Contract Law in Regulating the Conduct of the Parties - Case Study Example

 Contract Law: Economic Duress Felix Gitonga Institution December 23, 2018 Introduction The importance of contract law in regulating the behaviours of parties to a contract, or intending to enter into a contract cannot be overstated. Contract law sets the guidelines that must be followed in establishing legally enforceable contracts. Among other things, contracts must meet five conditions; contracts must have an offer and acceptance, there must be a consideration, there must be mutual and voluntary consent, members must have the capacity to enter into contracts, and the subject matter of the contracts must be legal in nature. When the legal form of a contract is in question, by way of lacking one or more elements named above, that contract is a valid contract. Similarly, if one of the parties to a contract does not fulfill the agreements as stated during the time of forming the contract, that contract is voidable. In this essay, a discussion revolving around the issue of validity and voidability of a contract will be made. Specifically, this discussion will revolve around the issue of duress especially economic duress and its impact on a contract. The aim is to offer Tara the available remedies and the next course of action she should take. The Case The case at hand involves delivery of specialty candles for pre-Christmas trade at a cost of £1,000. In this initial agreement, it is apparent that the subject matter of the contract was to make deliveries of the candles. It is also clear that the consideration is in the sum of £1,000. The offerer and the offeree are also identifiable and it is also clear that the contract is of a legal nature. The expectations, therefore, is that Samson (offerer), should make good his promise to Tara as per the original agreement. However, this is not the case because Samson gives reasons for not delivering according to the former agreements and instead coerces Tara into making a new contract with different terms from the original one. In fact, this new offer by Samson to Tara is a counteroffer because it is being made by Samson to Tara instead of delivering on the original contract as had been agreed. On that note, Tara could enforce her rights by voiding the contract on the claims that the terms of the contract were unmet. On the same note, Tara can also seek to void the contract under the claims of economic duress. This paper centers on economic duress and its impact on the contract. In his article, Sutton describes duress as behaviour by words or actions that cause another person to enter into a contract or perform in a certain manner fulfilling a transaction out of fear, which prevents the claimant from applying free will.1 Economic duress, therefore, means pressure in a commercial transaction that forces a party to act out of fear while under normal circumstances they would have stayed away from such a transaction. In claiming duress as a reason for voiding a contract, a party must fulfill three conditions or the following elements must be identifiable in the actions of the defendant.2 The first element in claims of duress is the nature of the threat employed. The second is the interference with free will such that the plaintiff cannot be able to exercise free will in the contract. The degree of coercion is a factor that is usually taken into account with the courts requiring a higher degree of coercion where the transaction in question meets merit. On the same note, the issue of the degree of coercion may arise where the plaintiff had the opportunity to mitigate the situation using other legal means.3 In situations where there is such an option, the court may assess the claims of coercion in relation to the mitigation measures taken by the plaintiff to mitigate the effect of coercion. The third element revolves around wrongfulness.4 The element of wrongfulness in cases of duress does not concern the threatened action, but the threat and the aim of the threat. The aim of the duress rules or law is to free people from unreasonable pressures intended to form a contract. Sutton argues that the role of duress law is to correct unequal transactions that can result from the unfair use of power.5 Traditionally, common law applied the doctrine of duress in contract law. Today, the courts apply the subjective test when determining the impact of duress. The subjective test determines the extent of the threat in terms of the threshold of the threat to the extent that it threatened the plaintiff such that he/she could not have resisted the action. Economic duress operates in the same sense as duress in general. The aim of the court in economic duress is to eliminate chances of inequitable transactions where one party gains over another. In Tara’s case, it is apparent that economic duress is present. As a result of that economic duress, the defendant wanted to gain more than they had originally bargained for in the former contract. Nevertheless, it is worth noting that the fact of there being inequitability or one party having an upper hand in the situation does not automatically lead to a contract being voidable.6 In presenting Tara with an appropriate action to undertake, in the light of the economic duress, in the present situation, it is appropriate to note that duress does not make a contract void. In common law, duress as a defense in contract breach was limited to threats of physical violence, imprisonment, physical harm and other types of threats that eventually led to inequitable contracts.7 In determining the extent to which economic duress can be claimed by Tara, as a reason for voiding the agreement, the following rules will be applied. Pressure was exerted on Tara The pressure was illegitimate The pressure caused the plaintiff to enter into a contract The claimant had no other choice of action than to enter into the contract The claimant protested the changes a short time after the contract was made From an objective perspective, it is apparent that the delivery of pre-Christmas candles was vital for Tara’s business. Additionally, it is also