It is quite common for people to say that they did something or agreed to something, which they later view as being detrimental to them, because they were put under some form of economic duress at the time of doing or agreeing to the event in question. The event could be, for example, the signing up to an ‘unfavourable’ final account agreement, agreeing not to pursue further claims, or agreeing to disadvantageous contract terms. However, will the defence of economic duress hold any water?
It is well established law that, where a party enters into a contract because of illegitimate duress, the contract is voidable by the party who suffered the illegitimate duress.
It must be remembered that in the commercial world, economic and commercial pressure is to be expected and is acceptable, but when that pressure crosses the line into being illegitimate ‘duress’ that is not permitted.
The question, of course, is where is the line to be drawn between ‘lawful economic pressure’ and illegitimate duress?
Although it did not relate to parties involved in construction, the Court of Appeal case of Times Travel (UK) Ltd v Pakistan International Airlines Corporation (Rev 2) [2019] EWCA Civ 828 (14 May 2019) gave some clarity on this matter, and the points raised in the judgment of that case should be kept in mind by all people (including those in the construction industry) that are involved in the process of commercial negotiations.
Times Travel was a small family business which sold tickets for Pakistan Airlines’ flights. At the time in question, the airline was the only operator of direct flights between the UK and Pakistan, and Times Travel's business was almost exclusively tied to that route.
Disputes arose between Times Travel and Pakistan Airlines relating to the rate and payment of commission. These disputes were not resolved and, subsequently, Pakistan Airlines gave notice to Times Travel to terminate the contract (in accordance with its terms).
Obviously this was devastating to Times Travel, and Times Travel sought to enter into a new contract with Pakistan Airlines. However, as a condition of entry into that new contract, Pakistan Airlines required a waiver of any prior claims by Times Travel (including those relating to the disputed entitlement to commission from the previous contract). Times Travel entered into the new contract but subsequently sought to argue that it was still entitled to the unpaid commission because the new contract had been entered into by it under illegitimate duress.
When this matter was referred to court, at first instance, the High Court (somewhat surprisingly) held that the new contract could be avoided (i.e. could not be enforced) on the grounds of illegitimate duress by Pakistan Airlines.
However, the Court of Appeal disagreed with this, and it set out the following principles applicable to questions of lawful (rather than illegitimate) act duress:
The Court of Appeal found that the doctrine of illegitimate duress does not extend to the use of lawful commercial or economic pressure to achieve a result which the person exercising that pressure believes, in good faith, it is entitled to, and in such a case, the Court will not examine whether or not there were reasonable grounds for a party's belief in its entitlement. For duress to be considered to be illegitimate such that a contract may be voided, at the very least, bad faith on the party exerting the economic or commercial pressure must be proved. The Court of Appeal also found that it would not be appropriate to develop the law of economic duress in a way which would fetter the lawful use of a monopoly position in a commercial situation.
The Court recognised that the impact of its judgment in the Times Travel case may have been harsh; but the outcome serves as a clear indication to all of us of the circumstances in which the defence of illegitimate duress may be available, thus ensuring that commercial parties can be comfortable regarding the limits of what is acceptable in commercial negotiations.
The Court of Appeal found that where only lawful acts have been carried out, economic duress will not be available as a defence unless bad faith can be proved.
This case brings much needed clarity on the law surrounding economic duress and in particular duress arising from lawful acts. The important point which the Court of Appeal stressed in its rationale was that the position which Pakistan Airlines had adopted in negotiations was lawful but had Pakistan Airlines sought to exert pressure over Times Travel which was unlawful then the Court of Appeal may have reached a different decision. An example of unlawful pressure which the Court of Appeal gave was criminal blackmail (for example, threatening to report a crime unless a sum of money is paid).
This Court of Appeal judgment does not come as a great surprise because, in the context of business to business dealings, the English courts have always favoured certainty, resisting attempts to get dragged into ruling after the event what would have been “fair” in the circumstances or allowing one party to depart from the agreed terms because they have decided those are unfair and/or are not what they really wanted to accept.
Therefore, the important points to note from the above are that in the normal course of events, the view the Courts usually take is that in commercial contracts, each party has to weigh up whether the consequences of entering into a contract are outweighed by the consequences of not entering into that contract and decide accordingly. Therefore when negotiating contracts / agreements etc., the above points must be kept in mind at all times.
