Economic distress leads to economic duress
When the ratings agency, Moody's, downgraded Bermuda in June 2016, it noted that the Bermudian economy had suffered a recession from 2009 to 2014, in the wake of the global financial crisis.
Although the Bermudian economy has been growing again since 2015, the effect of 5 years of recession has been felt both by international and local businesses based in Bermuda, and by local residents.
As a result, a number of Bermudian businesses have had to restructure, close, or cut costs (whether by way of merger, consolidation, termination of employees, arrangements with creditors and shareholders, liquidation or receivership).
In turn, and partly as a result of job losses and a decline in rental incomes, a significant proportion of local residents have defaulted on, or had to renegotiate, their debt obligations and their mortgages.
Against this background of economic distress, the Bermuda courts have started to see, and are likely to see an increasing number of, commercial and contractual disputes in which one of the parties seeks to avoid its contractual obligations on the basis of an argument that it only entered into the relevant contract under "economic duress", or as the result of illegitimate commercial pressure.
It is not surprising, of course, that at a time of widespread economic hardship, many individuals and businesses may feel that they have been 'bullied' into agreements which they would not have agreed to if they had been in a position of greater commercial strength. But while the Court has an important role to play in regulating the improper use of illegitimate pressure or duress, it is not the Court's function to renegotiate all commercial contracts, nor to ensure that all contracting parties negotiate from positions of absolute commercial equality.
The doctrine of "economic duress" is a relatively modern part of English and Bermuda law, having first emerged in the English case law in the 1970s and 1980s, and then in the Bermuda case law in the late 1980s1 and early 2000s2. However, the kinds of disputes in which claims of economic duress have been asserted and considered are wide-ranging, and include cases such as these:
- a building contractor refuses to complete building works unless the employer agrees to make additional payments or to waive accrued rights;
- an employer threatens to dismiss an employee unless the employee agrees to revised terms of employment and a lower wage for the same work;
- a bank threatens to repossess and sell a family home or other valuable asset unless the borrower (or a third party) agrees to provide additional security and agree to increased capital or interest payments3;
- a husband threatens to litigate indefinitely and unreasonably, and cuts off all sources of income, unless the impoverished divorcing wife agrees to accept a settlement agreement for a sum much lower than she would otherwise be entitled to4; and
- a trade union threatens to strike, or take some other form of unlawful industrial action, unless the Government, or an employer, succumbs to its demands.
This article is intended, therefore, to summarise the current state of Bermuda law on "economic duress".
In summary, economic duress is the exertion by one party of illegitimate economic, commercial or similar pressure on another party, which induces that party to offer its consent or to enter into an agreement. Where economic duress can be established, the innocent party will be entitled to avoid the consent or agreement, on the basis that it was unable to exercise its free will.
For economic duress to be established, however, the pressure must be found by the Court to be "illegitimate", and something more than the "rough and tumble of the pressures of normal commercial bargaining".
Although each case will turn on its own unique facts, the principal tests for economic duress were usefully summarized by Mr. Justice Dyson (as he then was) in the English case of DSND Subsea Ltd v Petroleum Geo-Services ASA  BLR 530, citing Universe Tankships Inc of Monrovia v International Transport Workers Federation  AC 336 and Dimskal Shipping Co SA v ITWF, The Evia Luck  2 AC 152.
In that case, Dyson J noted that the economic pressure needed to be of the sort: "(a) whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the claimant to enter into the contract".
One of the key elements in establishing economic duress is to prove that the threat was wrongful and/or illegitimate, and in this context, the authorities have drawn a distinction between a threat of unlawful action (which is prima facie illegitimate) and a threat of lawful action (which is prima facie legitimate).
The courts have been relatively cautious when it comes to expanding the principle of economic duress to commercial contexts where the threatened action is entirely lawful, and in those cases, the case law suggests that it will only be applied in "relatively rare" cases (see CTN Cash CTN Cash and Carry Ltd. v Gallagher Ltd.  All ER 714 at 719).
One of such cases, however, is where the action, conduct, or pressure is clearly "unconscionable" as a matter of equity, even if it is technically lawful as a matter of black-letter law.
Borelli v Ting: lawful but unconscionable
As a matter of Bermuda law, where a party claims that an agreement was entered into under economic duress and the conduct of the defendant was not unlawful, the Privy Council held in Borelli v Ting  UKPC 2, per Lord Saville, that economic pressure may be considered illegitimate where a party's conduct amounts to "unconscionable conduct" as a matter of equity.
In that particular case, a Bermudian company, Akai Holdings Limited (Akai), collapsed owing debts of over US$1billion. The liquidators of Akai had proposed a Scheme of Arrangement involving the transfer of shares to recover some of the debt but under Bermuda law, the scheme required the consent of the majority of shareholders, which included two companies controlled by Mr. Ting (the Chairman and CEO of Akai). Mr. Ting refused to consent and sought to defeat the scheme through the use of forged signatures and the provision of false evidence. However, as the deadline for the transfer of shares approached, the liquidators entered into a settlement agreement whereby Mr. Ting withdrew his opposition to the scheme, in consideration for the liquidators agreeing to grant Mr. Ting immunity from any claim in relation to his conduct of Akai.
