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Case law: Commercially weaker party cannot avoid agreement on grounds of ‘economic duress’ if the stronger party believes in good faith that it was entitled to act as it did

A weaker party to an agreement who wants to avoid it on grounds of economic duress by the other side, should consider whether the stronger party’s actions were taken in good faith, because if they were, it cannot avoid the agreement on grounds of economic duress.

July 2019

This update was published in Legal Alert - July 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A small, family-owned business contracted to become one of the sales agents of a major airline, selling an allocation of plane tickets for a particular route on a commission basis. The ability to sell those tickets was crucial to the small business’s survival, and the airline had a monopoly on them. Both parties were entitled to give notice of termination.

The airline failed to pay commission to a number of its agents and some of them (but not the small business) threatened court action.

The airline reacted by terminating its contracts with all of its sales agents, but then offered to re-engage the business as an agent, offering the same allocation of tickets as before - but only on terms that the business gave up its entitlement to its unpaid commission under the original agreement.

The business had no option other than to accept the new terms as the alternative was to close down. However, it took the airline to court to recover sums owed under the original agreement. It said the airline had used economic duress to force it into the new agreement which entitled the business to ‘avoid’ the agreement, ie, treat itself as not bound by it.

A contract can be avoided for economic duress if:

  • the stronger party applies illegitimate pressure;
  • that pressure is a significant cause that induces the weaker party to agree to the contract; and
  • the effect is that the weaker party is compelled, or feels there is no practical alternative.

The Court of Appeal said that the pressure applied by the airline was not illegitimate; it was neither a breach of contract nor a ‘tort’ (a wrongful act other than under a contract) and the airline believed, in good faith, that it was entitled to apply commercial pressure in the way it did. It would only have been economic duress if it had not. It was irrelevant whether, objectively, the belief was reasonable or not.

Operative date

  • Now

Recommendation

  • A commercially weaker party to an agreement that wants to avoid the agreement on grounds of economic duress by the other side needs to consider whether the other side’s actions were taken in good faith because, if they were, it cannot use economic duress to avoid the agreement.

Case ref: Times Travel (UK) Ltd v Pakistan International Airlines Corporation [2019] EWCA Civ 828

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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