Peter Barnes, Director, Blue Sky ADR Ltd
[email protected]
07515 104307
www.blueskyadr.com
Date 18 November 2020
This article is provided for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the writer or by Blue Sky ADR Ltd. If specific advice is required, Blue Sky ADR Ltd should be contacted direct at [email protected]. If you require any further information in relation to this article please contact one of our team.
It must be remembered that in the commercial world, economic and commercial pressure is to be expected and is acceptable, but when that pressure crosses the line into being illegitimate ‘duress’ that is not permitted.
The question, of course, is where is the line to be drawn between ‘lawful economic pressure’ and illegitimate duress?
Although it did not relate to parties involved in construction, the Court of Appeal case of Times Travel (UK) Ltd v Pakistan International Airlines Corporation (Rev 2) [2019] EWCA Civ 828 (14 May 2019) gave some clarity on this matter, and the points raised in the judgment of that case should be kept in mind by all people (including those in the construction industry) that are involved in the process of commercial negotiations.
Times Travel was a small family business which sold tickets for Pakistan Airlines’ flights. At the time in question, the airline was the only operator of direct flights between the UK and Pakistan, and Times Travel's business was almost exclusively tied to that route.
Disputes arose between Times Travel and Pakistan Airlines relating to the rate and payment of commission. These disputes were not resolved and, subsequently, Pakistan Airlines gave notice to Times Travel to terminate the contract (in accordance with its terms).
Obviously this was devastating to Times Travel, and Times Travel sought to enter into a new contract with Pakistan Airlines. However, as a condition of entry into that new contract, Pakistan Airlines required a waiver of any prior claims by Times Travel (including those relating to the disputed entitlement to commission from the previous contract). Times Travel entered into the new contract but subsequently sought to argue that it was still entitled to the unpaid commission because the new contract had been entered into by it under illegitimate duress.
When this matter was referred to court, at first instance, the High Court (somewhat surprisingly) held that the new contract could be avoided (i.e. could not be enforced) on the grounds of illegitimate duress by Pakistan Airlines.
However, the Court of Appeal disagreed with this, and it set out the following principles applicable to questions of lawful (rather than illegitimate) act duress:
The Court of Appeal found that the doctrine of illegitimate duress does not extend to the use of lawful commercial or economic pressure to achieve a result which the person exercising that pressure believes, in good faith, it is entitled to, and in such a case, the Court will not examine whether or not there were reasonable grounds for a party's belief in its entitlement. For duress to be considered to be illegitimate such that a contract may be voided, at the very least, bad faith on the party exerting the economic or commercial pressure must be proved. The Court of Appeal also found that it would not be appropriate to develop the law of economic duress in a way which would fetter the lawful use of a monopoly position in a commercial situation.
The Court recognised that the impact of its judgment in the Times Travel case may have been harsh; but the outcome serves as a clear indication to all of us of the circumstances in which the defence of illegitimate duress may be available, thus ensuring that commercial parties can be comfortable regarding the limits of what is acceptable in commercial negotiations.
The Court of Appeal found that where only lawful acts have been carried out, economic duress will not be available as a defence unless bad faith can be proved.
This case brings much needed clarity on the law surrounding economic duress and in particular duress arising from lawful acts. The important point which the Court of Appeal stressed in its rationale was that the position which Pakistan Airlines had adopted in negotiations was lawful but had Pakistan Airlines sought to exert pressure over Times Travel which was unlawful then the Court of Appeal may have reached a different decision. An example of unlawful pressure which the Court of Appeal gave was criminal blackmail (for example, threatening to report a crime unless a sum of money is paid).
This Court of Appeal judgment does not come as a great surprise because, in the context of business to business dealings, the English courts have always favoured certainty, resisting attempts to get dragged into ruling after the event what would have been “fair” in the circumstances or allowing one party to depart from the agreed terms because they have decided those are unfair and/or are not what they really wanted to accept.
Therefore, the important points to note from the above are that in the normal course of events, the view the Courts usually take is that in commercial contracts, each party has to weigh up whether the consequences of entering into a contract are outweighed by the consequences of not entering into that contract and decide accordingly. Therefore when negotiating contracts / agreements etc., the above points must be kept in mind at all times.
Peter Barnes, Director, Blue Sky ADR Ltd
[email protected]
07515 104307
www.blueskyadr.com
Date 18 November 2020
This article is provided for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the writer or by Blue Sky ADR Ltd. If specific advice is required, Blue Sky ADR Ltd should be contacted direct at [email protected]. If you require any further information in relation to this article please contact one of our team.
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