You plonker, Rodney! Lawful act economic duress in construction
Here is a common situation in the construction industry: a contractor (let’s call him “Del Boy”) engages a sub-contractor (who we’ll call “Rodney”) to work on a project to refurbish Nelson Mandela House (“NMH”). During the course of NMH, Del Boy instructs Rodney to carry out additional work. (One example being to install a large chandelier in the lobby of Nelson Mandela House.) In accordance with the contract, Rodney includes a number of variation claims in his payment applications. During NMH, the valuation of the variations is never properly resolved, with Del Boy making low “on account” payments and dodging any discussion or meeting with Rodney to resolve them fully.
Towards the end of NMH, Del Boy asks Rodney to tender for a second project, being the fit-out of the Nags Head Pub (“NHP”). NHP would be a substantial undertaking for Rodney. Rodney duly submits his tender, which he has priced keenly with a view to continue his relationship with Del Boy. After some initial discussions between the parties, it appears that Rodney’s bid is competitive. He is therefore hopeful of winning the contract for NHP.
Shortly after, Rodney submits his final account for NMH to Del Boy, containing the unresolved variations, which make up a significant chunk of the overall account. During the final account meeting, Del Boy tries to negotiate a significant reduction on the unresolved variations. Rodney initially resists, although he is mindful that he has lost some commercial leverage now that NMH is complete. Del Boy then says “I won’t award you NHP unless you waive the unresolved variations on NMH”. Rodney reluctantly agrees.
Some months later, Rodney is reflecting on his dealings with Del Boy. Due to the agreement regarding the variations, NMH just about broke even. Rodney has encountered material and labour shortages on NHP meaning it is currently running at a loss. In summary, Rodney is in a perilous position due to the pressure that Del Boy exerted on him. The question is, does Rodney have the right to rescind the contract for NHP due to Del Boy’s economic pressure (or, in legal terms, duress)?
In Pakistan International Airline Corporation v Times Travel (UK) Ltd  UKSC 40, the court considered the issue of economic duress in a similar situation to that between Del Boy and Rodney (albeit in the context of a contract to provide airline tickets and not a construction project).
The court said that the elements for a claimant to meet in order to show a right to rescind a contract entered into by economic duress are as follows:
- The threat or pressure made by the defendant must have been illegitimate;
- The threat or pressure must have caused the claimant to enter into the contract; and
- The claimant must have had no reasonable alternative to giving in to the threat or pressure.
In relation to “illegitimate pressure” at point (1) above, the court said that pressure applied in negotiations – what the court described as the “rough and tumble of commercial bargaining” - will rarely be categorised as illegitimate or unconscionable.
Let’s return to Del Boy and Rodney. Applying the test from PIAC v Times Travel above:
- It is unlikely that Del Boy’s statement (“I won’t award you NHP unless…”) would cross the line into illegitimate pressure, as it was said whilst the parties were negotiating NHP;
- From the facts above, Del Boy’s statement was the cause of Rodney entering into the contract for NHP; and
- Rodney seemingly did not have no reasonable alternative. He could have refused Del Boy’s offer and not entered the contract for NHP.
In summary, whilst Del Boy’s statement caused Rodney to enter into the contract for NHP, Rodney would not have the right to rescind it for economic duress. The result may have differed in a situation where Del Boy’s pressure was illegitimate (for example if he had hinted at withholding practical completion on NMH for spurious alleged defects) and Rodney had no reasonable alternative (although in a fertile market such as construction this would be hard to prove).
As the court pointed out in PIAC v Times Travel, lawful act economic duress is extremely rare in the context of commercial dealings. As to Rodney’s situation, prevention is preferable to cure, and his best strategy would have been to robustly negotiate the account for NMH before moving on to pre-contract discussions for NHP. However, the economic duress will be much easier to prove where the threat or pressure is unlawful. (One example would be a threat to breach the contract, such as deliberately withholding retention due to gain commercial leverage.)