PRINCIPLES OF CONTRACTUAL LIABILITY

Lecturer: MARY HISCOCK

 

 

SEPTEMBER 1997 ASSIGNMENT

 

 

WORD COUNT = 2892

Counts text, quotes and substantive footnotes.

Does not count Title Page, Research Outline or Bibliography.

 

Research Outline

ECONOMIC DURESS IS AUSTRALIA AFTER CRESCENDO

History of Anglo-Australian Economic Duress

Overborne Will or Illegitimate Pressure?

 

 


RESEARCH OUTLINE

I started out just by reading the cases in the casebook (Carter & Harland) and the section in the C&H companion text "Contract Law in Australia" on duress and following the references there to journal articles. Then I went to the shelves where the contract law texts are kept to try and get a general understanding of what I was writing about.

However almost all of the texts were out of date with recent decisions so I then focused almost entirely on journal articles. I went to the CD ROM journal indexes, and retrieved citations for lots of articles referring to economic duress.

Once I had followed up those articles, and followed "see also" type footnotes in many of them I had a fairly large collection of resources (not to mention paper) to go on. I then looked closely at the question in light of what I had read and decided how to narrow it sufficiently to write 3 000 words and still do more than just site articles endlessly.

From there I was able focus on to fairly specific areas, and used the library, Internet (http://www.austlii.edu.au, newsgroups, and an e-mail bulletin I receive - see http://www.farislaw.com) and lexus to get the relevant cases and statutes comments (from newsgroups - primarily bit.listserv.lawsch-l). I also referred to the "Australian Case Citator" and "Australian Case Annotator" to sort out small details.


ECONOMIC DURESS IN AUSTRALIA AFTER CRESCENDO

"Pressure and even coercion are often present in transactions in a market economy which accords individuals the freedom to choose with whom they deal. Where there are shortages of goods or services, the person who wishes to acquire them has little choice ... The legitimacy in many instances of coercive conduct mean that, while ... a rigid classification of types of coercion is undesirable, one can not ignore the type or coercion that has been used. ... A broad defence of duress may unduly undermine the security of transactions. Stability and finality are important, particularly in commercial transactions" (Beatson)

The development of the doctrine of economic duress has been a constant struggle against the traditional common law of duress. As such, many areas of the doctrine are as yet poorly defined, and are the subject of much discussion. In this essay I will examine what has emerged as the key to the modern doctrine of economic duress in Australia (i.e., the post McHugh J in Crescendo Management Pty Ltd v Westpac Banking Corp1 doctrine), the question of legitimacy.

History of Anglo-Australian Economic Duress

Before discussing the Crescendo2 case, some time needs to be spent tracing the development of this 'question of legitimacy'. Many of the innovations in this area of law have come form the Australian courts, however, it is difficult to see a clear development through the Australian cases, which have tended to refer to the English adoptions of Australian innovations rather than to the Australian authorities. Therefore, to trace the Anglo-Australian law of economic duress, it is easier to look first at England, then at Australia's adoption of that English precedent.

The first case that needs mention is that of Occidental World Wide Investment Corp v Skibs A/S Avanti (The Siboen v The Sibotre)3. This was a case regarding the charter of a ship. The owners agreed to lower the price lest the charterers go bankrupt. It later turned out that the representation of imminent bankruptcy was false, and thus the contract was voidable for misrepresentation. However the Court went on to consider (in obiter) submissions that the contract could only be avoided for duress to the person. Kerr J rejected this, the traditional English view. He commented that should someone instead threaten to slash a valuable picture or burn down a house he did not think that the law would uphold a contract resulting from those threats4. Kerr J held that the test for this kind of duress was "that the court in every case be at least satisfied that the consent of the other party was overborne by compulsion..."5

Macotta J approved Kerr J's obiter in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron)6. In his speech Macotta J quoted Kerr J from The Siboen v The Sibotre (bringing it out of obiter) and then referred to a number of Australian authorities7 that had allowed parties to avoid contracts as a result of economic duress. Macotta J held that it followed from the judgement of Isaac J in Smith v William Charlik8 that "the compulsion may take the form of 'economic duress' if the necessary facts are proved"9. Should there be economic duress he held that the contract should be voidable even though there may have been sufficient consideration.

