Halpern & Anor v Halpern & Ors

This is the trial of a preliminary issue ordered to be tried by Mr. Justice Christopher Clarke on 24 March 2006. The issue is one of law, namely, whether a party can avoid a contract procured by duress in circumstances where he cannot offer the other party substantial restitutio in integrum.

In this action the Claimants seek damages for breach of an agreement made on 11 March 2003 which compromised an inheritance dispute. The factual circumstances which have given rise to the dispute between the parties are set out in the judgment of Mr. Justice Christopher Clarke given on 24 March 2006. I need not recite them again but gratefully adopt his account of them.

One of the pleaded defences to the claim is that the compromise agreement was procured by duress. The question of law regarding restitutio in integrum arises because clause 4 of the compromise agreement requires that all documents relating to the agreement be destroyed. Mr. Justice Christopher Clarke said as follows:

“The act of destruction of the documents is one which has benefited the defendants and prejudiced the claimants. It can neither be undone nor reversed. Nor can any pecuniary relief put the claimants in as good a position as they would have been in if the agreement could have been rescinded and matters restored to the position in which they were before the agreement was made ie that the claimants and the dayanim retained their documents, unless, perhaps Mr. Lang had retained and is prepared to produce a copy of every material document. Accordingly restitutio in integrum would not appear to be possible. It is not however clear that an inability to make restitutio in integrum is a bar to avoidance of a contract on the ground of duress. Avoidance of a contract for duress (as opposed to rescission for undue influence) is a common law remedy. In essence the illegitimate pressure imposed on the victim renders his apparent consent revocable: Anson’s Law of Contract, 274. If, after the illegitimate pressure has ceased to operate, the victim treats the contract as valid, he can no longer revoke it. Equity, as a condition of granting rescission where there has been undue influence would require restitutio, at least in substance. It does not however necessarily follow that, if the victim of duress has not affirmed the contract, he loses his right of revocation if he cannot restore the other party to substantially the same position. At any rate I decline on an application for summary judgment to rule that that is so.”

On the hearing of the preliminary issue Mr. Romie Tager QC submitted that in order to rescind or avoid a contract on the grounds of duress at common law the party claiming the right to rescind or avoid on the grounds of duress had to be able to make restitutio in integrum, (or in modern terminology, counter restitution, see Dunbar Bank PLC v Nadeem [1998] 3 AER 876 per Millett LJ at p.884) to the other party. Further or alternatively, he relied upon the circumstance that in equity counter restitution was required. Mr. David Berkley QC submitted that the party claiming the right to rescind for duress at common law did not have to offer counter restitution. He further submitted that equitable principles could not be relied upon because the remedy of rescission in equity was an act of the Court and not, as it was at common law, an act of the party rescinding.

The legal dispute between the parties is reflected in passages in two textbooks. The Claimants’ argument is supported by a passage in Duress, Undue Influence and Unconscionable Dealing by Professor Enonchong (2006) at para.28-012. The Defendants’ argument is supported by a passage in The Law of Restitution by Professor Burrows 2^nd.ed. at pp.217-218.

However, in an unreported decision of the Court of Appeal, Dorimex and others v Visage Imports Limited given on 18 May 1999, the Vice-Chancellor, Sir Richard Scott, said, in relation to a plea of economic duress, that the trial judge, His Honour Judge Diamond QC, directed himself “impeccably” by reference to principles stated in Snell’s Equity 29^th.ed. and Goff and Jones on the Law of Restitution.

The passage from Snell provided as follows:

“ A person who rescinds a contract is entitled to be restored to the position he would have been in had the contract not been made. Hence, property must be returned, possession given up, and accounts taken of profits or deterioration.”

The passage from Goff and Jones provided as follows:

We have already seen that an important limit to rescission is that there must be restitutio in integrum. The effect of this principle is that the plaintiff must “be in a position to offer and must formally tender restitutio in integrum”; but the court will also, when rescinding the contract, order the restoration to the plaintiff of benefits received by the defendant from him under the contract. There ought to be a giving back and a taking back on both sides.”

The actual decision in Dorimex concerned the application of those principles to the facts of that case. For that reason the decision was not said to be binding upon this court with regard to the statement of principle and its application to a case of duress. However, the decision of the Court of Appeal to apply that statement of principle in a case of duress is plainly of strong persuasive authority that the defence of duress requires counter restitution.

Mr. Tager QC submitted that the Court of Appeal was right to say that rescission on the grounds of duress required an ability to give counter restitution. Mr. Berkley QC submitted that the application of the principle requiring counter restitution to a case of duress by the Court of Appeal was wrong and should not be followed.

In my judgment the common law remedy of rescission on the grounds of duress requires an ability to give counter restitution. My reasons for reaching that conclusion may be summarised as follows:

In Clarke v Dickson (1858) EL.BL and EL 148 a claim was brought for money had and received by the purchaser of shares in a company. It was said that he had been induced to purchase the shares by a fraudulent misrepresentation but he failed in his action at common law. Erle J. said that:

“the plaintiff cannot avoid the contract under which he took the shares, because he cannot restore them in the same state as when he took them.”

