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Posted on Jul 05, 2012 by  | 0 Comments

Economic duress is a legal remedy which may be used where a person or company has been forced by the other party into entering a contract. The remedy allows the contract to be set aside if it can be proved that pressure applied by the other side was illegal.

It is often it is difficult to distinguish between legal commercial bargaining pressure and illegal economic pressure. However a recent decision handed down by the High Court in Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm) has held that legal economic pressure may amount to economic duress if there has also been unethical behaviour.

The Progress Bulk case concerned ship owners and their hirers (charterers). The ship owners agreed to hire the ship to the hirers who needed it to ship scrap metal from the USA to China. However the ship owners subsequently hired the ship out to another hirer making it impossible for the scrap metal to be shipped.

The ship owners promised to provide a substitute ship and pay full compensation for any loss. The hirers notified the owners that they were incurring significant losses due to the delay and would be seeking damages for breach of contract.

The ship owners then conveniently forgot about the promise they had given the hirers and refused to supply the substitute ship unless the hirers agreed to waive all their claims for breach of contract. The ship owners’ stance was lawful as the promise they had given was not legally binding.

The hirers were facing catastrophic losses if they did not agree and so with no practical alternative they entered into the agreement albeit under protest. Subsequently the hirers made a claim against the ship owners despite having entered into the agreement, claiming it was void due to economic duress. The judge held that the unethical behaviour of giving an assurance that they would pay full compensation and then withdrawing it amounted to economic duress.

This recent case shows that lawful acts which are unethical may amount to economic duress. It further extends the reach of economic duress to include not just unlawful acts but in certain circumstances, lawful acts.

It is hoped that if economic duress is recognised by Scots law then Scottish Courts will adopt a similar approach to the High Court in England.

The case is significant because in certain circumstances borrowers may now be able to rely on the remedy of economic duress where a bank or financial institution has behaved unethically but lawfully.

If you are forced into an agreement by a bank or financial institution, you should only enter into the agreement under protest. Furthermore you should reserve your rights where possible and seek to end the agreement immediately after you have entered into it.

Business owners who are pressured by large financial institutions should be alert to the potential legal remedy of economic duress which in these difficult times could be the critical difference between the survival and demise of their business.

Has a metaphorical gun been put to your head by your lender? Do you think you may have suffered illegal or unethical economic pressure at the hands of a financial institution? If so, MBM Commercial LLP’s experienced and acclaimed banking disputes team may be able to assist you.

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