apparent that Samson saw an opportunity to make more money from the contract than he had previously determined. This objective would be achieved through increased prices and increased volume of deliveries. This is undue pressure because Samson knows that Tara would be at a disadvantage without the deliveries because she could not be able to sell the specialty candles during the pre-Christmas sales. By failing to make deliveries as originally agreed, Samson was sure that he would be able to corner Tara into agreeing to pay more and increase the frequency of deliveries meaning that he would achieve his goal or cashing in on this opportunity. Some events may have been unforeseen such as the increase in petrol prices and the instances of illness. However, this is a business risk that must be taken into account when forming the contract. As a rational businessman, Samson should have sought to include a clause to revise the price of the contract once future occurrences such as an increase in petrol prices occurred. Failing to put such a claim on the contract terms and conditions is a failure on the part of Samson to take wise business measures to prevent losses or risk in his business. By changing the terms of the contract, the conditions became unconscionable on Tara. As aforementioned, courts aim at eliminating in equitability in contracts by voiding contracts entered into under duress. In identifying the pressure exerted on Tara by Samson, it is paramount to determine whether duress made it impossible for Tara to use free will in the contract.8 From a business perspective, it is reasonable to assume that Tara had already made projections about the sales of specialty candles for the approaching Christmas festivities. It is with this information that she decided to get into a commercial transaction with Samson. It is also reasonable to see that Samson is taking advantage of Tara following that Tara might not have time to source for another supplier. The pressure was illegitimate because it gave Samson an upper hand against Tara. The option for Tara is to void the contract and get another supplier altogether. Perhaps because of Samson’s timing, Tara could not have had enough time to get into negotiations with another supplier. This could have adversely affected her business and the ability to make profits and meet her business obligations. Consequentially, the economic duress exerted on her by Samson made Tara incapable of applying her free will because if she did so, she would have suffered losses. From the case, it is apparent that Tara was not happy with the situation at hand but gave in either way because she did not have any other choice. On the same note, it is also clear that Samson was in a position of power because he had access to the supplies needed by Tara. Perhaps he knew that it would be impossible for Tara to find another supplier in time for pre-Christmas sales. This was undue pressure aimed at forcing Tara to continue with the contract. As aforementioned, for duress to be applicable as a defence in contract breach, the claimant must show that the undue influence or duress was so significant that it caused fear that made it impossible for the claimant to exercise free will.9 The impact of such fear is observable in the case at hand. Owing to the fear of facing challenges in meeting business obligations, Tara agreed to the new terms. The underlying fear is that, if Tara were to set out in search for a new supplier, she would not find any in time. It is therefore apparent that Samson is in a powerful position than Tara which means he can use that power to force the Tara into a contract, which he has already done. By showing that she had no other options to mitigate the situation, it is probable that the court might void the contract. The assumption is that owing to the timing of Samson’s claims, there may be no time for Tara to enter into a contract with another supplier. On the same note, Tara may claim that with the lack of options, her business could have suffered losses, which would have significantly affected the performance of her business. With the picture of immense losses in mind, Tara agreed to the new terms proposed by Samson. Consequentially, Tara can beseech the court to vitiate the contract on grounds of unconscionability caused by the economic duress exerted by Samson.10 Rules of Voiding a Contract Entered Under Economic Duress As aforementioned, economic duress derives from the concept of duress, which leads a party to enter into a contract without which they would have not. Additionally, in the above compilation, it has been noted that for duress claims to go through, there must be a complete diversion of the will of the person to the extent that the individual or claimant did not have any other choice than to enter into the contract. The test of the diversion of the freedom of will is the ultimate test in cases of duress (Sutton, 1974: p. 556).11 Additionally, the tests of the nature of threats and the aim of threats must be identifiable and argued in a case of duress for it to be successful. From the case at hand, we have identified the following, that the threat was a breach of contract by Samson. The sense is that by threatening not to deliver the specialty candles, for Tara to sell before the Christmas season, Samson was threatening Tara’s business. The other claim is that the threshold of the threat and the aims of the threat must be known.12 From the discussion above and the case at hand, it is clear that the threshold of the threat was magnitude in that it affected the operation of free will for Tara.13 Tara felt that she had no otherwise but to enter into the contract because her business was depending on the deliveries of the special candles. If the specialty candles were not delivered, her source of income would have been seriously affected. Past cases have adjudicated on the issue of duress broadly. The cases are applicable to economic duress and are discussed hereafter. The three elements of duress identified above were set in the Alec Lobb (Garages) Ltd. v. Total Oil Great Britain Ltd [1984].14 In the case, the