Contractors Right to Terminate a Contract due to Economic Duress

Contractors Right to Terminate a Contract due to Economic Duress

First we will address the question of ‘what is economic duress?’ because, unless a Contractor can understand and recognise what ‘economic duress” is he will inevitably be unable to terminate as a result of such.

In practice, economic duress is not common. The law recognises that there are certain forms of pressure that may be applied on a party which do not amount to a physical threat to a person nor to damage to goods, but which may allow the innocent party to throw off the contract. That kind of pressure is normally applied when a contract already exists, in order to obtain better terms. As was the case with Carillion Construction Ltd v Felix (UK) Ltd [2000).

The principle of economic duress was demonstrated in the case of Atlas Express Ltd v KAFCO (Importers and Distributors) Ltd.  Atlas Express Ltd was a well-known parcel carrier and it entered into a contract with KAFCO, a basket ware importer, to carry parcels at an agreed rate. The contract, which was recorded by telex, was crucial to KAFCO, because it had just entered into a major contract to supply basket ware to a large number of Woolworth department stores. After a few weeks, the carriers’ representative decided that the agreed rate was not viable for their company. Atlas knew that KAFCO was contracted to Woolworth, which would sue and cease trading with the importers if deliveries were not made. Atlas Express Ltd therefore wrote suggesting that the agreement be revised, and refused to carry any further parcels until a new more attractive agreement was signed.

KAFCO protested, but it had no real option but to sign the new agreement or face the consequences from Woolworth’s. When the invoices from Atlas Express Ltd arrived, KAFCO paid only the sums calculated in accordance with the original agreement and not the new revised agreement. Atlas Express Limited subsequently took legal action to recover the balance. In deciding in favour of KAFCO, the court pointed out that no person could insist on a settlement procured by intimidation. Economic duress was recognised in English law and, in this instance, it voided KAFCO’s consent to the second agreement. In addition, Atlas Express Ltd had not provided any consideration for the revised agreement and consideration was vital for the establishment of a contract or the variation of an existing contract.

A contract is essentially entered into on the basis of the exercise of free will by both parties. It has long been established that physical violence or the threat of it in order to induce a contract will make that contract void or at least voidable at the option of the threatened party. The Courts have ruled in the KAFCO case that economic pressure can be as difficult to withstand as physical violence.

Economic duress should not be confused with the principle of undue influence. In cases where there is some kind of confidential relationship, such as between bank manager and client, the court will usually presume undue influence prevented the client from making an independent judgment if there are dealings between the two parties.

It has been held that the following factors (which must be distinguished from the rough and tumble of the pressure of normal commercial bargaining) must be taken into account by a court in determining whether there has been economic duress:

whether there has been an actual or threatened breach of contract;

whether the victim protested at the time;

whether the victim has any realistic practical alternative but to submit to the pressure;

whether or not the person allegedly exerting the pressure has acted in good faith;

whether the victim affirmed or sought to rely on the existing contract.

Economic duress is the wielding of economic sanctions to induce a contract. There are many instances in the construction industry where Contractors or Sub-Contractors maybe persuaded to make savings or carry out additional work in circumstances that border on economic duress.

Although it is not simple to establish, the Contractor clearly has an avenue to terminate a contract when the Employer is attempting to place the Contractor under economic duress and the Contractor is able to demonstrate that such duress is above and beyond the normal business practices followed in the Malaysian Construction Sector.

MALCONLAW 2012

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