Economic duress and good faith (or, it’s ok to be nasty so long as you think it’s ok)

September 2019

Rating system:
Reading time (1-10 minutes): 3½
Sophistication level (1 (idiot) – 10 (expert)): 7
Entertainment value (1 (turgid) – 10 (side-splitting)): 5

Background

If you are pushed into entering into or changing terms of a contract as a result of threats or illegitimate pressure you may be able to ask a court to rule that the contract terms are void using the legal concept of duress. Historically claims of duress were limited to criminal behaviour, such as acts or threats of personal violence and unlawful threats to property. But later (since about 1976) it became extended so that illegitimate pressure amounting to economic duress can involve the threat of other unlawful acts (such as breach of contract or actionable tort). And it can also occasionally include certain ‘illegitimate pressure’ which might in itself be lawful, for example the threat to terminate an existing contract unless you agree to less favourable terms.

Economic duress cases are quite rare. I’ve been involved in a number of cases (one notable one involving a major supermarket chain) where I have helped clients try to negotiate new contractual terms with businesses which have threatened to breach the terms or simply pull out of existing long-term contractual agreements unless my client agreed new and less favourable terms. Whilst we had limited leverage to threaten the other parties with claims of breach of contract if they carried out their threats (which my litigation colleagues helped with whilst I played the good cop in the new contract negotiations), as is often the case my clients were nevertheless also very keen to keep doing business with them and therefore accepted the new terms. This can be an easier option than taking costly, lengthy and uncertain legal action, particularly against bigger businesses which you know are happy to play rough.

But occasionally situations do arise where people who have been shafted in this way do want to get out of their new contract, and then claim for damages based on what they should have got under their original contract.

In a recent case the Court of Appeal had a few things to say on what circumstances might amount to economic duress.

Recent case

Times Travel (‘TT’) is a travel agency that mainly sells plane tickets between the UK and Pakistan to the Pakistani community in and around Birmingham. In 2009 TT was appointed by Pakistan International Airlines (‘PIA’) as an agent authorised to sell PIA’s tickets in return for commission from PIA. TT was given a fortnightly ticket allocation of 300. PIA was at the time had a monopoly position as the only airline operating direct flights between the UK and Pakistan.

In 2012 PIA gave notice to TT (and to its other UK agents, many of whom had been bringing claims against PIA for unpaid commission) to terminate the contract, and at the same time also severely reduced the tickets it made available. This was all perfectly lawful in itself. PIA then offered TT a new contract in pretty much the same terms, including the original ticket fortnightly ticket allocation. But it said that TT would first have to waive any existing claims to unpaid commission. TT reluctantly agreed to enter into the new contract, as it might well have gone bust if it hadn’t.

In 2014 TT brought a claim against PIA to recover the unpaid commission under the original contract. It said the clause in the 2012 contract where it waived its rights under the original contract had only been consented to as a result of economic duress.

At the High Court trial, the court agreed with TT, and said that PIA should pay TT some of the unpaid commission. PIA appealed.

What did the Court of Appeal decide?

The Court of Appeal made the following rulings:

• PIA’s threat not to enter the new contract unless TT agreed to the waivers of commission was not in itself unlawful.
• It is well-established common law that taking advantage of a monopoly position to get a good deal in itself is not in itself applying illegitimate pressure. (Various statutory laws now impose all sorts of controls on monopolies, but that’s another matter).
• Where the pressure being applied is not unlawful, it won’t be illegitimate and so duress cannot be successfully claimed if the defendant believes they are acting in good faith to achieve a result to which they are entitled, *regardless of whether this belief is reasonably held.  So, it is a very subjective test rather than an objective test which is the type of test the law usually likes to impose on things.
• It is up to the claimant to prove the defendant’s bad faith.
• In this case, there was no evidence found that PIA was acting in bad faith, indeed the evidence showed that PIA had genuinely believed that they could legitimately behave in the way they did. They may have misunderstood their exact legal position in relation to the disputed unpaid commissions, but that didn’t matter.

So PIA’s appeal was successful.

Comments and tips

*Don’t be nice. If you genuinely think it’s legitimate to shaft someone in these circumstances then it is so long as you’re not doing anything unlawful. But if you don’t then it might not be. So it can help if you have lower standards as to what might be legitimate or not! If you do have doubts just don’t record them anywhere. (Same as if you’re thinking of proroguing Parliament.) All very strange law…

The case confirms the high threshold for proving economic duress. This will give comfort to parties to various types of long-term contracts, particularly those such as franchisors, whose contracts often include provisions and conditions to be met if the franchisee wants to renew or extend or sell on its franchise which could be ‘abused’ by the franchisor (such as paying new fees or other costs, waiving claims against the franchisor, or signing the latest form of franchise agreement).

Case: Times Travel (UK) Ltd v Pakistan International Airlines Corporation [2019] EWCA Civ 828.