It is not uncommon in business (e.g. a small limited company) to be compelled to accept often very biased or unfavourable terms in a contract offered by a much bigger company, particularly when the survival of the small company depends on it.  The Court of Appeal has recently considered when such a contract might be unenforceable due to economic duress.

It’s a tale as old as David vs Goliath. Small Co Limited relies either exclusively or very heavily on Big Co Limited for some or all of its business.  Big Co turns around one day and says to Small Co we are terminating our old contract and offering you a new one. The new contract is significantly weighted in favour of Big Co and very much to the detriment of Small Co. Big Co says ‘take it or leave it’ and Small Co in reality has to ‘take it’ as the survival of Small Co depends upon it.

To what extent can Small Co seek to argue that the unfavourable contract is unenforceable by Big Co due to economic duress? The Court of Appeal recently considered this issue in Times Travel (UK) Limited v Pakistan International Airlines Corporation [2019] EWCA Civ 828

The facts

TT was a travel agency that was an agent for PIA and relied heavily on that relationship in part because at the time PIA was the only airline flying directly to Pakistan. TT and PIA fell out over commission payments. PIA gave notice of its intention to cancel the existing contract with TT and offered a new contract to TT which amongst other things required C to waive all unpaid claims for commission.  TT was heavily reliant on the relationship and so felt it had no choice but to accept the new terms- it was either that or become insolvent.

However TT then issued proceedings for the unpaid commission. PIA argued that they owed nothing as the right to claim had been waived in the new contract.

The decision

The High Court decided in favour of TT, essentially because PIA had applied unfair pressure on TT who had no choice but to accept the bad bargain.

The Court of Appeal disagreed. Even though PIA  effectively held a monopoly the court decided that economic duress does not extend to the use of lawful pressure to achieve a result to which the person  (in this case PIA) exercising pressure believes in good faith it is entitled.

Conclusion

It remains possible to avoid a contract due to economic duress but it will not be easy to do so, or put another way, David does not often beat Goliath.

 

This blog was written by:  Michael Stewart

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