The area of law concerning defective contracts tainted by duress or undue influence has been created in order to protect those people that enter into a contract which involves high degrees of risks and which has been entered in disadvantageous circumstances. English law does not normally concern itself with the fairness of a bargain but it does recognise that it needs to intervene in some circumstances. Cases based on duress and undue influence are exceptional. It is true that the law in this area is unclear but in order to discuss its effectiveness it is necessary to weigh up both its merits and weaknesses.
It will then be possible to decide whether this area of law is chaotic rather than uncertain. In short, at common law, the doctrines of duress and undue influence allow a contract to be set aside if one party has put unfair and improper pressure on the other in the negotiations leading up to the contract. So, an inequality of bargaining power between contractual parties, which is exploited by the more dominant party, is a basis on which the law may permit the weaker party to rescind that contract.
Duress is the unlawful pressure to perform an act. In Universe Tankships v. ITWF,1 Lord Scarman said that to establish that duress had occurred, it was necessary to establish two things. Firstly, that the victim was subjected to pressure which was illegitimate and secondly, that the pressure exerted on the victim was so great that it gave rise to the compulsion of his/her will. If both these facts are present, the doctrine of duress would render the contract voidable. There are different categories of duress.
Duress to the person cases are of little significance, since the number of cases in this area has always been small. Duress to property recognises that a threat to seize another’s property or to damage it will justify a claim of duress and result in the ensuing contract being set aside. More recently, the emergence of a new and far more significant doctrine of economic duress has taken place. Due to its comparatively recent development in English law the doctrine is still developing. It therefore contributes to the chaotic nature of this area of the law.
Kerr J in the case of Occidental Worldwide Investment Corporation v Skibs A/S Avanti, The Sibeon and The Sibotre2 first examined the idea of economic duress. A common situation raising the possibility of action for economic duress is where one party threatens to break a contract unless that contract is renegotiated, and the other agrees rather than face disastrous consequences as a result of the breach. This area is fraught with difficulty because companies who deal with each other on a regular basis often voluntarily agree to change the terms of the contract.
The economic duress doctrine threatens them. However, the need for a clear and recognised doctrine in English Law has been called for due to changes to the law relating to consideration, particularly concerning variation of commercial contracts. In Pao On v Lau Yiu Long,3 the Privy Council approved the doctrine of economic duress and attempted to identify its essential ingredients. Two essential conditions for the operation of the doctrine were identified by Lord Scarman. Firstly, there must be a ‘coercion of the will that vitiates consent’ and secondly, the pressure or threat must be ‘illegitimate’.
Pao On involved the sale of shares in a company called Fu Chip. The plaintiffs agreed with the defendants that they would not sell 60% of their shares for one year. The defendants then promised to indemnify the plaintiffs against any loss in the value of their shares. The defendants signed an indemnity agreement but later claimed that this had been obtained as a result of duress when the plaintiffs sought to rely on it.
On the subject of a ‘coercion of the will’, Lord Scarman stated: “In determining whether there was a coercion of the will such that there was no true consent, it s material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it… ” Lord Scarman found that it was essential to distinguish between mere commercial pressure and duress but came to the conclusion that there was no coercion of the will and no duress present in this case.
However, it seems incorrect to argue that duress is based upon consent being vitiated so that the agreement is not voluntary. Atiyah4 strongly criticized this argument and in The Evia Luck5, Lord Goff stated that he doubts whether it is helpful to speak of a person’s will being coerced. In a claim for economic duress there must be pressure or a threat. This can lead to fine distinctions of fact. Also, any improper pressure must be ‘decisive or clinching’6. In addition the pressure must be illegitimate. It is far from clear where the line between legitimate and illegitimate pressure is to be drawn.
In DSND Subsea Ltd v Petroleum Geo Services AS,7 Dyson J stated that ‘illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining’. The remedy for duress will be lost unless the victim ensures that it takes action to ‘protest at the time, or shortly thereafter’. 8 In North Ocean Shipping Co. Ltd v Hyundai Construction Co. Ltd, The Atlantic Baron,9 the defendants threatened to breach a contract for the construction of a tanker unless the plaintiffs agreed to pay 10 per cent on top of the contract price.
The plaintiffs agreed and eight months after delivery of the tanker the plaintiffs sought to recover the extra payment. Mocatta J held that the defendant’s demand would have amounted to economic duress but their failure to reopen the issue for such a long time amounted to their affirmation of the contract. Therefore no remedy based on duress was available to the plaintiffs. However, the difficulty with this requirement is that it leaves the victim of duress with a difficult choice when deciding what course of action to take.
To sit back and fail to perform, relying on duress as a defence to any claim by the other party, runs the risk of being interpreted as affirmation of the contract. Although this doctrine has expanded over the years, it is clear that there are a number of key elements that require further elaboration. It would be helpful to have some recognised and clearly defined ingredients for the operation of the doctrine of duress as its importance is rapidly expanding. The difference between duress and undue influence is that in the first, the pressure is patent and the victim is reluctant about the position in which he finds himself.
