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Economic duress - have they got you by the short and curlies?

30 April 2018

When things don’t turn out between contracting parties there are various legal arguments that can be raised to avoid the deal. The defence of “economic duress” was raised unsuccessfully in a recent case.

Mr Haines and Mr Hornsby entered into various property transactions. One of those transactions included a mortgage from Mr Hornsby’s company to Mr Haines. When Mr Hornsby’s company did not make a mortgage repayment Mr Haines took action to exercise his rights under the mortgage and sell the property. Following this Mr Haines and Mr Hornsby prepared and signed their own agreements recording a resolution of the issues that had arisen between them.

Although Mr Hornsby eventually repaid the mortgage Mr Haines claimed there was still money owing to him. Mr Hornsby claimed he was forced to sign the agreements under “economic duress” and “Mr Haines had him by the short and curlies”. He claimed Mr Haines was not entitled to enforce the mortgage because there was an off the record understanding Mr Haines would never ask for the mortgage payment.

What is economic duress?

If a party to a contract proves he or she has been coerced to enter into it by “illegitimate” pressure he or she can choose to have the contract set aside. Pressure commonly exerted in commercial dealings will not necessarily be “illegitimate” and nor will a warning by a party that he or she might not be able to perform his or her side of the bargain as a matter of commercial reality. However, a threat to breach a contract will generally be illegitimate. The victim of the illegitimate pressure must have had no other practical alternative. That will depend on all the relevant circumstances, including the characteristics of the victim, the relation of the parties, the availability of professional advice to the victim and whether the victim protested, was independently advised or took steps to avoid the contract after entering it. If the victim proceeds as if he or she accepts the contract, the victim may lose the right to set it aside.

No economic duress

The judge was not convinced Mr Haines had an illegitimate grasp on Mr Hornsby’s short and curlies. He was not prepared to accept the off the record understanding about the payment because it was a device intended to avoid legal tax obligations contrary to written records of the agreement. He found Mr Haines had been entitled to exercise his legal rights under the mortgage. What’s more, Mr Hornsby’s defence of economic duress failed because he had other options (he could have sold the property), he had taken independent advice and he had acted as if he accepted the agreements.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott