Avoiding a Contract in Absence of Bad Faith
A commercially weaker party cannot avoid a contract on grounds of ‘economic duress’ if the stronger party believes in good faith it was entitled to act as it did.
Although businesses may avoid a contract on grounds of economic duress, there is legal uncertainty as to the circumstances where a contract results from a threat of a lawful act or omission. In what circumstances can it be invoked?
In a recent case1, the defendant was an airline - the only airline flying directly between the UK and Pakistan at the relevant time. The plaintiff ran a ticketing business agency for the airline and had been in dispute with it in 2012 in relation to unpaid commission for past ticket sales, during which the airline terminated its existing agency contracts with the plaintiff and with other agencies. New contracts were then offered by the airline. Not all the agents accepted the new terms but the plaintiff did.
The new terms incorporated a provision waiving claims for past commission. However, the plaintiff was not prepared to give up the past unpaid commission without a fight, and brought proceedings arguing that the new contract should be avoided on the basis of economic duress.
The High Court ruled that the plaintiff was entitled to avoid it on grounds of economic duress. However, the Court of Appeal overturned that ruling and found that the airline genuinely believed it was entitled to demand the waivers under the new contract terms, therefore, the demand was made in good faith. The plaintiff had not demonstrated economic duress nor had it established bad faith – and it was not for the airline to establish its good faith.
The court made clear that a lawful act in good faith did not amount to illegitimate pressure giving rise to a right of avoidance of a contract on the basis of economic duress.
Implications for Businesses
The appeal court gave useful guidance which businesses and their lawyers will find useful should a potential dispute involving alleged economic duress ever arise. It said that “the need to intervene is not engaged where a party uses lawful pressure to achieve a result to which it considers itself in good faith to be entitled”.
This applies in commercial dealings where the contractual parties owe no duties about the manner in which they exercise their personal rights and where they can choose whether or not to enter into a contract and, if so, on what terms.
However, Lady Justice Asplin acknowledged that even though there are harsh results in circumstances such as in this case, it is not appropriate to develop the law of economic duress in a way which would fetter the lawful use of a monopoly position. The control of monopolies is a matter for parliament.
1Times Travel (UK) Ltd v Pakistan International Airlines Corporation [2019] EWCA Civ 828
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