Doctrine of economic duress

Thus, more relevant for us becomes a question of efficiency and legal security of international trade operations, including those in the agricultural sector - the driving force of Ukrainian exports. When we talk about international trade, each lawyer would primarily rise a question of law, which should be applied to the agreement of the parties. Recently, more and more we get used to the fact that one or another agreement is a subject to the provisions of countries with the most sophisticated and effective legal system by far. The most striking example is the above-mentioned trade in agricultural products in general, and trade in grains and oilseeds in particular. Thus, 80% of world trade and, in my estimation, 95% of trade in grains and oilseeds from Ukraine are subject to English law, by the incorporation of standard contract terms of GAFTA and FOSFA.

Therefore, in this article I would like to touch directly upon the issues of international trade agreements that in its essence constitute the basis of relations between Ukrainian exporter and the foreign buyer or customer of goods and services in accordance with the rules of English law. In particular, narrowing the topic, I think it necessary to give an example of when this or that international agreement can be invalidated on the grounds of its conclusion under the influence of economic duress.

Although at first glance, this question is quite simple, wherein specific criteria of such duress may be distinguished and analyzed without much difficulty, in fact, recent case studies show the opposite. Anyone can become a victim, or without even realizing it, the initiator of such economic duress.

First, when exploring this subject, we are talking about legal actions made under the influence of duress, which limits true will and internal intentions of innocent person concerning the terms of the concluded agreement, which could eventually become a reason for cancellation of the contract and substantial losses and damages.

Ukrainian law at glance.

For comparison, it is especially interesting to see how Ukrainian Law explores issues of economic duress, what approach Ukrainian practice and doctrine have taken in this issue.

In this regard, it should be noted that the civil law provides a definition of economic duress, describing it as psychological or physical pressure and recognize it as violence (see Art. 231 of the Civil Code).  The notion of violence should be understood as any pressure that limits the freedom of one of the parties, aiming at inducement to commit certain actions, particularly in order to increase or decrease the price of goods, agree more favorable for the "aggressor" terms of delivery and other.

Giving analysis of modern Ukrainian court practice regarding the annulment of agreements concluded under the influence of violence, I conclude that the current understanding of Ukrainian judges is quite straightforward and provides limited opportunities for enforcement of Article 231 of the Civil Code, on assumption of the realities of modern trade relations particularly in an international context. This approach makes it impossible to protect fully the rights of persons affected by the pressure of its counterparty. Ukrainian court sets extremely high criteria for recognition of the agreement invalid. As a rule, it is a direct and real threat to human life and/or health, threat of dismissal, threat of financial and other sanctions.

The question arises how to deal with a situation when your counterparty requires, for example, reconsidering of the prices of goods under the contract, by threatening that otherwise he would have to cancel the contract or delivery of the goods? Will you be entitled to recognize additional agreements as null and void in future, including the price increase, even if you have agreed and signed them?

There are extremely serious doubts that under such conditions the innocent party will have real prospects in the Ukrainian court, initiating a claim for recognition of the transaction invalid.

Let us go ahead and presume that you have a similar foreign economic agreement you knowingly subjected to English law, such as it happens in contracts for the supply of agricultural products from Ukraine. You have faced with a same pressure, when the counterparty is threatening not to fulfil the contract and you are forced to agree to the proposed terms. Is it possible to challenge such a contract, by recognizing it invalid?

The continental system of law perspective.

The doctrine of economic duress has formed in continental legal system a long time ago. For example, major court cases[1] in England dated by the late 70's, early 80-ies.

Historically, until the formation of the current system, the practice of economic duress in England was similar in some ways, to the modern Ukrainian approach that defines duress as a violence and direct threats of physical or psychological pressure and as a rule, was qualified as a criminal offense. However, over time, the threat of violence in the continental system has been reformed into economic duress, acquiring more sophisticated meaning that makes it possible to recognize the agreement as invalid in the presence of, for example, the threat of not to deliver the goods or terminate the main agreement.

Thus, we approach to the key features and criteria of economic duress in the continental system. In general, the overall vision is to be formed as follows. If there is a threat in respect of a contract that can cause financial loss and there was no reasonable alternative actions for innocent party, such agreement shall be deemed invalid, for example:

Company A entered into an agreement to sell the Company B and further threatened to refuse delivery of the goods, if the latter will not agree to increase the price. Company B has no reasonable alternative in the market to buy a similar product. Having no other choice, Company B agrees to sign an additional agreement to increase price. Thus, the actions of the company A will be qualified as economic duress, and additional agreement to increase price shall be subject to invalidation.

Based on this example, we have an opportunity to outline two key criteria of the presence of economic duress in the actions of the seller:

First, there is a real threat to terminate the main agreement for the supply of goods;

The main reason for the conclusion of a supplementary agreement to increase price is a threat. It is necessary to establish a clear causal link between the threat and signed supplementary agreement. In addition, this threat must have additional features such as illegality and lack of principle of honesty in the actions of a person who is threatening. That is necessary to distinguish between illegal extortion and actual circumstances. For example, if the seller got in trouble and asks the buyer review the price, economic duress will not take place.

