An Opportunity Saved: Duress in the High Court of Australia: Verve Energy

By Professor Elise Bant

Verve Energy Case Page

Some may regard the recent High Court of Australian decision in Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7 (Verve Energy) as a missed opportunity to clarify the doctrine of duress. The basic elements of duress are straightforward: the plaintiff must have been (1) subjected to illegitimate pressure which (2) caused the plaintiff to confer a benefit on the defendant (see Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 45–6 (McHugh JA)). However, the boundaries of the doctrine are highly controversial. Verve Energy seemed to provide the opportunity to examine some of these controversies, in particular the operation and boundaries of so-called ‘economic duress’ and whether ‘lawful act duress’ is anything other than a legal oxymoron.

Why did the High Court not consider duress?
As it was, Verve Energy was decided on contractual principles. Specifically, a majority of the High Court held that the respondent Woodside had not breached any contractual duties to Verve in the light of the Court’s interpretation of key contractual provisions. It was conceded by the parties that this rendered consideration of the duress case unnecessary (at [33]). This narrow approach to deciding the case, however, leaves the door open for the Court to consider the duress issues afresh, and on the basis of full and proper argument, in due course. In the meantime, the Court of Appeal decision insofar as it relates to duress remains a valuable addition to the body of authority on this important area. Furthermore, certain characterisations of duress made in argument before the High Court that, if accepted, would have substantially altered the nature of duress in Australia, and for the worse, have for the time being been shelved. This again leaves it open to the High Court on another occasion, and in the light of full argument on the points, to reinforce the core nature and operation of duress in Australia.

How did the dispute arise?
The story starts with an explosion at the Apache Energy gas production plant in Western Australia in June 2008, which radically cut the supply of gas to that state’s market. Woodside was the other main gas supplier and quickly found itself in a position where demand outstripped supply. The price of gas skyrocketed. Woodside refused to provide certain ‘supplemental’ gas energy nominated by Verve pursuant to an existing supply contract (the original contract), for an indefinite period. It offered to supply gas to the plaintiff pursuant to new, short term contracts, at a price many times greater than originally payable. Under protest, Verve agreed. Woodside later conceded in proceedings that, during the relevant period, it in fact had sufficient gas to supply the nominated supplemental gas.

Contrary to the view ultimately reached by the High Court, the Western Australian Supreme Court of Appeal unanimously held that Woodside had breached its obligations arising under the original contract to ‘use reasonable endeavours’ to supply the supplemental gas to Verve. The pressure exerted on Verve through the threatened and actual breaches of contract was unlawful and therefore prima facie illegitimate. As the illegitimate pressure had indisputably caused Verve to enter into the short term supply contracts, the essential elements of duress were satisfied.

What is ‘lawful act duress’?
In the course of coming to this decision, the WASCA engaged in a rigorous review of a number of important and contentious points concerning the law of duress. Of particular interest was the treatment of the concept of ‘lawful act duress’. Concern about the inherent uncertainty of this concept had earlier led the New South Wales Court of Appeal in Australia and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344 to reject its existence outright. In a joint judgment, the Court of Appeal in that case limited duress to threatened or actual unlawful conduct. It suggested that if duress in this sense is not made out, an agreement may be set aside for undue influence, unconscionable conduct or on statutory grounds. In particular, statutory provisions such as those found in both the (then) Trade Practices Act 1974 (Cth) and Contracts Review Act 1980 (NSW) were considered to be more precise and thus a preferable avenue to relief. These allow for a contract to be set aside if its requirements are not ‘reasonably necessary for the protection of the legitimate interests’ of the stronger party (see Karam at [67]). It should be noted that the provisions mentioned in Karam have now been replaced in identical terms by s 21(2)(b) of the Australian Consumer Law, (found in sch 2 to the Competition and Consumer Protection Act 2010 (Cth)) and ss 12CB and 12CC of the Australian Securities and Investments Commission Act 2002 (Cth) in relation to financial services.

