Some construction clients are trying to force their suppliers to drop prices. But the courts will come down hard on those who rely on illegitimate threats and financial leverage
The use of force is repugnant to English law in all its forms save in self-defence. In the world of commerce, parties are constantly bargaining, haggling and negotiating. It is part of the hurly-burly of business and, provided it does not go too far, is perfectly legal.
Economic duress arises in situations where a person enters into a contract because of threats or pressure that do not involve threats of bodily harm. This causes the contract to be avoidable. The elements required to prove economic duress are that:
- The economic pressure applied by the defendant is illegitimate; and
- “but for” that illegitimate economic pressure, the claimant would not have entered into the disputed agreement or contract variation.
There is no absolute test to establish how a threat may be fingered as illegitimate, but in general a threat of a breach of contract or other civil wrong will be ample. However, where the parties are both experienced commercial entities, it is rare for the English courts to interfere.
So when will the courts hold that the seller has overstepped the mark in trying to extract more from the buyer than they were entitled to under the contract when the market goes against them?
- The courts expect companies to act properly in spite of the recession. Parties will not be able to rely on illegitimate threats and financial leverage to prop up margins
Under English law, the threat to break a contract will generally be regarded as illegitimate where the party threatening to break the contract knows that it would be in breach of contract if the threat were implemented. The courts will consider whether the claimant had a “real choice” or “realistic alternative”, so that it could have resisted the pressure placed on it by the party threatening to break the contract.
If there was no reasonable alternative, this might be very strong evidence leading to a finding of economic duress. Moreover, while it might be relevant to consider whether the claimant protested against the threat made, a failure to protest does not necessarily mean any payment made as a result of the coercion was made voluntarily.
This is particularly topical because the likes of Serco, Tesco and others have made no attempt to conceal how they are prepared to force their suppliers to drop their prices, in the name of sharing pain, or risk losing business or patronage.
Economic duress may apply to the formation of the contract or to subsequent variations of it, as Serco appeared to attempt last month by transferring the costs of spending cuts onto suppliers. It later retreated and uttered a grovelling apology to those suppliers.
There is some controversy on the question of whether or not a breach of contract, or a threat to commit a breach of contract, must always be regarded as illegitimate. Some commentators take the view that it should always be regarded as illegitimate, while others believe that in certain circumstances a threat may not be illegitimate if there is a reasonable commercial basis for the threat.
So how is the court to determine whether or not a threat to breach a contract in a particular case is legitimate or illegitimate? Factors considered include:
- Changed circumstances. A threat by the defendant not to continue to perform the contract as agreed may be regarded as legitimate where there is a serious change of circumstances, but the circumstances are not serious enough to discharge the contract on the ground of frustration.
- Whether a demand is reasonable. Even where there are unexpected events for which the defendant is not responsible, it is not permissible for him to use the change in circumstances as an excuse to make an unreasonable demand backed by a threat of a breach of contract. The demand must be reasonable for the threat to be legitimate.
The recent case of Kolmar Group AG vs Traxpo Enterprises PVT Ltd 2010 provides an example of the remedies available where a party refuses to comply with a contract unless the terms are amended or varied in its favour. The court found economic duress occurred when Traxpo refused to supply methanol at an agreed price and presented the purchaser, Kolmar, with a “take it or leave it” proposition. The purchaser had no practical choice but to agree to pay an increased price for the methanol. “But for” the pressure applied, the claimant would not have been induced to agree to the demands.
Kolmar illustrates that the courts expect companies to act properly in their commercial dealings, in spite of of any recessionary forces or other pressures, and will move to ensure that parties will not be able to rely on illegitimate threats and financial leverage to prop up margins. Big fish had better watch their backs, as backs are for scratching - not, as some prefer, for stabbing. An old man in a white wig beckons if they get that wrong.
Simon Tolson is a senior partner at Fenwick Elliott
This article was originally published under the headline ’Putting bullies in their place”