Good Faith or Hard Bargain: Negotiating Economic Duress in Commercial Transactions

[Madhav is a student at National Law School of India University.]

“A thread runs through our contract law that effect must be given to the reasonable expectations of honest men” – (Lord Steyn, 1997)

Implicit in Lord Steyn’s statement above is the axiom that good faith is an integral aspect of commercial dealings. In simple terms, good faith means contracting parties must act honestly, deal fairly, and avoid taking unfair advantage of each other, even when pursuing their own interests. Interestingly, there is no general principle of good faith in contracting in English Law. Courts instead rely on specific doctrines aimed at promoting fair dealing while actively abstaining from establishing a general principle of good faith in contract law. In this regard, Lord Hoffman has argued that embracing such a principle would 'destabilize normal commercial relationships' and introduce 'uncertainty,' reducing litigation by making it a negotiation tactic. Thus, in the words of Sir Thomas Bingham, good faith becomes ‘the most important contractual issue of our time’.

One of the avenues where this concept of good faith may prove relevant is the principle of ‘lawful act duress,’ discussed in the United Kingdom case, Times Travel and Anr. v Pakistan International Airlines Corporation (Times Travel), decided in 2021. The court translates the theoretical principle of good faith into a practical test to determine the existence of duress. However, as the author aims to demonstrate, the majority opinion fails to adequately analyze the nuances of the doctrine and falls short of providing a definitive test on lawful act duress. While the majority opinion led by Lord Hodge argues for a test of duress rooted in the doctrine of equity, the actual test, the author suggests, is the doctrine of bad faith demand given by Lord Burrows. This article discusses [a] the test laid down by the majority in Times Travel and why it should be disregarded in favor of a doctrine of bad faith demand; and [b] relevant equivalents and whether such a model is applicable in the Indian law of contracts. 

Examining Times Travel: Intersection of Good Faith and Duress

Facts

Times Travel, a travel agency located in UK, entered into a relationship with Pakistan International Airlines Corporation (PIAC) in 2006. PIAC had the exclusive choice of termination, simply by giving prior notice of a month. In September 2012, PIAC issued a termination notice, significantly reducing Times Travel’s ticket allocations and placing the agency under severe economic pressure. Consequently, on 24 September 2012, Times Travel entered into a new agreement, waving all prior claims against PIAC for unpaid dues. Later, Times Travel initiated legal action, claiming that duress had undermined its free consent to the new agreement.

Lawful act duress and the bad faith test 

As noted by Lord Burrows, lawful act duress is the threat of lawful action to gain an upper hand in contractual dealings. In simple terms, threats of initiating legal action, though lawful, would vitiate free consent in a contract. What then must be shown to conclusively establish duress? This is precisely the juncture where the judges differ. Lord Burrows suggests a ‘bad-faith demand’; wherein the threatening party does not genuinely believe that it has a defence, and there is no defence, to the claim being waived. Lord Hodge, on the other hand, proposes a doctrine based on equity to ascertain ‘illegitimate or unconscionable acts’, a necessary pre-requisite for lawful act duress. 

Lord Hodge’s model to judge duress

Lord Hodge’s model of illegitimate pressure is based on the equitable concept of unconscionability. This resonates with Universe Tankships, where Lord Diplock argues that the rationale behind the development of economic duress was that a person’s consent was induced by pressure which the “law does not regard as legitimate”. This was clarified in Borrelli, where unconscionable was used as a qualifier to describe illegitimate pressure or impropriety by the contracting party. The doctrine of ‘unconscionable’ bargains applies when a party exploits another’s weakness in a morally culpable manner. It is in this background that Lord Hodge proposes that lawful act duress requires more than bad faith; the conduct must involve highly reprehensible behavior or actions that equity would consider unconscionable. In the immediate case, there was no evidence of fraud, dishonesty, or other reprehensible behavior akin to Borrelli, and thus the appeal was dismissed.