In the Court of Appeal decision in Verve Energy, Murphy JA similarly preferred (at [176]) to restrict duress to cases of pressure that is ‘unlawful or wrongful by some external legal standard’ and cited Karam.

Ironically, precisely the same (objective) requirement of disproportionality between the lawful threat and the demand it supports — which is said to be such a preferable characteristic of the statutory schemes — underlies all cases of lawful, but illegitimate pressure. The cases are explored in detail in James Edelman and Elise Bant, Unjust Enrichment in Australia (Oxford University Press, 2006) 203–8. As was stated by McLure P (Newnes JA concurring) in Verve Energy at [25]:

If the pressure involves an actual or threatened unlawful act, it is prima facie illegitimate. If the pressure is lawful, it may be illegitimate if there is no reasonable or justifiable connection between the pressure being applied and the demand which that pressure supports.

As noted by Edelman and Bant in their examination of lawful act duress (cited above), it will be extraordinarily rare for a lawful refusal by a defendant to enter into a contract with a plaintiff except on certain terms and for legitimate commercial objectives (such as profit), to constitute lawful act duress. On the findings of the majority in the High Court of Australia, that was precisely the case in Verve. Woodside’s refusals to sell supplemental gas to Verve (except pursuant to new short term agreements) were not in breach of the original contract and were given for legitimate commercial motives (see Verve Energy [2014] HCA 7 at [44]–[49]). The result in the decision is thus consistent with McLure P’s analysis and leaves open the possibility for a further and considered examination of the operation of lawful act duress on another occasion.

Are there additional limitations in cases of ‘economic duress’?
Another positive to come out of the non-examination of duress by the HCA concerns the relevance of considerations such as ‘good faith, ‘protest’ and whether the plaintiff had ‘no reasonable alternative’ but to enter into the impugned transaction. These so-called requirements have generally been cited in cases where the pressure was of a commercial nature, for example, where a person has warned that they will be forced to breach a contract unless paid more for their performance. Courts have rightly been concerned not to subject good faith contractual renegotiations to the rigours of the doctrine of duress, particularly where the circumstances forcing the renegotiation are beyond the parties’ control. This has led some courts to conclude that additional limitations must be placed on claims of ‘economic duress’ over and above those that apply in other contexts. The parties in Verve Energy spent much time before the High Court debating these issues, drawing on the opinion of the Privy Council in Pao On v Lau Yiu Long [1979] UKPC 2. Delivering the advice of the Board in that case, Lord Scarman said that

in a contractual situation commercial pressure is not enough … it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it.

Should Australian courts adopt the ‘no reasonable alternative’ requirement?
A line of English cases has subsequently identified the ‘no reasonable alternative’ requirement cited by Lord Scarman as an independent element of duress (including B & S Contractors and Design Ltd v Victor Green Publications Ltd [1984] ICR 419; Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620; DNSD Subsea Ltd v Petroleum Geo-Services ASA [2000] BLR 530; and Carillion Construction Ltd v Felix (UK) Ltd [2001] BLR 1). Australian courts have rightly not followed this lead. As Kitto J said in the seminal decision of Mason v New South Wales [1959] HCA 5, ‘the critical question is not whether there was an alternative. It is whether the choice made between the alternatives was made freely or under pressure’. Indeed, as noted in Adam Opel GmbH v Mitras Automotive (UK) Ltd [2008] EWHC 3205 (QB) at [32], the ‘no reasonable alternative’ argument has a tendency to absurdity. The more egregious a threatened breach of contract, the more likely it is that a court would be prepared to give injunctive relief to prevent its occurrence. It follows that where a plaintiff capitulates to a demand to avoid a threatened and egregious breach, the ‘no reasonable alternative’ requirement will often operate to protect the perpetrator at the expense of the victim. The better view was expressed recently by Christopher Clarke J in Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2010] EWHC 113 (Comm) at [92]: ‘If there was no reasonable alternative, that may be very strong evidence in support of a conclusion that the victim of the duress was in fact influenced by the threat’. The absence of reasonable alternatives is an evidentiary matter only, going to the requirement of causation. It is not a separate requirement. Conversely, the presence of alternatives does not automatically preclude a finding that the illegitimate pressure caused entry into the impugned transaction.

