Contractual Free Will: Doctrines of Economic Duress & Undue Influence. PDF

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1|Page Contractual Free Will: doctrines of economic duress & undue influence By Chenoy Ceil 2|Page TABLE OF CONTENTS Contents Pages Critical analysis on: Undue Influence & Doctrine Page 03-06 of duress. Actual undue influence & Duress in English law Page 07-09 Approach to the Economic Du...

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Contractual Free Will: Doctrines of Economic Duress & Undue Influence. Chenoy Ceil

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T he Nat ure of Vit iat ing Fact ors in Cont ract Law Mindy ChenWishart Quant um Meruit , Est oppel and Primacy of Cont ract '(2009) Joshua Get zler Walking t he Divide: A Crit ical Examinat ion of t he Nat ure of Undue Influence and Unconscionable Dealing Daniel J Cook

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Contractual

Free

Will:

doctrines

of

economic duress & undue influence By Chenoy Ceil

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TABLE OF CONTENTS Contents

Pages

Critical analysis on: Undue Influence & Doctrine Page 03-06 of duress. Actual undue influence & Duress in English law

Page 07-09

Approach to the Economic Duress

Page 10-11

The judicial approach of economic duress

Page 11

Economic duress established by case law

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The jurisprudence of economic duress

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Conclusion

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Introduction The law entails that a contract must be entered into by parties under consent without any undue influence influencing their decision to enter into the contract. The historical origins of the concept of duress are shrouded by the ancient mists of the common law. Yet contemporary understanding of that same concept remains difficult to define with precision, notwithstanding almost a millennium of definition and application in both civil and criminal contexts. The classic formulation, “coercion of the will so as to vitiate consent” disguises at least as much as it reveals about duress. Questions remain when the other party can claim that such a “new” contract is voidable for duress. Although the language used by the courts is obscure, careful examination of the judgments dealing with this problem lead to the conclusion that the test is whether there was a reasonably sufficient alternative open to the innocent party when faced with the threatened breach. The appropriateness of this test can be seen by examining the tensions within the law which the test has to balance. It was only in 19761 that economic duress was recognized under English common law2 as an acceptable ground (under the general area of duress) to avoid an agreement.3 The first case appears to be Occidental Worldwide Investment Corp v Skibs.4 The case was decided on the fact that the threats made by the charterers were false and fraudulent and so the owners were entitled to avoid the renegotiated terms. However, of greater importance in the present context, Kerr J. accepted that, in principle, relief on the ground of economic duress was available to the owners. Kerr J. stated5 : “But even assuming, as I think, that our law is open to further development in relation to contracts concluded under some form of compulsion not amounting to duress to the person, the Court must in every case at least be satisfied that the consent of the other party was

I o t ast, i the U ited “tates e o o i du ess as al ead idel a k o ledged. “ee fo e a ple J. P. Da so , E o o i Duress--A Essa i Pe spe ti e Michigan Law Review 253; J. Dalzell, Du ess E o o i P essu e I 20 North Carolina Law Review 237-277. 2 The Chancery Courts had considered economic pressure over a century earlier: in Ormes v Beadel (1860) 2 Giff. 166 the court of equity had held that a contract entered into under circumstances of acute economic pressure, increased by a refusal of the architect to pay a builder a sum which the court found was a fair and just demand for work done, would be set aside in equity. The case was reversed on appeal on the ground of affirmation or acquiescence Ormes v Beadel (1860) 2 De G.F. & J. 333. 3 The origin of the common law position, that the only form of duress which would allow a party to avoid a contract was the duress of the person, lay in the decision of the Court of Exchequer in Skeate v Beale (1841) 11 Ad. & E.L. 983. The courts have since recognised that illegitimate pressure included threats of violence to the person. For example, Barton v Armstrong [1976] A.C. 104 and Friedeberg-Seeley v Klass (1957) 101 S.J. 275. See also D&C Builders Ltd v Rees [1966] 2 Q.W.B. 617 at 625 per Lo d De i g M.‘., ho stated: No pe so a i sist o a settle e t p o u ed i ti idatio . 4 [1976] 1 Lloyd's Rep. 293 (The Sibeon and The Sibotre ) (also noted in (1976) 92 L.Q.R. 496). 5 See ibid., at 336.