claimant set out to the courts to seek that a contract be vitiated on grounds that it was entered under economic duress and that because of that economic duress exerted on the Lobb Garages Ltd, the claimant had no choice. The claimant sought to vitiate the contract on 5 grounds. First, that the bargain entered into with the defendant Total Oil was harsh and caused unconscionability on the plaintiff Lobb v Total Oil [1984]. Second, the bargain came about as a result of abuse of fiduciary relationship by the defendant to the client. Third, the subject matter of the transaction was that of mortgage and had been improperly formed by the parties. Fourth, the petrol tie was void and unreasonable constraint to trade. Fifth, the contract or transaction came about as a result of economic duress. The main issue relevant to the current discussion is the economic duress claims. In dealing with the above issue, the judge used the three basic rules of upholding the economic duress defence for contract voiding in Lobb v. Total [1984].15 The three elements, as aforementioned in the previous paragraphs, and which are necessary to prove duress, were repeated in the case. The three rules in Alec Lobb were aimed at the bargaining positions of the parties. To determine whether there was duress, the judge specifically focused on the stronger party.16 To determine unconscionability, the judge applied these criteria. First, one party must be overwhelmingly disadvantaged to the other because of certain circumstances. Two, there must be an exploitation of the weakness of the disadvantaged party. Three, the resulting transaction must not only improvident or hard but also oppressive and overreaching. In its determination, the court found only one criterion of the three present in Lobb’s case [1984].17 Additionally, the court did not find the actions of the defendant in any way as coercive. Consequentially, the plaintiff's claim was not awarded by the court. This case is important in the current discussion because it sets the groundwork for determining whether economic duress exists and whether it subverted the will of the plaintiff. In the case, Barton v. Armstrong [1979], Armstrong a majority shareholder and chairman of Landmark Corporation Ltd issued death threats to Barton if the latter failed to buy all of Armstrong’s shares at an overvalued price.18 Barton, the managing director, agreed partly because of the death threats and also because of it was desirable of all directors that Armstrong relinquishes his chairmanship, which could only be achieved if he no longer had majority shareholding (1979).19 The court held that the pressure of death threats to Barton constituted duress and for that reason, the contract was set aside Barton v. Armstrong [1979]. 20This case is important in this discussion because it shows the operation of duress in motivating the transaction of sale of shares. Although Tara’s case is different because it does not involve the threat of physical harm, it does involve the threat to the business. The underlying threat is the assertion by Samson that if Tara does not accept the new terms. The threat to Tara’s business, in this case, can be termed as threats that would induce fear for Tara to act accordingly Barton v. Armstrong [1979].21 Another case that mirrors the current situation is Pao On v Lau Yiu Long [1979].22 In this case, Pao v Lau, the claimant threatened not to complete the purchase of share if subsidiary agreements containing guarantee and indemnity were not met.23 The defendant sought to have the agreement vitiated on the grounds of economic duress. The court held that there was no economic duress Pao v Lau [1979].24 The Privy Council identified four factors to determine if there is economic duress in a case. The four factors were as follows Did the person claiming duress protest? Was there any other option available to that person? Was independent advice available? After entering into the contract what actions did the person take? In Pao v Lau [1979], the defendant did not protest and since advice was available, he did not seek to apply it.25 Additionally, the defendant did not take any other available option such as selling the shares to another person. Finally, the defendant did not take any claims to void the contract after entering into it under duress. Because the case did not meet those conditions, the court disregarded the economic duress case. The Pau v Lau [1979] case fits in the current discussion because it is a precedent that guides the aggrieved parties such as Tara on how to make claims of economic duress. 26 Conclusion From the above compilation, it is clear that the issue of economic duress does not make a contract void but voidable. Nevertheless, for a contract entered into under economic duress, and where the resulting transaction brings about unconscionability and inequitability, there are certain conditions to be met as identified in the various cases discussed. In establishing duress or when seeking to void a contract on grounds of duress, the plaintiff such as Tara must follow three rules that have prominently featured in the discussion above and in the cases analyzed. For Tara to claim duress she must prove the following beyond reasonable doubt. First, there must be pressure exerted on her. Second, the pressure must be significant such that it subverts the ability to apply free will. Third, the plaintiff must show that she attempted to mitigate the situation or show that there was no other option. As discussed above, all these conditions have been satisfied. References Book Elliott C & Quinn F. Contract Law. (Pearson Education Limited, 2017) Cases Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd [1984] EWCA Civ 2 Alexander Barton v Alexander Ewan Armstrong and Others [1975] 2 W.L.R. 1050 Pao On v Lau Yiu Long [1980] AC 614 Journal Articles Dawson JP. Economic Duress: An Essay in Perspective. Michigan Law Review, 45(3) (1947) pp.253-290. Ogilvie MH. Wrongfulness, Rights and Economic Duress. Ottawa L. Rev., (1984) 16, p.1. Sutton, RJ. Duress by Threatened Breach of Contract. McGill LJ, 20, (1974) p.554-586 Read More