Fallacy of arguing Economic Duress to challenge supplementary agreements in Construction Contracts

- Khushbu Turki[1]


I. Introduction

Some of the most common disputes in construction contracts revolve around a scenario wherein the employer, who has breached the contract, is unwilling to pay the requisite amount of compensation to the contractor. Instead, he offers the contractor a choice of entering into a supplementary agreement, and accepting a reduced amount as compensation. The contractor, who is often not in a good financial position, agrees to enter into the said agreement, and accepts the reduced compensation. Later, however, the contractor challenges the validity of the agreement on the ground that he entered into the same under economic duress.

This challenge is based on the following two contentions – First, the fact that the contractor accepted a reduced compensation due to a financial crunch itself indicates duress; and Second, entering into such an agreement amounts to a waiver of the right to seek compensation, which cannot be waived under the Contract Act. The author has undertaken an attempt to analyse the accuracy of such claims, and the same has been done in three parts. Part I examines the essentials of duress, the conditions in which financial distress can amount to economic duress, and duress amounting to coercion and undue influence. Part II discusses the waiver of the right to seek compensation under the Indian Contract Act, 1872 (‘the Act’). Lastly, in Part III, the author concludes that adopting a fact centric approach is a must while dealing with claims of duress, and waiving of compensation or accepting a reduced amount is solely a matter of discretion of the concerned party which is not prohibited under the Act.

II. duress as coercion

Economic duress has been recognised as a form of coercion under Section 15 of the Act.[2] However, in order to successfully establish a claim of duress, it is necessary for the affected party to establish the following two criteria – first, the existence of an illegitimate pressure; and second, the lack of a reasonable alternative, that is, the lack of any other practical choice in a particular situation.[3] It is pertinent to note that in a contractual setting, mere commercial pressure cannot be termed as illegitimate in nature.[4] The coercive action required for vitiating free consent has to be of a category in which the person under duress is left with no option but to give consent, and is unable to take an independent decision in his interest. Bargaining and thereafter accepting an offer by give and take to solve one's financial difficulties cannot be treated as duress. Such situations arise in trade and commerce every day, and consequently, certain business decisions are taken by parties, some of which they might not have taken but for their immediate financial requirements and economic emergencies.[5]

Further, since “reasonable alternative” is a subjective term, the existence of another practical choice needs to be evaluated from the factual matrix of each case. In such cases, it is material to enquire whether the allegedly coerced party did or did not protest at the time of being coerced, whether it had the option of availing a legal remedy, whether it was independently advised, and whether after entering into the agreement it still expressed its dissatisfaction and took steps to avoid it. Proceeding on an assumption that the acceptance of the reduced compensation due to a financial exigency is enough to constitute duress is an inherently flawed approach. Accepting this proposition can potentially give rise to a scenario wherein parties to a contract, who even willingly entered into such supplementary agreements would later claim that they did so under duress.

It is therefore necessary to examine the seriousness of the financial crunch to conclude if it was grave enough to not leave the affected party with any other alternative but to enter into the supplementary agreement. For instance, there can be cases wherein the affected party accepts the reduced compensation simply because it does not wish to prolong the entire process and thereafter sue the defaulting party for compensation. The desire to avoid the long legal process may stem from a reluctance to invest money in dispute resolution, since the affected party might not be in a financially strong position. However, financial troubles cannot justify the decision of not taking recourse to a legal remedy in every situation.

A distinction must be drawn between a situation wherein the affected party makes a choice of not opting for the legal remedy and a situation wherein it is not reasonable to expect the party to take legal recourse because of the acuteness of the financial crunch. In the former situation, whatever the party’s reason for accepting the reduced compensation, the decision is arrived at after applying the necessary commercial wisdom. A rational choice made between two evils cannot be labelled as one made under duress. It is a business decision, unlike the latter situation where no real choice exists except entering into the supplementary agreement.

