6.4 Duress

Duress occurs where a dominant party applies illegitimate pressure to another (weaker) party, and that pressure induces the (weaker) party to enter into a transaction. In Crescendo Management Pty Ltd v Westpac Banking Corporation^[1] McHugh J stated that: “A person who is the subject of duress knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take an alternative course of action”.^[2] This highlights that consent given under duress is nevertheless consent; it is the quality of the consent that is in question. More specifically, the consent is not given freely. Further, as consent given under duress is nevertheless consent, it is only natural that a contract to which one party gave its consent under duress is not automatically void. Rather, it is voidable at the option of the party that entered into it under duress.

There are three different kinds of duress:

• duress to person;
• duress to goods; and
• economic duress.

These categories may overlap, but regardless of which category of duress an action relates to, it is for the party seeking to rely on duress to prove the existence of illegitimate pressure amounting to duress. However, it is not necessary to establish that consent was given solely as a result of duress. In Barton v Armstrong,^[3] the majority held that:

Though it may be that [the plaintiff] would have executed the documents even if [the defendant] had made no threats and exerted no unlawful pressure to induce him to do so, the threats and unlawful pressure in fact contributed to his decision to sign the documents.^[4]

If it is established that such pressure was present, it is for the defendant to prove that the duress had no bearing on the consenting party’s decision. This would ordinarily be a rather heavy burden. Furthermore, as far as threats are concerned, it is to be noted that these need not be expressed in words but may be implied: “If circumstances for which the appellant was responsible conveyed the threat to the respondent, then the threat of duress would operate as forcefully as if it were put into words”.^[5]

The circumstances outlined in Article 3(a – b) are commonly referred to as duress to person and were originally the only forms of duress recognised by the courts. An often-cited example of duress to person is the previously mentioned Barton case, where the defendant had threatened to have the plaintiff murdered, if the latter did not execute a deed relating to the sale of certain companies. The Court found there to be duress to person, and noted that:

No man, it may be said, is a free agent who is subject to any pressure, economic, commercial, emotional or otherwise but the law makes a distinction. Duress to the person to that extent which amounts to duress at common law is such a constraining force that it takes away the freedom of will, of agency, in a way which other forms of coercion do not.^[6]

Scolio Pty Ltd v Cote^[7] is another example of alleged duress to person.  Cote (the respondent) was employed by Scolio Pty Ltd (the appellant). An audit revealed that the respondent had misappropriated funds belonging to the appellant. The respondent entered into a deed under which he undertook to repay an agreed sum, but later claimed that he did so under duress as, if he had not done so, the audit results would have been handed over to the police. The Court was not satisfied that the appellant’s representative had made a promise as to whether the police would still be informed even if payment was made, and Ipp J stated that:

some other element of impropriety is needed, apart from the threat of prosecution, before there could be said to be duress resulting in the respondent becoming entitled to avoid the deed. The element that is normally sought to be established in cases of this kind is an agreement not to proceed with the prosecution. Such an agreement is illegal and is therefore void … Further, the existence of such an agreement introduced a quality of impropriety into a transaction induced thereby so as to render it voidable for duress …^[8]

This case clearly highlights an overlap between the concept of duress and the concept of illegality discussed in Chapter 7.

Duress to goods (Article 3(c)) is exemplified in Hawker Pacific v Helicopter Charter.^[9] In that case, the defendant had agreed to paint the plaintiff’s helicopter. More than one paintjob was done but the plaintiff was not satisfied with the defendant’s work. When arriving to pick up the helicopter, the plaintiff was asked to agree to pay a certain amount and release the defendant from any further liability. The plaintiff signed the agreement, but never paid the money. Instead, it took action in court arguing that the reason it signed the final agreement was that it feared that the defendant, who knew the helicopter was needed urgently, would otherwise not release it. The Court found this to be a case of threatened duress to goods.

As indicated by the vague nature of Article 3(d), economic duress is the most difficult type of duress to define. The most typical situation in which the courts have been prepared to find economic duress to have been exercised is where one contractual party, knowing that the other party faces financial devastation if the contract is not properly performed, threatens not to meet its existing contractual obligations unless it is given further benefits, for which it will not give any additional consideration in return. In T A Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd,^[10] the defendant had agreed to supply galvanised iron to the plaintiff at £109 per ton. The iron was to be imported from France, and the defendant knew that the plaintiff needed the iron to meet its commitments to other parties. Prior to delivery, the defendant informed the plaintiff that the iron would cost an extra £27 per ton due to a sharp rise in the world price. Having paid the higher price, the plaintiff successfully recovered the extra amount paid due to economic duress.

Similarly, in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron),^[11] the defendant, knowing that the plaintiff relied on it fulfilling its contractual obligations to meet commitments to third parties, demanded a 10 per cent increase in price without having any contractual entitlement to do so. The Court held that, in paying the higher price, the plaintiff had acted under economic duress. However, the amount paid could not be recovered since the plaintiff had affirmed the varied contract by their failure to protest and by their eight-month delay in bringing the action.

The Australian law’s present position on economic duress is somewhat unclear. However, a useful starting point is found in the statements made by McHugh JA in Crescendo Management Pty Ltd v Westpac Banking Corporation.^[12] The appellant argued that its consent to a mortgage in favour of the respondent was given under economic duress. McHugh JA stated that:

The proper approach … is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress.^[13]

In clarifying when pressure is to be regarded as illegitimate, Lord Scarman, in Universe Tankships Inc of Monrovia v International Transport Workers Federation,^[14] stated that:

In determining what is legitimate two matters may have to be considered. The first is as to the nature of the pressure. In many cases this will be decisive, though not in every case, and so the second question may have to be considered, namely, the nature of the demand which the pressure is applied to support.^[15]

In that case, the ship, the Universal Sentinel, was blacklisted unless the owner agreed to pay the defendants a large sum of money. It was held the contract was voidable for duress.

