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  • Charles Baker

What is Economic Duress

Many people later regret documents they sign or agreements they made and, to avoid them, argue that they signed them “under duress.” Often they say the other party made threats or intimidated them and thus exerted an illegitimate or unlawful pressure on them to sign or make the agreement. Respectfully, most lay people do not understand what is required to make out the defence of economic duress sufficient to cause a Court to relieve them of their agreements.

In two English decisions, the House of Lords dealt with the law relating to economic duress, and in both decisions the Court ruled that economic duress had not been proven. In Pao On v. Lau Yiu, the Defendant claimed that he was coerced into giving a guarantee when the Plaintiff refused to comply with the terms of a binding agreement unless the Defendant executed the guarantee. It was found that the Defendant had considered the matter thoroughly, chose to avoid litigation, and formed the opinion that the risk in giving a guarantee was more apparent than real. In these circumstances, the Court ruled that there was no economic duress.

The Court then when on to say that duress is a coercion of the will so as to vitiate consent. Commercial pressure is not enough. “There must be present some factor which could in law be regarded as a coercion of his will so as to vitiate his consent.”

Factors to consider in determining whether a person was coerced are:

(a) Did the person protest; (b) Did the person have an alternative course open, such as an adequate legal remedy; (c) Was the person independently advised; and (d) Whether after entering into the contract he took steps to avoid it.

The Court concluded:

There is nothing contrary to the principle of recognizing economic duress as a factor that may render a contract voidable, provided always that the basis of such recognition is that it must amount to a coercion of will that vitiates consent. It must be shown that the payment made or the contract entered into was not a voluntary act.

Three years later the English House of Lords had a further occasion to consider the law of economic duress in Universe Tankships Inc. v. International Transport Workers’ Federation. The issue was whether payments extracted by the Trade Union from ship owners in return for the Trade Union’s co-operation were made under economic duress. It was conceded that the financial consequences to the ship owners were catastrophic as to amount to a coercion of the ship owners’ will that vitiated their consent. The issue was whether the pressure was legitimate.

The Court commented on the rationale for the law of economic duress:

The rationale is that his apparent consent was induced by pressure exercised on him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind.

The Court then referred to two elements comprising the wrong of duress:

(a) Pressure amounting to compulsion of the will of the victim; and (b) The illegitimacy of the pressure exerted.

The Court defined compulsion by referring to the classic case of duress as the victim’s intentional submission arising from the realization that there is no other practical choice open to him.

In determining what is legitimate, two matters may have to be considered, according to the Court:

(a) The nature of the pressure. In many cases this may be decisive, though not in every case, and so the second question may have to be considered;

(b) The nature of the demand that the pressure is applied to support. The Court noted that in life, including life in commerce and finance, many acts are done “under pressure, sometimes overwhelming pressure”, but they are not necessarily done under duress. “That depends on whether the circumstances are such that the law regards the pressure as legitimate.”

As can be seen, the defence of economic duress is neither simple to make out nor easy to maintain. The best advice, then, is not sign a document or make an agreement unless you are prepared to live with the consequence.

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