What options are available to a party which finds itself pressured to enter into a contract?
It might be possible to undo the agreement on the basis that it was reached under duress - even, in principle, where the pressure consisted of a threat to do something lawful.
However, most, perhaps all, commercial negotiations will be carried out under some degree of pressure, and sometimes overwhelming pressure. This raises a question for negotiating parties: in pressing home a strong bargaining position, how far is too far?
The answer is that a threat to carry out a lawful act goes too far when it is made 'illegitimately'. As we reported here, in his 2012 judgment in Progress Bulk Carriers1, Cooke J held that 'illegitimate' in this context means 'morally or socially unacceptable'.
This open-textured test has been clarified and restricted in a recent Court of Appeal judgment2. Where the threats or acts in question are lawful, the doctrine will only apply when the party in question acts in bad faith. This appears to set a high bar indeed for parties seeking to rely on lawful acts as grounds for an economic duress case.
Times Travel (UK) Limited (the "Agency") is a small family business which sells tours to Pakistan. Its business depends upon an agency agreement with Pakistan International Airlines Corporation (the "Airline"), which was at the relevant time the sole operator of direct flights between the UK and Pakistan.
The Agency and the Airline traded under an agency agreement from around 2008. That agreement provided for the Airline to pay a flat rate of commission on sales by the Agency, with a bonus payable depending on total sales. The Agency claimed that the Airline owed it unpaid commission in respect of sales between 2009 and 2012.
Between 2011 and 2012 some 30 different travel agents brought claims against the Airline for unpaid commission under similar agreements.
In 2012, the Airline served notice on the Agency terminating the agency agreement. The Airline simultaneously reduced the Agency's allocated stock of tickets by 80%. This put the Agency under immense strain.
Enclosed with the notice of termination was an offer to enter into a new agency agreement. The Airline indicated that once this was signed, the Agency's ticket allocation would increase. The catch was that, as a condition of the new agreement, the Agency had to waive its claims for unpaid commission. Otherwise, the agreement was substantially the same as before.
The Agency accepted the new terms and, shortly later, its ticket allocation was restored in full.
A number of other agencies declined the new offer and persisted with their claims for unpaid commission, securing a settlement under which additional commission would be paid on future sales.
When, in December 2013, the Agency requested a similar bonus structure, the Airline declined. The Agency then commenced its own claim for unpaid commission but, in order to succeed, it needed to avoid the waiver in the new agreement. It sought to do so on the ground of economic duress.
A claim of economic duress has three elements. First, the pressure applied to one party must have been illegitimate. This is usually the case when the pressure consists of a threat of unlawful action, although the fact that a threat is lawful does not necessarily make the pressure legitimate.
The Court will assess the legitimacy of pressure against a range of factors: in particular whether there has been an actual or threatened breach of contract and whether the person exerting the pressure has acted in bad faith.
The pressure must have influenced the victim's decision to enter into the contract, and the practical effect of the pressure must have been a lack of practical choice for the claimant. The Court will examine whether the victim had any realistic practical alternative, whether the victim protested at the time, and whether the victim subsequently affirmed the contract.
The Courts have been eager to distinguish illegitimate pressure from "the rough and tumble of the pressures of normal commercial bargaining".
The first instance judgment – bad faith not a necessary component
At first instance Warren J sided with the Agency. In finding that the Airline had acted illegitimately, the judge relied upon the strength (as he saw it) of the Agency's claim for historic commission, the fact that the Airline's actions appeared calculated to ensure that the Agency lost its claim to accrued rights, and the fact that the Agency was a longstanding and honest commercial partner which was given no adequate period of notice which might allow it to adjust its business.
The Agency did not establish that the Airline had acted in bad faith, but Warren J held that this did not matter.
Reversal by the Court of Appeal
The first instance judgment was reversed unanimously.
The Court of Appeal's reasoning had two principal strands, one general and the other more specific to the case at hand.
The general proposition is that "the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result to which the person exercising pressure believes in good faith it is entitled, and that is so whether or not, objectively speaking, it has reasonable grounds for that belief." What is required is "deliberate wrongdoing in the sense of pursuing claims known to be invalid".
In other words, where the party's means are lawful, there has to be something illegitimate about the intended end in order to engage the doctrine – and that means an end pursued in bad faith.
Here, it was common ground that the Airline was entitled to terminate the old contract and reduce the Agency's ticket allocation. The judge had not found that the Airline lacked a genuine belief in its right to reject the Agency's claims for commission. Accordingly, the Airline's means and intended result were both legitimate, and the new agreement stood.
The second strand of the Court's reasoning was that the strength of the Airline's negotiating position derived from its position as a monopoly provider. As a matter of policy, the restraint of monopoly power is regulated by statute (i.e. by competition law) and not by the common law.
The Court of Appeal's judgment sets a high bar – perhaps prohibitively high - for parties seeking to establish lawful act economic duress.
The party seeking to avoid the agreement bears the burden of proof. It must show on the balance of probabilities that the other party did not, in good faith, consider that it was entitled to the result it sought to achieve. Even if the other party had no reasonable grounds for believing itself to be entitled to that result, this will not necessarily be enough to clear that evidential hurdle.
English law regards it as paramount that contractual obligations are kept. This judgment is directed towards this ideal. In most circumstances, a party which has struck a hard bargain will not need to worry that it may be undone by the Courts.
Scope for further challenge?
There is perhaps scope to query the way the Court of Appeal casts the test for bad faith in Times Travel.
The test applied by the Court of Appeal appears to be wholly subjective – what was required was a factual finding that the Airline "lacked a genuine belief in its right to reject [the Agency's] claims".
This may sit uneasily with the authorities construing the words "made in bad faith" in the Trade Marks Act 1994. In the 2004 judgment in Harrison v Teton Valley Trading Co Ltd3, the Court of Appeal held that the test for bad faith in this context had both objective and subjective elements, mirroring those in the (then) test for dishonesty as set out in Twinsectra v Yardley.4
Matters are complicated further by the 2017 judgment in Ivey v Genting5, in which the Supreme Court held that in the context of dishonesty, Twinsectra is no longer good law. The test for dishonesty now involves a (factual) inquiry as to the party's knowledge as to the facts, followed by an inquiry as to whether its conduct was (objectively) honest given the state of its knowledge. In that context, whether the party in question had reasonable grounds for its (apparent) belief is likely to be determinative.
We can see the attraction of the Ivey test in the context of economic duress. There may be circumstances in which a party genuinely believes it is entitled to a particular result, in circumstances where an ordinary person in their shoes would consider that result to be morally or socially unacceptable. There is an argument that a party in that position should not benefit from its own lack of moral judgment.
A similar line of argument was pursued unsuccessfully by the Agency, but the case law above appears not to have been cited to the Court of Appeal, so there may be scope to explore the test in future cases. This argument would need to be balanced against the desire for certainty in commercial arrangements (and our expectation is that the latter would prevail).
Although the Agency is likely to feel aggrieved at having been backed into a corner by the Airline, the judgment is entirely consistent with English law's desire to ensure that contracts bind. The scope of lawful act economic duress has been narrowly confined, although the doctrine will continue to have a greater role where one party threatens to act unlawfully, for instance by breaching an existing contract.
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