Crompton J. said:

“when once it is settled that a contract induced by fraud is not void, but voidable at the option of the party defrauded, it seems to me to follow that, when that party exercises his option to rescind the contract, he must be in a state to rescind it; that is, he must be in such a situation as to be able to put the parties into their original state before the contract…………….. The plaintiff must rescind in toto or not at all; he cannot both keep the shares and recover the whole price. That is founded on the plainest principles of justice. If he cannot return the article he must keep it, and sue for his real damage in an action on the deceit.”

The same principle was stated in the House of Lords in the Scottish case of The Western Bank of Scotland v Addie (1867) 1 LR Scotch Appeals 145. This was another case in which rescission of a share purchase agreement was sought on the grounds of fraudulent misrepresentation. Lord Cranworth said, at p.164:

“Relief under the first head, which is what in Scotland is designated restitutio in integrum, can only be had where the party seeking it is able to put those against whom it is asked in the same situation in which they stood when the contract was entered into. Indeed, this is necessarily to be inferred from the very expression, restitutio in integrum; and the same doctrine is well understood and constantly acted on in England.”

It was thus well established that at common law a party to a contract who wished to avoid or rescind the contract on the grounds of fraudulent misrepresentation had to be able to give counter restitution. Although no authority has been found in which that principle has been applied to a party to a contract who wished to avoid or rescind a contract on the grounds of duress, I can see no reason why the same principle should not apply by analogy to the case of duress. The analogy has been drawn before. In Barton v Armstrong [1976] AC 104 Lord Cross said:

“there is an obvious analogy between setting aside a disposition for duress or undue influence and setting it aside for fraud. In each case – and to quote the words of Holmes J. in Fairbanks v Snow (1887) 13 NE 596,598 –“the party has been subjected to an improper motive for action.”

Mr. Berkley QC accepted that at common law rescission on the grounds of fraudulent misrepresentation required an ability to give counter restitution. However, he disputed that the same principle applied to rescission on the grounds of duress and, in this regard, adopted the reasoning of Professor Burrows in The Law of Restitution 2^nd ed. at pp.217-218 who has written as follows:

“Most importantly, it appears that the bar that restitutio in integrum is impossible generally does not apply to rescission for duress. The explanation for that is that it would generally contradict the basis for the claimant’s restitution to recognise a counter-claim by the defendant: if it was illegitimate for the defendant to demand a sum of money for a particular consideration, for example, carrying out work, it would be inconsistent then to award the defendant counter-restitution for that work.”

The principles underlying the need for counter restitution were explained by Lord Wright in Spence v Crawford [1939] 3 AER 271 as follows:

“Restoration, however, is essential to the idea of restitution. To take the simplest case, if a plaintiff who has been defrauded seeks to have the contract annulled and his money or property restored to him it would be inequitable if he did not also restore what he had got under the contract from the defendant. Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly enriched, as he would be if he both got back what he had parted with and kept what he had received in return. The purpose of the relief is not punishment, but compensation. The rule is stated as requiring the restoration of both parties to the status quo ante ……………”

Thus restoration to the status quo ante is required even though the party resisting rescission has acted fraudulently. It seems to me that the reasons requiring counter restitution in a case of fraud apply equally in a case of duress. I therefore do not accept the submission, based upon the passage in Professor Burrows’ book, that counter restitution is not required in cases of duress. Nor can I accept Mr. Berkley’s related submission that it would be unjust to recognise a counterclaim for restitution by a wrongdoer. A person who has obtained a contract by fraud is as much a wrongdoer as a person who has obtained a contract by duress and yet he is entitled to counter restitution.

Mr. Tager further relied upon the circumstance that in equity rescission also requires counter restitution, albeit that the required counter restitution is understood more broadly and less strictly than at common law. He argued that it would be absurd if that requirement did not also exist in respect of rescission based upon common law duress.

In Erlanger v New Sombrero Phosphate Company (1878) 3 App.Cas.1218 Lord Blackburn said, at p.1278:

“It is, I think, clear on principles of general justice, that as condition to a rescission there must be a restitutio in integrum. That parties must be put in statu quo. See Lord Cranworth in Addie v The Western Bank. It is a doctrine, which has often been acted upon both at law and in equity. But there is a considerable difference in the mode in which it is applied in Courts of Law and Equity, owing, as I think, to the difference of the machinery which the Courts have at their command. I speak of these Courts as they were at the time when this suit commenced, without inquiring whether the Judicature Acts make any, or if any, what difference.

It would be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed to throw back on the other party’s hands without accounting for any benefit he may have derived from the use of the property, or if the property, though not destroyed, has been in the interval deteriorated, without making compensation for that deterioration. But as a Court of Law has no machinery at its command for taking an account of such matters, the defrauded party, if he sought his remedy at law, must in such cases keep the property and sue in an action for deceit, in which the jury, if properly directed, can do complete justice by giving as damages a full indemnity for all that the party has lost; see Clarke v Dixon and the cases there cited.

But a Court of Equity could not give damages, and, unless it can rescind the contract, can give no relief. And, on the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.”