The Privy Council considered these decisions in Pao On v Lau Yiu Long10. This was a complex case arising out of a threatened breach of contract. The Council held that on the facts the threat had been legitimate commercial pressure, however they stated unequivocally that "there is nothing contrary to principle in recognising economic duress as a factor which may render a contract voidable."11

There are several other cases that went to the English courts considering details of the doctrine, however following Pao On v Lau Yiu Long it was clear that economic duress is a part of the English law. Theoretically the English courts still relied on the old test whether the victim's will had been 'overborne', however, in every case the decision rested on the Court's assessment of whether the pressure exerted could be considered 'legitimate' commercial pressure.

Overborne Will or Illegitimate Pressure?

It is a necessary element of our system of commerce that parties are able to exert some degree of pressure upon one-another when making deals. This was recognised in the Australian Courts in the Crescendo Management12 case, and McHugh J rejected the proposition that the test should a subjective one of whether the victim's will had been overborne.

McHugh J made reference to the criminal case Director of Public Prosecutions of Northern Ireland v Lynch13 where the Law Lords were unanimous in finding "that duress is not inconsistent with act and will, the will being deflected not destroyed"14. In doing this McHugh conceded the academic view that "A person acting under duress does normally know what he is doing, does choose to submit and does intend to do so"15. The rejection of this test is essentially an embodiment of the rule in Barton v Armstrong16, that the duress need only be one reason for the person submitting to the will of the bully, in that it recognises that even when acting under duress a party still makes a choice between alternatives.

Stewart argued strongly in 198417 that the rule in Barton v Armstrong should not apply to economic duress as it would make the doctrine too broad18. He said that threats of physical violence would only very rarely be justifiable, and thus with respect to violence Barton v Armstrong was a good policy ruling. On the other hand, Stewart continued, the distinction between what pressure is allowable and what is not in commercial dealings is far more difficult to draw. On that basis he concluded that the rule in Barton v Armstrong should be confined lest it override the more important considerations to be made. However the courts have rejected or ignored these arguments holding that Barton v Armstrong does apply19. I submit that this is the correct decision, because anything else would afford the bully an avenue of escape by simply showing that there were other factors playing on the victim's mind. This, in an economic environment such that every price on the supermarket shelf is the result of competing pressures of supply, demand, and competition between manufacturers, should not be the case.

The nature of "Legitimacy"

The judgement of McHugh J makes it clear that the Australian law of economic duress depends on the conduct in question being classified as "illegitimate". However the real meaning of this test is unclear. As M. Sindone pointed out in an article "Economic Duress - Part 2"20:

"The difficulty in drawing the line between threats which constitute legitimate and illegitimate pressure is shown by the following propositions:
(a) A threat to carry out a lawful act may amount to illegitimate pressure.
(b) A threat to carry out an unlawful act may not necessarily amount to illegitimate pressure"21

That being the case, how can 'stability and finality' be achieved in commercial dealings? The purpose of contract is to create agreements so that the parties can be sure of having them enforced. Without adequate guidelines as to how much pressure is acceptable, commercial dealings will never be certain. As Lord Wilberforce and Lord Simon of Glaisdale said in the dissent22 in Barton v Armstrong23:

"... in life, including the life of commerce and finance, many acts are done under pressure, sometimes overwhelming pressure, so that one can say that the actor had no choice but to act."24

However only in some cases will that pressure amount to economic duress.

Though it seems attractive to use lawful or unlawful conduct as the measure of legitimacy, on closer analysis this is not the case. The problems with this distinction can be seen easily in the contrast between two very similar cases Smith v William Charlik25 and White Rose Flour Milling Co Pty Ltd v Australian Wheat Board26. Here the distinction between lawful and unlawful conduct lead to a startling anomaly: though the material facts were almost identical, the outcomes were opposite. The only distinction was that "White Rose Milling Co was lucky enough to have a standing contractual relationship with the Australian Wheat Board"27. That made it a threatened breach of contract on the part of the Wheat Board, where the same threat was lawful by William Charlik Ltd.

While there are problems with drawing the distinction strictly between lawful and unlawful conduct, the obvious path should be that lawful conduct which falls short of blackmail (i.e., the vast majority of conduct) should not be sufficient to have a valid contract set-aside. Some guidance has been given in the recent Court of Appeal decision from England CTN Cash and Carry Ltd v Gallagher Ltd28. The case concerned a cargo of cigarettes delivered to the wrong warehouse. The plaintiff owned both the indented warehouse and the one to which the cargo was delivered. When the mistake was discovered the defendant agreed to move the cargo to the correct warehouse, however, before they could it was stolen. The defendant then invoiced the plaintiff for the £17,000 cargo. The plaintiff paid the £17,000 under protest when the defendant threatened to withdraw their credit if payment was not made.

