Economic duress and 'bad faith'

The latest development in the Post Office case shows this legal saga could be far from over. In December, it was reported that 555 Post Office workers who had previously settled their civil claims could take further legal action, as they now argue that their £57m settlement agreement was obtained under duress and not in good faith.

Economic duress is an interesting concept in English law and one which is hotly debated, although a recent Supreme Court judgment helps give much-needed clarity.

To provide further context to this latest development, the former subpostmaster Alan Bates told the Business, Energy and Industrial Strategy committee of the House of Commons that this group had not received the compensation that was properly due. The group’s £57m, he stated, was mainly used to pay legal costs, leaving £20,000 for each victim – a total that Alan Bates said fell ‘well short’ of what is needed.

The offer of £57m was accepted at the time, Bates said, because claimants felt they had no other option due to the ‘high financial commitment’ they had incurred.

This case, if heard, will revolve around the point of good faith involved in these sorts of agreements under duress. Commenting on this point of good faith, Bates said, ‘we were forced into an agreement because Post Office’s legal team were trying anything and everything to run us out of cash’.

Contractual disputes

Given our current economic situation and as the country’s businesses look to claw back losses from the pandemic, it is likely this legal point regarding good and bad faith related to economic duress will be debated more hotly in contractual disputes.

The case of Pakistan International Airline Corporation v Times Travel (UK) Ltd (in which my firm successfully acted for Pakistan International Airline Corporation) helped drill down into the ingredients and scope of economic duress.

This case revolved around a claim from a small family-owned travel agency, Times Travel, which entered into a contract with Pakistan International Airline Corporation (PIAC). Times Travel acted as a ticketing agent for PIAC and it claimed it was put under economic duress and forced to sign a new contract with PIAC regarding the sale of airline tickets.

In 2012, PIAC offered new terms and conditions to travel agencies that wished to continue to sell flights to Pakistan. It gave notice on the previous terms and a condition of the new terms was to waive the rights to previous commission. Times Travel signed these new terms and conditions.

However, Times Travel later launched proceedings to claim unpaid commissions and payments. Originally, the High Court found in favour of Times Travel on the grounds that PIAC used duress to force the agency to sign the new terms.

Economic pressure justified

However, this was later overturned on appeal. We successfully argued that PIAC had not acted in bad faith and the latest appeal in the Supreme Court reiterated that PIAC was justified in applying economic pressure because of its standing as a monopoly supplier of airline tickets to Pakistan. The five justices residing unanimously dismissed the appeal, which meant that PIAC would not need to retrospectively pay any commissions.

In the PIAC case, the original argument centred around the ‘bad faith’ principle. Although commercial negotiations can be unfair, with one side having more bargaining strength than the other, unlawful acts of duress render contracts voidable. If PIAC had entered the contract in ‘bad faith’, then the result could have been very different.

This was why this judgment was significant, as it helped clarify the scope of a lawful act of economic duress.

The ruling established that the original nature of the commercial negotiation was appropriate. Outlining that the demand was not made in ‘bad faith’ by PIAC and, therefore, the new terms were not voidable, the justices agreed that the law should continue to recognise duress.

However, they also agreed that judges cannot be arbiters of social morality. Further, the justices agreed that ruling any other way would cause a potential lack of clarity in future commercial litigation cases.

While it is accepted in the judgment that the doctrine of lawful act duress does exist, the tipping point is the illegitimacy of the pressure. Pressure has to be akin to an unconscionable act to cross the threshold hence allowing the contract to be voidable.

New boundaries

The decision changed the landscape of commercial negotiations by establishing the boundaries of acceptability. This could prove particularly interesting given the current economic conditions and the pressures facing many businesses. Where it is claimed that the one party was put under economic duress, they need to prove that the negotiations were done in bad faith.

This is clearly a point the Post Office workers will look to prove and it is expected there will be further investigation into this matter by the Commons Business, Energy and Industrial Strategy committee in the coming weeks. This is a legal saga not close to being concluded.

Farhan Farani is managing partner at Farani Taylor, London