Duress distinguished from legitimate renegotiation

29
October
2021

Duress: the law

Outside of the context of perhaps ‘relational contracts’, the law is not in general concerned to prevent a party simply taking advantage of superior bargaining power. There is a presupposition of freedom of contract which underpins Anglo-New Zealand common law (the growth of consumer law has been moving in a different direction). Nor is there any general notion of inequality of bargaining power or principle of ‘fair dealing’ in commercial transactions.

Thus, the New Zealand Court of Appeal in Dold v Murphy (2020) held that the doctrine of lawful-act duress (as opposed to the ‘silver or lead’ kind of duress) does not provide a remedy against hard-nosed commercial self-interest without more. The Court of Appeal rejected a claim of lawful act duress in circumstances where a minority shareholder, who had 6.2% of a company’s shares, successfully demanded to be paid considerably more than the proportionate value of his shareholding when the other two shareholders, who between them held 93.8% of the shares, wished to accept a particularly valuable offer for all of the shares in the company. This was rank opportunism but not exculpatory for the majority shareholders.

Like the New Zealand courts, the courts in England have held that pressure is commonplace in commercial negotiation and only illegitimate pressure can support a case of duress. Nevertheless, the cases still leave the question of what exactly constitutes illegitimate pressure in the law of contract unanswered. The UK Supreme Court’s decision in Pakistan International Airline Corporation [2021] UKSC 40 clarifies that there is no general doctrine of bad-faith demands or ‘exploitation’ of inequality of bargaining power – a position that tends to align with the approach in New Zealand.

The dispute

Times Travel (UK) Ltd (TT), a travel agent situated in Birmingham, UK, operated a business which almost entirely comprised selling flight tickets to travel from UK to Pakistan on planes owned by Pakistan International Airlines Corporation (PIAC).  PIAC held a monopoly position in the market as the only airline carrier at the time operating direct flights between Pakistan and the UK.  There was no long-term supply agreement between the parties.  PIAC could choose to terminate its contractual relations with TT at any time, by providing a short period of notice.   As TT had built its business in exclusive reliance on PIAC, without legal safeguards, any decision by PIAC to terminate its contract with TT would effectively put an end to TT’s entire business operations.  

A dispute arose as to unpaid commissions, which TT (and other travel agents) asserted that PIAC owed to them.  Faced with this assertion (which PIAC did not accept) PIAC gave notice of termination of its contract with TT and moved to reduce TT’s usual fortnightly ticket allocation from 300 to 60.  PIAC then offered TT to enter into a new contract that included an onerous waiver term under which TT would be required to release PIAC from all claims that TT may otherwise have had in respect of the earlier unpaid commissions.  TT reluctantly agreed to enter into the new contract, but subsequently sought to rescind the same on the basis that it had been subjected to illegitimate threats or pressures by PIAC.  

The issue for the UK courts was whether PIAC’s actions amounted to lawful act economic duress, rendering the new contract voidable.  There was no question that PIAC’s pressures on TT to enter into the new agreement were lawful; it had validly terminated the earlier agreement by providing notice and the reduction in ticket allocation did not constitute a breach of contract.  It was not argued that PIAC’s initial breach of contract (in failing to pay commission owed) meant that this was a case of unlawful economic duress.  The previous breach was not the relevant threat or pressure that induced TT to enter into the new agreement.  Rather, it was the threat or pressure of PIAC not continuing their contractual relationship with TT that constituted the relevant inducement.  The question for the court was whether PIAC’s actions, while entirely lawful, could nonetheless be viewed as asserting illegitimate pressure on TT.  

The Supreme Court (UK)

Like the Court of Appeal, the Supreme Court found PIAC’s actions were not illegitimate under the doctrine of lawful act economic duress.  

However, the majority of the judges believed that the Court of Appeal and CTN Cash and Carry Ltd v Gallaher Ltd, a prior Court of Appeal decision, had gone too far in focusing on the defendants’ honest belief (as to their legitimate interest) and had wrongly focused on “bad faith”. A subjective bad-faith threat or demand was not required (Lord Burrows dissenting on this point).  

The majority considered it irrelevant whether PIAC genuinely believed it had a defence to the claim it sought TT to waive (i.e. an entitlement to the thing demanded) and it was not desirable to introduce such a subjective test to the doctrine. Not only would it be unduly difficult for the party seeking to rescind the contract (being the party bearing the onus of proof) to establish the subjective belief of the other party, but it would also be no different in principle from making demands for inducement payments as a pre-condition to entering a contract – a common occurrence in the context of commercial negotiations, widely accepted as legitimate.    

As the majority noted, where the common law does not recognise a doctrine of inequality of bargaining power or any principle of good faith in commercial dealings, hard-nosed exercise of monopoly power as against more vulnerable commercial parties does not of itself amount to illegitimate pressure. What is required is some form of reprehensible conduct (which would often involve some element of bad faith) that actively maneuvers the other contracting party into a position where they have no reasonable alternative but to agree to the contract.  

Comment

In general, a ‘threat-and-demand’ motivated by commercial self-interest will be justified. Something more than being difficult or ungenerous is required, and this is likely to require extreme facts where a contracting party deliberately takes steps which, albeit lawful, are calculated to place the other party in a position where the essence of the choice that party then faces is effectively no better than ‘silver or lead’.

Stuart Dalzell, Partner and Lina Worthing, Associate