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In distress? The Supreme Court confirms the existence of lawful act economic duress in English law

Disputes / 26 November 2021

The Supreme Court has confirmed that lawful act economic duress does exist in English law in its recent judgment of Pakistan International Airline Corporation v Times Travel (UK) Ltd. [2021] UKSC 40 (“the Case”). We digest the judgment here. 

The Case
For many legal concepts, common sense readily acknowledges the rationale behind a principle. Take unlawful duress and undue influence, both of which will void a contract and both of which are easily digested concepts. But how about a contract being set aside because the counterpart threatened to commit a lawful act?

A Birmingham-based travel agency, Times Travel (UK) Ltd, was built around selling tickets for flights to Pakistan. When the dispute arose, the only airline operating flights to Pakistan from the United Kingdom was Pakistan International Airlines Corporation (“PIAC”). Times Travel and PIAC had entered a contract where they were paid commission based on ticket sales. Under the contract, PIAC could terminate on one month’s notice.

A dispute arose over alleged unpaid commission and Times Travel, along with other agencies, commenced action against PIAC. PIAC served notice to terminate and cut Times Travel’s allocation of seats to sell from 300 to 60 – as it was contractually entitled to do. Times’ business was at serious risk, and it entered into a new contract with PIAC, waived any entitlement to unpaid commission, and did not join the other travel agents with their action.

But Times Travel then issued proceedings against PIAC for the unpaid (and disputed) commission that it had contractually waived. It claimed that the contract was only entered into due to economic duress, which would rescind it.

Times Travel succeeded in the High Court. On appeal, the Court of Appeal reversed the High Court’s decision. Times Travel then appealed to the Supreme Court.

The decision
The Supreme Court found in favour of PIAC and unanimously dismissed Times Travel’s appeal, finding that there was no “lawful act duress” (but was not unanimous in its reasons why; more on that below). In its judgement, the Supreme Court confirmed that lawful act economic duress does exist in English law; however, it is clear that it is very narrowly interpreted. There is a high threshold for a party to argue this successfully. They must show:

1. There was a threat exerted by the threatening party that is illegitimate;

2. The illegitimate threat caused the threatened party to enter into the contract; and

3. The threatened party must have had no reasonable alternative but to give in to the threat.

It may assist the common-sense digestion of the above by reminding oneself of the crime of blackmail: a blackmailer will usually threaten something that he has the right to do – such as communicating something to another person (the crime lies in the motive and the intended result).

So in the commercial world, what makes a threat to do something “illegitimate”?  There was disagreement in the Supreme Court that turned on a fine distinction. First, what it is not: the Court of Appeal and Lord Burrows considered that the key question was whether PIAC had a genuine belief that it was not liable for the commission that it had demanded be waived – i.e. whether it was acting in good faith or bad faith. But the majority in the Supreme Court did not agree that bad faith in itself would make a threat illegitimate. Bad faith would be a factor, but the proper question was whether the defendant’s conduct was so reprehensible that it rendered enforcement of the contract unconscionable: the illegitimacy of the threat depends on the justification for the demand.

In the court’s view, PIAC had pursued their commercial self-interest and used their position to have a market monopoly. That was found to be legitimate: “The reduction of the ticket allocation was a hard-nosed exercise of monopoly power, which, in the absence of a doctrine of unequal bargaining power, could not by itself amount to illegitimate pressure.”

So what tips a case into the “reprehensible” territory? Thankfully, the examples are limited. A case referred to by the Supreme Court was a director using a minority vote, and also presenting falsified documents, to block and delay a liquidators’ scheme of arrangement (which would have provided funding for the liquidation… and investigation of claims against the director), and who then used the time pressure created to compel the liquidators to enter a settlement agreement that included a waiver of any claims against him by the company in liquidation. The settlement agreement was set aside (Borrelli v Ting [2010] UKPC 21).

Comment
It is important to remember that under English contract law there is no duty to contract in good faith or any principle giving relief for mere inequality of bargaining power. If a business does find itself in distress and wants to argue lawful act economic duress, it will have a high bar to achieve the criteria. It is not a simple case of running to court and shouting “distress”!

It must demonstrate that there has been an illegitimate threat and that they have not merely fallen foul of hard negotiation.

 

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This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: mailinglists@greenwoodsgrm.co.uk

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