How the majority misses the mark

The author posits the view that Lord Hodge, leading the majority judgment, misses the mark on bad faith demand, and his criticisms of Lord Burrows position are unfounded. First, Lord Hodge’s view that judging duress from the perspective of bad faith would challenge the autonomy of parties and leads to uncertainty simply falls wide of the mark. A good-faith requirement in contracts is designed precisely to respect the autonomy of contractors. Second, the majority fears that a bad faith standard’s subjective requirement might be of limited utility, as a party would simply have to assert that they genuinely believed that there was a defence, to escape liability. Lord Burrows rightly dispels these concerns, noting that courts will expect stronger evidence if the defendant's claim of genuine belief seems unreasonable. Lastly, the majority takes refuge in the ‘adversarial’ model of English contract law arguing that English law allows commercial parties to act in their self-interest during negotiations, even if their demands are harsh or exploit their strong bargaining position. However, contract law exists as much to perform a ‘facilitating role’, as to perform a ‘regulatory’ role. This regulatory role aligns contract law more closely with commercial practice expectations, which are rooted in society’s moral views. Extending this reasoning in CTN Cash and Carry Ltd., Lord Steyn rightly mentions that good faith was a ‘critically important’ characteristic for restitution on the basis of economic duress. Interestingly, Lord Hodge draws upon Borrelli and Cenk K to explain ‘unconscionable’ and ‘reprehensible’ acts. However, he does not recognize that Borelli, in a full circle of events, is consistent with the bad faith requirement proposed by Lord Burrows, as it was clear that Ting was acting in bad faith. 

Application of Bad Faith Demand in India

The doctrine of bad faith demand laid down in Times Travel is not expressly mentioned in the Indian Contract Act 1872 (ICA). Although specific provisions mention good faith, such as indemnifying an agent for acts done in good faith, there is no general doctrine of bad faith demand.

The Indian courts have not strayed too far from the interpretation offered by the English courts. In cases pertaining to economic duress, a threat that constitutes an ‘illegitimate action’ must be necessarily present. Commercial pressure amounts to economic duress if two key essentials are fulfilled: 1) Pressure amounting to compulsion of the will of the victim; and 2) the pressure exerted is illegitimate. Indian courts have recognized that acts in furtherance of commercial advantage, though not ‘forbidden’, ultimately vitiate the free consent of the individual, and amount to coercion. While a general doctrine of good faith is not explicitly stated, Indian law recognizes specific instances of good faith. This is exemplified by Association of Unified Telecom Service, where the Delhi High Court holds that “every contract has an implied covenant of good faith and fair dealing”. The Supreme Court also held that a contract, being a commercial document, must be read with a commonsensical rather than a narrow legalistic approach. This illustrates the practical and commonsensical approach adopted by Indian courts to read in fairness in commercial agreements.  

All things considered, while the ICA does not explicitly recognize a general doctrine of good faith, this is equally true for the United Kingdom. Therefore, this should not preclude Indian courts from applying the doctrine, particularly in cases involving illegitimate pressure through economic duress. Moreover, Indian courts have consistently emphasized that threats made in furtherance of commercial advantage, even if lawful, can amount to coercion if they employ illegitimate pressure. Under Section 16 of the ICA, undue influence arises when a party is able to dominate the will of another and uses that position to secure an unfair advantage. Therefore, the author contends that the bad faith demand can be applied in India under the broader doctrine of economic duress, as it is consistent with the Indian legal framework.

Conclusion

In the words of Sir Thomas Bingham in Interfoto, English law has not committed itself to any overriding principle of good faith but has developed piecemeal solutions in response to specific problems of unfairness. The Supreme Court, in Times Travel, had an opportunity to lay down a definitive principle for testing duress through the framework of bad faith demand. However, the court did not adequately address the nuances of the concept and instead opted for a narrow and limited alternative. While Times Travel is significant in laying down the extent as well as existence of lawful act duress, it nonetheless raises more questions as to the scope of the principle. Why should lawful acts of duress necessarily be construed in a narrow manner? Moreover, what role must bad faith play when there is an absence of reprehensible / unconscionable conduct? Times Travel, therefore, leaves us without answers to these seminal questions.

Nevertheless, the author posits the view that good faith is an omnipresent concept throughout contract law, not only permeating all its rules, but also acting as an ‘inspiration’ of those rules. I argue that a general doctrine of good faith would not only be good for fair commercial dealings, but also dispute resolution, as judges could apply the ‘umbrella principle’ and would not have to covertly stretch existing principles to fit in the fold of good faith. Indian law is no different, and while specifically applying the concept in statutes and case laws, it abstains from any general doctrine of good faith. Moreover, given that such a doctrine is already well-developed in insurance contracts, a similar development in contracts, though difficult, is possible.