Thus both common law and equity required counter restitution but in equity what amounted to counter restitution was understood more broadly and less strictly than at common law.

Where equity allowed rescission on grounds beyond those recognised at common law, for example, innocent misrepresentation or undue influence, counter restitution was required, albeit in the broader sense acceptable to a court of equity. Thus in Adam v Newbigging (1888) 13 App.Cas.308, a case involving innocent misrepresentation, Lord Watson said:

“I entertain no doubt that these misrepresentations, although not fraudulently made, are sufficient to entitle the respondent to rescind the arrangement of February 1883, if he is in a position to give as well as to demand restitution.”

Similarly, in O’Sullivan v Management Agency and Music Limited [1985] 1 QB 428, a case involving undue influence, the principle requiring counter restitution was applied but in the broader sense of practical justice explained by Lord Blackburn in Erlanger. In O’Sullivan a submission was indeed made (at p.449) that the “doctrine of restitutio in integrum applied only to the rescission of contracts for misrepresentation or mistake, and did not apply to equitable relief where contracts had been entered into as the result of undue influence.” After a review of the authorities Dunn LJ (at p.458) concluded that:

“This analysis of the authorities shows that the principle of restitutio in integrum is not applied with its full rigour in equity in relation to transactions entered into by persons in breach of a fiduciary relationship, and that such transactions may be set aside even though it is impossible to place the parties precisely in the position in which they were before, provided that the court can achieve practical justice between the parties by obliging the wrongdoer to give up his profits and advantages, while at the same time compensating him for any work that he has actually performed pursuant to the transaction.”

Equity thus applied the principles of counter restitution both in those cases where there was a ground for rescission recognised at common law (eg fraudulent misrepresentation) and in those cases where there was a ground for rescission recognised in equity but not at common law (eg innocent misrepresentation or undue influence), albeit that in both types of case the principles were applied in a broader, less strict, sense than at common law. I am therefore not able to discern any reason of justice or logic why those same principles should not apply in cases where the ground of rescission is duress. This is especially so when one has regard to the fact that the same conduct can amount to duress at common law and to overt acts of improper pressure or coercion recognised as unacceptable by equity; see Royal bank of Scotland v Etridge (No.2) [2002] 2 AC 773 per Lord Nicholls at p.795. and Lord Hobhouse at p.820.

Mr. Berkley submitted that the fact that equity applied principles of counter restitution could not assist the Claimants because in equity the remedy of rescission was achieved by order of the court whereas at common law the remedy was the election of the party rescinding the contract. This submission generated additional written submissions after the close of the oral hearings.

Mr. Berkley submitted that duress at common law renders a contract voidable so that unless and until the contract is avoided or rescinded it remains in effect. The act which brings the contract to an end is the act of the party who avoids or rescinds the contract. There was no dispute that that was so. He further submitted that rescission in equity (on grounds which were not recognised at common law) was a judicial remedy which takes effect from the date of the court’s order and not from the date of the party’s decision to avoid or rescind the contract. He relied upon dicta in certain of the cases (Erlanger v New Sombrero Phosphate (1878) 3 App.Cas 1218 at p.1278, Williams v Bayley (1866) LR 1 HL 200 at pp.216 and 222 and Redgrave v Hurd 1881) 20 Ch.D 1 at p.22) and on passages in Duress, Undue Influence and Unconscionable Dealing by Professor Enonchong at para.28-005 and in an article entitled “Justifying Partial Rescission in English Law” by Poole and Keyser in (2005) 121 LQR 273 at pp.284-289. This further submission was controversial. Mr. Tager submitted that rescission in equity is triggered by the act of the person claiming the right to rescind and that the court order which recognises that rescission is of retrospective effect. He relied in particular upon Snell’s Equity 31^st.ed.p.323 and upon the analysis of rescission by Lord Atkinson in Abram Steamship Company v Westville Shipping Company [1923] AC 773 at p.781.

I do not propose to resolve this debate because it is not necessary to do so in order to decide the preliminary issue before the Court. That is because even if, as submitted by Mr. Berkley, the remedy of rescission in equity (in those cases where the common law did not recognise a right of rescission) takes effect by order of the court and not by the election of the party electing to rescind, I was not persuaded that this (assumed) difference enables me to ignore the circumstance that equity, when dealing with rescission, applies the principles of counter restitution, albeit in a broader sense than those principles were applied at common law. That is because, in circumstances where counter restitution is required when a contract is rescinded or avoided both at common law on the grounds of fraudulent misrepresentation and in equity on the grounds of innocent misrepresentation or undue influence, there does not appear to me to be any good reason of justice or logic why it is not required when a contract is rescinded or avoided at common law on the grounds of duress. On the contrary, the reasons requiring counter restitution as explained by Lord Blackburn in Erlanger and by Lord Wright in Spence v Crawford appear to me to apply when a party seeks to rescind on the grounds of duress.

For these reasons the answer to the question, whether a party can avoid a contract procured by duress in circumstances where he cannot offer the other party substantial restitutio in integrum, is No.