Often when two parties negotiate a contract one party has much more influence over the other and is able to impose terms or conditions that significantly tilt the balance of power in their favour. This is commercial reality and the law not only recognises but even encourages such play to promote free markets. What happens however if after contracts are agreed one party tries to change the terms of the agreement and uses economic pressure to do so? For example Party A threatens to stop construction on site unless Party B agrees to make a larger payment once the work is complete. In many cases Party B may be in the position to reject the proposal and go elsewhere but often it cannot.
This is where the law known as ‘economic duress’ will step in to protect Party B. Much like physical duress if it can be demonstrated that a party entered into a contract, or more likely with the case of economic duress, agreed to a variation, under illegitimate economic pressure the contract or variation is void. The law is not there however to save a party where it has made a bad deal.
Many businesses are under enormous financial pressure due to the devastating impact of COVID-19. This may cause Party A to seek to change the terms already agreed. Or it may give Party B little choice but to agree to the change. Whatever the underlying circumstances are a variation can be set aside if Party B was put under economic duress. It will be necessary to establish that (a) the demand made by Party A was ‘illegitimate’ in other words there is no justification for it, for example it threatened to breach the contract by stopping production or supply; (b) the pressure induced Party B to accept the change; (c) the effect of the pressure gave Party B no choice.
A party wishing to rely on economic duress will need to act quickly and wisely to avoid inadvertently waiving the right to later rely on economic duress.
This blog was written by: Allan Kornbluth
DISCLAIMER: Please note that this post sets out the general position under the general law. It should not be acted upon in any specific circumstances without taking specific legal advice as to those circumstances. Also, it should not be relied upon, acted upon or treated as a substitute for specific advice relevant to particular circumstances. If you do require specific advice please contact us for assistance.