ECONOMIC DURESS AND ITS EFFECT ON CONTRACTUAL OBLIGATIONS IN INDIA
ECONOMIC DURESS AND ITS EFFECT ON CONTRACTUAL OBLIGATIONS IN INDIA
Prof. (Dr.) Sairam Bhat, Professor of Law, NLSIU
Ms. Lianne D’Souza, Research Fellow, CEERA.
Economic Duress: An Overview
“Justice requires that men, who have negotiated at arm’s length, be held to their bargains unless it can be shown that their consent was vitiated…” – Lord Scarman.
Implicit in this statement by Lord Scarman is the axiom that consent is a necessary element of a contract. Mutual consent of the parties, which necessarily must be free consent is sine qua non of a valid contract. It is a foundational pillar upon which the legal sanction for contractual promises is buttressed. When the consent of parties is subdued by some overbearing factor which deprives the contracting parties of their freedom to contract, their consent is said to be defeated and can no longer be regarded as ‘free’. One such factor which has gradually expanded over time, gaining increased recognition, is that of economic duress.
Economic Duress is an extension of the classical common law doctrine of ‘duress’. Simply put, ‘duress’ refers to undue pressure exerted on the will of a contracting party. It may be regarded as the umbrella term which may manifest in three forms; duress to person, duress to goods and economic duress. In the early stages of common law, duress was only limited to threats to life or limb. As it emerged as a by-product of placing contractual controls on crimes and tort, threats to business of proprietary interests were not contemplated within its ambit. However, with the liberal construction of common law principles, duress was no longer limited to cases of threats to the person or goods. Rapid industrialisation demanded for a new category of duress that would account for inequities in the commercial sphere. Courts started recognising threats to economic or commercial interests as effective means of coercing unfair agreements. Thus, the recognition that financial/business compulsion or economic pressure could vitiate the consent to contract paved way for the modern notion of economic duress.
Crudely put, economic duress involves a manipulation of the will of a person to do or not to something adverse to his commercial interests, which vitiates the consent of a party. It is characterized as ‘an unlawful coercion to perform an act by threatening financial injury at a time when one cannot exercise free will.’ It turns upon whether the commercial pressure exercised by one party on the other was such as to vitiate the other party’s consent by coercion of his will. In the leading case of Pao On v. Lau Yiu Long, the Court laid down specific criteria to constitute economic duress in an attempt to provide an objective definition. The Court stated that “the commercial pressure alleged to constitute economic duress must be such that the victim must have entered the contract against his will, must have had no alternative course open to him, and must have been confronted with coercive acts by the party exerting the pressure”. Thus, any finding of economic duress must rest not only on the exclusion of consent but on the conjunction of pressure and lack of specific choice.
From a peripheral observation, the notion of economic duress may share similarities with that of undue influence in contractual negotiations. Both concepts involve persuasion through improper conduct arising due to the relationship between the parties. However, the former differs the latter on the ground that unconscionable bargain induced by economic duress is a possibility even between the parties who may not in economic terms be situate differently. The defence of undue influence offers protection to persons of mental or physically inadequacy where their capacity to contract need not be justified through some violation, or threatened violation, of a tort or crime. But, in the case of economic duress, a threat of sorts, which constitutes an illegitimate action must be necessarily present. It is not sufficient that the extraction of some economic or financial gain results from the disproportionate standing or relationship of the parties. Rather, what is essential is the inequity of the act consists in compelling a person to do what he does not want to do.
Economic Duress v. Commercial Pressure
A recurring issue that has often cropped up in laying the law relating to economic duress is the distinction between economic duress and mere commercial pressure. In the business world, commercial pressure is often a corollary of unequal bargaining power between parties. Ordinarily, courts will not venture into questioning the validity of contracts negotiated as a result of commercial pressure or business compulsion. This is because of the trite reality that there can never be perfect bargaining equality between parties and the mere existence of variances in bargaining power can never be a valid ground to vitiate an agreement between parties. This being said, there are instances where inequality in bargaining power may be thwarted through improper conduct and for ulterior motives so as to vitiate the animus contrahendi of parties. In such situations, it becomes imperative for the courts to step in and restore the sanctity of contracts.
