Lawful act economic duress - the Supreme Court speaks

The Supreme Court delivered judgement today in Pakistan International Airline Corp v Times Travel (UK) Ltd [2021] UKSC 40, on the question of whether (and if so, in what circumstances) a party can set aside a contract on the ground that it was entered into as a result of the other party threatening to do a lawful act – the concept of “lawful act duress”

Lord Hodge (with whom Lords Reed, Lloyd-Jones and Kitchin agreed) gave the leading judgment, with Lord Burrows, the fifth member of the panel, giving a concurring judgement.

The Respondent, Pakistan International Airline Corporation ("PIAC"), had entered into a contract with the Appellant, Times Travel (UK) Ltd ("TT"), under which TT acted as ticketing agent to PIAC. TT was a small family business almost entirely dependent on the business it did with PIAC.?In September 2012, PIAC gave TT lawful notice of the termination of its existing agency contracts, and offered TT a new contract which contained a waiver by TT of its claims for unpaid commission under the prior arrangements. TT accepted and signed the new contract, but in 2014, TT brought proceedings to recover unpaid commission and other payments which it said were due to it under the prior contractual arrangements, and which it was entitled to seek because the new contract had been procured by economic duress on the part of PIAC. Warren J found in favour of TT at first instance, and PIAC appealed.?

The Court of Appeal allowed PIAC’s appeal, holding (in essence) that the doctrine of lawful act duress did not extend to the use of lawful pressure to achieve a result to which the person exercising pressure believed in good faith it was entitled, and that was so whether or not, objectively speaking, it had reasonable grounds for that belief.?Moreover, in the context of a party to a commercial contract using lawful commercial pressure in support of a purely commercial demand, there was no yardstick by which to judge such demands, save those that could be set out in legislation such as that applying to consumer contracts. Such demands were a matter of negotiation against the background of the pressures operating on both parties.

As I reported on this forum, TT’s appeal against this decision began before the Supreme Court on 2 November 2020 – and I predicted a steep hill for TT to climb.?That prediction turns out to have been justified: the Supreme Court today unanimously dismissed the appeal, but it did so on not entirely unanimous grounds.

Lord Hodge, giving the majority judgement, defined the elements of lawful act economic duress (and on this, Lord Burrows concurred), namely that where it was alleged that a defendant had induced a claimant to enter into a contract by duress, there were two essential elements that the claimant needed to establish in order to rescind the contract:

(i)???????????the threat or pressure by the defendant must have been illegitimate; and

(ii)??????????the threat or pressure must have caused the claimant to enter the contract?

Economic duress also had a third element, namely that the claimant must have had no reasonable alternative to giving in to the threat or pressure.?That third element, and element (ii) above, had been accepted throughout as being present in this case.?The appeal was concerned soley with element (i): had PIAC’s threat been illegitimate?

In addressing this, the Court began with a unanimous recognition of the existence in English law of the doctrine of lawful act duress.?This was for three reasons:

(i)???????????case law in the area referred to “illegitimate” rather than “unlawful” acts;

(ii)??????????the crime of blackmail included threats of lawful action; and

(iii)????????there had been several cases in which it had been accepted that threats of lawful action entitled a threatened party to rescind a contract.

In the majority judgement, Lord Hodge explained that there were two circumstances in which the English courts had recognised lawful act duress. The first was where a defendant had used his knowledge of the claimant’s criminal activity, or that of a person close to the claimant, to threaten the claimant. The second was where the defendant, having exposed himself to a civil claim by the claimant, had used reprehensible means to manoeuvre the claimant into a position of vulnerability to force him to waive his claim.

Both instances were closely connected to the equitable concept of unconscionability, whereby equity identified specific contexts which called for judicial intervention to protect the weaker party. ?But absent a doctrine of inequality of bargaining power or a general principle of good faith in contracting, it would be rare that a court would find lawful act economic duress in the context of commercial negotiation. Lawful act economic duress should not depend on whether the defendant genuinely believed that it had a defence to the claimant’s claim.?

In so holding, Lord Hodge partially departed from the reasoning of the Court of Appeal.?David Richards LJ (who had delivered the unanimous judgement of that Court) had stated (paragraph 62 of his judgement) that “…where A uses lawful pressure to induce B to concede a demand to which A does not bona fide believe itself to be entitled, B’s agreement is voidable on grounds of economic duress.” ?This, Lord Hodge said, would not be correct in the absence of circumstances involving the manoeuvring by A of B into a position of vulnerability by means which involved bad faith or were similarly reprehensible and went beyond the use of its position as a monopoly supplier, or which brought the transaction within the ambit of the equitable doctrine of unconscionable transactions. In the present case, on the facts found at first instance by Warren J, PIAC had believed in good faith that it was not liable for breach of contract as a result of its failure to pay past commission and, in any event, the pressure which PIAC had applied to obtain the waiver from TT was the assertion of its power as a monopoly supplier. PIAC’s giving of notice that the previous contract would be terminated and cutting TT’s ticket allocation did not constitute reprehensible conduct in the sense used in the case law. PIAC’s genuine belief that it was not liable to pay the disputed commission lent further support to the view that its behaviour was not reprehensible. ?TT’s appeal was accordingly dismissed.

The difference between Lord Burrows and the majority came down to the relatively narrow point as to what was meant by illegitimate threats in relation to economic duress. As the threat or pressure was of a lawful act, the question of whether it was illegitimate should, Lord Burrows believed, focus on the justification for the demand.?He considered that a demand was unjustified (so rendering the accompanying threat illegitimate) if (i) the threatening party had deliberately created or increased the threatened party’s vulnerability to the demand, and (ii) the demand had been made in bad faith in the specific sense that the threatening party had not genuinely believed that it was owed what it was claiming, or did not genuinely believe that it had a defence to the claim being waived. ?But even on that basis, Lord Burrows considered that TT’s claim for lawful act economic duress failed, because PIAC had genuinely believed that it was not liable for the unpaid commission.