COUNSEL: David Berkley QC and Richard Selwyn Sharpe appeared for the defendants; Nochum Mordechai Halpern, David Moshe Halpern and Bezalel Yaacov Halpern, and Romie Tager QC and Juliette Levy appeared for the claimants; Yisroel Meir Halpern and Shmuel Halpern.

SOLICITORS: Simon Bergin, Stockport; Shammah Nicholls, Manchester

JUDGES: Waller, Sedley and Carnwath LJJ

DATES: 27, 28 FEBRUARY, 3 APRIL 2007

HEADNOTE: The Court of Appeal gave judgment in the defendants’ appeal from the judgment of Christopher Clarke J on 24 March 2006 (Halpern v Halpern [2006] EWHC 603 (Comm), [2006] 2 All ER (Comm) 251) and in their appeal from the judgment of Nigel Teare QC, sitting as a deputy High Court judge on 4 July 2006 (Halpern v Halpern (No 2) [2006] EWHC 1728 (Comm), [2006] 3 All ER 1139, [2006] QB 88), in the trial of a preliminary issue ordered to be tried by Christopher Clarke J, answering in the negative the question whether a party could avoid a contract procured by duress in circumstances where he could not offer the other party substantial restitutio in integrum. Allowing the appeal from the judgment of Nigel Teare QC, to the extent of setting aside his answer to the preliminary issue, but otherwise making no order, CARNWATH LJ, with whom WALLER and SEDLEY LJJ agreed, said:

JUDGMENT 1:
WALLER and SEDLEY LJJ:

‘[56] The second appeal arises from the separate trial by Nigel Teare QC (the deputy judge) of a preliminary issue of law (see [2006] EWHC 1728 (Comm), [2006] 3 All ER 1139, [2006] QB 88). As has been seen, one of the pleaded defences to the claim was that the compromise agreement was procured by duress. The claimants argued that, even if duress is established, rescission was no longer possible, because the parties could no longer be restored to their positions before the agreement. This was because, according to the claimants, they had destroyed all the documents related to the compromise, as required by cl 4 of the agreement. In other words restitutio in integrum or “counter-restitution” could not be achieved.

[57] Christopher Clarke J seems to have proceeded on the basis that the documents had indeed been destroyed, and that the only remaining issue was one of law: whether that fact was sufficient to rule out rescission for duress. He put the issue thus ([2006] 2 All ER (Comm) 251 at [106]):

"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 … 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 (28th edn, 2002) p 278. 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."

[58] Accordingly, he directed that there be a trial of the following legal issue: “whether a party can avoid a contract procured by duress in circumstances where he cannot offer the other party substantial restitutio in integrum.” That question was answered by the deputy judge in the negative, and his order contains a determination to that effect.

[59] As Waller LJ has explained, matters have moved on since the preliminary issue was ordered, and the answer may well prove academic. On the one hand, it now appears that there is a triable issue as to what documents were in fact destroyed. On 26 January 2007, as part of the directions for trial, Andrew Smith J required the claimants to give particulars of the documents which they allege were destroyed. In the light of that, and other matters, the claimants accept that, even if counter-restitution is required, there is a triable issue whether that requirement can be satisfied on the facts of the case. Furthermore, Mr Tager before us accepted that, even if rescission were no longer possible, the defendants would not necessarily be without a remedy. It might be open to them, on the same facts, to counterclaim for damages for intimidation, and to set those damages off against the claim. The scope of the tort of intimidation in such circumstances is not wholly clear (see e g Burrows The Law of Restitution (2nd edn, 2002) pp 212-213). However, the availability and practical worth of such a remedy, if properly pleaded, can again only be tested at trial.

[60] In the light of those developments, the determination of the abstract legal issue before us is of uncertain value in resolving the dispute between the parties. It would be tempting simply to say that it is inappropriate to deal with it, before the relevant facts have been found. However, there was no appeal against the direction for a preliminary issue in that form, and the appeal comes before us as one solely on the substance of the decision. Furthermore, the deputy judge’s decision (which is reported at [2006] EWHC 1728 (Comm), [2006] 3 All ER 1139, [2007] QB 88) now stands as the most recent judicial treatment of an issue of some general importance. If it is wrong, we should not leave it uncorrected.

