North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd 20 Jul 1978 [1979] QB 705, QBD

Shipbuilders threatened to breach a contract unless the price was increased by 10% after a currency devaluation. The buyers reluctantly agreed to ensure their ship was delivered. The court held this was economic duress, but the buyers lost their right to repudiate through delay.

Facts

The plaintiffs, North Ocean Shipping Co Ltd (‘the owners’), contracted with the defendants, Hyundai Construction Co Ltd (‘the shipbuilders’), for the construction of a tanker, ‘The Atlantic Baron’. The price was fixed in US dollars, payable in five instalments. After the first instalment was paid, the US dollar was devalued by 10 per cent. The shipbuilders, who were not protected by a currency clause in the contract, demanded that the remaining instalment payments be increased by 10 per cent. They threatened to terminate the contract if their demand was not met. The owners, who had arranged a lucrative charter for the vessel upon its completion, were concerned that a dispute would jeopardise this charter. They therefore agreed to the price increase ‘without prejudice to our rights’ in order to secure the ship’s delivery on time. The ship was delivered, and the final increased payments were made without protest. Eight months after delivery, the owners commenced arbitration proceedings to recover the additional 10 per cent they had paid.

Issues

The court had to determine three primary legal issues:

1. Was there any consideration for the owners’ agreement to pay the additional 10 per cent, given that the shipbuilders were already contractually obliged to build the ship for the original price?
2. If consideration was found, was the agreement to pay the increased price voidable on the grounds of economic duress?
3. If the agreement was voidable for duress, had the owners affirmed the contract through their subsequent conduct, thereby losing their right to rescind it and recover the extra money?

Judgment

The judgment was delivered by Mocatta J. in the Queen’s Bench Division.

Consideration

Mocatta J. found that there was consideration for the owners’ promise to pay the extra 10 per cent. The shipbuilders had, in return, agreed to increase the amount secured by their letter of credit by a corresponding 10 per cent. The judge held that this variation to the letter of credit was a sufficient, albeit minor, benefit to the owners and a detriment to the shipbuilders, thereby constituting good consideration for the variation of the payment terms.

Economic Duress

The court found that the shipbuilders’ threat to break the contract was a coercive act that amounted to economic duress. The pressure exerted was illegitimate, as the shipbuilders had no legal right to demand the extra payment. Mocatta J. recognised that a threat to breach a contract could invalidate a subsequent agreement if it left the other party with no practical alternative but to submit. He stated:

The Yard were adamant in their attitude that they would not proceed with the construction of the vessel without the owners agreeing to increase the price by 10 per cent. … the owners were in a very difficult position. … The Yard’s case was one of ‘It is my way or no way.’

He concluded that the contract variation was therefore voidable at the option of the owners.

I am also of the opinion for the reasons I have given, based on the findings of fact, that the pressure applied by the yard was of such a kind that it could properly be described as illegitimate in the sense that there was no legal justification for it… This enables the owners to avoid the agreement… on the grounds of economic duress.

Affirmation

Despite finding that the agreement was procured by economic duress and was therefore voidable, the court ultimately held that the owners’ claim failed. The owners had lost their right to rescind the contract because they had affirmed it. They paid the remaining instalments without protest and, crucially, waited eight months after the ship’s delivery (at which point the duress had ceased) before making their claim. Mocatta J. concluded that this delay and inaction were inconsistent with an intention to avoid the agreement.

The owners’ silence and inaction after November 27, 1974, when the Atlantic Baron was delivered… is, on the evidence, only consistent with an intention to affirm the agreement of July 28, 1973, which they must have known, with the benefit of legal advice, they had the right to avoid. … I am driven to the conclusion that the owners affirmed the agreement… and that their claim for the return of the 10 per cent. fails.

Implications

This case is a landmark decision in the development of the doctrine of economic duress in English contract law. It established that a threat to breach a contract could constitute illegitimate pressure sufficient to render a resulting agreement voidable. However, its greater significance lies in the clarification that such a contract is voidable, not void. This imposes a duty on the coerced party to act swiftly to set aside the contract once the duress has lifted. Failure to do so, or any conduct that indicates an intention to be bound by the agreement, will be interpreted as an affirmation of the contract, thereby barring any later claim for rescission.

Verdict: The claim by the plaintiffs (North Ocean Shipping Co Ltd) to recover the 10 per cent price increase was dismissed.

Source: North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd 20 Jul 1978 [1979] QB 705, QBD