Economic Duress

Profession:Herbert Smith
 
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Economic duress has always been considered by lawyers as a notoriously difficult allegation to establish. Two recent cases in the Technology and Construction Court provide guidance as to what is required and practical examples of what does and what does not constitute economic duress.

Background

In substance, economic duress amounts to the application of illegitimate pressure by one party on another, which results in the innocent party being forced to enter into a contract they would otherwise not have entered into. The concept of economic duress has been recognised, in theory at least, for many years. However, it remains difficult to establish in practice. The problem for judges and arbitrators is drawing a distinction between tough, but legitimate commercial negotiations on the one hand and unlawful coercion on the other. DSND Subsea v. Petroleum Geo-Services [2000] BLR 531 and Carillion Construction Limited v. Felix (UK) Limited [2001] BLR 1 are two recent cases in which economic duress was raised. Both cases were before the same judge, Dyson J, and decided only three months apart. Economic duress was successfully argued in one, but not the other.

DSND Subsea case

The factual background to this case is complicated and concerned the development of a Floating Production Storage and Off-Take vessel ("FPSO") in the Banff sector of the North Sea. PGS Offshore Technology AS ("PGS") contracted with DSND Subsea Limited ("DSND") to provide subsea work required to hook up the FPSO to an underwater wellhead. The agreement was formalised in a number of documents. The first of these was the heads of agreement. There was no dispute about the terms of this agreement. Subsequently, the parties entered into a further document, the Memorandum of Understanding ("MOU"). PGS later alleged inter alia that this agreement was entered into as a result of economic duress. DSND had refused to continue work on the FPSO until PGS had agreed to provide i) assurances as to their insurance cover and an indemnity, and ii) a reimbursable basis of payment. PGS were under severe financial pressure from their employer and were at risk of substantial damages for delay. PGS agreed to these terms. They claimed later that they had done so under duress.

Dyson J summarised the law in the following test

There must be:

a threat or pressure,

whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim,

which is illegitimate, and

which is a...

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