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Initiating arbitration and claiming damages for breach of contract by the other side seems the normal course of action in most cases wherein the contract has an arbitration clause.
India Corporate/Commercial Law
Initiating arbitration and claiming damages for breach of contract by the other side seems the normal course of action in most cases wherein the contract has an arbitration clause. However quite often, a contract, which could not be completed due to delays and breaches caused by one party, is renegotiated to settle the dispute between the parties and a substituted or a supplementary agreement is then executed. However, such a supplementary contract might later be assailed by the other party as being void as the same was without free consent and was only agreed to by them to have a continuous cash flow because it was in severe financial distress.
The argument for voiding the supplementary contract is made so that the contractor can then bring claims for damages for breach attributable to the employer under the original agreement. In English law such voiding of the contract due to lack of free consent, in situations of financial distress, is discussed under principles of economic duress. The Indian law on this aspect is not crystal clear and in this article the authors attempt to chart a path to making such claims in domestic arbitration based on the Indian contract law.
Duress is a common law remedy to void a contract which has been induced by unlawful or other illegitimate forms of pressure. 1 Modern cases of duress mostly cover illegitimate pressure as it is wider than unlawful conduct. 2 Economic duress refers to a subset of duress wherein there is a threat of serious financial consequences so as to give the threatened party no practical choice but to enter into the contract. 3 In particular, one party may threaten to breach or terminate the contract unless the contract is renegotiated in its favour, and the other party may accede to this demand in order to avoid adverse financial consequences that may follow due to such actions.
The rule of causation applies to assail a contract for duress. The party alleging duress needs to establish that duress was the cause of entering into the supplementary contract and show that had there been no illegitimate pressure from the opposite party, the agreement would not have been executed at all or at least not on the terms in which it was agreed. 4 It is worth noting that if there exist alternate remedies then the party's allegations of duress for entering into the supplementary contract, may not stand. Nonetheless, legitimate renegotiation of the contract may be good defence against allegation of duress.
A genuine compromise to the extent of a reduced compensation towards legitimate claims is permissible. 5 Such compromise may not amount to illegitimate pressure in particular when the immediate payment of a reduced compensation is consideration for the breach and for waiver of the claims. 6 Hence, whether the claims under the original contract and the renegotiation between the parties leading to a supplementary agreement, of which one of the terms is a reduced compensation, is to be considered as economic duress or not, will depend on the facts and circumstances of each case. The determination will have to be made whether there existed illegitimate pressure or legitimate renegotiations between the parties. Under English Law, the onus of proving is on the party alleging duress. This will become relevant when discussing the Indian position for such an argument.
Indian law of contract is codified and governed by the Indian Contract Act, 1872 ("ICA"). Free consent for formation of the contract is the bedrock of Indian contract law jurisprudence. Sections 14 - 19 of the ICA, deals with free consent, actions which vitiate free consent, and ultimately the status of and remedies against agreements made in this manner. Coercion, undue influence, misrepresentation, and fraud are the named actions vitiating free consent. It is pertinent to note that duress is not even one of these named actions let alone economic duress.
Even though India has a codified contract law, the courts in India have discussed the aspect of economic duress not as a part of one of the sections dealing with free consent (or lack thereof) but as a principle in use in the UK and general principle of English common law of contract. Such court driven legal propositions has been necessitated because the concept of economic duress does not clearly fall in the pigeonholes of the provisions on lack of free consent under the ICA.
Coercion and undue influence under the ICA are the only two provisions under which an attempt can be made to include the concept of economic duress. Even under English law, the principles of coercion, duress and undue influence are stated to be somewhat overlapping in their operation. If we consider the concept of coercion as is defined under the ICA, it only recognizes such actions to vitiate free consent if they are prohibited by the Indian Penal Code, 1860. Hence, economic duress or just duress generally would not come under coercion and the same would have to be ruled out. Even if we consider the aspect of undue influence, the same requires that one of the parties have a real or apparent authority over the other, which might not be possible in cases of commercial contract between corporate entities. The courts in UK, however, have held that economic duress may also be applicable for two parties similarly placed financially without any dominant authority of one over the other. 7 This was also recognized by the Supreme Court of India ("SCI") in Central Inland Water Transport v. Brojonath Ganguly. 8 Relevant portion is extracted hereunder:
It would appear from certain recent English cases that the courts in that country have also begun to recognize the possibility of an unconscionable bargain which could be brought about by economic duress even between parties who may not in economic terms be situate differently.