[61] Before the deputy judge, the argument turned specifically on the requirements of rescission for duress at common law. This was contrasted, on the one hand, with common law rescission for fraud, for which counter-restitution was a well-established requirement (see e g Western Bank of Scotland v Addie (1867) LR 1 Sc & Div 145); and, on the other, with equitable rescission for undue influence, for which again a form of counter-restitution was required, albeit subject to a more flexible criterion of “practical justice". The classic statement of the latter approach is in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1278-1279, [1874-80] All ER Rep 271 at 286 per Lord Blackburn:

"… 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.” (My emphasis.)

In more modern times, the same approach was adopted and applied by this court in O’Sullivan v Management Agency and Music Ltd [1985] 3 All ER 351 at 365, [1985] QB 428 at 458 per Dunn LJ.

[62] Before the deputy judge, Mr David Berkley QC for the defendants had submitted that duress at common law was to be distinguished, in that there was no necessary requirement for the party seeking rescission to offer counter restitution. He relied on the lack of any reported cases in which such a requirement had been imposed, and on the following passage by Professor Burrows (p 218):

“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.”

[63] The judge rejected this argument. He could see no sensible reason for distinguishing between fraud and duress in this respect. He cited Lord Cross in Barton v Armstrong [1975] 2 All ER 465 at 474, [1976] AC 104 at 118:

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

He also referred to a passage in Duress, Undue Influence and Unconscionable Dealing by Professor Enonchong (2006) p 480 (para 28-012):

“The issue of restitutio in integrum has not presented itself in cases of rescission for common law duress. This is probably because in most cases of duress the complainant has simply paid money or agreed to pay money without receiving any benefit that he needs to return upon rescission. Since in such cases the question is only about the repayment of the money by the defendant, there is no issue of restitutio in integrum. The lack of discussion on this issue in case of rescission for duress should not be taken to mean that restitutio in integrum is not a requirement for rescission on the grounds of duress. If A is induced by B’s duress to enter into a contract to buy B’s car, it is unlikely that the court will allow rescission of the contract so that A can recover the price paid to B without insisting that A should return B’s car. It would not be inconsistent with the basis of A’s restitution for the court to insist on counter-restitution by A. In any event, restitutio in integrum is clearly a requirement in the case of rescission for other common law vitiating factors such as fraudulent misrepresentation.”

[64] In the arguments before this court the differences between the two sides seem to have narrowed since the appeal was launched. In his original skeleton argument (August 2006), Mr Berkley had sought to justify a special rule for common law duress:

“Whereas fraudulent misrepresentation or indeed any misrepresentation is reliant upon a wrong that is extrinsic to the contract itself, as it merely induces a contract, duress by contrast is directly and intimately bound up with the contract formation, that is to say, the improper conduct operates at the point of entry into the contract itself. Effectively the victim’s autonomy is threatened. Since mutuality is at the heart of contract an avoided contract cannot be enforced in either direction and no benefits including counter restitution can be sought. Effectively, once the contract is avoided for duress and the victim as an act of self-help takes back that which he parted with and/or is relieved from unperformed obligations, the loss lies where it falls in a manner analogous to illegality.”

[65] However, in his supplementary skeleton (February 2007, with Mr Selwyn Sharpe) he seems to have moved towards an argument based, not on the distinction between law and equity, but on their assimilation:

“… the modern statement of the law is that, impossibility of restitutio in integrum is no longer a bar to relief when a claimant seeks to avoid/rescind a contract on the grounds of duress or undue influence. Instead the Court’s approach is to do practical justice between the parties by making orders for counter restitution, even if they cannot restore them to the precise position they were in prior to the contract being rescinded …