While the concepts of economic duress and commercial pressure have a very fine line of difference, many judicial attempts have been made to distinguish the two on certain objective criteria. The first of such attempts was evident in the formulation of the ‘Coerced Will’ or ‘Overborne Will’ theory through a trilogy of case laws in the late 1970’s. As the name suggests, this theory recognises commercial pressure as a vitiating factor if it results in the coercion of the will of the party to consent. According to the theory, the true determinant for distinguishing economic duress from mere commercial pressure is the ‘voluntariness’ of the plaintiff in concluding the contract. The compulsion to consent must be such that the victim must have been deprived of his freedom to exercise his will. Even if the consent of the victim is apparent in concluding the contract, the consent was not a voluntary act. ‘Voluntariness’ was therefore the objective criterion laid down to distinguish economic duress form commercial pressure. However, this criterion appeared to be too crude. The indeterminacy of voluntariness in each case gave rise to more perplexity than clarity. The subtlety in the notion of ‘voluntary’ appeared to be problematic as its application in cases lacked certainty. Critics of this theory also refuted its authority by stating that this test was nothing more than the old test of duress; only transpiring in commercial matters.
To plug the gap in this test, a different test was developed which added a new and rather sophisticated criterion – ‘illegitimacy of pressure’. The ‘illegitimate pressure’ test postulated that the real determinant of duress in economic sphere is not commercial pressure, which is invariably present in commercial dealings, but it is the nature of the pressure. It does not suffice that the will of the plaintiff be overborne by coercive action. Rather, the coercive action must be ‘wrongful’ or ‘illegitimate’. According to this test, commercial pressure would amount to economic duress if three basic elements are proved; (1) that some illegitimate means of persuasion was used; (2) that a causal relationship existed between the illegitimate conduct and the plaintiff’s response; and (3) that the plaintiff’s response was self-conscious and he acted as he did because he was forced to do so. The import of this element of illegitimacy is based on the presupposition that “The apparent consent of the plaintiff was induced by pressure exercised on him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable”. Therefore, the very fact that the conduct of the defendant was improper or illegitimate in the eyes of the law warrants that the commercial pressure so exerted is one that vitiates the consent of the plaintiff and thus amounts to economic duress.
The test of ‘illegitimate pressure’, in its essence, continues to hold good till date. However, over a course of judicial developments a new element – ‘absence of an alternative remedy’ – was embroidered into the test, giving way for greater objectivity. Also known as the ‘But for Test of Causation’, this test differentiated commercial pressure from economic duress on the ground that in the case of the latter, the consent of a victim is obtained almost voluntarily because he has no other choice or alternative remedy. The claimant submits to the pressure because has no other practical alternative available but to consent. The rationale of economic duress is to discourage or prevent an individual in a stronger position, usually economic, from abusing that power by presenting an unreasonable choice of alternatives to another person in a weaker or more vulnerable position, in a bargain situation. The nexus between the absence of free will and the impropriety of the alternative presented would thus give way for economic duress.
Law relating to Economic Duress in India
In the Indian discourse on contractual law, economic duress as a legal concept finds its place in Chapter II of the Indian Contract Act, 1872. A perusal of Section 14 of the Act highlights an exhaustive list of causal factors that vitiate free consent in contracts. The section defines ‘free consent’ with reference to the existence, or rather non-existence, of five explicit causes which affect free consent. Implicit in the exhaustive nature of this definition is that no other cause can debase the parties’ consent to contract. Even if by fact the consent is not free, it is presumed to be de jure ‘free consent’, for want of the five vitiating elements. Interestingly, although the Indian Contract Act, 1872 does not expressly recognise economic duress as a vitiating factor, this concept has been woven into the fabric of Chapter II of the Act through a liberal interpretation of the provisions contained therein.
A perusal of cases that delve into a discussion on economic duress highlights that there is no rule of universal application indicated by the courts in this regard. As the Indian legal framework on contracts by and large reflects the principles evolved in common law, the law on economic duress is also largely based on English precedents that discuss the same. Therefore, for all practical purposes the Indian Courts have not strayed too far away from the interpretation adopted by the English courts. The law, as enunciated through judicial decisions, categorises economic duress within the sweep of coercion, as duress, regardless of the form it takes, is nothing but a coercion of the will to vitiate consent.  The general rule adopted in this interpretation is that commercial pressure or business compulsion would amount to economic pressure if two key ingredients are fulfilled i.e. (1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted. The litany of cases that interpret economic duress akin to coercion postulate that economic duress encompasses the basic elements of coercion i.e the combination of illegitimate pressure and absence of practical choice. It is ultimately coercion of his will so as to vitiate consent, albeit for commercial or economic advantage. Therefore, a plea of economic duress is nothing but an expansion of the exceptional vitiating factor of coercion under Section 15 of the Indian Contract Act.