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overborne6 by compulsion so as to deprive him of any animus contrahendi.” In North Ocean Shipping Co Ltd v Hyundai Corporation Co,7 the shipbuilders threatened (without legal justification) to terminate the contract unless the plaintiff agreed to increase the price by 10 per cent. The ship owners had chartered the ship to Shell and fearing a loss in the charter if the ship was delivered late, agreed to the additional payment. In this case, Mocatta J. stated: “compulsion may take the form of ‘economic duress' if necessary facts are proved. A threat to break a contract may amount to such ‘economic duress”’. Similarly, in Pao On v Lau Yiu Long8 the Privy Council judgment delivered by Lord Scarman concluded9 : “there is nothing contrary to principle to recognising economic duress as a factor which may render a contract voidable …” Although of more recent provenance,10 economic duress, which expands the application of the concept of duress from physical pressures to economic bargaining pressures, duplicates and complicates these problems, at the very least because it does not involve the easier case of actual threatened physical violence, as shown by two House of Lords decisions11 and one Privy Council12 decision, as well as lower court decisions in recent years, including from Canadian appellate courts. One recent case, however, from the New Brunswick Court of Appeal, Greater Fredericton Airport Authority Inc v Nav Canada,13 moves the discussion about the nature of economic duress forward, and for that reason, merits detailed consideration. Writing for a unanimous court, Robertson J.A. carefully reviewed the Anglo-Canadian case law and proposed a new, simpler test than those earlier proposed, that is, that economic duress only be found where the exercise of pressure leaves the coerced party with no practical alternative but to submit. This test is 6

Lynch v DPP of Northern Ireland, n.4 above, established clear declarations of principle on the question of whether duress negatives consent or whether contracts procured by duress are voidable. The latter was stated to be the correct analysis: see especially the speech of Lord Wilberforce at ho stated that du ess does ot dest o the ill, fo e a ple to e te i to a o t a t, ut p e e ts the la f o a epti g hat has happe ed as a o t a t alid i la . Ho e e it should e oted i Occidental, along with Pao On v Lau Yiu Long [1980] A.C. 614 and Universe Tankships of Monrovia v I.T.W.F. [1983] 1 A.C. 366 the judges spoke of economic duress as negativing true consent. 7 [1979] Q.B. 705, The Atlantic Baron. 8 [1980] A.C. 614. 9 See ibid., at 636. 10 Occidental Worldwide Investment Corp v Skibs A/S Avanti; The Siboen and The Sibotre [1976] 1 Lloyd's Rep. 293 QBD. 11 North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All E.R. 1107 QBD sets the stage for Universe Tank Ships of Monrovia v International Transport Workers' Federation [1982] 2 All E.R. 67 HL and Dimskal Shipping Co Ltd v ITWF [1991] 4 All E.R. 871 HL. 12 Pao On v Lau Yiu Long [1979] 3 All E.R. 65 PC (Hong Kong). 13 Greater Fredericton Airport Authority Inc v NAV Canada (2008) 290 D.L.R. (4th) 405 NBCA.

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somewhat similar to the “but for” test proposed by Mance J. in Huyton v Cremer14 and may be usefully compared to it. In recent years the debate surrounding the true jurisprudential basis of undue influence has been renewed with increased vigour.15 The catalyst for the burgeoning academic literature on this subject can, in part, be attributed to Professors Birks and Chin who argued that “the doctrine of undue influence is about impaired consent, not about wicked exploitation.”16 They classified the latter as defendant-sided and the former as claimant-sided, arguing that where a claimant-sided analysis is adopted: “It is not necessary for the party claiming relief to point to fraud or unconscionable behaviour on the part of the other.”17 Such a view, at least ostensibly, is strongly supported by a group of Court of Appeal authorities, spearheaded by Hammond v Osborn,18 and to a lesser extent by significant decisions in both Canada19 and Australia.20 Yet, the Court of Appeal has not always been so unequivocal21 and, indeed, in Dunbar Bank Plc v Nadeem,22 appeared to adopt the opposite view. The conclusions of Birks and Chin also sit uneasily with the language adopted by the House of Lords in its landmark decisions of National Westminster Bank Plc v Morgan,23Barclays Bank Plc v O'Brien24 and Royal Bank of Scotland v Etridge (No.2),25 reinforced by recent opinions of the Privy Council which reveal an unconscionability-based perspective of undue influence.26 This research work analyses the problem which occurs where one party threatens a breach of an existing contract to procure revised contractual terms by exerting undue influence or by putting the other party under economic duress. The question which is considered is when the other party can claim that such a “new” contract is voidable for duress. Although the language used by the 14