Though the Court made it clear that they felt the defendant's conduct was unacceptable, they held that because of policy considerations they could not find them guilty of economic duress:

"Outside the field of protected relationships and in a purely commercial context it might be a relatively rare case in which 'lawful act duress' can be established. And it might be particularly difficult to establish duress if the defendant bona fide considered that his demand was valid."29

The Court deliberately refrained from saying that lawful conduct could never amount to economic duress, but made it quite clear that it should only be in extreme cases.

The Australian Courts have said that 'compulsion' "includes every species of duress or conduct analogous to duress, actual or threatened, exerted by or on behalf of the payee and applied to the person, property or any right of the person who pays"30 And that

"Pressure will be illegitimate if it consists of unlawful threats of amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure 'not amounting to unconscionable or unlawful conduct will not necessarily constitute economic duress."31

In Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd32 the plaintiff had the defendant repaint one of its' two helicopters. The plaintiff's business depended on the helicopter and this was known to the defendant. When the defendant did a poor job the first time they agreed to do it again for a small increase in the original price. However, once the helicopter was finally finished the defendant held the plaintiff to ransom, demanding that they pay for the additional work in full ($4 300) before the helicopter was released. The Court held that in this case the defendant's lawful conduct was unconscionable and gave relief for economic duress.

The Australian Courts therefore seem to be far more willing than those in England to find economic duress where there has been lawful conduct. If that is the case, what guidelines can be given to people making commercial deals? How can a company be sure that the pressure they exert will not be considered economic duress should it go before a court? This kind of uncertainty in commercial contracts could seriously undermine our entire free market system. In part 2 of "The Doctrine of Economic Duress"33 Sindone explores the issue of legitimacy under a series of headings, categorising 'types' of pressure34. "Threat to Litigate"35, "Threat to bring industrial action"36, "Threats made in bad faith"37, "Threats made in good faith"38, "Threats to refuse future business"39, the list of possibilities goes on. Beatson40 points out that while rigid classifications such as these are undesirable, a broad defence of duress could seriously undermine the basis of the marketplace. Indeed, in the economic environment I have described above, it would leave little unchanged. Is this analysis the best way to restrict the doctrine into something that the business world can plan around?

Even the most thorough classification cannot hope to give a doctrine from which reliable predictions can be made. The cases have all depended as much on evidence as on the applicable rules of law. The apparent anomaly referred to above between Smith v William Charlik41 and White Rose Milling42 is just one example of how slight variations in the fact pattern can entirely change the Court's view of a case. This makes it very difficult to define a rule of economic duress comparable to most other 'hard and fast' common law rules.

Although there is a common law "right" to have a contract voided for economic duress, the courts seem in most cases to have dealt with the matter in a way more suited to discretionary equitable matters. The formation of rules seems to have been less the Court's priority than finding a way to punish defendants who they think have acted dishonourably. McHugh J made this quite clear I think in adopting the Equitable notion of unconscionability into duress43. However the Courts have not adopted the standard from Equity all together. They have ensured that "the categories are not closed"44, so should new facts arise in contract no Court will be bound to make a decision it does not like by Equity. The English Court of Appeal went to great lengths to refrain from saying never and keep the categories open in CTN Cash and Carry45.

Ridge46 felt that this was less important in McHugh's judgement than the endorsement of unconscionability as a standard by which to judge conduct. She said that "McHugh J's definition would be better expressed as unconscionable conduct including unlawful threats."47 This analysis, though it would clarify the law considerably by wholly adopting the standard of conduct recognised by Equity as unconscionable, is not in my view consistent with the accompanying body of case law. As there is no High Court statement on the matter (although Crescendo48 has been applied in a number of other Australian jurisdictions49), considerable attention must still be paid to overseas trends such as that expressed in CTN Cash and Carry50 (that the categories of economic duress should not be limited as Ridge51 suggests) when reading the Crescendo52 case.

It seems to me that the message from the Court, though well hidden, is very simple. It is 'act honourably'. It is 'do not take advantage of an unequal bargaining positions beyond what an honourable person would'. They have clearly left it to themselves to be the ultimate arbiter of what 'acting honourably' actually means.