A similar view was expressed by the Supreme Court in the case of National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd., wherein the Court observed that if a claimant who is keen on having a settlement and avoiding litigation, voluntarily reduces the claim for damages and requests for settlement, then he cannot later challenge the same on grounds of duress.[6] In such situations, even if the claimant agreed for settlement due to financial compulsions and commercial pressure, the decision is his free choice. Therefore, instead of equating every situation involving a financially unstable party with duress, a more appropriate approach would be to examine the seriousness of the exigency and thereafter decide on whether it would constitute duress.

III. DURESS AS UNDUE INFLUENCE

Economic duress, as explained above, may also fall squarely within the ambit of undue influence, as defined under Section 16 of the Act.[7] There are two ways in which a claim of duress can be established under this Section – First, if 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, this shall amount to undue influence. A party would be considered to be in such a dominating position when it holds some real or apparent authority over the other, or in case of fiduciary relations.

An employer who refuses to pay the requisite compensation to the contractor despite knowing his financial troubles, and thereafter proposes the idea of the supplementary agreement with a reduced compensation clause, can clearly be understood as a dominant party in that contractual relationship. However, the Section will come into operation only when such dominant authority is used to obtain an unfair advantage, and the same shall again have to be established in the manner in which coercion is sought to be established. Hence, the burden of proof in such a scenario will lie on the affected party, which will have to establish the exercise of such duress or undue influence.

Second, when a party 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 falls upon the dominant party. Here, the nature of the transaction is sufficient to raise a presumption of undue influence. The phrase “unconscionable bargain” has not been defined in the Act. The Supreme Court, in the landmark case of Central Inland Water Transport Corporation v. Brojonath Ganguly, deduced that an unconscionable bargain would be one which indicates no regard for conscience, and is irreconcilable with what is right or reasonable.[8] Unconscionability in such cases does not arise out of fraud, but out of the unconscientious use of superior power.[9] The same has been reiterated in a number of judgments.[10]

However, a bargain would not be unconscionable merely because the parties to it are unequal in bargaining position, or because the inequality results in an allocation of risks to the weaker party.[11] But gross inequality of bargaining power, together with terms unreasonably favourable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, and may show that the weaker party had no meaningful choice or no real alternative but to assent to the unfair terms.

Relying on the aforementioned proposition, it appears that a supplementary agreement providing for a reduced compensation to a contractor already under financial strain would clearly raise a presumption of an unconscionable transaction, with the employer being in the dominant position. Once the presumption arises, the burden of proof shifts to the dominant party. This presumption would then have to be negated by relying on the facts and circumstances of the case. Hence, it is essential to note that irrespective of who discharges the burden of proof, the outcome in matters of economic duress would always be heavily dependent on the facts of the case at hand.

IV. WAIVER OF THE RIGHT TO SEEK COMPENSATION

Waiver is the abandonment of a right which every individual is at a liberty to waive. It signifies nothing more than an intention of not insisting upon the right.[12] In India, the general principle with regard to waiver of contractual obligations is found under Section 63 of the Act. The Section provides that it is open to a promisee to dispense with or remit, wholly or in part, the performance of the promise made to him, and he may accept instead of it, any other satisfaction that he deems fit.[13] This implies that every contracting party has a choice to accept a modified performance of the opposite party’s contractual obligations. The author believes that the same principle should be applied when dealing with cases relating to acceptance of a reduced compensation.

However, the contention raised by the affected party in such disputes is that the right to waiver is relevant only in respect of the rights existing under the contract between the parties, and not for the rights conferred by the Act itself. Since the Act provides for a party’s right to claim compensation in lieu of a breach of contract, the same cannot be waived off. The author finds no merit in this contention for the following three reasons: First, there is no reason why a distinction should be drawn between rights conferred by the specific contract and those conferred by the Act. If a party can waive off a breach of contract by the defaulting party, and can voluntarily abandon its legal rights to enforce the contract or to claim any remedy in relation to that breach, then a party claiming compensation for a breach should also be well within its rights to accept a reduced amount of compensation. Second, even if such a contention is accepted, it must be noted that while the Contract Act confers the right to claim compensation for a breach of contract, the right pertains to claiming compensation and not the exact amount due under the original contract. As long as the party is being compensated under the supplementary agreement, the requirements of the Act are being satisfied.

