Abstract
The common law concept of ‘duress’ occurs when someone is forced to act against their free will and the resultant consent renders the contract voidable. The effect of duress is not to make the acts of the victim involuntary, nor does it deprive him of his free choice, but leaves him with a “choice between evils”[1]. Traditionally, under the English law, duress only included an act or threat of violence or imprisonment, however, in recent times the wrongful or illegitimate threats to one’s economic interests in order to obtain his/her assent also comes under the preview of ‘duress’, where the victim has no practical alternative but to submit. Thus, there has developed a tremendous jurisprudence around the concept of “Economic Duress” both in English and Indian laws. This doctrine was first adopted as part of Indian law by the Bombay High Court in the leading case of Dai-ichi, 1992[2]. However, the correctness of the extent to which the decision of importing the doctrine in Indian law has been subjected to interpretations and scrutiny. This paper will discuss whether the scope of Sec. 15[3] of the Indian Contract Act, 1872 is wide enough to include the common law concept of economic duress.
Keywords: duress, economic, contract, coercion, undue, influence, reasonable, doctrine, pressure, unconscionable.
Introduction
“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…”[4] were the words of Lord Scarman while giving the Privy Council’s advice on the case of Pao On v. Lau Yiu Long, 1979[5]. Here Lord Scarman implicitly puts that free and mutual consent is a ‘sine qua non’ of a valid contract. It serves as the basis for the legal protection of all contractual promises. The consent of parties is said to be defeated and can no longer be regarded as “free” when it is subdued by an overpowering factor that robs the contracting parties of their freedom to contract. One such overpowering factor is that of Economic Duress.
The word ‘Economic Duress’ is not mentioned in the Indian Contract Act, 1872 (hereafter referred to as the Act) as it has evolved from the common law doctrine of ‘duress’. Simply put, it is said to be caused when one party, threatens the other party of serious financial consequences so as to obtain their acceptance in the contract. It arises when some ‘illegitimate pressure’ is put on one party, leaving them with no reasonable choice but to enter into the contract. This concept of economic duress, if proven, makes the contract voidable. Naturally, in Indian law, this doctrine comes under the purview of coercion and undue influence. Thus, a liberal reading of section 14 of the Act[6], which highlights the exhaustive list of the causal factors that affect the free will of the parties involved, lays down the scope of Economic Duress as a subset of these factors.
Review of Literature
Dhanuka J. in the case of Daiichi Karkaria v Oil and Natural Gas Corporation, 1992[7], observed that the common law concept of economic duress came under the scope of section 15 of the Act which talks about coercion. He further held that “I am in complete agreement with the principles of law to be applied in cases involving economic duress…. The above-referred principles are also relevant for interpretation and elucidation of law of coercion contained in Section 15 of Indian Contract Act, 1872”[8]. Since then, reading economic duress into section 15 under the scope of coercion has steadily become a part of the Indian law.
The treatise on Indian Contract Act by Sir Frederick Pollock and Sir Dinshah Mulla[9], argues that the foundations of the concept of Economic Duress in Indian law is not clear. It takes the case of Daiichi Karkaria v Oil and Natural Gas Corporation, 1991, which established the doctrine of Economic Duress in India, to show that how the Bombay High Court procedurally did not have to go into the matters pertaining to economic duress as the suit was for interim injunction which could only be decided on the grounds pf equity. Furthermore, the court discussed the effects of economic duress in interlocutory proceedings. Thus, Pollock and Mulla declares that the judgement delivered was not clear whether the duress renders the contract voidable for the lack of free consent or on the basis of public policy. It notes that “provisions of ss. 15 and 16 as defined in the Contract Act are not flexible to deal with the new emerging principles, whether of inequality of bargaining power, economic duress or unconscionability”[10]
Prof. (Dr.) S. Swaminathan in his paper “Coercion, Undue Influence, and Unconscionability in Indian Contract Law”[11] argues that the scope of section 16[12] of the Act is wide enough to include the concept of economic duress as it is in line with “pressure cases”. He contends that although ss 15 will indeed be non- flexible to the needs of economic duress, ss 16 of the Act would be wide enough if interpreted in the way envisioned by its drafters. He argues that the doctrine of economic duress cannot be applied to ss 15 of the Act unless it contingently coincides with the threat of committing an offence forbidden by IPC or detention of property. He cites the case of Universe Tankships of Monrovia v International Transport Workers Federation[13] to show that how the case came under the purview of mere coercion and not economic duress as the trade unions blocked the claimant’s ship which came directly under ‘detention’ of property. Therefore, he argues that undue influence under section 16 was the appropriate provision to deal with pressure cases.