Should this be the case?

The distinction between economic duress and unconscionability seems to be only that the Court has reserved the right to even greater flexibility when determining economic duress. The jurisdiction in which it lies however causes some significant differences in the doctrine.

If the doctrine lies within the common law then a party may have a contract voided "as of right", where Equity has discretion. It appears that the Courts have tried to maintain some of this equitable discretion in the doctrine of economic duress.

If economic duress could be said to be within the jurisdiction of equity then there are other issues to consider, such as the plaintiff's "clean hands", or the plaintiff's duty not to "sleep on his rights". In The Atlantic Baron53 It was held that even though there had been conduct that would satisfy the requirements of economic duress, relief was refused because the plaintiff had affirmed the contract by failing to take action sooner. Simply re-phrased, he had "slept on his rights".

This issue has not come before the Courts in Australia, however when it eventually does it will be interesting to see whether the Court makes the final leap into Equity by applying the same principle as in The Atlantic Baron54 or maintain the common law status of economic duress by applying statutory limitations to common law claims.

It is my submission that the doctrine of economic duress as it stands is really an equitable one. I think that the courts make a value judgement on the nature of the defendant's conduct, and essentially base their judgement upon that. Only in CTN Cash and Carry did the Courts avoid their 'gut reaction', and only in that case to avoid setting in their view a particularly dangerous precedent. Value judgements of this kind belong in Equity, where the courts have the discretion to grant or refuse relief regardless of the facts. As far as the commercial community is concerned, I think that that leaves them with a greater responsibility to act fairly and honourably in their dealings. I accept that this may be a naïve and idealistic hope, however I submit that the role of the law in some cases must be to set that idealistic example. I think that this is one of those cases.

Martyn Hanmore

Footnotes:

1 (1988) 19 NSWLR 40; Carter & Harland "Cases and materials on contract law in Australia" p510.

2 Supra at 1

3 [1976] 1 Lloyd's Rep. 293; Evans, A., "Economic Duress" [1981] Journal of Business Law 188 - 193

4 Ibid. 335

5 Ibid. 335

6 [1979] 1 QB 705 (Queen's Bench Division); Carter & Harland "Cases and materials on contract law in Australia" p507.

7 Including Smith v William Charlik Ltd (1924) 34 CLR 38, and T A Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1955) 56 SR(NSW) 323

8 (1924) 34 CLR 38

9 [1979] 1 QB 705 at 717

10 [1979] 3 WLR 435

11 Ibid. 451; Stewart, A., "Economic Duress - Legal Regulation of Commercial Pressure", Vol. 14 June 1984 Melbourne University Law Review 410 at 413

12 Supra at 1

13 [1975] AC 653

14 Ibid. 695, Quoted by McHugh J in (1988) 19 NSWLR 40 at 45

15 Atiyah P. S., "Economic Dress and the 'Overborne Will'" v98 The Law Quarterly Review 197 - 202 at 200; Sindone, M. P., "The Doctrine of Economic Duress -- Part 1" Vol. 14 Australian Bar Review 34 - 60 at 58. See similar discussions of "choice" by the victim e.g.: Steward (supra 10) at 433; Panna, A., "Economic Duress, the court's answer to laissez unfair", Vol. 59 March 1985 Law Institute Journal 164 - 171 at 171; Dawson "Economic Duress - A essay in perspective" (1947) 5 Michigan Law Review 253 at 267.

16 [1973] 2 NSWLR 598 at 633; [1976] AC 104 at 120 per Lord Cross.

17 I.e., before Crescendo

18 Stewart, A., "Economic Duress - Legal regulation of Commercial Pressure" Vol. 14, June 1984 Melbourne University Law Review 410 - 441 at 432

19 Duress: In Marriage of O'Brien (1981) 7 Fam LR 919, St Clair v Petricevic [1988] ASC 58,205 ((55-205)
Economic Duress: Scolio Pty Ltd v Cote (1992) 6 WAR 475, Australian Steel & Mining Corporation Pty Ltd v Corben [1974] 2 NSWLR 202.

20 (1996) 14 Australian Bar Review 114 - 142.

21 Ibid. 119

22 Note that this dissent was found to represent the law relating to duress by the Judicial Committee in Pao On v Lau Yiu Long [1980] AC 614 at 635.

