Economic duress: Progress Bulk Carriers Ltd vs Tube City IMS LLC

Life in the construction industry remains tough. As competition for work increases, profit margins are continually being squeezed. Add in the rising cost of raw materials and the knock-on effect on cashflows, and it should come as no surprise that negotiations to settle final accounts or disputes, particularly where there have been delays on a project, can quickly become hostile.

The basic principle is that parties are free to enter into whatever contracts they agree and the courts have generally been reluctant to interfere in the “rough and tumble of… normal commercial bargaining” (Adam Opel GmbH vs Mitras Automotive (UK) Ltd). However, be too aggressive in pressing home any commercial advantage you may have and you could find yourself on the wrong end of a claim to have that settlement agreement or variation agreement set aside for economic duress. Or put another way, that you have used illegitimate financial pressure to force the other side to agree to that settlement or variation.

Claims of economic duress are notoriously difficult to prove and the courts have little sympathy where these are thrown in with the kitchen sink. To succeed, claimants need to show that they have been subjected to illegitimate pressure which has caused them to enter into an agreement or where they had no reasonable alternative.

The recent case of Progress Bulk Carriers Ltd vs Tube City IMS LLC has held that illegitimate pressure includes lawful but unethical behaviour. It is a shipping case, but the principles apply to all commercial agreements (including construction).

Tube chartered a ship from Progress to transport its cargo of scrap to a buyer in China, but in breach of contract, Progress hired the ship to a third party. According to the arbitrators, Progress then “lulled Tube into a false sense of security” by offering to provide a substitute ship and cover all of Tube’s losses. However, Progress was really “quietly manoeuvring Tube into a corner”. By the time a substitute ship was suggested, Tube had been forced to accept a significant price reduction from its buyer for failing to deliver the cargo on time, as well as facing mounting storage costs.

Claims of economic duress are notoriously difficult to prove and the courts have little sympathy where these are thrown in with the kitchen sink

Knowing that Tube had no real alternatives as the price of scrap had fallen sharply, Progress then refused to honour its promise to compensate Tube in full and made a “take it or leave it” offer which required Tube to waive all of its claims against Progress. Under protest, Tube accepted Progress’ terms. The arbitrators (and the court on appeal) held that Progress’ lawful but unethical behaviour amounted to illegitimate pressure and that Progress should not be allowed to benefit from its original breach of contract.

So if you are the party applying the pressure in negotiations, be careful that any action you threaten to take is not illegal or a breach of contract. Although you are free to drive as hard a bargain as you possibly can, you must not take unfair advantage of the other side or the situation in which they find themselves.The recent case of Daventry District Council vs Daventry and District Housing Limited is another reminder that the courts are alive to sharp practices and will penalise those who seek to benefit from unscrupulous behaviour.

As part of a transfer of council housing from Daventry council to the defendant company, a number of council employees and their pensions (which were underfunded) were also to be transferred to the company. The company’s representative realised that a draft agreement in principle which had been circulated was ambiguous and could be read in two ways. He knew that the council believed that the agreement required the company to be responsible for meeting any funding requirements of the pensions. However, he chose to interpret it as meaning that the council had agreed to pay the £2.4m deficit, and he led his colleagues to believe that this was the case. The council failed to appreciate that the final form contract did not reflect their understanding of the agreement and, fully aware of the council’s mistake, the defendant’s representative kept quiet. When the council’s error finally came to light, it sought an order for rectification.

The Court of Appeal ordered that the contract should be rectified and made it clear that its decision was heavily influenced by the representative’s unconscionable behaviour.

Tom Peel is construction and engineering partner at Walker Morris