undue or illegal conduct in a commercial transaction where the weaker party is prevented from acting out of free will in fear of economic distress.
Economic Duress Details
Under the common law doctrine, illegitimate pressure is applied on the weaker party by forcing it to agree to terms or term modifications in a new or existing agreement favorable to the stronger party. If an economic duress claim prospers, the said agreement is automatically considered voidable.
Integral to the doctrine of economic duress are the concepts of unconscionable conduct and undue influence. These tend to look similar at a glance but actually differ significantly from each other. Unconscionable conduct pertains to the actions of the stronger party and their impact on the weaker party. Undue influence focuses on the consent of the weaker party, in which equity contributes favorably to the presumption of influence in particular cases.
If the stronger party threatens to commit an illegal act, the weaker party can file a claim of duress if it violates social and moral standards. For example, if there is blackmail involved in a deal.
Economic Duress Example
Consider a retailer who, despite knowing his supplier's dire financial situation, refuses to pay him the full amount he owes under a valid contract. The retailer instead offers to make a partial payment, and if the supplier refuses to accept it, the retailer won't make a payment in part or in full. Because of the supplier's desperate circumstances, he has no recourse but to accept the offer. But he can later file for economic duress, which is evident in this case, and force the retailer to pay off his balance.
In another scenario, a company threatens to cancel a current contract with a client company that refuses to accept a 20% increase in the contract price. This is days after both parties signed the agreement. Knowing that such termination of a contract will significantly compromise its financial position, the client company agrees. Again, there is economic duress in this case because the client company made the decision fearing the economic impact of a refusal and the subsequent termination of the contract.
Significance of Economic Duress
The principle of economic duress is important in ensuring fair and lawful commercial bargaining practices, especially in protecting the weaker party from abuse. However, it is a dynamic concept that changes over time, depending on new patterns in society that may warrant such changes. Nonetheless, the significance of the principle remains.
For example, in the past, the only way a contract was voidable was if one party made an unlawful threat or performed an unlawful act against the other party's body. It is important to underscore changes in the definition of economic duress because these changes impact the principle's significance in modern society, which itself is in a constant state of evolution. Ultimately, it all boils down to the principle's methodical process of establishing the element of duress in commercial bargaining and securing the courts' protection of weaker parties.
Difference Between Illegitimate Pressure and Economic Duress
Illegitimate pressure is a term often confused with economic duress as an overall doctrine. A breach or threatened breach of contract, or any threat to commit an unlawful act, is, prima facie, considered as illegitimate pressure. But it is not automatically equivalent to economic duress, which is the interplay between specific circumstances surrounding the case.
Also, to determine whether there has been illegitimate pressure, the courts will look into several issues, including but not limited to:
- whether there has indeed been a breach or threatened breach of contract;
- the motives of the party applying the pressure;
- the presence of reasonable options for the weaker party if they did not succumb to the pressure; and
- whether the weaker party fought the pressure and insisted on upholding the contract from the beginning.
In proving economic duress, the requirements include inducement or coercion (by applying illegitimate pressure), a benefit to the stronger party, and the absence of a rational alternative for the weaker party. In other words, illegitimate pressure is not the same as economic duress but is rather a requirement to prove duress.
Economic Duress History
While economic duress has likely existed from the beginning of time, its acknowledgment as a distinct concept occurred not so far back in history. This was in 1976 when it arose from a case involving building or civil engineering projects in England. But the common law doctrine has since been less restrictive and now covers beyond physical harm.
As mentioned, the early common law doctrine only made a contract voidable if the unlawful threat or conduct was made against a person's body. If an unlawful threat or conduct was made against a person's goods, it did not render an agreement voidable, although a claim of duress could still be filed and help in restitution.
Nowadays, economic duress covers not only blatantly unlawful threats and misconduct but also those that seem lawful at the outset, whether against a person's body or goods but are subsequently deemed illegitimate in the context of duress. A contract executed with one party under duress is voidable, but whether the said agreement has, as a matter of fact, been affirmed remains contestable.