Introduction
For a contract to be legally binding, the consent of both parties must be freely given. English contract law recognises that certain factors can impair this consent, rendering a contract unenforceable. One such vitiating factor is duress, where one party uses illegitimate pressure to force the other into an agreement. While historically limited to threats of physical violence, the doctrine has evolved to include economic duress. This assignment will explore a contractual situation involving alleged economic duress, analysing the key legal principles, the effect on the contract, and the available remedies, supported by relevant case law.
The Contractual Scenario
Consider the following situation based on the facts of a real case (see Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989]). Small Furnishings Ltd, a small furniture manufacturer, secures a highly valuable contract to supply bespoke chairs to a large department store, ‘The Home Store’. The contract is crucial for the survival of Small Furnishings Ltd. They contract with a national courier, Rapid Deliveries plc, to transport the chairs at an agreed price per delivery.
A week before the first major delivery is due, in the busy pre-Christmas period, Rapid Deliveries plc informs Small Furnishings Ltd that the original price was a mistake and they will not make the delivery unless a significantly higher price is paid. Small Furnishings Ltd protests, but with no time to find an alternative courier and facing the prospect of breaching their lucrative contract with The Home Store, they reluctantly agree to the new price in writing. After the deliveries are completed, Small Furnishings Ltd refuses to pay the extra amount, claiming they only agreed under duress.
The Vitiating Factor: Economic Duress
The vitiating factor alleged by Small Furnishings Ltd is economic duress. This occurs when one party uses its superior economic power illegitimately to coerce another into agreeing to a contract or, as in this case, a contractual variation. The modern test for economic duress was set out by Dyson J in DSND Subsea Ltd v Petroleum Geo-Services ASA [2000]. It requires two key elements: illegitimate pressure, which is a significant cause inducing the innocent party to enter the contract.
The consent of Small Furnishings Ltd was clearly affected. The company was not acting with free will but was faced with a "compulsion of the will" (Poole, 2021). The choice was between agreeing to the price hike or facing financial ruin from the loss of The Home Store contract. As Lord Scarman stated in Pao On v Lau Yiu Long [1980], the court must ask whether the person allegedly coerced protested, had an alternative course open to them, was independently advised, and after entering the contract, took steps to avoid it. In this scenario, Small Furnishings Ltd protested and had no realistic alternative. The pressure exerted by Rapid Deliveries plc was a threat to breach their existing contract, which is generally considered illegitimate pressure. It was not a legitimate commercial negotiation but an opportunistic demand made at a time when the claimant was most vulnerable.
Validity of the Contract and Available Remedy
A contract entered into under duress is voidable, not void. This means the contract is valid until the innocent party takes action to have it set aside (rescinded). Small Furnishings Ltd has the option to either affirm the modified contract (and pay the higher price) or seek to rescind it.
The primary remedy is rescission, which aims to return the parties to their pre-contractual position. In this context, it would mean setting aside the agreement to pay the higher price, leaving the original contract price as the only one enforceable. However, the right to rescind can be lost. One significant bar to rescission is affirmation, which occurs if the innocent party, once free from the pressure, acts in a way that suggests they consent to the contract. For instance, in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron) [1979], the claimants lost their right to rescind because they waited eight months after the pressure had ceased before making their claim. To succeed, Small Furnishings Ltd must have acted promptly to repudiate the variation once the deliveries were complete and the threat had passed. Refusing to pay the extra sum immediately after the contract's performance would likely be seen as a timely action.
Conclusion
In the scenario involving Small Furnishings Ltd and Rapid Deliveries plc, there was a genuine cause for concern regarding the validity of the contractual variation. The threat by Rapid Deliveries plc to breach their contract amounted to illegitimate pressure. This pressure was a significant cause of Small Furnishings Ltd’s agreement to the new terms, as they had no practical alternative available. Therefore, the elements of economic duress appear to be satisfied. The agreement to pay the higher price is voidable, and provided Small Furnishings Ltd did not affirm the contract by delaying their challenge, they should be entitled to the remedy of rescission and would not be liable for the additional payment demanded under duress.
References
Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833.
DSND Subsea Ltd v Petroleum Geo-Services ASA [2000] BLR 530.
North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron) [1979] QB 705.
Pao On v Lau Yiu Long [1980] AC 614.
Poole, J. (2021) Textbook on Contract Law. 15th edn. Oxford University Press.
