| Date | 24 January 2001 |
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| Judgment | Carillion Construction Limited -v- Felix (UK) Limited TCC 6 November 2000 |
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| The Issue | The setting aside of agreements on the basis of economic duress. |
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| Implication |
An agreement may be set aside by the court if it can be shown that it was obtained by illegitimate pressures or threats and providing performance of the agreement has ceased as soon as that pressure is removed. |
printHow times have changed. Not so long ago in the construction industry, it was common practice for main contractors to squeeze sub-contractors' payments, demanding completion of sub-contract works before being prepared to discuss the sub-contractors' grievances concerning the account. Once the sub-contract works were complete, the main contractor was, of course, in a stronger commercial bargaining position and many main contractors exploited this to the full. Adjudication under the Construction Act has produced a marked shift in this commercial balance, but sub-contractors should be careful not to overstep the mark. In the recent case of Carillion v Felix, it was held that Felix had put unreasonable pressure on Carillion to obtain settlement of its sub-contract final account before works were completed. The settlement was set aside by the Court. Carillion, as main contractor, had engaged Felix as sub-contractor to design, manufacture and supply cladding panels for an office building. Felix was in delay, and there was no certainty when it would complete its work. It's potential liability to Carillion for damages for delay was substantial, though uncertain. It did, however, hold some strong cards. Felix knew that there was a number of trades which were dependent upon Felix completing its work, or at least completing the outstanding work at ground floor level in order to ensure the building was watertight. Moreover, Felix knew that it would be impossible for Carillion to find an alternative supplier in time to meet the main contract completion date. Accordingly, Felix hatched a plan to obtain agreement to its final account, prior to completion of its works. Arrangements were made to meet with Carillion for this purpose. In preparation for the meeting, Felix directors made an aide-memoire, which proved revealing in court. Under the heading "Carillion Weaknesses", they made a list, which included "they need to finish the work". Lower down the page was written "no deliveries until we get agreement". Carillion were certain that the maximum value that the sub-contractor's account would reach was £2.9m, although at present it was still being valued at £2.75m. In addition, Carillion would seek to apply substantial contra-charges, though these were not yet quantifiable. Felix had other figures in mind. They had initially sought payment of £3.3m, but in preparation for the meeting this was raised to nearly £3.5m, the additional claims being wholly unsubstantiated. In court it was held on evidence that there was no negotiation in the sense of give and take on individual items. The contentious points were discussed in turn and no agreement was made in relation to any of them. In the event, Felix threatened to withhold deliveries until the final account was agreed. That threat was not removed until the parties agreed a figure of £3.2m at the meeting. This figure was the best Carillion could achieve in the circumstances. However, once the sub-contract works were completed, Carillion immediately commenced proceedings to set the agreement aside on the ground of economic duress. The case of DSND Subsea Ltd v Petroleum Geo-services was cited as an accurate statement of the law concerning economic duress. In that case the Judge had said that "illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining". In line with the judgment, to succeed Carillion would have to show that there was (a) pressure or threat, (b) which was illegitimate, (c) the practical effect of which was that it had no practical choice but to enter into the agreement, and (d) which was a significant cause inducing it to enter into the settlement agreement. Mr Justice Dyson was satisfied that Carillion had made out its case on each of these points. The threat to withhold deliveries was a threat to commit a clear breach of contract. There was no contractual entitlement to insist on agreement of the final account before completion of the sub-contract works, still less was there any contractual right to suspend deliveries until the account was agreed. In his opinion, these threats were illegitimate. Furthermore, Carillion had no practical alternatives for entering into the agreement. They had approached two other contractors to see whether they would supply the remaining cladding units, but one was not interested and the other would not have been able to deliver for several months. Felix suggested that an alternative to Carillion would have been to have commenced adjudication if it was unhappy with the pressure being applied. Justice Dyson dismissed this suggestion, noting that it would have taken a minimum of six weeks to obtain an adjudicator's decision, a period that Carillion could not afford to wait. Finally, Felix alleged that Carillion had affirmed the settlement agreement by applying its terms. Justice Dyson held that Carillion had stopped performing the settlement agreement as soon as it ceased to be subject to the effect of the threat, that is, as soon as Felix had made its final delivery. In conclusion, Carillion had made out its case on economic duress and the Settlement Agreement was therefore set aside.
CJ-0103
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