Research Methodology
With the help of secondary sources such as books, websites, journals and articles along with my own interpretation of the matter, I conducted this doctrinal research project. The process involved researching and analyzing various sources to finally presenting my own interpretation in mapping the scope of economic duress in Indian Contract Law.
Scope of Economic Duress in Indian Contract
The idea of economic duress was introduced in the common law in the 1976 through the case of Occidental Worldwide Investment Corporation v. Skibs[14]. In this case, the defendants rented two vessels from the defendant. The defendants warned the plaintiffs that if the charter fee was not reduced, they would go bankrupt. This claim was in fact entirely false. The claimants were worried that if the defendants did go bankrupt, they would lose significant amounts of money that were owed to them by the defendant. As a result, the claimants consented to reduce the contract’s charter price. The court held that it was not a case of economic duress as there was no coercion of will to vitiate the contract. Thus, the court observed that mere commercial pressure was not sufficient to avail the remedy of economic duress to make the contract voidable.
There are three basic ingredients of economic duress that makes the application of the doctrine narrower. Firstly, an act of one party must create a sense of compulstion in the minds of the other party, leaving them with no “reasonable” choice but to enter into the contract. Secondly, the pressure applied on the other party must be “illegitimate”. Lastly, the illegitimate pressure must be causally linked to the other party’s consent to the contract. Thus there must be an active attempt to coerce the free will of the other party by exerting illegitimate influence on them. This raises the question whether economic duress amounts to coercion or undue influence?
This juxtaposition was solved in the English Law by the leading case of Pao On v. Lau Yiu Long, 1979[15]. The plaintiffs were owners of all the shares of a company (Shing On) while the defendants were majority shareholder of another company (Fu Chip). Lau and Pao decided to swap their company shares for the building rather than simply selling it for cash. All of the shares of Shing On were purchased by Fu Chip, and Pao was compensated with 4.2 million shares of Fu Chip. On Lau’s request, Pao committed not to sell 60% of the shares for at least a year in order to prevent a shock to the share price of Fu Chip. Pao then realized that the price would remain set and he would not receive the gains if the share price increased by more than $2.50 during the year. He then insisted that in its place, Lau would only reimburse Pao in the event that the share price dropped below $2.50. Lau argued that it was not possible due to two reasons. Firstly, there was no fresh consideration as only past consideration with pre- existing duty existed and secondly, the consent was obtained under economic duress.
Although the judicial committee of the Privy Council held that mere commercial pressure was not a reason to prove economic duress, the words of Lord Scarman implicitly placed economic duress under the scope of coercion. Lord Scarman observed that “There must be present some factor ‘which could in law be regarded as a coercion of his will so as to vitiate his consent…”. The case established the ‘Pao On test’ to determine the presence of such economic coercion. Thus, the courts must consider the following factors while deciding such cases. Firstly, the party alleging economic duress ‘protested’ at the time of entering into the contract. Secondly, whether the party alleging duress had some ‘alternative course of action’ available to him. Thirdly, whether the party alleging duress had some amount of ‘independent advice’ on the matter. Lastly, whether the party alleging duress took any steps to avoid the contract after entering it. These guidelines had comfortably put the common law concept of economic duress under the scope of coercion in 1979.
Subsequently, in the case of Universe Tankships Inc of Monrovia v International Transport Workers’ Federation, 1983[16], Lord Diplock while giving majority opinion held that not only coercion, but also ‘illegitimate pressure’ was required to constitute economic duress. In this case, the plaintiff’s ship (The Universe Senital) was blacked by the defendant (a trade union) while docked at a port of Milford Haven. Blacking means that the ship was restricted from moving from the shore. The plantiff agreed to the demands of the trade union and paid a large sum of money as back wages and futher additional amount to the trade union’s welfare fund in order to release its ships from blacking. This was done out of fear of economic consequences of being trapped at the port. This case effectively shifted the notion of economic duress from the ‘coercion of free will’ of the victim to the ‘illegitimacy of pressure applied’ by the defendant.
Lord Diplock (majority with Lord Russel and Lord Cross) held that the ship owner (plaintiff) agreed to the trade union’s (defendant) terms under the condition of duress. The court observed that illegitimate commercial pressure was applied by the defendants which therefore constituted economic duress. However, Lord Scarman, who delivered the judgement in the leading case of Pao On v. Lau Yiu Long, dissented from the views of Lord Diplock. Lord Scarman observed that the pressure exerted by the trade union was in fact legitimate and did not constitute economic duress. However, a liberal reading of the case shows us that it was never a case of economic duress but was that of mere coercion. As argued by Dr. S. Swaminathan, the blacking of plaintiff’s ship by the defendant constituted as “detention of property” and thus by its very definition, the matter was of coercion. It was upon the courts to decide whether the detention of the ship was lawful or unlawful according to the local trade laws[17].
In Indian law, the doctrine of economic duress was accepted by the Bombay High Court in the case of Dai-ichi Kakaria v. Oil and Natural Gas Company, 1991[18], by reading it into section 15 of the Act. In this case, the Oil and Natural Gas Corporation of India, which received materials from the claimant, demanded that the latter sign a bank guarantee, which was a deviation from an earlier understanding between the parties. The claimant signed the guarantee because refusing to do so would have resulted in the Corporation cancelling sizable orders from the claimant. According to the claimant, the bank guarantee was signed under financial pressure because having the Corporation cancel future purchases at that point would have meant definite financial losses. It was held that economic duress took place when the plaintiff was forced to agree to the stipulation of signing the bank guarantee. It was further held that ONGC took unfair advantage of the situation knowing that the threat to break the contract would leave the plaintiff with severe economic challenges.
In this case of Dai-ichi, the court observed that occasionally it may occur that only a specific clause in a contract is tainted by coercion or fraud and not the entire transaction. In these circumstances, the victim of duress is free to impugn on the portion of the transaction or even a specific clause that was added to the contract through coercion. In certain circumstances, the duress victim may request an injunction to prevent the enforcement of the contested provision that the other party imposed on him using economic duress without reversing the entire transaction. Dhanuka J. held that “The above-referred principles are also relevant for interpretation and elucidation of law of coercion contained in Section 15 of Indian Contract Act, 1872”[19]. However, as argued by Dr. S. Swaminathan, section 15 of the Act cannot accommodate the doctrine of economic duress unless it contingently coincides with an act or threat to do an act forbidden by IPC or detention of property[20].
In the case of Puri Construction P. Ltd. and Ors. v. Larsen and Toubro Ltd. and Ors.[21], it was argued whether the common law concept of economic duress can come under the scope of unconscionable bargain under section 16 (3) of the Act which states that “Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable...”[22]. the court held that although economic duress is read under the definition of coercion, it could also arise out of situation where one party is in a position so as to dominate the will of the other party to obtain unfair advantage over them. This directly comes under section 16 of the Act which defines undue influence. However, the court also observed that invocation of economic duress under section 16 requires the pre-condition of proving one party can in fact dominate the will of another in the given situation. The presence of a real and visible power of one party over the other is essential because an unconscionable bargain is only evident when one party is in a comparative advantage over his counterpart.
The scope of the doctrine of economic duress in Indian law can also be extended to the exception of “public policy”. In the case of Jaipal v. State of Haryana[23], the court observed 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”[24]. Here the court understands economic duress as a factor not only affecting the free will of the person, but also affecting public policy under section 23 of the Act. This section defines what considerations and objects are lawful and unlawful by giving the court the power to make contracts voidable if “the Courts regards it as immoral, or opposed to public policy”[25]. This view by the court was interesting in the sense that it extends the scope of the doctrine of economic duress to not only coercion and undue influence, but also ‘immoral’ and opposed to public policy of the State.
