It is an obvious feature of economic downturns that once commercially attractive contracts now look far less appealing. To what extent can a party use its commercial bargaining power to leverage a renegotiation?

The recent case of Kolmar Group AG v Traxpo Enterprises PVT Limited is an example of the remedies available where a party refuses to comply with a contract unless the terms are amended in its favour ([2010] EWHC 113 (Comm)). The decision offers an insight into the potential significance of economic duress and the tort of intimidation to both claimants and defendants as fluctuating market conditions make it increasingly difficult for companies to fulfil their contractual relationships profitably.

The ingredients of economic duress and the tort of intimidation are similar. Both address the situation where one party relies on illegitimate pressure to cause another party to accede to its demands. The clearest area for overlap between the two is where, like in Kolmar, one party threatens to breach a contract.

Economic duress. Economic duress causes a contract to be avoidable. The elements required to prove economic duress are that:

There is no absolute test to establish how a threat may be characterised as “illegitimate”, but normally a threat of a breach of contract or other civil wrong will be sufficient. Evidential factors the courts will consider include: whether or not the claimant had a reasonable alternative; whether the threat was a grave one; and whether or not the claimant protested.

Tort of intimidation. The tort of intimidation is established where:

The key requirement of the tort of intimidation is that there has been a threat to act unlawfully. A threat to do something one is legally entitled to do will not amount to intimidation.

Traxpo agreed to supply Kolmar with methanol. The price and quantity were agreed, but it later transpired that when the contract was made, Traxpo did not have access to sufficient cargo at the same or lesser price than the contract price. The situation worsened after the contract was agreed because the market price of methanol increased dramatically and Traxpo faced a significant shortfall.

The first inkling of a problem emerged when Kolmar was informed by a third party that Traxpo might have been providing cargo earmarked for Kolmar to other customers. Kolmar needed the methanol to fulfil an obligation to an important customer in the US so, to head off any potential difficulties, it arranged for a letter of credit, re-iterating the contract terms, to be opened in Traxpo's favour. The difficulties continued, however, and delays arose when Traxpo failed to provide the necessary paperwork to allow Kolmar’s cargo vessel to begin loading.

As the shipment date drifted further into the distance, and with Kolmar facing the prospect of reneging on its contract with its customer in the US and also mounting demurrage, Traxpo informed Kolmar that it was considering backing out of the contract and sought increasingly onerous changes to the terms if it were to proceed. Traxpo's demands culminated in a "take it or leave it" proposal: the price would be increased significantly and the quantity reduced. Kolmar protested to no avail and eventually, on the basis that it had no alternative given the soaring market price for methanol, accepted.

Almost immediately after delivery of the cargo, Kolmar issued proceedings. Traxpo was unrepresented at trial. In addition to awarding Kolmar damages for short delivery, demurrage and shifting expenses, the High Court held that:

Kolmar illustrates that the courts expect companies to behave properly in their commercial dealings, regardless of any recessionary forces or other restrictions, and will act to ensure that parties will not be able to rely on illegitimate threats and financial leverage to prop up margins.

The courts will consider closely the facts in each case to ensure that a coercive and unlawful threat or illegitimate economic pressure, as opposed to fair negotiation, has indeed caused the claimant’s actions.

In the current recessionary climate, where contractual relationships are more easily frayed, there are lessons to be learned from Kolmar for both potential claimants and defendants.

A potential claimant, before looking to argue economic duress or intimidation, should consider carefully whether or not a threat or demand is in fact illegitimate and goes beyond the negotiating pressures common in the commercial world. If a potential claimant is convinced that its counterparty is acting unlawfully then, as a matter of best practice, it should do as much as possible to demonstrate that it is being forced to act under coercion. Clear indicators of this would be to protest at the time and to take legal action as soon as practicable afterwards.

The potential claimant should also explore realistic alternatives, such as trying to source the required services or goods elsewhere in the market. Each of these steps will not, of themselves, establish economic duress or intimidation, but they are strong evidential factors.

Potential defendants should obviously consider whether what they are proposing is unlawful. Beyond that, a company should consider the effect of its demand on the potential claimant and the influence that demand may have on the potential claimant’s actions, and assess whether the demand risks being cast as improperly exploiting commercial strength.