Secondly, the lack of alternative options, including the possibility of selling or buying a product on the market;

The court must examine whether the real alternative actions exist, including effective possibility of recourse to a competent court for a recovery of losses.

Of course, it would be irrational to provide a party with possibilities to avoid liability for default of contract at the slightest chance when the agreement was disadvantageous to the party. Therefore, particularly English courts treat such claims with a high degree of caution and often apply additional criteria confirming fact of economic duress existence.

Existence of parties’ objection on the proposed terms of the supplemental agreement shall be determined.

If the party voluntarily accepts the terms of the additional agreement on a price increase, without objection, the court may have questions about the true intention of the party. Has the party signed the agreement forcibly or voluntarily?

The theoretical approach is undoubtedly needed for a common understanding of the criteria and conditions of duress, but only practical experience provides us with real examples of enforcement. In reality, things could be different.

Practical experience.

Based on the above criteria, it may seem that it is rather difficult to satisfy these conditions. How to distinguish normal trade from economic duress? How these criteria are applied in practice?

The answers to those questions can be found in the case, which was recently reviewed by the Tribunal of GAFTA (Grain and Feed Trade Association) in London, which incorporates and subordinates, by an arbitration agreement, the aforementioned trade-related disputes in grain around the world and in particular with Ukraine.

The essence of the dispute was as follows. Seller signed a contract for the supply of goods on FOB, which presume the duty of the buyer to provide a vessel for loading. In due time for delivery, the seller states the buyer as follows:

"Our supplier refuses to deliver the goods, if the price will not be revised upward. Accordingly, we ask buyers to review the price of the contract between the seller and the buyer in order to be able to perform the contract”

Buyer, in its turn, not objecting to raise the price, gave their consent to increase the contract price, and therefore signed the additional agreement. Once the goods have been loaded on the ship, the buyer refused to perform the contract at the new price, paying only the price stated by the main contract. The seller, of course, being dissatisfied by shortfall of funds requested in GAFTA arbitration, requiring appropriate surcharge for delivered goods.

Buyer has given his objection to arbitration, arguing that additional agreement to increase the contract price was signed under the influence of economic duress and asked the Tribunal to recognize it invalid.

At first glance, seller’s actions comply with usual behavior in such situations. Thus, the seller did not require the buyer to increase price and not threatened to break the contract for failure to fulfill his requirements. The essence of the seller’s letter was simply to ascertain the fact of provider’s refusal to supply in case the price will not be revised. For its part, the buyer agreed to terms on a price increase without claiming any protests. In addition, under normal conditions, barriers to purchase alternative products on the market usually should not exist and if the conditions for price increase would not suit the buyer, nothing prevented the latter to "go to market" and purchase similar product.

However, GAFTA Tribunal came to the opposite conclusion, finding, in these conditions, the actions of the seller the presence of economic duress, satisfying the requirements of the buyer and finding additional agreement invalid.

The Tribunal’s motivation was the following. The Seller’s message requesting a review of the price of goods should be interpreted in conjunction with the supplier’s refuse to delivery. The Tribunal concluded that the seller used illegal duress of supplier in its favor, since the buyer realized that if the price is not raised, he could ultimately remain with no goods. That is, if the price of the contract were not increased, the goods would not be loaded. Thus, the seller’s letter was an act of unlawful pressure.

As to the possibility of buying an alternative product on the market, the tribunal decided that the evidence, including such from trading brokers, is not sufficient for the quick acquisition of goods, especially when it was determined that the product was needed in the short term.

Despite the lack of protest, the tribunal concluded that this criterion is not "vital" in the circumstances of this dispute, therefore it should not be used because the illegal pressure on the buyer and the lack of real alternatives is sufficient to declare the agreement invalid. Thus, the Tribunal accepted the seller’s position and satisfied the requirement for an additional contract cancellation and leaving for claim at its initial stage.

It can be assumed that majority of Ukrainian lawyers may be at least surprised by similar solutions, but as we see from the above example, despite the relatively high level of proving the criteria for recognition of the agreement invalid on the grounds of economic duress, in a real international trade disputes, arbitrators satisfy these claims easily.

Of course, it is necessary to take into account the fact that in essence the decision was made not by professional judges but trade arbitrators, which usually have only basic legal skills necessary for the highly specialized cases, particularly in the agricultural sector. However, in any case, such a case is an example of a common approach, used in continental system of law in matters of economic duress in contractual relations.

Ivan Kasynyuk

Partner, AGA Partners Law Firm

[1] Dimskal Shipping Co Ltd  v I.T.W.F [1981]; Occidental Worldwide Investment Corp v Skibs A/S Avanti [1976]; North Ocean Shipping Co Ltd v. Hyundai Construction Co Ltd [1979]; Pao On v Lau Yiu Long [1980]