Susan Rosser and Tom Wild 20 Jun 2019 03:51pm

Economic duress – a narrow doctrine, made narrower

Economic duress is dealt with differently around the world. Here’s an in-depth look at what causes it, and the cases that have set precedence for how it is dealt with

Caption: Explaining what causes economic duress and how it’s dealt with around the world

English courts uphold contracts unless they are given a very good reason not to. The default position, leaving aside agreements with consumers as a special category, is that contracting parties are expected to look after their own interests – buyer beware – and applying pressure, even overwhelming pressure, is a legitimate feature of commercial bargaining.

Certainty in commercial dealings is extremely valuable. If parties could not rely on validly made contracts, they would be unable reliably to regulate their affairs, or value their assets and liabilities. One of the great historic attractions of English law is that parties to contracts generally know where they stand.

However, there are some situations so unfair that the courts will allow one party to avoid an agreement which would otherwise bind. These are generally narrow and clearly defined – think fraudulent misrepresentation, or undue influence. This article concerns one such area, duress, which is the subject of a noteworthy recent Court of Appeal judgment.

The core concept of duress will be familiar. If I am compelled to enter into an agreement under threat of physical violence, the law will not hold me to that apparent bargain. The injustice of the situation outweighs the policy objective of enforceability.

At the edge of the doctrine, where these competing policy objectives are most finely balanced, lies so-called 'economic duress'. This is where a bargain is struck following a threat to a party's economic interests (as opposed to life and limb), in circumstances where it would be unjust to hold that party to the resulting agreement.

The legal test which needs to be satisfied by the aggrieved party is threefold. First, the party must show that 'illegitimate' economic pressure has been applied. Second, that pressure must have influenced their decision to enter into the agreement, and third, the pressure must have deprived them of any practical choice.

The scope of economic duress, and in particular the first limb of the test – 'illegitimate pressure' - has until recently been somewhat unclear. However, in the recent case of Times Travel (UK) Limited v Pakistan International Airlines Corporation, the Court of Appeal clarified that 'illegitimate pressure' means one of two things: either a threat to do something unlawful (like breaching a contract), or applying (otherwise lawful) economic pressure in bad faith. In this context, 'in bad faith' means 'lacking a genuine belief that the party is entitled to the objective which it is pursuing'.

This sets a very high bar. In Times Travel, an airline threatened (lawfully) to terminate a contract on which a travel agency was reliant and (again lawfully) slashed its ticket allocation unless it agreed to enter into a revised contract and waive certain claims it had against the airline. This put the travel agency under immense commercial pressure, but the Court of Appeal had no trouble in holding unanimously that the new contract – including the embedded waiver - stood, as the agency was unable to establish bad faith and the airline had acted lawfully throughout.

In practical terms this judgment narrows the scope of economic duress, and hence increases parties' ability to rely on contracts. A party in a strong bargaining position will in most cases be able to press home its advantage without concern that this will undermine the agreement reached.

The travel agency may well feel aggrieved at this result (particularly since it succeeded at first instance), but it is entirely consistent with the longstanding policy of the English courts, which is to uphold bargains, and strictly to define the circumstances in which one party can walk away.

Susan Rosser is a partner and Tom Wild an associate in the litigation and disputes team at Mayer Brown.