A bit of "rough and tumble"?

Have you ever felt that you were forced to pay a contractor or a subcontractor more money as a result of a threat? Perhaps they threatened to suspend the works or to refuse to deliver materials in breach of contract? There comes a time when the “..rough and tumble of the pressures of commercial bargaining..” can cross a line and become the basis of a claim for economic duress.

The recent case of Capital Structures Plc vs. Time & Tide Construction Ltd considered the issue of whether a settlement agreement entered into under economic duress was void. Additionally, it was considered whether provisions to go to adjudication over disputes in the settlement agreement would survive termination of the underlying contract.

The facts

In 2003 and 2004 Time & Tide issued subcontract orders to Capital Structures for the design, fabrication and erection of structural steelworks and labour. Later in 2004 the parties were in dispute over valuations and interim payments and Time & Tide’s performance.

The project suffered from delays and the contractor was caught between the demands of the employer and its non-performing subcontractor. Time & Tide ran the risk of being thrown off the site, an act which it was said could push it into liquidation. The contractor received an ultimatum from the employer to reach a settlement with the subcontractor by a certain date and very shortly thereafter Time & Tide entered into the settlement agreement with Capital.

This agreement provided for a payment to be made immediately for the steelwork still in Capital’s possession and subsequently for a large quantity of retention monies to be released to Capital following building regulations approval of the installation of these works.

It agreed that the settlement would be in ‘full and final settlement of all existing and future claims’ and that any disputes under the agreement would be subject to the adjudication provisions of the Construction Act. Settlement agreements generally do not fall within the scope of the automatic application of the Construction Act.

Crucially, the director of Time & Tide gave evidence that even though he was in receipt of independent legal advice, due to the pressure he was under he had no choice but to accept the deal offered by Capital.

While the payment for the outstanding steelwork was made right away and the materials were delivered and installed, the contractor did not make the payment of retention monies. Capital served notice of adjudication claiming its money. Time & Tide challenged the jurisdiction of the adjudicator on the basis that the settlement agreement should be set aside as void due to “economic duress”.

As expected, the adjudicator awarded the retention monies in favour of Capital which then applied to court to seek enforcement in this case.

What is economic duress?

His Honour Justice Wilcox took the opportunity to revisit the case law on the subject. In one recent case, DSND Subsea Ltd v Petroleum Geo-Services ASA, the claimant who cried foul did have other rights available to him, such as termination of the disputed contract. As a result he failed to prove that the alleged wrong-doing amounted to anything more than the “rough and tumble of the pressures of commercial bargaining.”

The case of Carillion Construction Ltd vs. Felix (UK) Ltd set out the following four-point test to establish whether economic duress had taken place:

• that there was pressure or a threat;
• nwhich was illegitimate;
• the practical effect of which was that the contractor had no practical choice but to enter into the settlement agreement; and
• that the pressure or threats were a significant cause inducing the contractor to enter into the settlement agreement.

In the Time & Tide case HHJ Wilcox went through these points to see whether the defendant would have had a real prospect of successfully defending the claim for enforcement of the adjudicator’s decision.

Whether a pressure is ‘illegitimate’ or not is dependent on whether there has been an actual or threatened breach of contract, whether the sub-contractor has acted in bad faith, whether the contractor has any other realistic alternative but to submit, and, crucially, whether the ‘victim’ protested at the time.

A contract entered into under duress is therefore ‘voidable’ and not automatically void. If a ‘victim’ continues to affirm or act upon a contract despite the above elements being met he will be held to have ratified the contract.

In this case payment of the first sum for the outstanding steelwork was held not to amount to a ratification of the agreement as without it the steelwork wouldn’t have been released and the duress would have continued. The contractor had however protested in its response to the adjudication.

It was held that if the contractor had still managed to void the settlement agreement then technically the agreement would never have existed. If the agreement never existed then, as a consequence, the provisions of that agreement providing for adjudication would also be void.

As the Time & Tide case before the court was only an interim application to prevent the enforcement of the adjudicator’s decision against them they didn’t need to fully establish economic duress, only that there was a possibility of proving duress. It was held that there was an “arguable, albeit shadowy, case as to economic duress”, and so both parties will have to submit to the rough and tumble for a little longer.

Lessons to be learnt

• If you feel as if you are being placed under duress, record the position in writing at the time.
• Avoid taking steps to affirm the contract completed under duress.
• Take independent advice before entering into the contract