Lawful Act Economic Duress: A High Bar
Businesses seeking to show ‘lawful act economic duress’ to avoid their obligations under their contracts have quite a hurdle to clear, following a Court of Appeal ruling1.
An act might be lawful but a lawful act could amount to economic duress, for example, because it is unethical. However, if a party’s lawful act amounts to economic duress but it was done in good faith, the agreement cannot be avoided.
The background
A small, family-run travel company (Times Travel) operated a business that depended, for the most part, on selling tickets as agents for the major Pakistani airline (PIAC), selling an allocation of tickets for a particular route on a commission basis. A significant number of other agents also sold tickets for PIA.
A dispute arose when the airline failed to pay agents their commission and some threatened court action. In response, PIAC terminated the contracts with all its sales agents then offered them new contracts on the condition that they waived their existing claims. Some of the agents continued legal proceedings while others negotiated a new contractual term entitling them to receive from PIAC a sum equivalent to recoveries made in the litigation as if they had brought or continued proceedings.
However, Times Travel accepted the terms offered by PIAC as it had no other option but to close down. It then began proceedings to recover the commission under the original agreement (and other payments), on the basis that PIAC had used economic duress to force it into the new agreement. It claimed it was therefore entitled to ‘avoid’ the agreement.
What did the appeal court say?
The Court of Appeal rejected the claim by Times Travel. It found that the pressure exerted by PIA was not illegitimate, breach of contract or a tort. PIAC believed, in good faith, that it was entitled to apply commercial pressure in the way it did.
The court made clear “on the central legal issue 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”.
So only without good faith would PIAC’s actions have amounted to economic duress allowing the contract to be avoided. On that point, it is for the claimant to establish bad faith and not for the defendant to prove good faith – the burden of proof is on the claimant.
What does this mean?
It could be argued that the ruling validates conduct by the party with stronger bargaining power to exert economic duress through lawful conduct, so long as they do so in good faith. If the claimant is a weaker party, the additional challenge is proving the other acted in bad faith.
That could be an uphill struggle and specialist legal advice should be sought.
1Times Travel (UK) Limited v Pakistan International Airlines Corpn [2019] EWCA Civ 828
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