The legal principle known as economic duress will entitle a party to avoid a contract where they can prove they entered into it due to illegitimate economic pressure applied on them by the other contracting party.
Commonly, economic duress claims will arise where one party is in financial difficulty and the other party seeks to take unfair advantage of this by threatening not to comply with a contract or obligation, or threatening to withhold payment unless a contract is renegotiated in their favour. Making out a claim for economic duress will enable the aggrieved party to avoid the contract; in other words, it will be as though the contract was never entered into. damages: in litigation and dispute resolution, financial com... More can also be claimed by way of restitution for any monies paid under the contract.
Elements of economic duress – what must claimants prove?
In order to make a claim for economic duress the aggrieved party must show that:
- the other party applied illegitimate pressure;
- had it not been for the illegitimate pressure, it would not have entered into the contract, or put another way, the illegitimate pressure caused the aggrieved party to enter into the contract; and
- in the circumstances, the aggrieved party had no reasonable alternative other than to enter into the contract.
In order for there have been “illegitimate pressure”, the conduct of the party applying the pressure does not necessarily have to be unlawful and, although in most cases it will be, it is more a question of whether the conduct is morally or socially acceptable.
Economic duress vs ordinary commercial negotiations
Often it is difficult to distinguish between economic duress and commercial negotiations. The line may be particularly blurred in times of economic downturn when businesses are trying to squeeze the best deals for themselves. Accordingly, the courts will not make a finding of economic duress lightly and in applying the test for economic duress in order to reach a decision, the courts will look at factors such as:
- whether the party applying the pressure has actually breached the existing contract or threatened to do so;
- the seriousness of the illegitimate pressure;
- the intention of the party applying the pressure – if the party applying the pressure is acting in bad faith then illegitimate pressure may have been applied;
- the alternatives available to the aggrieved party – if there are no other practical options but to agree to the demands of the other party then it may be possible to claim economic duress;
- whether the claimant expressly or implicitly affirmed the agreement – if the aggrieved party acts in such a way as to affirm the contract and the demands of the other party, such as by making payment without protest, it may not be possible to claim economic duress; and
Parties who may be the subject of economic duress should ideally seek legal advice prior to entering into a contract which they are being placed under pressure to sign. It will often be of great assistance to that party to record in writing that the contract is being signed under protest and that all rights to argue that the contract can be subsequently avoided for economic duress are reserved.
South Bank Legal is a firm of solicitors specialising in business disputes. We have successfully acted for claimants in economic duress claims, achieving settlements without the need for court proceedings. To speak to one of our expert business litigation solicitors today, please get in touch.