Even up to 2008, the SCI in National Insurance Company v. Boghara Polyfab, 9 recognized the principle of economic duress as principle of common law and discussed free consent generally. The SCI held that the factors which went into the decision making of the party, agreeing to a lower settlement or a full and final discharge, must be seen to determine whether settlement or supplementary agreement was freely consented to. Hence, we see that across more than 20 years of these two SCI judgments, the depth of analysis has remained the same and reliance has been placed on the principles prevalent under common law as developed in UK.
The question which then becomes relevant is how a party must then build a case of economic duress before the arbitral tribunal / courts to disregard the subsequent contract or supplementary contract made between the parties and then lead the arbitral tribunal to grant damages under the original contract between the parties. This discussion may be guided by the judgment passed by the High Court of Delhi in Puri Construction v. Larsen & Toubro. 10 In this case Puri Construction Limited ("PCL") owned certain lands in Gurgaon and received licence from the District Town and Country Planning ("DTCP") to develop the same as residential complexes. It entered into an agreement with Larsen & Toubro ("L&T") to develop the lands. Under the Agreement L&T had an obligation to pay External Development Charges ("EDC") to DTCP. However, based on certain reports received by L&T from Boston Consulting Group and other ancillary sources, L&T delayed the payment of the EDC since it was of the opinion that the housing market had taken a downturn. The DTCP threatened to cancel the license to develop granted to PCL due to non-payment of the EDC amounting to INR 6 Crores till date. Hence the parties entered into a supplementary agreement wherein the obligation of payment of EDC shifted to PCL.
However almost immediately there were issues regarding the payment, wherein PCL was of the opinion that past dues of EDC in any case had to be made by L&T and only the future payments had to be made by PCL. The disputes reached arbitration and PCL was able to show the tribunal, based on evidence, that L&T was never interested in performing its obligations under the contract after it received a negative feasibility report, Further, it also showed that L&T knew of the adverse financial position of PCL and intended to not perform its contract and hence forced PCL to enter into the supplementary agreement. L&T also did not produce the report by BCG and did not lead oral evidence of several key personnel and submitted that an adverse inference may be drawn against them if required. The arbitral Tribunal looking at the conspectus of the evidence lead by the parties came to the conclusion that L&T never intended to perform the contract and coerced PCL to enter into the Supplementary Agreement to reduce its obligations under the original contract. Although the Single bench of the Delhi High Court set aside the award of the Sole Arbitrator, the same was restored by the Division Bench under Section 37 of the Act, 1996.
The dictum of the Court on the issue of economic duress is quoted hereunder:
88. The authorities discussed previously, especially recent judgments of the Supreme Court have dwelt upon circumstances where the parties are allowed to contend or take a position which is seemingly contradictory or in conflict with the earlier position if it can establish or prove that it was not a free agent. In other words, economic duress is now a recognized head answering the description of "coercion" entitling the contracting party to avoid the contract or some of its terms. This head of "economic coercion" would fall within the meaning of Section 16 of the Indian Contract Act, 1872 which defines "undue influence" as one where the relation subsisting between the parties is such that one of them is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Section 16(3) states that, where a person in a position to dominate the will of the other enters into a contract with him and the transaction appears on the face of it or on the evidence of it to be unconscionable, the burden of proving that there was no undue influence is on the person who is able to dominate the will of the other. Illustrations (c) and (d) particularly deal with cases of economic duress or undue influence. Given the nature of evidence, which was on the record before the Tribunal and the legal position as to economic duress being one of the factors that can successfully avoid a contract, there is no patent illegality in the findings recorded in the award. Likewise, it cannot be said that the Tribunal arrived at a finding which is contrary to the substantive law of the country or contrary to justice and morality. As a result, the findings of the learned Single Judge that Supplementary Agreement could not be characterized as the product of undue influence and economic duress, because both parties were corporate entities is unsustainable, is, therefore, set aside.