It is also necessary to clarify the term “unconscionable conduct”, as used by McHugh JA in Crescendo Management Pty Ltd v Westpac Banking Corporation.^[16] The Court in Parras Holdings Pty Ltd v Commonwealth Bank of Australia^[17] makes clear that “unconscionable conduct”, in the context of duress, is not the same as the equitable doctrine of unconscionable conduct:

In the equitable principle, the term “unconscionable” refers to the nature of the advantage taken of a person in a position of disability or special disadvantage. For the purposes of economic duress, the term “unconscionable” looks rather to the nature of the duress or compulsion exercised, to its legitimacy or illegitimacy.^[18]

A case decided relatively recently may arguably have changed the state of the Australian law on economic duress. ANZ Banking Group Ltd v Karam^[19] involved a dispute between the directors of a company and the company’s bank. Put simply, it was not entirely clear from the initial contract between the parties whether the directors of the company were personally liable for the company’s debts. At a point in time when the company was experiencing severe financial problems, the bank sought to condition further loans on the directors being personally liable for the company’s debts. The Court noted that:

It is of importance that the absence of practical choice is only one of two elements in establishing economic duress. The critical issue is whether the pressure placed on the Karams by the Bank was “illegitimate”. The Bank emphasised in argument that all it was proposing was an offer to extend the credit available to the Company on condition that the acknowledgment was signed by the Karams personally. No doubt the Company had a commercial expectation that the credit available to it would be maintained, but it had no realistic expectation of additional credit nor that the existing facilities would be allowed to continue, were it to default. Accordingly, on the Bank’s case, it was offering an indulgence in return for improved security … The Bank was under no obligation to extend the credit facilities already granted, nor to do so without securing its own position. Nor was the Bank reacting over hastily to some sudden and unexpected downturn in the affairs of the Company.^[20]

Furthermore, it is significant to note that the Court opted for a narrower definition of what constitutes “illegitimate pressure” than what was decided in the cases discussed above. Indeed, the Court held that where the “illegitimate pressure” is not unlawful, one cannot rely on economic duress and should instead examine the matter in the context of the equitable doctrines of undue influence, unconscionability, or the relevant statutory provisions. The rationale expressed for this is that:

The vagueness inherent in the terms “economic duress” and “illegitimate pressure” can be avoided by treating the concept of “duress” as limited to threatened or actual unlawful conduct. The threat or conduct in question need not be directed to the person or property of the victim, narrowly identified, but can be to the legitimate commercial and financial interests of the party. Secondly, if the conduct or threat is not unlawful, the resulting agreement may nevertheless be set aside where the weaker party establishes undue influence (actual or presumptive) or unconscionable conduct based on an unconscientious taking advantage of his or her special disability or special disadvantage, in the sense identified in [Commercial Bank of Australia Ltd v Amadio^[21]. Thirdly, where the power to grant relief is engaged because of a contravention of a statutory provision such as s 51AA, s 51AB or s 51AC of the Trade Practices Act [see ss. 20-22 of the ACL], the Court may be entitled to take into account a broader range of circumstances than those considered relevant under the general law. Pursuant to both Trade Practices Act [now ACL] provisions and the Contracts Review Act [NSW only], the relative strengths of the bargaining positions of the parties, and their ability to negotiate terms, will be relevant. However, it does not follow that because, for the purposes of s 9(2)(a) of the Contracts Review Act, there was a material inequality of bargaining power, a contract between such parties will necessarily be set aside. Most “contracts of adhesion” will fall into that category, but most will be valid.^[22]

To conclude, it is to be noted that the doctrine of economic duress still appears to be evolving, and the Court in ANZ Banking Group Ltd v Karam^[23] noted that:

How the doctrine of economic duress fits with the equitable doctrines is unclear. The reference to “unlawful” conduct, read in context of the earlier authorities, was originally a reference to unlawful detention of goods. Concepts of “illegitimate pressure” and “unconscionable conduct”, if they do not refer to equitable principles, lack clear meaning, outside, possibly, concepts of illegitimate pressure in the field of industrial relations.^[24]

Since Karam, the approach to economic duress suggested by McHugh JA in Crescendo, in the above quote, has been applied in the Queensland Court of Appeal^[25] and in the Supreme Court of Victoria,^[26] and has also been considered in the Supreme Court of Western Australia.^[27]  The High Court has not thus far had the opportunity to decide a case on the issue of economic duress. However, in Australian Competition and Consumer Commission (ACCC) v CG Berbatis Holdings Pty Ltd,^[28] the High Court also cited, with approval, McHugh JA’s words in Crescendo.  The New South Wales Supreme Court, by contrast, has continued to apply the principle in Karam,^[29] preferring the notion of ‘unconscientious taking of advantage’^[30] [of another party’s disadvantage] to the term ‘economic duress,’ which, it said, “should be limited to situations where there is threatened or actual unlawful conduct.”^[31]  (It should be noted that the appellant’s pleading in Maher v Honeysett & Maher Electrical Contractors Pty Ltd^[32] was that certain agreements were procured by “duress or unconscionable conduct” [emphasis added], as opposed to “economic duress”).^[33]