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The UK High Court recently had to decide whether a party to a settlement agreement could avoid the agreement because it had been entered into under economic duress. In this case, the party in breach engaged in some manoeuvring and hard bargaining with the result that the innocent party had no realistic alternative but to accept the settlement agreement, or otherwise risk incurring enormous loss. The court ruled that this conduct, when taken together with the original breach, amounted to economic duress, and the innocent party was not bound by the settlement agreement.
Facts
Progress Bulk Carriers Limited v Tube City IMS L.L.C. [2012] EWHC 273 Comm involved a charter for a ship, but the principles in the case could apply equally to a technology services contract.
For example, imagine a time-critical project for the design, delivery and implementation of a system. It becomes clear that the supplier will not meet a critical "go-live" date. The Supplier assures the customer that it will parachute in additional resources and expertise to bring the project back on track. The customer relies on the supplier's assurances and does not seek an alternative supplier. The supplier provides only minimal additional resource, the milestone date passes without the milestone being met and the project is now under enormous pressure with the risk of the customer suffering huge losses. The Supplier says that it will bring in further additional resource to complete the project if the customer waives all claims relating to the initial breach and subsequent delay. At this late stage, attempting to find an alternative supplier will result in further delay and loss, and the customer reluctantly agrees. Legitimate pressure or economic duress?
That scenario is not dissimilar to the one that the court had to consider in Progress Bulk Carriers. Tube City chartered a ship to transport cargo to China. The ship owner breached the charter by allocating the ship to another charterer. This was a repudiatory breach – a breach that goes to the root of the contract and entitles the innocent party to treat the contract as at an end. Tube City decided not to exercise its right to treat the charter as at an end, and instead relied on the owner's assurances that it would provide an alternative ship and compensate Tube City for its losses. Tube City contacted the purchaser of the cargo to ask for the delivery date to be extended. The purchaser was willing to agree in return for a reduction in the cargo sale price. In the circumstances, this was still the best deal available, as the market price had dropped considerably. After further negotiations with the owner, Tube City agreed a new delivery date with the purchaser of the cargo in China. However, the Owner then changed the goal posts and made a "take it or leave it" offer. The owner would provide a substitute ship only in return for a full waiver of all claims. Under loud protest, Tube City, accepted the owner's terms.
Ruling
Economic duress arises where a party has entered into a contract as a result of "illegitimate pressure. The High Court confirmed earlier authorities that pressure does not have to be "unlawful" in order to be "illegitimate", although in a commercial context this would be unusual.
Although threatening a future unlawful act (for example, threatening to breach of contract) can amount to economic duress, in this case, the owner was not contractually bound to provide a replacement ship, so there was no corresponding threat.
However, the court said that the combination of the owner's repudiatory breach of contract and its subsequent conduct (even though lawful) amounted to economic duress and that Tube City could avoid the settlement agreement. The court took particular account of the fact that, following the breach, the owner manoeuvred so that it could drive a hard bargain, and Tube City had no alternative but to accept the substitute ship on the owner's terms.
Practice tips
When negotiating a settlement agreement, the party in breach should take care not to cross the line that separates the rough and tumble of commercial negotiations and economic duress. Each case will depend on the facts, but if the party in breach is steering the innocent party into a position where its options are limited so that it has no realistic alternative but to agree to the settlement terms in order to avoid further loss, then there is a risk of economic duress.
There are steps that a party that finds itself on the receiving end of economic duress should take in order to protect its position.
- Make it clear to the other contracting party in writing that you are entering into the contract under protest
- Take care not to affirm the contract once the pressure has been relieved. For example, do not try to enforce any of its terms against the other party. Otherwise you risk losing the right to avoid the agreement.
For more information please contact Rob Shooter, Partner in the Technology and Outsourcing Group at Field Fisher Waterhouse LLP.