Economic duress in adjudication

Summing up

The case: Capital Structures plc -v- Time & Tide Construction Ltd, TCC 8 March 2006.

The issue: Whether an adjudicator's decision was void because the settlement agreement that provided for adjudication had been entered into under economic duress.

The implication: Leave to defend enforcement proceedings was granted on the basis that there was an arguable, albeit shadowy case as to economic duress and that the defendants were avoiding the agreemenet, which if subsequently found to be the case would void the adjudication provisiion and the decision of the adjudicator.

Economic duress in adjudication

In the recent case of Capital Structures -v- Time & Tide, Capital Structures sought summary judgment of an award of payment resulting from an adjudication arising out of a settlement agreement between the parties.

Settlement agreements will not usually fall under the ambit of the HGCRA 1996, but the agreement in this case contained a clause that provided for adjudication. Time & Tide resisted the application by arguing that the settlement agreement had been reached under economic duress.

This case considers two points of particular interest. It reviews the law of economic duress and the effect, if established, that this would have upon the settlement agreement, and it further considers the effect that this would have upon the jurisdiction of the adjudicator.

Capital Structures was engaged as subcontractor by the main contractor, Time & Tide, to supply, deliver and install structural steelwork and cladding and in addition, balconies, juliettes and four staircases. Disputes arose about payment and the value of work done. In March 2004, Capital took its labour off site. The employer, Kerringtons, became aware of the situation and contacted Capital's representatives, advising them that their failure to deliver balcony materials would force the employer to step in and take over the development from Time & Tide. Time & Tide contended that the effects of being thrown off site would have been disastrous, leading to potential liquidation.

Settlement discussions

This pressure brought about settlement discussions that resulted in a settlement agreement dated 20 April 2004. The agreement provided for the payment of £108,000 plus VAT for the materials stored off site on the condition that property in the materials would pass to Time & Tide and a further payment of the sum of £20,000 plus VAT in consideration for Capital's labour to return to site and tighten the bolted connections to the steelwork in compliance with the specification and building control. The agreement was a full and final settlement of all claims and provided that any dispute arising under the agreement could be referred to adjudication.

The sum of £108,000 plus VAT was paid, but it later became apparent that the balcony materials were not fit for purpose and Time & Tide refused to make the further payment. Capital referred the non-payment of £20,000-plus VAT to adjudication. Time & Tide defended by arguing that the adjudicator had no jurisdiction as the settlement agreement had been entered into under economic duress. The adjudicator rejected this argument and ordered Time & Tide to pay £29,000, including VAT and costs.

Summary judgment

By way of defence to the action for summary judgment before His Honour Judge Wilcox, Time & Tide maintained its position in respect of economic duress. The judge considered the sequence of events and observed that the pressure placed on Time & Tide was doubtless real. The question was whether the pressure such as it was could amount to economic duress. The judge stated the law as follows:

The ingredients of actual duress are that there must be pressure:

(a) whose practical effect is that there is compulsion on, or a lack, of practical choice for the victim;

(b) which is illegitimate; and

(c) which is a significant cause in inducing the claimant to enter into the contract.

The judge referred to Pas On -v- Lau Yin Lon [1980] A.C.614, and associated cases for guidance on what amounts to pressure. There must be coercion or illegitimate pressure, otherwise a threat to a pre-existing contractual obligation or an unfair use of a dominant bargaining position will not be sufficient to invalidate the contract.

Other factors taken into account include whether the person alleged to have been coerced did or did not protest, and whether, at the time of making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy.

The effect of economic duress is not to bring the contract to an end from the start, but to render it voidable, which means that the party alleging economic duress must show that it has taken steps to avoid rather than affirm the contract.

Capital argued that the facts did not support economic duress even when put at their highest and that Time & Tide had affirmed the agreement by making payment in accordance with it and that it had waived its right to avoid the contract by failing to take the necessary steps and as a consequence all of the provisions of the agreement survived.

The judge disagreed, observing that payment of the £108,000 did not amount to affirmation of the agreement as without such payment and the release of the balconies, juliettes and stairs the pressure would have continued. Furthermore, Time & Tide argued it had elected to set aside the settlement letter in its response to the notice of adjudication and so there was some evidence of avoidance.

Adjudication clause

The second point of interest in this case was whether it could be argued that the adjudication clause could somehow survive termination of the agreement. Capital contended that the adjudication provisions would have survived even if the agreement had been avoided for duress, citing the case of Hayman -v- Darwin [1942] as authority for the fact that an arbitration agreement survives termination of the underlying contract.

The judge agreed that this was the case where there was a repudiation or total breach of the contract, but he confirmed that where there has never been a contract because it has been avoided on the ground of duress, it logically follows that any arbitration or adjudication provision also becomes void.

In summing up, His Honour Judge Wilcox gave leave for Time & Tide to defend, on the basis that he considered there to be "an arguable, albeit shadowy, case as to economic duress", an arguable case that Time & Tide was avoiding the agreement, and that if both were established, the adjudicator would have no jurisdiction.