Under (legitimate) pressure?
Supreme Court clarifies the scope of lawful act duress in Pakistan International Airline Corporation v Times Travel (UK) Ltd  UKSC 40.
It has long been established that unlawful acts which threaten a person's economic interests, such as the threat to commit a breach of contract, can amount to duress which, if established, enables a party to rescind a contract that they have been induced to enter into as a result of such illegitimate threat. However, the extent to which lawful acts might similarly amount to economic duress has been a source of some confusion.
The Supreme Court has now confirmed that lawful act economic duress does and should exist in English law, but has made it clear that it has a narrow scope and in doing so set out a very restricted set of situations when it might arise.
Pakistan International Airlines ("PIAC") was the sole operator of direct flights between the UK and Pakistan and the national flag carrier airline of Pakistan. A small travel agent, based in Birmingham, Times Travel (UK) Ltd ("TT"), sold tickets to fly on PIAC pursuant to an agency agreement concluded in 2008. At the relevant time, TT's business was almost solely based on selling flights from the UK to Pakistan on PIAC planes.
A dispute arose out of unpaid commissions on sales of tickets. On 14 September 2012, PIAC threatened to terminate its contractual relationship with TT which it was lawfully entitled to so, while also offering TT a new contract which contained a waiver by TT of its claims for unpaid commission under the prior arrangements, extinguishing all previous liabilities between the parties.
On 17 September 2012, PIAC increased the pressure further on TT to enter into the new contract by reducing TT's fortnightly allocation of tickets from 300 to 60. It was accepted at first instance, that this reduction in ticket allocation, whilst also lawful, had a major impact on TT's business.
On 24 September 2012, TT accepted and signed the new contract, but in 2014 TT brought proceedings to recover alleged unpaid commissions due under the original agency agreement (said to be GBP 1 – 1.5 million). TT argued that they could rescind the new contract for lawful act economic duress, and that the waiver in respect of previous commissions should not bind it in light of the circumstances in which it had been obtained.
At first instance, Warren J held that TT was entitled to rescind the contract for lawful act economic duress. That decision was overturned by the Court of Appeal. TT appealed to the UK Supreme Court.
Background – economic duress
In order to prove economic duress, the aggrieved party must show:
- illegitimate pressure being exerted (or threat made), for which there is no commercial or similar justification, which may include a threatened tort or breach of contract;
- that it would not have entered the contract but for such economic pressure (or threat); and
- it had no reasonable alternative but to give in to the pressure (or threat).
In this case, the parties accepted that the matter before the Supreme Court solely concerned the first limb: the illegitimacy of the threat or pressure. It was not disputed that the Claimant could otherwise establish causation and that it had no reasonable alternative to giving into the threat/pressure exerted.
The judgment of the Supreme Court
Should lawful act economic duress exist?
The Supreme Court agreed that lawful act economic duress did and should exist, because:
- the leading judgments on economic duress referred to “illegitimate” rather than “unlawful” acts;
- the crime of blackmail included threats of lawful action and so it would be unbalanced if the civil equivalent did not include the same; and
- there had been several long-standing cases in which it had been accepted that threats of lawful action entitled a threatened party to rescind a contract.
In what circumstances has lawful act duress been recognised?
Lord Hodge outlined the two previous circumstances where the English courts had recognised lawful act economic duress: (1) where a defendant had exploited knowledge of a claimant's criminal activity ; and (2) where a defendant had used illegitimate means to manoeuvre the claimant into a position of weakness to force him to waive his claim . Both of these circumstances were linked (but not exhaustively so) to the equitable concept of unconscionability.
Lord Hodge further acknowledged that as there is no doctrine of inequality of bargaining power in English contract law, nor a general principle of good faith in contracting (negotiating pressure being illegitimate only where it included an element of unconscionability) this naturally restricted the scope of lawful act economic duress in normal commercial life.
On the facts of this case, the court was only concerned with the second recognised situation, and Lord Hodge concluded that it would be rare that in a commercial context the use by A of lawful pressure to induce B to concede to a demand would amount to economic duress. Significantly, the lower courts had made no findings that PIAC had used any reprehensible means to manoeuvre TT into a position of increased vulnerability in order to exploit that vulnerability.
Consequently, Lord Hodge (with whom Lords Reed, Lloyd-Jones and Kitchen agreed) dismissed TT's appeal, with Lord Burrows (delivering a concurring judgment) reaching the same conclusion as the majority, but by differing reasoning, holding that there had been no lawful act economic duress.
Whilst PIAC's negotiating has been "hard-nosed", making use of its superior bargaining position to pressure TT into signing up to the new contract, its conduct had not crossed the line so as to be illegitimate.
Wikborg Rein Comment
The Supreme Court has made clear that although the doctrine of lawful act economic duress exists, instances in which it would apply are rare in a commercial context and any future extension to this doctrine should be approached with caution. This should provide reassurance to the majority of commercial counterparties when negotiating whilst also providing a legal backstop to protect against illegitimate (although lawful) pressure being applied which does fall into one of the two identified categories.
- See Williams v Bayley  1 HL 200, Kaufman v Gerson  1 KB 591 and Mutual Finance Ltd v John Wetton and Sons Ltd  2 KB 389 for successfully argued cases under the first ground
- See Borrelli v Ting  UKPC 21 and Progress Bulk Carriers Ltd v Tube City IMS LLC (The Cenk Kaptanoglu)  EWHC 273 (Comm) for successfully argued cases under the second ground