What is the role of protest in duress?
As with the existence of reasonable alternatives, Australian courts have not considered the fact of protest to be an additional requirement in cases of economic duress. Rather, it is merely evidence from which it might be inferred that the exertion of illegitimate pressure did in fact influence the plaintiff’s decision to enter into the transaction. Again in Mason v New South Wales, Windeyer J explained:

A protest at the time of payment may of course afford ‘some evidence, when accompanied by other circumstances, that the payment was not voluntarily made to end the matter’ … But there is no magic in a protest; for a protest may accompany a voluntary payment or be absent from one compelled … Moreover the word ‘protest’ is itself equivocal. It may mean the serious assertion of a right or it may mean no more than a statement that payment is grudgingly made.

The truth of this observation and the correspondingly limited role for protest was well expressed more recently by Christopher Clarke J in Kolmar at [92]:

the presence, or absence, of protest may be of some relevance when considering whether the threat had coercive effect. But even the total absence of protest does not mean that the payment was voluntary.

What is the role of good faith in duress?
The final issue to be considered in this post is the relevance of the defendant’s good faith in a claim of duress. This was considered by the parties to Verve Energy to be a key issue before the High Court. But similarly to the facts of protest and ‘no reasonable alternative’, the presence or absence of good faith should be restricted to a supportive, evidential role. This was the approach taken by the WASCA in Verve Energy. In a detailed review of the authorities at [184]–[200], Murphy JA (with whom McLure P and Newnes JA agreed on this point) rejected Woodside’s argument that threatened or actual breaches of contract might not be illegitimate if made in good faith. The fact that a defendant had acted in bad faith might inferentially support the requirements of illegitimate pressure or causation, but (in the words of McLure P at [30]) ‘is not a material fact on which the cause of action depends’. It followed that the Woodside’s undisputed belief that it was not acting in breach could not negate the finding of duress.

Conclusion
When duress again comes before the High Court of Australia, it is to be hoped that the core elements of duress — applicable in all contexts, including those of economic duress — will be reasserted and their operation clarified. The test for illegitimate pressure adumbrated by McLure P, which encompasses lawful act duress, is well supported by authority. Indeed, in so far as it draws attention to the very similar approach taken in cognate statutory areas, it actively promotes coherence in the law — recently and repeatedly emphasised by the High Court as an overriding requirement of Australian private law in cases such as Miller v Miller [2011] HCA 9 and Equuscorp Pty Ltd v Haxton [2012] HCA 7. As to the apparent danger of allowing claims of economic duress overly to intrude into commercial negotiations, the law of duress has entirely suitable and existing mechanisms to deal with that problem, without additional and in some cases unjustifiable requirements being introduced into the mix. In particular, as McLure P explained in the Court of Appeal threatened breaches of contract are unlawful and therefore prima facie illegitimate. Where renegotiations of a contract are in play, close consideration of the facts may reveal that the defendant did not threaten to breach the contract, but rather was merely warning of an unavoidable consequence, or making an offer or request. In general, a person issuing a warning has no or little control over the predicted consequences, unlike in the case of a threat. Threats must also be distinguished from requests (where no unwelcome consequence is proposed or consequential upon the request) and offers (in which the proposed consequence is usually welcome) (see Stephen A Smith, ‘Contracting under Pressure: A Theory of Duress’ (1997) 56 Cambridge Law Journal 343). In this context, the presence of reasonable alternatives, protest and the bona fides of the defendant are evidential matters that can helpfully inform the question of whether illegitimate pressure caused the plaintiff to enter into the transaction. They should not be elevated to free-standing requirements of duress.

