Economic Duress – How Far Is Too Far?

Introduction

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.

The dispute

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...