“Hard-nosed commercial negotiation” does not amount to duress

Where does the boundary lie between robust negotiating tactics and the use of illegitimate economic threats or pressure in commercial negotiation? The issue of economic duress has recently been considered for the first time by the Supreme Court in Pakistan International Airline Corp v Times Travel [2021].

The Supreme Court confirmed that economic duress does exist in English and Welsh law, but it has a narrow scope which means that the courts will rarely conclude that it applies in the context of commercial negotiation.

What is economic duress?

A contract may be set aside by a party or by the court where it has been entered into under economic duress e.g. where a party (A) threatens to terminate a contract unless the other party (B) agrees to their demands and B has no practical choice but to accept.

Economic duress therefore arises in the context of lawful, rather than unlawful, threats or pressure, however it is controversial, given the fact that many commercial contracts are entered into under some form of pressure from the other party.

What was the background?

Times Travel (UK) Ltd (TT) was a travel agent whose business consisted almost exclusively of selling plane tickets to and from Pakistan. Pakistan International Airline Corporation (PIAC) was the sole operator of those flights. It allocated tickets to TT and paid commission to TT for the tickets it sold. This contractual arrangement could be terminated by PIAC at one month’s notice.

A dispute arose about TT’s entitlement to commission. PIAC cut TT’s normal ticket allocation, as it was entitled to do, and gave notice that it would terminate their existing arrangement. This would have put TT out of business, so TT agreed to accept new terms by which it waived any claim it might have for the previously unpaid commission. TT subsequently sought to have the new contract set aside on the grounds of economic duress in order to recover the unpaid commission.

The trial judge held that TT was entitled to set aside the contract for economic duress, but this was overturned by the Court of Appeal. It decided that, as the relevant threat (i.e. to terminate the contract) was lawful, economic duress could only be established if PIAC’s demand (i.e. for TT to waive any claim it might have for unpaid commission) had been made in bad faith. As the trial judge had found that PIAC had not been acting in bad faith (it had genuinely believed that the disputed commission was not due) the pressure exerted by PIAC did not amount to economic duress. TT appealed.

What did the Supreme Court decide?

The Supreme Court dismissed TT’s appeal, the contract could not be set aside for economic duress.

Reasons for the decision

The Court confirmed that economic duress does exist in English and Welsh law. The three elements that need to be established are as follows:

1. The threat (or pressure) must have been illegitimate.

2. The threat caused the claimant to enter into the contract.

3. The claimant had no reasonable alternative but to give in to the threat.

As the parties agreed that TT could establish (2) and (3) of the above, the appeal was solely concerned with (1): whether PIAC’s threat was illegitimate.

The Court identified just two categories of case where economic duress has applied to date. First, where a defendant used its knowledge of criminal activity by the claimant to obtain a personal benefit by threatening to report the crime. Second, where the defendant, exposed to a civil claim, deliberately manoeuvred the claimant into a position of weakness to force it to waive its claim. In both categories, the defendants’ behaviour was highly reprehensible and amounted to an illegitimate threat.

The Court explained that, while the above categories are not exhaustive, the law does not recognise inequality of bargaining power or a general principle of good faith in contracting so the courts should approach any extension to the above categories with caution. Demands made in commercial negotiations will rarely amount to an illegitimate threat – something more is required e.g. reprehensible behaviour which renders the enforcement of the contract “unconscionable”.

In relation to this case, the Court recognised that PIAC had engaged in “hard-nosed commercial negotiation”, but this did not amount to reprehensible behaviour as per the above categories of case. PIAC’s genuine belief that it was not liable for the disputed commission further supported the view that its behaviour was not reprehensible.

What are the practical implications?

This is a welcome decision which provides certainty for commercial parties. While the Supreme Court made it clear that the boundaries of economic duress are not fixed, it is likely to be harder to succeed on economic duress claims in future. Claimants will therefore have to consider other causes of action if they wish to set aside a contract.

How can we help?

If you would like to discuss any issues concerning contract disputes, please contact a member of our Commercial Disputes Team.