The correct approach is that counter-restitution is never in fact impossible: it should always be possible for the party seeking to rescind to pay a Defendant a sum of money to reflect counter-restitution of the value of benefits received by him. There can be no rational reason in a system of fused administration of law and equity why the liberal approach taken in equity cannot also be taken at common law …”

Just as in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, [1874-80] All ER Rep 271 the value of depreciation of a phosphate mine could be measured in order to make counter-restitution in equity, so, it is argued, the court can in the present case put an appropriate monetary value on the loss of the documents, even if this is represented by a reduction in the claimant’s prospects of success in the arbitration (c f Kitchen v Royal Air Forces Association [1958] 2 All ER 241, [1958] 1 WLR 563).

[66] To support this approach, he relies on another passage from Professor Burrows’ book (p 246), where, having criticised some aspects of the decision in O’Sullivan v Management Agency and Music Ltd, he adds:

“Despite this criticism, the decision in O’Sullivan is highly significant for one can strongly argue that, by its willingness to award complex mutual restitution, the Court of Appeal has effectively emptied the traditional ‘restitutio in integrum must be possible’ bar of any content. What is required is that the rescinding claimant makes counter-restitution, whether specifically or by a monetary equivalent: counter-restitution may be difficult to assess but it is never impossible.” (My emphasis.)

[67] As an example of this flexible approach, applied to facts similar to the present, Mr Berkley refers to Hulton v Hulton [1917] 1 KB 813, which concerned a wife’s claim to rescind a separation deed for fraudulent misrepresentation. As part of the terms of the deed the litigation documents had been destroyed. This was held not to be a bar to rescission, because (in the words of Scrutton LJ (at 825)):

“… it was the defendant who was anxious that those letters should be destroyed. I cannot in these circumstances treat the letters as so important to him that there can be no rescission because they cannot be brought back into existence.#148;

[68] This shift of position by Mr Berkley removed much of the force from the learned disquisition presented in the skeleton of Mr Tager and Miss Levy, on behalf of the claimants. Their lengthy discussion of the history of the remedy of rescission in common law and equity deserves a place in an academic journal, but unfortunately it has lost much of its continuing relevance in the present case. As they acknowledge, at the end of this discussion, the battle ground has changed: “The Appellants are now advancing a new argument that the court is invariably obliged by applying the ‘practical justice’ formula and that the Court will always conclude that the requirement will be satisfied."

[69] Thus, it seems, the defendants have abandoned the stance that common law duress was to be distinguished from undue influence at equity. Instead they have embraced the Erlanger “practical justice” criterion as applicable to both. But they have taken it a stage further, by arguing that by this test counter-restitution is never impossible. Counsel for the claimants do not dispute the “practical justice” approach, but submit that the extension is wrong in principle, and contrary to authority.

Discussion

[70] 130 years after the “fusion” of law and equity by the Judicature Act 1873, an argument based on a material difference in the two systems would have faced an uphill task. Section 49 of the Supreme Court Act 1981 (or “Senior Courts Act 1981", as it will be: see Sch 11 to the Constitutional Reform Act 2005) reproduces the effect of s 25(11) of the 1873 Act; it states: “… wherever there is any conflict or variance between the rules of equity and the common law with reference to the same matter, the rules of equity shall prevail."

[71] In terms of their subject matter, duress and undue influence have much in common. In Royal Bank of Scotland v Etridge (No 2), Barclays Bank plc v Coleman, Bank of Scotland v Bennett, Kenyon-Brown v Desmond Banks & Co (a firm) [2001] UKHL 44 at [8], [2001] 4 All ER 449 at [8], [2002] 2 AC 773, Lord Nicholls of Birkenhead said:

#147;Equity identified broadly two forms of unacceptable conduct. The first comprises overt acts of improper pressure or coercion such as unlawful threats. Today there is much overlap with the principle of duress as this principle has subsequently developed …#148;

Professor Enonchong (pp 82-83 (para 7-004)) expands on the same point:

“… there was a protection gap between the two doctrines, with equity affording wider protection through undue influence than the common law through duress. In the past this protection gap was very wide, but the great expansion in the scope of duress in recent times has resulted in considerable overlap between the two doctrines, since both deal with overt acts of improper pressure such as unlawful threats.”

