Research Outline
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Assignment.doc
Author: Martyn Hanmore
Created: 11/18/97 11:47 AM
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Assignment!
"Pressure and even coercion are often present in transactions in a market economy which accords individuals the freedom to choose with whom the 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 defense 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 Corp doctrine), the question of legitimacy.
Before discussing the Crescendo 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). This was a case regarding the charter if a ship. The owners agreed to lower the price lest the charterers would 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 the traditional English view that contracts could only be set-aside for threats to the person. 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 threats. 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…"
Macotta J approved Kerr J's obiter in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron). 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 authorities 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 Charlik that "the compulsion may take the form of 'economic duress' if the necessary facts are proved". 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 Long. 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."
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.
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 Management 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 Lynch where the Law Lords were unanimous in finding "that duress is not inconsistent with act and will, the will being deflected not destroyed". "A person acting under duress does normally know what he is doing, does choose to submit and does intend to do so". (Atiyah, check footnote 146 from Aust. Bar review v14 p57 for citation). The rejection of this test is essentially an embodiment of the rule in Barton v Armstrong that the duress need only be one reason for the person submitting to the will of the bully.
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":
"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"
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, commercial dealings will never be certain. As Lord Wilberforce and Lord Simon of Glaisdale said in the dissent in Barton v Armstrong:
"… 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."
However only in some cases will that pressure amount to economic duress.
Though it seems attractive to use lawful and 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 to very similar cases Smith v William Charlik and White Rose Flour Milling Co Pty Ltd v Australian Wheat Board. The distinction between lawful and unlawful conduct lead to a startling anomaly in these cases. The material facts are almost identical in both cases, yet 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". 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) 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 Ltd. 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 they did not.
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."
The Court deliberately refrained from saying that lawful conduct could never amout 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 ir duress or conduct analagous 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"
And that that
"Pressure will be illegitimate if it consists of unlawful threats ir 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."
In Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd the plaintiff had the defendant repaint one his it's 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 nothing. However, once the helicopter was finally finished they held the plaintiff to ransom, demanding that they pay for the additional work before the it was released. The Court held that in this case the defendant's lawful conduct was unconsionable 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" Sindone explores the issue of legitimacy under a series of headings, categorising 'types' of pressure. "Threat to Litigate", "Threat to bring undustrial action", "Threats made in bad faith", "Threats made in good faith", "Threats to refuse future business", the list of possibilities goes on. Is this analysis the best way to restrict the doctrine into something that the business world can plan around? Beatson points out that while rigid classifications such as these are undesirable, a broad defence of duress could seriously undermine the basis of the marketplace.
Even the most thorough classification cannot hope to give a doctrine upon which reliable predictions can be made. The cases have all depended as much of evidence as on the applicable rules of law. The apparent anomaly referred to above between Smith v William Charlik and White Rose Milling 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 create a rule of economic duress comparable to most other 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 that they can punish defendants who they think have acted dishonourably. McHugh J made this quite clear I think in adopting the Equitable notion of unconscionability into duress. However the Courts have not adopted the standard from Equity all together, they have ensured that "the categories remain open", so that should new facts arise in contract no Court will be bound to make a descision it does not like by Equity. The English Court of Appeal went to great lengths to keep the categories open in CTN Cash and Carry.
It seems to me that the message from the Court is very simple (although well hidden). It is 'act honourably', it is 'do not take advantage of an economic advantage in bargaining beyond what an honourable person would'. They have clearly left it to themselves to be the ultimate arbiter of what 'acting honourably' actually means.
If that is the case, should it be?
The distinction between economic duress and unconsionability 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 draws some significant distinctions.
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 is within the jurisdicion of equity then there are other issues to consider, such as the plaintiff's "clean hands", or the plaintiff's duty not to "sit on his rights". In The Atlantic Baron 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 "sat 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 Baron 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 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
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