Recent Developments 2006
Economic duress
ANZ v Karam [2005] NSWCA 344
(Relevance Chapter 7: other business related torts)
ANZ v Karam [2005] NSWCA 344 represents an attempt by the New South Wales Court of Appeal to refine the concept of economic duress by assimilating it to the general ground of unconscionable conduct by restricting duress to threats made to person or property.
In this case a family-owned business had borrowed money from the ANZ Bank. The bank obtained security over the assets of the company and the personal assets of the directors. The directors had been initially unaware that they were personally liable for the company's debts until they had requested further financial accommodation. Unknown to the directors, the bank had doubts about the enforceability of the original securities and had made the provision of further loans dependent on the directors executing additional documents acknowledging that they were personally liable for the company's debts. In addition, the directors, at the request of the bank, sold various properties to reduce the company's indebtedness.
The directors sought relief in relation to the securities on the basis that they were:
- unjust under the Contracts Review Act 1980 (NSW); and
- unconscionable under the general law and should be varied or set aside; and
and they also sought:
- damages against the bank in negligence;
- damages under s. 82 of the Trade Practices Act 1974 (Cth); and
- an order for equitable compensation.
At first instance, Santow J held that the transactions should be set aside on a number of grounds including unconscionability and economic duress. However, on appeal the Court of Appeal overturned that decision.
The Court of Appeal formed the view that the Bank’s conduct did not amount to the Amadio type of conduct (see Commercial Bank of Australia Ltd v Amadio(1983) 151 CLR 447) as the family members did not suffer from a ‘special disability’ or ‘special disadvantage’. The family members were in as good a position as the bank to form their own views about the financial position of the company and they couldn’t rely on the parlous financial state of the business as itself forming part of the illegitimate pressure [para 12].
The Court of Appeal was also unable to say that there was economic duress. The directors understood the nature and effect of the action they were taking and there could be no question of their will being overborne by the bank. Their actions were driven by the need to obtain additional funds to keep the company going. The bank, for its part, wanted further security as the price for providing further credit to a company already in financial difficulty.
The Court of Appeal appears to be limiting duress to “threatened or unlawful conduct” [para 66]. Thus, a threat to the legitimate commercial and financial interests of a party would be sufficient to trigger an action in duress because it would amount to “unlawful” conduct. If the threat was not “unlawful”, then the weaker party may still be able to argue that it is unconscionable at common law or be caught under the unconscionability provisions in the Trade Practices Act. However, a mere difference in the comparative bargaining strength of the parties will not be enough.
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