts, but it is now clear that the requirement of illegitimacy (for economic duress) is likely to be met where:

1. the innocent party's predicament is created by the perpetrator's previous repudiatory breach of contract; and

2. the perpetrator has subsequently attempted to take advantage of the position created by its original unlawful act (for example, by failing to comply with past assurances), in order ultimately to extract a more favourable settlement from the innocent party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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