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Hard-nosed commercial negotiation that exploits monopoly advantage not duress

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Jason Rix

PSL Counsel

London

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22 September 2021

Times Travel’s business depended upon selling Pakistan International Airlines’ tickets. The travel agency was pressured by the airline to waive claims for unpaid commissions under its old contract, by the threat of the airline not entering a new contract. The airline had no obligation to enter into the new contract, but the travel agency could not survive without it. The agency signed a waiver agreement but later argued that it should be rescinded for duress. The UK Supreme Court held that, “While this entailed hard-nosed commercial negotiation that exploited [the airline's] position as a monopoly supplier, it did not involve the reprehensible means of applying pressure” and so was not economic, or lawful act, duress.

Duress is a common law basis on which to rescind a contract. The essential elements are:

  • there must be a threat or pressure exerted by D that is illegitimate (but not necessarily unlawful);
  • that illegitimate threat or pressure must cause C to enter into the contract; and,
  • for economic, or lawful act, duress, C must have had no reasonable alternative to giving into the threat or pressure.

The majority of the UK Supreme Court noted that, to date, there are two circumstances where lawful act duress has been found to exist:

  • where D uses knowledge of C’s criminal activity (or that of C’s associates) and the threat of reporting it to obtain a personal benefit; or,
  • where, D being exposed to a civil claim (eg breach of contract) by C, D illegitimately manoeuvres C into a position of vulnerability so that C waives its claim.

The majority noted that while the boundaries of lawful act duress are not fixed, the courts should approach any extension with caution, particularly in context of contractual negotiations between commercial entities (while at the same time noting that the equitable doctrines of undue influence and unconscionable bargains already exist and, moreover, there is no overriding duty of good faith in contracting nor a doctrine of imbalance of bargaining power.

In the view of the majority, without more, a bad faith assertion of a pre-existing legal entitlement by D which C believes or knows to be incorrect did not amount to lawful act duress. Examples of what could be that "more" included breach of duty, a misleading act or something that is “unconscionable”.  Lord Burrows disagreed on this point.

It seems therefore that in the context of contractual negotiations between commercial entities, lawful act duress will rarely be made out.

 
Postscript: this case was applied in Heritage Travel v Windhorst.  The assumed facts were: before serving an acceleration notice, Heritage told Windhorst that, unless Windhorst agreed to the terms eventually incorporated into a settlement agreement, Heritage was prepared to disclose to potential investors matters which, before the acceleration notice, would have been confidential. Windhorst, believing that this disclosure would likely jeopardise a proposed securitisation transaction, considered that there was no realistic alternative but to give in to the Heritage's demands. The judge held this was  “... plainly a lawful act threat, coupled with a demand motivated by commercial self-interest. Such conduct is generally regarded in law as wholly legitimate. Nothing in the facts of this case, even taking [Windhorst's] case at its highest, comes close to establishing the kind of reprehensible or improper conduct or the kind of unconscionability that could provide [Windhorst] with an arguable defence”.

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