Economic Duress: Feeling The Pressure?

The law is often opposed to interfering in a commercial bargain struck by two consenting parties – even if the terms are stacked heavily against one party and they suffer badly as a result. This idea is known as ‘freedom of contract’ and recognises that parties to an agreement should be ‘free’ to set its terms.

Businesses are starting to feel the effect of the economic downturn. Many will be experiencing financial pressures in honouring their existing commercial agreements. It is likely also to impact on negotiations for new bargains or variations to existing ones. People may be tempted to take advantage of the situation.

In such turbulent economic times, it is worth knowing that the law can offer some help to a party who has lost their ‘freedom of contract’. This can occur when that party has agreed to do something only because they have been subject to undue financial pressure from the other contracting party.

For example, a supplier may hike their prices for goods needed desperately by a business where there are no or few alternatives available; or a party may threaten or refuse to do something until a variation is agreed by the other. In both scenarios, the suffering party would need to show that they had no choice but to agree i.e. it was not a voluntary act.

This is known as ‘economic duress’ and can in limited circumstances result in that agreement being set aside. There are four recognised elements that must be satisfied to argue economic duress:

1. The pressure on the suffering party must leave them with no realistic alternative other than to accept the agreement on the terms offered. An alternative may include taking legal action;

2. The pressure must be illegitimate. A court would consider whether there has been an actual or threatened breach of the agreement. It would also look into whether the dominant party has acted in good or bad faith. Illegitimate pressure must go further than the everyday pressures of commercial negotiations;

3. The pressure must be a significant cause for the suffering party to enter into the agreement;

4. The suffering party must not affirm the agreement by their conduct. Agreements entered into under economic duress are not automatically void. They are voidable. This means they are valid until a party seeks to avoid its terms. It is important, therefore, that a suffering party acts quickly if they consider that they have been a victim. However, making payment under an agreement does not automatically mean it has been affirmed.

Although it is historically difficult to prove, economic duress is certainly something to watch out for now that businesses are feeling the effects of the credit crunch. A successful party in a claim of economic duress is generally entitled to recover any money paid into an agreement; or for their losses arising from the duress.

Published 24/03/2009. The author of this article is Ben May