23 [1973] 2 NSWLR 598

24 Ibid. 634

25 Supra 8

26 (1945) 18 ALJR 324

27 Supra 17 at 427

28 [1994] 4 All ER 714; Baxt, R., "Economic Duress - unconscionable conduct - the drip drip drip theory of law reform" 69 Australian Law Journal 320 - 322

29 Ibid. 321

30 Supra 8 per Isaac J at 56; [1984] 14 Melbourne University Law Review 410 - 441 at 412

31 Supra 1 per McHugh J at 46

32 (1991) 22 NSWLR 298

33 Sindone, M. P., 14 Australian Bar Review 114 - 142

34 A similar system of categorisation was used by Halson in "Opportunism, Economic Duress and Contractual Modifications" (1991) v107 Law Quarterly Review 649 - 678 generally at 657 - 665

35 Supra 32 at 120

36 Ibid. 121

37 Ibid. 122

38 Ibid. 123

39 Ibid. 124

40 'Beatson' as quoted in the question! :)

41 Supra 8

42 Supra 23

43 Crescendo: Supra 1 at 45

44 Ibid.

45 Supra 8 at 719

46 Ridge, P., "Duress and Undue Influence"63 Australian Law Journal 504 - 506

47 Ibid. at 505.

48 Supra 1

49 e.g. Supreme Court of Victoria: Deemcope Pty Ltd v Cantown Pty Ltd [1995] 2 VR 44
Supreme Court of NT: Geoffrey Raymond Smith v Paul Desmond Sweeny and Ornamental Cornice Pty (unreported, 12 February 1997, Kearny J) LTD No. 63 of 21996,
WA Court of Appeal: Scolio Pty Ltd v Cote (1991) 6 WAR 475,
Federal Court of Australia: Food Delivery Services Pty Ltd v ANZ Banking Group Ltd (1996) 19 ACSR 345; News Limited v Australian Rugby Football League Limited & Ors [1996] ATPR 41,636 ((41-466)

50 Supra 25

51 Supra 45

52 Supra 1

53 Supra at 6

54 Ibid.


BIBLIOGRAPHY

This list includes all the articles that I found useful in forming my ideas and writing the essay. They have not all been directly referred to in the text - those that have are footnoted. Irrelevant articles and texts or those that were of little use have been omitted. This page was not included in the word count.

 

Australian Contract Law Reporter Pub. CCH Australia Ltd, Sydney.

Battersby, C., "Economic Duress" (1989) v133 No. 45 Solicitor's Journal p1424 - 1426.

Baxt, R., "Economic Duress - The drip drip drip theory of law reform" (1995) 69 Australian Law Journal 320 - 322.

Carter & Harland "Cases and Materials on Contract Law in Australia" 2nd Ed. Butterworths, Melbourne, 1993.

Carty & Evans, "Economic Duress" [1983] Journal of Business Law 218 - 225.

Case Note, "News Limited v Australian Rugby League: More than just football" (1996) 19(2) University of New South Wales Law Review 490 - 499.

Clarke, P., "Contract Law" Pub, Butterworths, Sydney 1993.

Collinge, J., "Tutorials in Contract" 4th Ed. Pub. The Law Book Co. Sydney, 1986.

Halson, R., "Opportunism, Economic Duress and Contractual Modifications" (1991) v107 Law Quarterly Review 649 - 678.

MacDonald, E., "Duress by Threatened Breach of Contract" [1989] Journal of Business Law 460 - 473.

Panna, A., "Economic Duress - the court's answer to laissez unfair" (1985) v59 No. 3 Law Institute Journal 164 - 171.

Phang, A., "Economic Duress - Uncertainty confirmed" v 5-6. 1992-1993 Journal of Contract Law 147 - 156.

Ridge, P., "Duress and Undue Influence" 63 Australian Law Journal 504 - 506

Sindone, M., "The Doctrine of Economic Duress Part 1" (1996) v14 Australian Bar Review 34 - 60.

Sindone, M., "The Doctrine of Economic Duress Part 2" (1996) v14 Australian Bar Review 114 - 142.

Stewart, A., "Economic Duress - Legal Regualtion of Commercial Pressure" (1989) v14 No. 3 Melbourne University Law Review 410 - 441

Evans, A., "Economic Duress" [1981] Journal of Business Law 188 - 193