With undue influence the pressure is more subtle because the victim trusts the other person and is willing to enter into the contract. In the case of Allcard v Skinner,10 Lindley J said that the principle upon which the doctrine of undue influence is based is that “it is right and expedient to save (persons) from being victimised by other people. ” The notion is extremely imprecise and flexible: “There is no precisely defined law setting limits to the equitable jurisdiction of a court to relieve against undue influence. This is the world of doctrine, not neat and tidy rules…
A court in the exercise of this equitable jurisdiction is a court of conscience. Definition is a poor instrument when used to determine whether a transaction is or is not unconscionable: this is a question which depends on the particular facts of the case. ” There are two classes of cases which fall within the doctrine of undue influence, which are actual undue influence and presumed undue influence. Although in theory the distinction between these two classes is clear enough, in practice it may not be easy to draw the line.
Sometimes the undue influence is manifest by the actual conduct of the other party. Here, it is not necessary to show that the agreement was disadvantageous to the victim. In this case the contract may be rescinded. However, this class of undue influence has no necessary role. According to Lord Browne-Wilkinson in CIBC Mortgages plc v Pitt11: “Actual undue influence is a species of fraud. Like any other victim of fraud, a person who has been induced by undue influence to carry out a transaction which he did not freely and nowingly enter into is entitled to have that transaction set aside as of right. ”
In the cases of presumed undue influence, the allegation is simply that there was ‘a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused the relationship in procuring the complainant to enter into the impugned transaction. ’12 In National Westminster Bank plc v Morgan13, it was suggested that in these cases it is necessary to show that there was a ‘manifest disadvantage’ to the complainant.
In CIBC Mortgages plc v Pitt,14 Lord Browne-Wilkinson appeared to be less than certain that even in presumed influence cases there was an absolute requirement to establish manifest disadvantage. The Court of Appeal in Barclays Bank plc v Coleman,15 reconsidered the requirement of ‘manifest damage’ in cases of presumed undue influence. Nourse LJ commented that ‘a serious question mark’ has been put ‘over the future of the requirement of manifest damage in cases of presumed undue influence. ‘ It was important for the House of Lords to consider what was really meant by ‘manifest disadvantage’ and not to enlarge its significance.
It was stated that the disadvantage must be ‘clear and obvious’. Over the twentieth century, the doctrines of duress and undue influence have been modernised, strengthened and expanded. In Lloyds Bank Ltd. V. Bundy16, Lord Denning MR argued that these doctrines were not really independent doctrines but rested on ‘a single thread’ of ‘inequality of bargaining power’.
In this case, Lord Denning was promoting a broader principle. He stated: “English law gives relief to one who, without independent advice, enters into a contract upon erms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him for or for the benefit of the other. ” In Pao On v Lau Yiu Long,17 Lord Scarman expressed his disproval of Lord Denning’s wider doctrine on the basis that it ‘would render the law uncertain’ because it would have to be determined on the facts of each case whether the use of the bargaining position was unfair.
He also stated that it exposes a risk that any contract, resulting from bargaining in which one party had the upper hand, might be overturned by the courts, thereby causing great uncertainty. Lord Denning’s doctrine would embrace not only undue influence and duress but also unconscionable transactions. There are advantages of adopting the wider doctrine. Firstly, it would rationalize an unnecessarily fragmented area of the law. In addition, it would enable the courts to target more precisely the mischief that the law ought to be tackling.
It would also give greater judicial flexibility to do justice where fact situations do not fall into the traditional narrow categories. However, there are disadvantages of such a wide doctrine. The existing doctrines are already sufficiently wide and flexible to cover any fact situation that might arise. A wide doctrine may also detract from the stability, certainty and predictability of the law and it would undermine the principle of freedom of contract. In conclusion, the current law of duress and undue influence is confusing.
Due to the recent development of certain areas of the doctrines this area of law is still developing and is at present unclear. There are many contradictory opinions between the judges on key elements of the doctrines, which does not provide a good basis to improve and develop the law in this area. There is a fine line between hard bargaining and duress and between presumed and actual undue influence, which leads to great inconsistency in the law. It has been argued that this sphere of law is too flexible and does not set sufficient boundaries.
Lord Denning’s wide doctrine would give judges greater discretion but some would argue that it is necessary to contain the effects of this power since a change in the law of this nature should be made by Parliament rather than the courts. The difficulty is that the vast majority of these cases appear to be unwise with the benefit of hindsight and it is up to the Court of Appeal to clarify the principles. In my opinion, the doctrine of duress and undue influence is not chaotic but rather incoherent and unstructured. We need to move away from the instability and unpredictability in the law and produce clear and recognised doctrines.