As per the decision quoted above, parties may now base the claim for economic duress or economic coercion by following the provisions of undue influence under Section 16 of the ICA. This however is easier said than done. It goes without saying that adequate documentary and oral evidence may be necessary to prove the claim and the ingredients required for the satisfaction of a claim of undue influence. Section 16 of the ICA which deals with Undue Influence comes with its own requirements and burden of proof. The same is extracted hereunder:
Undue influence defined.-- (1) A contract is said to be induced by "undue influence" where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another--
(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.
The phrasing of the section is such that it uses subjective terms without guidelines to interpret them. The court or the tribunal will have to determine whether one party is dominant over the other and has in fact used its dominance to wrestle the other side into a contract which is unconscionable. However, under Section 16, once the party has shown that the other party is in dominant position and on the basis of the evidence and on the face of it the terms of the contract are unconscionable, the burden of proof shifts to the dominant party to show that the contract was performed without undue influence. The dominant party may then have to argue on aspects of legitimate renegotiation and may show that the contract and its terms are not unreasonable based on the consideration. This position is in contradistinction to the position under English law as was stated above.
Arbitral tribunals may not however jump to strike down provisions of the contract, as the general trend has been that the arbitral tribunals have to decide the disputes within the four corners of the contract. The presumption will be to uphold the terms of contract unless the contract has absolutely unconscionable terms. If this hurdle is crossed the supplementary contract can then be set aside and the party will be eligible for damages to be payable for breach of the main agreement.
In the opinion of the author, in cases of economic duress, the domination arises out of the economic superiority of one party over the other. Further, as is made clear under English law and as recognized by the Supreme Court in Central Inland Water Transport v. Brojonath Ganguly, 11 the fact that both the parties were corporate entities, will not affect the characterisation or possibility of one being dominant over the other.
It is heartening to find Indian courts discussing principles of contract law while referring to provisions of the ICA. Many a times, the courts delve into the commonly known principles of contract law which apply to India and/or UK and apply them to the issues at hand. Hence, it is pleasant to note that even though, the High Court of Delhi in Puri Construction v. Larsen & Toubro 12 looked at the entire jurisprudence of economic duress as discussed in the courts of England and India, it finally still put the concept of economic duress under Section 16 - Undue Influence under the ICA and hence guided future parties as to the strategy to be adopted for such disputes and claims.
The takeaway from this article remains that economic duress is a recognized principle to void supplementary contracts made without free consent. It would be beneficial to parties to record the instances where the opposite party aims at renegotiating the contract in bad faith and uses illegitimate pressure which the parties in domestic contracts in India can then assail as being illegal and void and take support for the same from principles developed and used under common law in UK and the ICA.
Footnotes
1. J Beatson, A Burrows and J Cartwright, Anson's Law of Contract (31st edn, Oxford University Press) 372.
2. The Universe Sentinel [1983] 1 AC 366
3. Occidental Worldwide Investment Corp v. Skibs [1976] 1 Lloyds Report 293; North Ocean Shipping Company v. Hyundai Construction [1979] QB 705; Pao On v. Lau You [1980] AC 614; The Universe Sentinel [1983] 1 AC 366; Alec Lobb(Garages) v. Total Oil Great Britain [1983] WLR 87
4. Huyton SA. Peter Cremer [1999] 1 Lloyds Rep 620;
6. Callisher v. Bischoffsheim (1870) LR 5 QB 449
7. Occidental Worldwide Investment Corp v. Skibs [1976] 1 Lloyds Report 293; North Ocean Shipping Company v. Hyundai Construction [1979] QB 705; Pao On v. Lau You [1980] AC 614;
8. AIR 1986 SC 1571
9. (2009) 1 SCC 267
10. FAO(OS) 21/2009, Delhi High Court decided on 30.04.2015
11. AIR 1986 SC 1571
12. FAO(OS) 21/2009, Delhi High Court decided on 30.04.2015
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