News

Wed, 12 May 2010

Economic Duress and Shipping Contracts

In a time of economic uncertainty and price fluctuations in the commodities market the recent decision in Kolmar Group AG v Traxpo Enterprises Pvt Ltd demonstrates the application of the legal doctrine of economic duress to deal with a party who exerts illegitimate pressure in order to escape a bad deal.

In August 2007 Kolmer agreed to buy a quantity of methanol from Traxpo for shipment within September 2007. Kolmar wanted the methanol in order to sell it to a very important customer in the U.S.A, who had an urgent requirement for the cargo.

After the contract was made it was apparent that Traxpo did not have access to a sufficient quantity of Methanol to be able to supply Kolmar at the contract price. Furthermore, the market price of Methanol had increased dramatically.

The letter of credit provided a latest date of shipment of 30 September 2007. However, owing to the shortfall in cargo and issues on quality the vessel could not be loaded.

On Friday 05 October 2007 Traxpo presented Kolmar with a “take it or leave it proposal”. Traxpo sought to ship a reduced quantity of Methanol but at an inflated price.

Kolmar had, by this time, already incurred $140,000 in demurrage and if the Methanol was not loaded Kolmar faced a heavy claim for dead freight. Given the importance of Kolmar’s customers in the U.S.A, Kolmar had no choice but to accept.

Kolmar later claimed against Traxpo for restitution which Kolmar claimed was extracted from it by economic duress.

The court confirmed that economic pressure can amount to duress provided that it is characterised as illegitimate pressure. A threat to break a contract, as in this case, will generally be regarded as illegitimate. It was also relevant to consider whether the claimant had a “real choice” or “realistic alternative”. Given the demurrage and potential dead freight charges together with the urgency with which the Methanol was required there was no realistic alternative. Finally, the presence or absence of protest, which was present in this case, may be of some relevance when considering whether the threat was coercive.

Accordingly, the court held that Kolmar was entitled to restitution of the increased prices which it had been forced to pay by the economic duress by Traxpo.

Traxpo found itself in a situation materially different to that which was contemplated on the formation of the contract. Rather than take the hit, Traxpo forced a change in the agreement as a result of economic duress but at what price? Restitution aside, the potential damage to commercial relations and reputation could be immeasurable.