In concluding this post, what can be accepted as uncontroversial is that, in the event this type of claim again comes before the High Court, the unhelpful language of economic duress should be abandoned. The label has rightly been criticised as suggesting a homogeneous category, whereas cases of economic duress come in countless varieties (see Keith Mason, ‘Economic Duress’ in Simone Degeling and James Edelman (eds), Unjust Enrichment in Commercial Law (Lawbook, 2008) ch 14). Many cases of economic duress involve unlawful threats, such as threats to property (see, eg, Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298) or threats to breach contracts (see, eg, TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd (1955) 56 SR (NSW) 323). They can and should be understood by reference to the unlawfulness of the pressure, as explained earlier. Where the pressure is lawful, the question becomes (as explained by McLure P) whether there is no reasonable or justifiable connection between the pressure being applied and the demand which that pressure supports. This clear and principled approach is, it is submitted, the best way forward. Thanks to the outcome in Verve Energy, the opportunity to take that approach remains open in Australia.

AGLC3 Citation: Elise Bant, ‘An Opportunity Saved: Duress in the High Court of Australia: Verve Energy’ on Opinions on High (12 March 2014) <http://blogs.unimelb.edu.au/opinionsonhigh/2014/03/12/bant-verve-energy/>.

Elise Bant is Professor of Law at Melbourne Law School.

6 thoughts on “An Opportunity Saved: Duress in the High Court of Australia: Verve Energy

  1. I’m interested to know: if a breach of the contract had been established, do you think the High Court would have allowed a restitutionary claim on the basis of duress in this case?

    • Hi Katy,

      It is an interesting question. I think there is little doubt that if Woodside’s refusal to supply the supplemental gas had been found to be in breach of contract, duress would have been made out. A threat to do an unlawful act (such as breach a contract) unless the plaintiff confers a benefit on the defendant is prima facie illegitimate. And there was no doubt that the defendant’s pressure caused the plaintiff to enter into the transaction. So the key elements of duress would have been established.

      But that was not the end of the question. There were two further potential hurdles to recovery. The first was that Woodside argued that cl22.7(c) of the original contract of supply had ‘capped’ liability arising out of breach of the relevant ‘reasonable endeavours’ clause at a certain amount. So (it was said) even if duress was made out, the claim in duress could not yield greater relief than was permitted under the original contract. That was relevant here because restitution of the higher price paid by Verve under the short term contracts was worth a lot more than a simple award of compensatory damages. In the High Court, Gageler J (alone of all the judges) accepted that there was a breach by Woodside of the reasonable endeavours clause, but characterised the claim for duress as a ‘valiant, but ultimately vain, attempt by [Verve] to overcome the cap’ [69]. It could (and perhaps should) have been argued that the ‘liability’ referred to under cl22.7(c) was liability for breach of contract, and didn’t ‘cover the field’ for claims such as duress, which arise under the independent category of claim in unjust enrichment (see eg Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221). However, according to Gageler J, Verve had not argued that the ‘liability’ capped under the original contract was limited to contractual liability (at [70]) and, in any event, seemed disposed to accept that the clause would have been sufficiently broad to cover duress (at [71]).

      The other hurdle to recovery on the ground of duress was that Verve had not sought to recind the short term contracts pursuant to which it had paid the higher price for supplemental gas. This meant, in essence, that those contracts as they stood justified Woodside’s retention of the higher payments. Normally, a plaintiff in Verve’s position would seek to ‘rescind’ (or undo) the short term contracts for duress. If rescission had been sought, there would have been little problem, so far as I am aware, although there was some talk in the Court of Appeal judgment about whether it would be possible to unravel the transactions appropriately (cf discussion at [33] and [205]. But in any event, Verve ‘eschewed the need for rescission’ (see the WASCA decision at [204] – [205], also at [32]-[33]). It was for this reason that the duress claim also ultimately failed at the Court of Appeal level.