Huyton v Cremer [1999] 1 Lloyd's Rep. 620 QBD. Big ood, U due I flue e: I pai ed Co se t o Wi ked E ploitatio O.J.L.“. 16 Bi ks a d Chi , O the Natu e of U due I flue e i Beatso a d F ied a eds , Good Faith and Fault in Contract Law (Clarendon Press, 1995). 17 Birks and Chin, above 18 ] EWCACi , oted i De e e , Ha o d . Os o J.“.W.F.L. . 19 Morrison v Coast Finance Ltd (1965) 55 D.L.R. (3d) 710 at 713 per Davey J.A. 20 The Commercial Bank of Australia v Amadio (1983) 57 A.L.J.R. 358 at 363 per Mason J. 21 See Portman Building Society v Dusangh [2000] 2 All E.R. (Comm) 221 at 233 per Ward L.J.; Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All E.R. 144; and Irvani v Irvani [2000] 1 Lloyd's Rep. 412. 22 [ ] All E.‘. ; dis ussed i Cha dle , Ma ifest Disad a tage: Li its of Appli atio L.Q.‘. . 23 [1985] A.C. 686. 24 [1994] A.C. 180. 25 [2001] UKHL 44, particularly at [6]-[7]. 26 See R. v Attorney-General for England and Wales [2003] UKPC 22 and National Commercial Bank (Jamaica) Ltd [2003] UKPC . E e the late P ofesso Bi ks oted the diffi ulties these de isio s eated fo his a d Chi 's thesis: see Bi ks, U due Influence as Wrongful E ploitatio L.Q.‘. . 15

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courts is obscure, careful examination of the judgments dealing with this problem lead to the conclusion that the test is whether there was a reasonably sufficient alternative open to the innocent party when faced with the threatened breach. The appropriateness of this test can be seen by examining the tensions within the law which the test has to balance. Economic duress in construction cases have played a pivotal role developing the doctrine. In the seminal case of Williams v. Roffrey Brothers,27 the Court of Appeal, by taking an expansive view of the doctrine of consideration, established economic duress as the device for policing renegotiation of contracts. Recently, the cases of DSND Subsea v. Petroleum Geo-Services28 and Carillion Construction Limited v. Felix (U.K.) Limited29 in the Technology and Construction Court have resulted in further development. This research work examines the contribution of doctrine of economic duress, and argues that the doctrine emerging from the cases may be difficult to reconcile with established contractual principles. A more predictable approach, drawing on established legal principles, is then proposed. On the other hand undue influence is based on a notion of unconscionability. In particular, the unconscionable bargain doctrine, a doctrine which is both contextually and historically linked to undue influence, clearly suggests that a claimant-sided approach is not necessarily incompatible with an unconscionability-based approach to undue influence. Furthermore, there is an overriding, explicit, unconscionability requirement in cases of undue influence, albeit often overlooked. The doctrine of duress, economic duress and doctrine of undue influence provides a vital role while determining the free will of contract. In this research work, effect of economic duress and undue influence on the validity of contracts will be critically analyzed and examined to understand the depth of the concept.

Critical analysis on Undue Influence and Doctrine of Duress Essentially, undue influence requires a relationship between the parties, generally one of trust and confidence or of vulnerability and dependency, where one party exploits the other to his own [1991] 1 Q.B. 1 at 21, per Pu has L.J.; see Pha g, Co side atio at the oss oads i [ ] Build.L.‘. DSND . 29 [ ] Build.L.‘. , Carrillion .

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L.Q.‘.

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advantage.30 Consequently, the vulnerable party's consent is vitiated, and so the contract is held by the court of equity to be unenforceable. It is this vitiation of consent which apparently provides the justification for the court's intervention in cases of undue influence;31 thus Ward L.J. emphasised in Daniel v. Drew that, in all cases of undue influence the critical question is whether or not the persuasion or the advice, in other words the influence, has invaded the free volition of the donor to accept or reject the persuasion or advice or withstand the influence. The donor may be led but she must not be driven and her will must be the offspring of her own volition, not a record of someone else's.32 This doctrine holds itself out as a doctrine of procedural unfairness only: the law will investigate “how the intention was produced”33 in order to determine its presence, not the content of the transaction itself. The same is true in the cases of the common law doctrine of duress and the equitable jurisdiction to set contracts aside on the basis of unconscionability. It has been observed that it is the vitiation of the vulnerable party's consent which provides the justification for relief in these cases as well. Thus, duress is “a coercion of the will so as to vitiate consent”;34 and in unconscionability cases, the vulnerable party's consent is vitiated by the fact that they are at a serious disadvantage due to some weakness or disability, which has been exploited in a reprehensible manner by the other party. The coercion of the will theory has, however, been criticised in the context of duress in particular.35 Atiyah has pointed out36 that a party who is subject to duress does choose to enter into the contract, but does so in order to avoid the greater

