North Ocean Shipping Co v Hyundai Construction Co (The Atlantic Baron)
Citations:  QB 705;  3 WLR 419;  3 All ER 1170;  1 Lloyd’s Rep 89.
The claimant was a shipbuilding company. They contracted to build a ship for the defendant for a fixed price in USD payable in instalments. They opened a letter of credit as security to refund the payments should they default on the contract.
After the first payment, the USD devalued by 10%. The claimant insisted that the defendant pay an additional 10% on the remaining instalments. The defendant refused, but when they paid the second and third instalments without a 10% uplift, the claimant refunded the money. The defendant suggested that the parties enter arbitration to resolve the dispute, but the claimant refused.
The claimant continued to insist on the additional 10%, threatening to terminate the contract. By this time, the defendant was negotiating a lucrative contract for the charter of the ship. They told the claimant that though they did not consider themselves obliged to pay the extra 10%, they would do so ‘without prejudice’ if the claimant agreed to increase the amount available under the letter of credit. The claimant agreed.
Eight months later, after the ship was built, delivered and the payments made, the parties entered arbitration. The claimant sought the return of the additional 10% they paid on two grounds.
- That the defendant had not provided consideration for the agreement;
- That the contract was voidable for economic duress.
The arbitrators submitted these two issues to the court to determine as a matter of law.
The High Court held that the claimant provided consideration for the agreement. They were not merely relying on their pre-existing contractual obligations. Rather, they had agreed to do something extra – extending the letter of credit.
The High Court also held that the economic duress defence failed. The substantive elements of the defence were established: the claimant had threatened to breach the contract without any legal justification in a manner which gave the defendant no practical choice but to renegotiate the deal. However, the defendant then made the payments without protest and delayed avoiding the contract for eight months. As such, they had affirmed the contract and lost the right to avoid it.
This Case is Authority For…
Mocatta J recognised that a threat to a parties’ goods can constitute ‘economic duress’.
A contract made under economic duress is ‘voidable‘, rather than void ab initio. This means that the right to rescind can be lost. One of the ways of losing the right to rescind is by ‘affirming’ the contract. Continuing voluntarily to perform under the contract, or failing to escape it once free of the duress, is evidence of affirmation. The fact that the innocent party is secretly unhappy, if they fail to make their desire to rescind the contract objectively clear, is not relevant.
Mocatta J noted that the mere fact that a new deal lets the parties perform the existing contract on the basis of ‘amicable relations’ does not provide consideration, even if this is important to the parties.