Conclusion
At first appearance, the concept of economic duress seems to be a startling illustration of the broadness and equitable framework of the contract law. However, this substantive philosophy of economic duress is riddled with many flaws. The idea of economic duress has become increasingly well-known over the past few years and now plays a crucial part in the negotiation and execution of business agreements. Generally speaking, the subjective nature of its use entails ambiguity and improper discretion. The idea has been viewed in some instances as an extension of the doctrine of coercion[26] and in others as an extension of undue influence[27]. In some cases, it has also been seen as a part of fraud[28] and public policy[29]. The distinction between “commercial pressure” and “economic duress”[30] is plagued by doubt both conceptually and legally due to the lack of precise objective criteria. Clarity in this area of Indian jurisprudence would guarantee that contracts are negotiated with contractual integrity and inject a better level of impartiality into such case determination.
Adityaa Agarwal
B.B.A. LL. B (Hons.)
Jindal Global Law School (JGLS)
[1] Lynch v DPP, Northern Ireland 1975 AC 653, 690.
[2] Dai-Ichi Karkaria Private Ltd. vs Oil & Natural Gas Commission, AIR 1992 Bom 309.
[3] Indian Contract Act, 1872, § Section 15, Acts of Parliament, 1872 (India)
[4]Pao On v. Lau Yiu Long [1979] UKPC 17.
[5] Ibid.
[6] Indian Contract Act, 1872, § Section 14, Acts of Parliament, 1872 (India).
[7] Dai-Ichi Karkaria Private Ltd. vs Oil & Natural Gas Commission, AIR 1992 Bom 309.
[8] Ibid.
[9] 16 N Bhadbhade (ed), Pollock and Mulla: Indian Contract Act 1872 (14th edn, Nagpur: Lexis Nexis Butterworths Wadhwa, 2012) 355.
[10] N Bhadbhade (ed), Pollock and Mulla: Indian Contract Act 1872 (14th edn, Nagpur: Lexis Nexis Butterworths Wadhwa, 2012) 355
[11] Swaminathan, S. Coercion, undue influence, and unconscionability in Indian contract law. Available at: http://pure.jgu.edu.in/id/eprint/5476/3/oso-9780192859341-chapter-7.pdf (Accessed: 15 June 2023).
[12] Indian Contract Act, 1872, § Section 16, Acts of Parliament, 1872 (India).
[13] Universe Tankships Inc. of Monrovia v. International Transport Workers’ Federation [1982] 2 All ER 67
[14] Occidental Worldwide Investment Corporation v. Skibs [1976] 1 Lloyd’s Rep. 293.
[15] Pao On v. Lau Yiu Long [1979] UKPC 17.
[16] Universe Tankships Inc. of Monrovia v. International Transport Workers’ Federation [1982] 2 All ER 67
[17] Swaminathan, S. Coercion, undue influence, and unconscionability in Indian contract law. Available at: http://pure.jgu.edu.in/id/eprint/5476/3/oso-9780192859341-chapter-7.pdf (Accessed: 15 June 2023).
[18] Dai-Ichi Karkaria Private Ltd. vs Oil & Natural Gas Commission, AIR 1992 Bom 309.
[19] Ibid.
[20] Swaminathan, S., supra note at 17.
[21] Puri Construction P. Ltd. and Ors. v. Larsen and Toubro Ltd. and Ors, AIR 1989 SC 777.
[22] Indian Contract Act, 1872, § Section 16 (3), Acts of Parliament, 1872 (India).
[23] Jaipal v. State of Haryana 1988 AIR 1504.
[24] Ibid.
[25] Indian Contract Act, 1872, § Section 23, Acts of Parliament, 1872 (India).
[26] Dai-Ichi Karkaria Private Ltd. vs Oil & Natural Gas Commission, AIR 1992 Bom 309.
[27] Puri Construction P. Ltd. and Ors. v. Larsen and Toubro Ltd. and Ors, AIR 1989 SC 777.
[28] Shaarc Projects Ltd. v. Indian Oil Corporation Ltd. W.P. LD VC No. 379 of 2020.
[29] Jaipal v. State of Haryana 1988 AIR 1504.
[30] Pao On v. Lau Yiu Long [1979] UKPC 17.