      Really, both hurdles to the success of the duress claim reflect the difficult but necessary task of working out how claims of unjust enrichment relate to contract. Claims in unjust enrichment will not generally succeed where to allow recovery will subvert a valid contract (the classic discussion of this is found in the High Court’s decision in Lumbers v W Cook Builders Pty Ltd (in liquidation) [2008] HCA 27). So whether it was trying to show that the claim for restitution did not subvert the contractual ‘cap’, or explaining why restitution of the payments should be made without rescission of the short terms contracts, Verve faced some uphill battles to recover the payments on the ground of duress.

      • Thanks Elise, as you know, I find the interaction between unjust enrichment and contract such a fascinating topic. I look forward to a case where the court considers it in detail!

  2. Another interesting case. In brief (and excluding much detail), a buyer entered into contracts (the ‘previous contracts’) with the seller for the purchase of certain gasoil and gasoline products and made a number of advance payments under those contracts. None of the gas products was ever delivered, which meant the basis for the payments (delivery of the products) had totally failed. However, rather than going down the road of demanding repayment (restitution) of the value of the advance payments on that ground, the parties agreed further supply contracts for petroleum products. Under these contracts, the purchaser would get a discount on the purchase price which, in essence, would gradually pay off the value of the advance payments. The idea was to give the seller a mechanism that would enable it to repay the value of the advance payments received under the previous contracts, without forcing it into some sort of cash flow crisis. However, this time the purchaser tripped up, committing a repudiatory breach of the new contracts. The vendor terminated the contracts (both under a contractual ‘cancellation’ clause and under the general law) and sued for compensation. The buyer counterclaimed for restitution of the value of the advance payments made under the previous contracts.

    The question that arose was whether the purchaser’s right to restitution had been overtaken or extinguished by the subsequent agreements. The judge found that it had not and upheld the purchaser’s claim. The judge did not dispute that it was important to look closely at the terms of what was agreed, and that in some cases, it might be correct to conclude that the contract excluded restitutionary relief. But that was not this case. In this case, the later contracts (as interpreted by the judge) merely provided a mechanism for the swifter recovery of the value of the advance payments, and did not purport to provide an exhaustive avenue, or otherwise exclude the purchaser from suing for restitution. The key parts of the reasoning are at [87]-[90] I think:

    “[87]The Trident Beauty illustrates that, where the right to repayment of money is regulated by contract, the law will not superimpose a remedy in restitution based on unjust enrichment. In so far as such a restitutionary remedy would coincide with the contractual right, it is unnecessary; and in so far as it would differ, such a remedy is inappropriate because enrichment sanctioned by the contract is not unjust.

    [88]In this case, however, unlike The Trident Beauty, a right to recover money on the basis of unjust enrichment existed before the relevant contracts were made. The question is therefore not whether it was necessary or appropriate for the law to impose a remedy in restitution, but whether a remedy which the law undoubtedly did impose was extinguished by agreement. There is nothing in the terms of either the Caspian Contract or the Contract which so provides either expressly or as a matter of necessary implication.

    [89]The burden of Newland’s case is that Toba agreed to give up an unconditional right to be repaid approximately US$3.2 million and to receive instead rights to repayment which were conditional on the Caspian Contract and the Contract being performed. It is not suggested that Toba received any inducement to agree to such an arrangement. This is, as I see it, an inherently improbable and unreasonable intention to attribute to the parties. The more reasonable interpretation, in the absence of clear words to the contrary, is that the contractual provisions were intended to be a way of effecting repayment as quickly as possible, against a background where Newland had said that its money was tied up with suppliers and it did not have the cash immediately available (see paragraph 1 above); but was not intended to be the only way in which Toba could ever recover the outstanding sum, such that the sum due to Toba would cease to be payable if the contractual mechanism failed.

    [90]I am reinforced in this conclusion by the fact that the provisions for repayment included in the [later contracts] would, if fully operated, have resulted in a ‘refund’ of more than the full amount. This demonstrates that neither provision was intended to be the only way in which Toba could obtain repayment. If that is so for each of the contractual provisions considered individually, I do not see why the provisions when considered collectively should be understood as intended to be exclusive. “

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