A relevant point for enquiry that has emerged in the discussions relating to economic duress is whether the concept can be invoked as a means of unconscionable bargain under Section 16(3) of the Indian Contract Act. In the case of Puri Construction P. Ltd. and Ors. v. Larsen and Toubro Ltd. and Ors. the Court answered this in the affirmative. It noted that even though economic duress is a recognized head answering the description of “coercion”, economic coercion arising from a situation where the relation subsisting between the parties is such that one of them is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other, will fall within the meaning of Section 16 of the Indian Contract Act. However, an invocation of Section 16 to support a claim of economic duress is based on certain pre-conditions. A claim of economic duress under Section 16(3) of the Act will sustain provided one party is proved to dominate the will of the other. As unconscionable bargain is evident where one party is in a comparatively advantageous position than his counterpart, the existence of a real and apparent authority of one party over the other is imperative. Therefore, although economic duress may be regarded as a means of unconscionable bargaining, it can only be restricted to cases where the parties are unequally situated.
Notably, the Indian Courts have taken the liberty to stretch this doctrine of economic duress by including it within the sweep of the ‘public policy’ exception. In the case of Jaipal v. State of Haryana, the learned Single Judge quite distinguishingly pointed that “transactions, which are unfair and unconscionable and caused by economic duress, cannot bind the petitioners, even if they were not under undue influence or coercion. The Courts have to strike down such terms on the ground of public policy.” Of much importance in the observation of the Court is the fact that economic duress is not contemplated as a factor vitiating consent but that which affects public policy under Section 23 of the Act. This implied that even though the contract stands undefeated for want of animus contrahendi, its validity may be affected on the touch stone of public policy. This goes to show that economic duress is a broad concept that need not be restricted to an inquiry into consent of parties.
In terms of the effect of economic duress on a contract, economic duress renders a contract voidable and not void. Underlying this is the fact that duress results in the impairment of consent and not in the absence of it. Duress, be it economic or not, gives room for compromise. A victim of economic duress may often submit to the illegitimate pressure simply because his commercial interests would be best served by consenting to the contract. The party whose consent was vitiated by duress may allow for honest claims in the contract by agreeing to vary the terms. In such situations, it would be more practical for the party under threat to renegotiate the terms of the contract after the illegitimate pressure is put to rest rather than reduce the contract to a nullity. In the case of Dai-ichi Karkaria Private Ltd., Bombay vs. Oil and Natural Gas Commission Bombay and Ors., the Court observed that sometimes it may happen that the entire transaction in a contract is not vitiated by duress or fraud but only a particular stipulation is vitiated. In such situations, it is open to the victim of duress to impugn the part of the transaction or even a particular stipulation which was incorporated in the contract by use of duress. Similarly, whenever duress results in a varied contract, the victim of duress may refuse to abide only by the new term introducing the variation. In certain situations, the victim of duress may seek an injunction restraining enforcement of the impugned term imposed on him by the other side by use of economic duress without setting aside the entire transaction. Therefore, to rectify this impairment, the contract may be declared void only at the instance of the party whose consent was impaired.
From a cursory glance, the doctrine of economic duress appears to be a striking example of the expansive and equitable framework of contract law. Having gained increasing recognition over the past five odd decades, the concept of economic duress has come to play a vital role in the negotiation and conclusion of commercial contracts. This being stated, as a substantive doctrine, economic duress is fraught with many shortcomings. Principally, the indeterminacy of its objective application invokes vagueness and excessive discretion. In some cases, the concept has been interpreted as an extension of the doctrine of coercion, whereas in others, an extension of fraud. This invokes uncertainty in the predictability of cases. The lack of strictly objective criteria in differentiating ‘commercial pressure’ from ‘economic duress’ also leaves it afflicted with uncertainty at a conceptual as well as jurisprudential level. With specific reference to the Indian legal framework, many questions are left unanswered. For one, the comparative infancy of the doctrine gives rise to imprecision of its scope. For instance, the plethora of cases that summarily discuss this concept does not clearly lay down whether the element of ‘illegitimacy’, which is the key to identifying economic duress, must corelate to only the conduct of the party, the means of imposing pressure/coercive action or the result of the pressure. Secondly, the array of cases does not clarify whether economic pressure must be illegal or merely unlawful by virtue of moral turpitude. Clarity in this regard would not only infuse a higher level of objectivity in determining cases but will also ensure contracts are negotiated on contractual integrity.
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 Shaarc Projects Ltd. v. Indian Oil Corporation Ltd. W.P. LD VC No. 379 of 2020, (Decided on 17.09.2020 – BOMHC) :