Economic duress – what it is, and what it is not

Customers in disputes with their lender often raise economic duress in circumstances where a lender attempts to take enforcement action. The potential ramifications are significant because a successful claim of economic duress can render the relevant agreement voidable. However economic duress is not simply the application of economic pressure applied by one contracting party over another. This article considers what economic duress is, and what it is not.

We were recently faced with a case in which the Customer of our lender client asserted that releases given by him and his related corporate entities to the lender were voidable on the basis that they were obtained as a result of economic duress. The relevant facilities were not subject to the Consumer Credit protections and the Customer was alleging duress at common law.

What is (and what is not) economic duress?

In simple terms, duress at common law requires that the offending party to an agreement uses illegitimate pressure to force the other party to enter into an agreement (or modify an existing agreement) as a result of which the offending party obtains a benefit.

A successful claim with respect to economic duress can render the relevant agreement voidable.

Economic duress is often asserted together with undue influence and unconscionable conduct as there can be some overlap, depending on the conduct alleged. Nonetheless, there are important differences.

In simple terms, unconscionable conduct is focused on the quality of the conduct of the offending party but duress is assessed by reference to the effect of the pressure applied by the offending party.

Undue influence is more keenly focussed on the quality of the consent of the “weaker” party (with equity helpfully presuming influence in certain relationships). For those interested in further reading we recommend the discussion of undue influence and unconscionable conduct in the joint judgment of Chief Justice Keifel, together with Justices Bell, Gageler, Keane and Edelman in Thorne v Kennedy [2017] HCA 49.

What is required to prove a claim of economic duress?

Historically, the early common law doctrine required that in order for the relevant agreement to be voidable, there must be an unlawful threat or conduct in relation to a person’s body.

Threats to a person’s goods were not sufficient to render the agreement voidable but were sufficient to amount to duress and could be used to support an application for restitution.

In more recent times the common law doctrine of duress is not so restrictive and the doctrine has been taken beyond threats of physical harm and includes not only unlawful threats, but lawful threats or conduct which are considered to be illegitimate.

The key features of economic duress include:

1. 1. Illegitimate pressure;
   2. Inducement / coercion (which is only relevant if there has been illegitimate pressure);
   3. Benefit to party who applied the illegitimate pressure; and
   4. No reasonable alternative – that is, the consequence of resisting the illegitimate pressure. [1]

Illegitimate pressure, inducement and the existence of reasonable alternatives

The most obvious and clear cut type of illegitimate pressure is that applied by means of unlawful conduct. For example, threats of harm to a party’s physical person or to destroy physical assets which would, of course, be illegitimate pressure.

As a general rule, if a lender refuses to enter into an agreement with a Customer without the inclusion of certain terms which are designed to achieve legitimate commercial objectives (for example, the making of a financial profit), that should not be considered illegitimate pressure.

Whether or not the pressure is ‘illegitimate’ is a matter of law. Whether or not the illegitimate pressure was a factor which induced the party to enter into the relevant agreement is a question of fact.

With respect to illegitimate pressure and inducement, the Courts have held that:

1. 1. “pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct…”[2];
   2. “it is unnecessary…to prove that the illegitimate pressure was the sole reason for him entering into the contract. It is sufficient that the illegitimate pressure was one of the reasons for the person entering into the agreement…”[3];
   3. “Relief will not be granted, however only on the basis of an inequality, even a great inequality, of bargaining position. Relief may, however, be appropriate when the disparity was substantially brought about by the other party’s antecedent conduct. The exploitation of the inequality could then be described as ‘unconscientious’…”[4];
      “It is not, however, that the inequality of bargaining position, or the reason for its creation, which is the essence of the action – it is the pressure brought to bear and its wrongfulness: “There must be pressure the practical effect of which is compulsion or the absence of choice”…”[5];
   4. Duress requires pressure that is “regarded by the law as unacceptable…[which] are various and indefinite and the categories are not closed”;
   5. “When the relationship between the parties is that of debtor and creditor, a threat by the creditor to institute legal proceedings or to pursue another legal remedy in order to recover the debt could seldom be wrong in itself… the proper use of legal process does not constitute duress… A bona fide threat by a secured creditor to exercise rights conferred by the security can scarcely be relevantly different from a bond fide threat to sue”[6]; and
   6. With reference to a settlement agreement which was a genuine compromise of legitimate contending claims, that:
      a. “the rough and tumble of the pressures of normal commercial bargaining” is not the same as illegitimate pressure[7];
      b. It was necessary to determine if a party had acted in good faith or bad faith in distinguishing between the “rough and tumble pressure” and illegitimate pressure.

Conferring of a “benefit”

The Collins dictionary defines “benefit” as the “help” or the “advantage” that results from something.

The Courts have been very clear that in this context that, “benefit” is to be given a very broad meaning.

It would certainly include releasing a lender from claims that the Customer may have had against the lender, which was the position in our case.

Summary in our case

In our case, the evidence demonstrated that there was no illegitimate pressure which was sufficient of itself to dispose of the economic duress claim. However, the Court went on to consider that even if there had been illegitimate pressure, on the Customer’s own evidence, he felt that he had the option not to execute the relevant documents.

Further, the Customer’s evidence was that he was not aware that the relevant releases were in the relevant documents and therefore the Court determined that he could not have been under pressure (illegitimate or otherwise) if he was unaware he was giving the releases.

[1] Hingst v Construction Engineering (Aust) Pty Ltd (No 3) [2018] VSC 136 per Zammit J.

[2] McHugh JA (Samuels and Mahoney JJA agreeing) in Crescendo Management v Westpac (1988) 19 NSWLR 40 at 45-46 (*NB unconscionable conduct is an act that is considered so unreasonable that it defies good conscience – it must be more than simply unfair – it must be outside of what is acceptable in societal norms – examples usually relate to taking advantage of a person operating under a disadvantage or disability – for example, the document is not in a party’s first language; the party is mentally ill etc – obviously the disability must be evident to the other party – however, wilful blindness won’t fly).

[3] Ibid.

[4] Keifel J (Northorp and Lindgreen JJ agreeing) in Westpac Banking Corporation v Cockerill (1998) 152 ALR 267 at 290.

[5] Ibid at 292 quoting from Universal Tankships Inc of Monrovia v International Transport Workers’ Federation [1983] 1 AC 466 at 400.

[6] Tadgell JA (Batt JA agreeing) in McKay v National Australia Bank Ltd [1998] 4 VR 677.

[7] Mitchell v Pacific Dawn Pty Ltd [2011] QCA 98 at [50] -[52] (Fraser JA, Chesterman JA and Ann Lyons J agreeing).

Authored by: 

Kimberley Arden, Partner

Judith Hishon, Senior Associate