The Privy Council avoided the settlement agreement, on the liquidators' application, holding that Mr. Ting's conduct amounted to "unconscionable conduct", that the liquidators had "no reasonable or practical alternative but to make a deal", and that it would "offend justice" to permit Mr. Ting to rely on the immunity conferred upon him by the settlement agreement to defeat the claims (including the misappropriation of funds of Akai) brought against him by the liquidators.
The test of unconscionable conduct has also been applied in Australia, where it has been stated by McHugh JA in Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 that "pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct".
In English case law, the test for illegitimate pressure has been the subject of varying descriptions (over and above the phrase "unconscionable conduct"), including whether the conduct was "morally or socially acceptable" (see CTN Cash and Carry Ltd. v Gallagher Ltd.  All ER 714, per Lord Justice Steyn) and whether the conduct involved "impropriety" (see Progress Bulk Carriers Ltd v Tube City IMS LLC (The Cenk Kaptanoglu)  All ER 122, per Cooke J).
In the recent English case of Dawson v Bell (unreported) (21 May 2014), Judge Havelock-Allan QC5 suggested that the Privy Council case of Borrelli v Ting did not introduce any new legal principle, but that it was simply an "application of the established principles, which are founded on the concept of what is conscionable, to a particular set of facts".
The relevant factors when assessing a claim of economic duress
As Mr. Justice Dyson explained in DSND Subsea Ltd v Petroleum Geo-Services ASA  BLR 530, the Bermuda Court should take into account the following considerations and factors, when determining a claim of economic duress:
- whether there has been an actual or threatened breach of contract;
- whether the person allegedly exerting the pressure has acted in good or bad faith;
- whether the victim had any realistic, practical alternative but to submit to the pressure;
- whether the victim protested at the time; and
- whether the victim affirmed and sought to rely on the contract.
One further consideration recognised by the case law is whether the victim had access to independent legal advice at the time of offering its consent or entering into the agreement.
Ultimately, each case will turn on its own unique facts and evidence, and as the English House of Lords held in Universe Tankships Inc of Monrovia v International Transport Workers Federation  1 AC 366, per Lord Scarman: "The classic case of duress is ... not the lack of will to submit but the victim's intentional submission arising from the realisation that there is no other practical choice open to him ... The absence of choice can be proved in various ways, eg by protest, by the absence of independent advice, or by a declaration of intention to go to law to recover the money paid or the property transferred."
The Hong Kong Court of First Instance, per Lam J, has recently considered these factors in deciding to set aside a settlement agreement and a consent order in the case of Zebra Industries (Orogenesis Nova) Ltd v Wah Tong Paper Products Group Ltd.  HKCFI 1538. In that case, the Court found that the plaintiff had "no real choice" but to enter into the settlement agreement, and to accept a lower arbitration award than it was legally entitled to, as the defendant refused to pay the award, and the plaintiff could not enforce the award due to its own impecuniosity. In considering whether the pressure was illegitimate, the Court considered the state of mind of the defendant, stating that "prima facie [the defendant] knew or at least had reason to think that [the plaintiff] was impecunious" (paragraph 96) and that there was a "conscious breach" of contract and the defendant had "no genuine belief ... that it was legally entitled to withhold payment" (paragraph 117). On the issue of contemporaneous protest, the Court was satisfied that the plaintiff had protested on the basis of email correspondence in which the plaintiff had stated that it had "no choice" and was faced with an "impossible situation". Furthermore, within a month of the settlement, the plaintiff had made a prompt application to have the consent order set aside.
Given Bermuda's economic circumstances, the Bermuda Courts are likely to see an increasing number of claims of "economic duress". The principles identified in the case law are not only of relevance in a litigious environment, however. Even in a transactional context, all contracting parties in Bermuda would be well advised to keep the scope of the doctrine of "economic duress" carefully in mind when negotiating a contract governed by Bermuda law, to mitigate the risk that the contract might be avoided, in the future, by claims of illegitimate commercial pressure, above and beyond the acceptable "rough and tumble of the pressures of normal commercial bargaining".
1 See, for example, National Iranian Oil Company v Ashland Overseas Trading Ltd  Bda LR 64,  Bda LR 13.
2 See, for example, Flag Ltd v Reda and Abdul-Jalil  Bda LR 27,  Bda LR 17.
3 See, for example, Junos v Bank of Bermuda (HSBC)  Bda LR 54.
4 See, by way of contrast, Gibbons v Gibbons  Bda LR 31, X v Y  Bda LR 30, and Peniston v Peniston  SC Div Bda 47, in which the Supreme Court of Bermuda has dismissed various applications to set aside Consent Orders in divorce proceedings on the basis of allegations of duress.
5 Published as an Annex to the Court of Appeal decision, per Tomlinson J, in Dawson v Bell  EWCA Civ 96,  2 BCC 59
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.