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Economic duress or not?

28th October 2019

You can’t always get what you want?

In contract negotiations the parties come to the table with an idea of where they want to be, when all is said and done. But this can often change throughout the course of negotiations.

Ultimately, a balance may have to be struck between what a party wants and what they are willing to settle for; or indeed can get.

Working in the Corporate team here at Ansons, I often see the difficulty of negotiating when the other party has the bigger bat, alluding to that party’s greater strength of bargaining power.

The party who stands to lose more or who is not in a position to walk away from the deal could be all but ‘browbeaten’ into accepting a position that they otherwise wouldn’t have done, had they been more on an equal footing.

Bargaining power versus economic duress

The question is though, at what stage does the ‘bigger bat’ become unreasonably excessive and cross the line into economic duress?

This was the very issue considered in the recent case of Times Travel (UK) Limited v Pakistan International Airlines Corporation [2019] EWCA Civ 828.

A travel agency (Times Travel), was authorised to sell flight tickets as an agent for Pakistan International Airlines (PIA), dealing almost exclusively with PIA and paid commission for their sales.

However, a dispute arose over unpaid commission and in 2012 PIA cancelled the agency contract with Times Travel which, given its reliance on PIA, would have had a significant impact on their business.

At the same time, PIA offered a new contract to Times Travel on less favourable terms than the previous one. In particular, it required Times Travel to waive all claims for historic unpaid commission.

This was the only viable commercial option as far as Times Travel was concerned, as refusing the new deal would almost certainly have put them out of business.

Times Travel issued proceedings in relation to the unpaid commission, but PIA argued that their right to claim unpaid commission had been waived by the terms of the new contract they had agreed and signed.

Times Travel challenged the enforceability of the new contract, claiming it was forced to accept the new terms to avoid facing a collapse of their business. In other words, they claimed that PIA had asserted economic duress.

Close but no cigar

Originally, the High Court found in favour of Times Travel, agreeing there had been economic duress from illegitimate pressure being applied, which had the effect of compelling them to enter into the contract and thereby waiving claims for earlier commission.

PIA appealed and in May of this year, the Court of Appeal found in their favour on the grounds that use of pressure to achieve a result that someone believes (in good faith) they are entitled to, does not amount to economic duress.

PIA was able to apply pressure as a result of their position as major supplier of tickets for direct flights between the UK and Pakistan. Whilst it could be argued they were in a monopolistic position here the court decided this did not in itself amount to duress and was not enough to set aside the new contract. This has always been the position at common law.

Strictly speaking there is no hard and fast rule to distinguish illegitimate pressure from the cut and thrust of commercial bargaining; there has to be something more and various factors are considered including:

  • The seriousness of the impropriety.
  • Whether the person exerting the pressure acted in good or bad faith.
  • Whether the other had a realistic alternative.
  • Whether there was any protest from the other party.

Acting in good faith

This case turned on the ‘good faith’ aspect of the claim. If, at the time PIA rejected Times Travel’s claim for unpaid commission, PIA had a genuine belief that it was entitled to do so then there could not have been any economic duress as there was no element of bad faith.

Times Travel did not establish any ‘bad faith’ so there was no need for the Court to consider whether there were reasonable grounds for PIA’s belief that it was entitled to reject Times Travel’s claim.

The Court concluded that economic duress does not extend to the use of lawful pressure to achieve a result to which the relevant party believes, in good faith, it is entitled.

If bad faith had been found in this case, Times Travel may have chosen either to affirm or cancel the contract, but if cancelling the agreement was no longer possible, the court may have awarded compensation.

The Court acknowledged its ruling may have produced a severe result, but considered it necessary to frame the policy as it had, to avoid uncertainty in future commercial contracts. The decision sets a high bar for parties seeking to establish economic duress but it is consistent with the court’s desire to ensure contractual obligations are kept.

Ultimately, the strength or weakness of your hand is always going to be of major importance in commercial negotiations, but if you play that hand in bad faith, using it to illegitimately strip the other party of any other choice, then you must be aware of the risk of any contract entered into off the back of this being quashed.

Let’s make it happen

Ansons Corporate Team offers a wide range of commercial legal services from business acquisitions and disposals and negotiating commercial contracts to setting up new business ventures. If you would like more information please contact Emma Benniston at ebenniston@ansonssolicitors.com or on 0121 716 3701.