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Thus, in Royal Bank of Scotland plc v. Etridge (No.2) [2001] UKHL 44, Lord Nicholls repeatedly describes undue influence as a o g a d e plai s at [ ] that T pi all [u due i flue e] o u s he o e pe so pla es t ust i a othe to look afte his affairs and interests, a d the latte et a s this t ust p efe i g his o i te ests. He a uses the i flue e he has a ui ed. 31 This also accounts for the fact that Lord Cotton V.C. was at pains to stress in Allcard v. Skinner (1887) L.R. 36 Ch. D. 145, 171, that The ou t interferes, not on the ground that any wrongful act has in fact been committed by the donee, but on the ground of public policy, and to prevent the relations which existed between the parties and the influence arising therefrom ei g a used. He did ot ant to impugn the conduct of the Mother Superior who had induced a new member of the sisterhood to pauperise herself by giving all her property to the nunnery: Birks and Chin explain that the claimant had been u de a spell o pou ded of he e thusias fo the siste hood a d he auto o as i pai ed to a e eptio al deg ee P. Bi ks a d Chi N uk Yi , O the Natu e of U due I flue e i J. Beatso a d D. F ied a eds , Good Faith and Fault in Contract Law (Oxford 1995), ch. 3, p. 68). It was the vitiation of her consent in the circumstances which allowed the court to find that there had been undue influence. 32 [2005] EWCA Civ 507, at [36]. 33 Huguenin v. Baseley (1807) 14 Vesey Junior 273, 300, per Lord Eldon L.C. 34 Pao On v. Lau Yiu Long [1980] A.C. 614, 635, per Lord Scarman; see also The Siboen and The Sibotre [1976] 1 Lloyd's Rep. 293, per Kerr J. Pao On v. Lau Yiu Long [1980] A.C. 614, 635, per Lord Scarman; see also The Siboen and The Sibotre [1976] 1 Lloyd's Rep. 293, per Kerr J. 35 See e.g. The Evia Luck (No.2) [1992] 2 A.C. 152, per Lord Goff. 36 P.“. Ati ah, E o o i Du ess a d the O e o e Will [ ] L.Q.‘. , .

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evil presented by the threat made.37 Consequently, Mance J. has advocated the imposition of an objective test as well as a subjective ‘but for’ test.38 The availability of alternatives is, for him, the most important of the Pao On factors set out by Lord Scarman. When the cases say that the victim had no “real” choice, they are better understood as saying that he had no “reasonable” choice. By contrast, there is no objectivity requirement in the case of undue influence, because in each case consent is vitiated in different ways: undue influence operates at an unconscious level, whereas the victim of duress is only too aware of the situation and acts “through gritted teeth”. In any case, the rationale behind duress remains that the victim of the duress has not had the opportunity to give true consent, and, in effect, the doctrines of undue influence, duress and unconscionability all deal with cases where, in the words of Lord Nicholls, “the intention was produced by an unacceptable means”, and consequently “the law will not permit the transaction to stand”.39 In all three doctrines, our focus is on the way in which the contract is formed, not on the substantive terms of the contract.40 Smith, in the course of his argument that vitiated consent should alone be sufficient to establish duress (without the requirement of illegitimacy), gives us the reason why upholding consent is so important: freedom underlies both the broad contours of the common law of contract and the political ideals of the countries in which that law is in place, and so consent (and consequently matters of procedural fairness which might serve to undermine that consent) should be taken seriously.41 Certainly, procedural fairness is an important matter in itself; however, this does not mean that the substantive terms of the contract are irrelevant to the court's enquiry into the existence of undue influence, duress or unconscionability. If the substantive terms are particularly disadvantageous to the weaker side, then this will help to establish the evidentiary presumption in favour of undue influence, and will add weight to a claimant's accusations of duress or unconscionability. Furthermore, in any case, it likely that the transaction will display substantive

Indeed, Lord Scarman himself conceded in The Universe Sentinel [ ] A.C. , , that The lassi ase of duress is, however, not the lack of will to submit but the victim's intentional submission arising from the realisation that there is no other p a ti al hoi e ope to hi . 38 Huyton SA v. Peter Cremer GmbH & Co [1999] 1 Lloyd's Rep. 620. 39 Royal Bank of Scotland plc v. Etridge (No.2) [2001] UKHL 44, at [7]. 40 There is an obvious analogy between setting aside a transaction for duress, undue influence or unconscionability and setting it aside fo f aud: i ea h ase, the pa t has ee su je ted to a i p ope oti e fo a tio Fairbanks v. Snow (1887) 13 N.E. 2d 596, 598, per Holmes J.). 41 “.A. “ ith, Co t a ti g U de P essu e: A Theo of Du ess [ ] C.L.J. .

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unfairness as well, sin...