Third, the general principle of law is that everyone has a right to waive the advantage of a law or rule made solely for the protection and benefit of the individual in his private capacity, which may be dispensed with, without infringing any public right or public policy.[14] Therefore, the test to determine the nature of interest at stake is to see if it affects the general welfare of the society. If the answer is negative and it is the right of the party alone that is being affected, then the right is entirely capable of being abnegated either in writing or by conduct.[15] Hence, as the right of a party to claim compensation for breach of contract does not affect the general welfare or interest of the society, it may be waived off by accepting a reduced compensation.

V. CONCLUSION

It is true that commercial realties do not always correspond to the existing provisions of law, and economically powerful entities such as public corporations, which get the works executed, can easily prevail over private parties by withholding legitimate payments, arm-twisting them into not accepting any payments or desisting from making claims towards undue and inordinate delay that is solely caused by the public undertaking, corporation or agency. While the author agrees that in many cases, the contractor accepts the reduced compensation because of the ongoing financial crisis, this does not hold true for every situation.

Hence, it is suggested that instead of developing a proposition which is based on an assumption that equates acceptance of a reduced compensation due to financial distress with economic duress, it is better to adopt a fact centric approach to evaluate the claim of duress. This is because accepting such a proposition is equivalent to proceeding with an assumption that the employer is at fault, even though it is the contractor’s responsibility to discharge the initial burden of proof in cases of coercion. Even in cases of undue influence, it would fall upon the contractor to establish that the employer was in a dominant position and misused the same, or to prima facie establish that the transaction was unconscionable in nature.

Further, equating a financial crunch with economic duress runs contrary to and considerably dilutes the criteria for establishing duress as laid down by the Courts in various judgments. In situations wherein the affected party has expressed reservations about its financial position, or has indicated in any way that it is entering the supplementary agreement under duress, the Court can easily invalidate the agreement after checking the veracity of such claims. Additionally, the waiver of compensation resulting from the agreement would also automatically be set aside.

[1] Khushbu is a Staff Writer for the Arbitration Workshop Blog. She is currently a third year law student pursuing B.A L.L.B (Hons.) at National Law Institute University, Bhopal. She also serves as an Editor for the NLIU Law Review and the Indian Arbitration Law Review. She can be contacted at khushbuturki14@gmail.com [2] Section 15, The Indian Contract Act, 1872. [3] Pao On v. Lau Yiu Long, (1979) UKPC 17. [4] M/s. Balaji Pressure Vessels Ltd. v. Bharat Petroleum Corporation Ltd., 2014 SCC OnLine Bom 1709. [5] Double Dot Finance Limited v. Goyal Mg Gases Limited & Anr., 117 (2005) DLT 330. [6] National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd., 2009 (1) SCC 267. [7]Section 16, The Indian Contract Act, 1872. [8] Central Inland Water Transport Corporation v. Brojonath Ganguly, 1986 SCR (2) 278. [9] The State of Karnataka and Ors. v. State of Tamil Nadu and Ors., (2018) 4 SCC 1. [10] Delhi Transport Corporation v. DTC Mazdoor Congress and Ors., 1991 AIR 101. [11] Assistant General Manager and Ors. v. Radhey Shyam Pandey, (2020) 6 SCC 438. [12] Waman Shriniwas Kini v. Ratilal Bhagwandas & Co., AIR 1959 SC 689. [13] Section 63, The Indian Contract Act, 1872. [14] Lachoo Mal v. Radhey Shyam, (1971) 1 SCC 619. [15] Indira Bai v. Nand Kishore, (1990) 4 SCC 668.

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