[72] It would be particularly surprising to find Professor Burrows called into the lists as a champion for the contrary argument. His chapter on duress quoted above (p 211) starts with a plea that: “In the modern law the historical divide between common law and equity should not be allowed to drive a wedge through uniting principle.” He expanded on this theme in his professorial inaugural lecture (published as “We Do This at Common Law But That in Equity” (2002) 22 OJLS 1, p 1), in which he nailed his banner firmly to the fusionist mast. He commented specifically on the distinction still drawn in the academic literature between duress and undue influence (p 6):

“… nothing here turns on the distinction between common law and equity. One simply has different types of threats or pressure. Duress at common law traditionally comprised merely threats to the person but has since been expanded to include duress of goods and economic duress. Actual undue influence, in so far as concerned with threats or pressure as opposed to influencing another, covers other types of threat or pressure with many of the cases concerning threats to prosecute, sue or publish information about the claimant. The law can be perfectly well described by saying that all these various types of pressure or threat inducing a contract render the contract voidable. There is nothing to be gained by here referring to actual undue influence as opposed to duress or, more generally, there is nothing to be gained by here referring to common law and equity.”

[73] Against this background, the passage previously cited (at [61], above), dealing with the issue of counter-restitution in respect of rescission for duress, cannot sensibly be read as intended to support a special common law rule. The passage is part of a section directed to a different purpose, that is, to argue against a distinction between contractual and non-contractual payments. I note that his assertion that the requirement for counter-restitution “generally does not apply” is not supported by specific authority.

[74] On the other hand, the example used by him-an illegitimate demand for payment for work carried out-does point to the difficulty of too rigid a rule. To expand the example, one may imagine someone persuaded by improper means to pay an excessive amount for work done on his house, for example re-tiling of his roof. It is hard to see why it should matter whether the improper means was a threat or a fraudulent misrepresentation. In either case, one would expect the law to find a means to enable him to recover his money, without requiring him to undo the work to the roof. It may be open to debate whether he should be required to give any credit for the value of the work done, assuming it was a value to him. But there could be no justification for any such counter-restitutionary requirement, if the evidence was that the re-tiling had not in fact been needed.

[75] It is unnecessary to explore such questions in the context of this case, where the facts are very different. The example shows, perhaps, that for the purposes of “practical justice", the primary objective may not always need to be to restore both parties to their previous positions. As Professor Treitel has said (in the context of rescission for misrepresentation):

“… The essential point is that the representee should not be unjustly enriched at the representor’s expense; that the representor should not be prejudiced is a secondary consideration …” (See Treitel Law of Contract (11th edn, 2003) p 380, a passage quoted by Burrows at p 178.)

[76] Returning to the question posed by the preliminary issue in this case, a definitive response is not possible or appropriate, until the facts have been found. I would be inclined to agree with the deputy judge that rescission for duress should be no different in principle from rescission for other “vitiating factors". However, the practical effect of counter-restitution, in the terms explained by Lord Blackburn in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, [1874-80] All ER Rep 271, will depend on the circumstances of the particular case. In the present case, if (contrary to Clarke J’s expectations) the defendants are able to establish that their consent to the compromise agreement was procured by improper pressure (whether that is characterised as duress or undue influence), it would be surprising if the law could not provide a suitable remedy. The form of the remedy, whether equitable or tortious, is a matter which cannot sensibly be decided until the facts are known, not only as to the nature and effect of the improper pressure, but also as to the identity and significance of the documents destroyed.

[77] Mr Tager submits, with some justification, that the defendants’ present stance is not reflected in their grounds of appeal. However, the court should not be constrained by the pleadings to answer a question of law which it regards as incapable of useful answer in the terms posed. Accordingly, the right course is to allow the appeal to the extent of setting aside the judge’s answer to the preliminary issue, but otherwise to make no order.’