by John Wojtowicz (Director - Law Central Legal 

It is not unusual to desire a change in your existing contractual agreements to find more favourable terms. However, it is not always legally permissible to pressure the other party to change your contractual terms. Situations can develop where a party to an agreement may feel they are being illegitimately pressured into a decision or contract even if there are no threats to their person or their property. If a person has been forced into a transaction because of that pressure there may be grounds for a claim of economic duress. The basics of this doctrine involve using a form of economic pressure, such as threatening to break a contract or leveraging a monopoly position to threaten or coerce a victim.

What is Economic duress?

The doctrine of economic duress has many overlaps with the doctrine of unconscionable conduct and the doctrine undue influence, but the situations that give rise to a claim of duress have important differences. Economic duress requires a party in an agreement to use illegitimate pressure to coerce the victim to enter into or modify an agreement, in order to gain a benefit. Ordinary common law duress requires a threat against a person or a property whereas economic duress is typically concerned with threats made that affect a person’s economic status or wellbeing.

Electricity Generation Corporation t/as Verve Energy Ltd v Woodside Energy Ltd [2013] WASCA 36 outlined two general situations in which economic duress claims will arise. The first is when there is an actual or threatened breach of the contract in question. This is unlawful illegitimate pressure being used to procure a benefit. For example, in Verve v Woodside, the party applying the pressure was found to not be fulfilling the agreement by applying the pressure, and as such was in breach of the contract. The second situation is where there is unreasonable overwhelming pressure given the specific circumstances of the dispute. This is what can be termed lawful illegitimate pressure, in that nothing illegal has occurred but it would be unfair to the victim to allow this behaviour to continue. It has been questioned whether this second scenario exists at law, given the unclear standards of the doctrine.

The unsettled position in Australia

Historically in Australia and other jurisdictions, the concept of economic pressure was not considered a legitimate basis for common law duress. This changed in Universe Tankships Inc. of Monrovia v. International Transport Workers Federation and Others [1982] 2 All ER 67 where the English courts established the precedent that economic duress can give rise to a duress claim. While this position has been adopted in Australia, some more recent developments have altered the doctrine.

The standard of pressure used to determine economic duress is currently unsettled law in Australia. The position in Australia has undergone many alterations, as the courts have initially followed precedents set in the UK and have later developed the doctrine in a domestic context. The case of Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 (“Crescendo”) appears to be the current authority. The standard developed in Crescendo is a continuation of the historical doctrine in the UK and Australia, and it has been cited as the authority in recent economic duress decisions.

The standard was altered in Australia and New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149 (“Karam”) where the court suggested that the terms “illegitimate pressure” and “economic duress” were too ambiguous to be the basis for a duress claim. The court established that common law duress should have a more narrow scope, instead defined by “threatened or actual unlawful conduct”. The Karam understanding of the test of duress has also been followed in some decisions, and so it seems there are two different standards for making a duress claim in Australian law.

Rather unhelpfully, the High Court in Thorne v Kennedy (2017) 263 CLR 85acknowledged that the doctrine of duress had been altered but did not determine which approach was to be favoured. The matter was decided on other grounds and so the law remains unclear on the existence of “lawful act” duress. Statutory provisions found in the Competition and Consumer Act 2010 (Cth) cover contractual situations similar to lawful act duress, which may be an argument for narrowing the scope of common law duress since it has been addressed in statute.

What constitutes a claim of economic duress?

The test for economic duress involves several key features explained by the court in Crescendo. The first element is pressure which amounts to a compulsion of the will of the victim. In practical terms, the pressure needs to be more than just a facet of bargaining or of tough negotiating tactics. Instead, the effect needs to compel a person such that they feel there is an absence of choice. The focus should be on the quality of the person’s consent under the pressure.

The second part is the application of pressure which is illegitimate. According to McHugh JA in Crescendo, pressure will be illegitimate “if it consists of unlawful threats or amounts to unconscionable conduct”, but the categories are not limited by this definition. This suggests the pressure can be unlawful, such as breaching a contract, or lawful, such as unconscionable bargaining tactics. However, this is an area with some ambiguity as there can be economic pressure that is done in good faith. For example, a creditor who threatens to sue for a debt is exerting pressure, but it is not illegitimate. The illegitimate pressure does not need to be the only factor that influences a person to act.

If the new standards established in Karam are followed, the concept of “illegitimate pressure” is replaced by unlawful conduct. This would require an actual threat of some kind, such as threatening non-performance in a contract, or an actual breach of contract. As such, there are fewer situations that can be the basis of a claim of duress, and economic duress is limited to actual or threatened breaches of contract. If Karam is confirmed as the correct application of the law, it would definitively confirm that lawful act duress is not a claim that can be brought before the court. Until the High Court makes a determination on which standard of duress applies, the law will be considered unsettled on this point.

A finding of economic duress will render a contract voidable rather than void. This means a party may need to actually take action to void the contract if they wish to claim certain remedies, as seen in Electricity Generation Corporation t/as Verve Energy Ltd v Woodside Energy Ltd [2013] WASCA 36. While economic duress was found in this case, the victim could not claim the compensation they were seeking as they had not taken action to rescind the contract. Terminating a contract was a necessary step in order to claim unjust enrichment, and subsequently the claim of economic duress failed.

Gold and Platinum members can read on for a discussion concerning the balance between commercial bargaining and lawful act duress.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.