To print this article, all you need is to be registered or login on Mondaq.com.
Where one party induces another to enter into a contract by applying threats or pressure, that contract is liable to be set aside for economic duress. It is well established that threatening some unlawful act (for instance threatening to breach a contract or commit a tort) can give rise to economic duress. More controversial though is whether, and in what circumstances, threatening to commit a lawful act (e.g. threatening to exercise a contractual termination right) can amount to economic duress. These were the questions the Supreme Court grappled with in its judgment in Pakistan International Airline Corp v Times Travel (UK) Ltd.
The resulting decision is important for those negotiating and operating commercial contracts - particularly where the parties have unequal bargaining power.
- Threatening to do something lawful can, in certain circumstances, amount to economic duress; such that any agreement procured by the threat can be set aside.
- However, for a lawful act to be deemed to amount to duress, illegitimate pressure must be applied.
- Illegitimate pressure is more than simply hard-nosed commercial self-interest or leveraging a bargaining position. The pressure must be morally reprehensible; such that it is unconscionable to enforce the agreement induced by that pressure.
- 'Lawful act economic duress' therefore has very limited scope of application in commercial dealings - it will apply only in rare exceptional cases.
For background on economic duress in general, see our article 'The Basics: How easy is it to distinguish between rigorous commercial bargaining and economic duress?'. For a summary of the background facts and lower court decisions in this particular case, see our earlier article on the Court of Appeal's decision.
In short though, threatened with no longer being able to sell the airline tickets that were the mainstay of its business as a travel agent, Times Travel agreed to waive claims it had against the airline for unpaid commission on past ticket sales. Times Travel nonetheless subsequently sought to pursue those claims, asserting that its waiver was procured under economic duress and so should be set aside. The Court of Appeal held that the pressure exerted by the airline did not amount to economic duress, effectively meaning the waiver was binding and Times Travel could not pursue its claims for commission. Times Travel appealed to the Supreme Court.
Supreme Court appeal
As this is the first time the Supreme Court has considered lawful act economic duress, we received a wide-ranging review of the law. The court delivered two judgments - a leading judgment delivered by Lord Hodge (with whom Lords Reed, Lloyd-Jones and Kitchin agreed) and a concurring judgment delivered by Lord Burrows. The court was unanimous in dismissing the appeal, finding that the circumstances of the case did not amount to lawful act economic duress. However, the two judgments differ in their assessment of when a threat or pressure is sufficient to find duress. Below we look at the areas of agreement and disagreement between the judgments.
Does lawful act duress exist?
All members of the panel agreed that lawful act duress (including lawful act economic duress) does, and should exist in English law. Cases that have come before the courts in the past have talked about 'illegitimate' pressure, as distinct from 'unlawful' pressure, suggesting that a lawful act can nonetheless found a claim for duress. Further, criminal law already recognises a concept of lawful duress - blackmail is often a demand supported by a threat to do something lawful, for instance to report criminal conduct to the police. The panel agreed it would therefore be odd if the criminal law recognised a concept of lawful act duress, but the civil law did not.
What are the elements of lawful act duress?
The panel also agreed that there are three essential elements of economic duress:
(1) a threat or pressure that is illegitimate;
(2) the threat or pressure in question caused the claimant to enter into a contract; and
(3) the claimant had no reasonable alternative but to give in to the threat or pressure.
In this appeal, the parties accepted that a number of the elements of economic duress were present - it was not disputed that the pressure exerted by the airline induced Times Travel to waive its claims, or that Times Travel had no reasonable alternative but to agree to the waiver in order to receive the ticket allocation, which was critical to its business.
The critical question in this appeal was therefore whether the threat or pressure exerted by the airline was 'illegitimate'?
When is pressure 'illegitimate'?
Although all members of the panel concluded there was no illegitimate pressure in this case, they differed in their analysis of when a threat or pressure will be illegitimate.
Focus on the demand, not the threat
Because lawful act duress involves a threat of a lawful act, the panel agreed that, when considering whether the pressure was illegitimate, the court should focus not on the nature of the threat but instead on the nature of the demand made. Is the demand (in this case, the demand that Times Travel waive its claims to unpaid commission) justifiable?
Certainty in English contract law
The panel also agreed that lawful act duress must be narrowly confined - if the law of lawful act economic duress is stated too widely or imprecisely, then English law's longstanding reputation for certainty in commercial contracts may be lost.
No wide principle of good faith
The court also noted that English law does not have a general principle of good faith dealing against which to judge illegitimate pressure. That would require the court to decide what is commercially unacceptable or unreasonable in any given case, which would again undermine certainty in English contract law. Rather than start from a wide principle of good faith, the panel agreed it was instead appropriate to set out a limited but clear and workable boundary for the application of lawful act duress.
The court also recognised that commercial self-interest, and a demand motivated by commercial self-interest, will generally be justified. As Dyson J (as he then was) put it in an earlier case, "illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining". The doctrine of lawful act economic duress is concerned with identifying rare exceptional cases where a demand motivated by commercial self-interest is nevertheless unjustified.
Beyond bad faith
However, having agreed on those overarching principles, the two judgments differ in their approach to illegitimate pressure. In his minority judgment, based on an analysis of past cases, Lord Burrows argued that illegitimate pressure required two elements:
- First, a "bad faith demand" in relation to an existing right - i.e. the party making the demand does not genuinely believe it is entitled to what it is demanding. Lord Burrows also referred to this as "the dishonest assertion of an existing right, or the dishonest removal (by waiver) of an existing right".
- Second, the party making the demand must also have created or increased the other party's vulnerability to the demand in some way.
- On the facts of this case, the airline arguably had increased Times Travel's vulnerability by reducing its ticket allocation. But under Lord Burrows's formulation, a 'bad faith demand' would have required that the airline did not genuinely believe it had a defence to the claims which it was pressurising Times Travel to waive. In circumstances where the judge had found the airline genuinely believed it had a defence to Times Travel's claims, demanding a waiver could not therefore amount to a bad faith demand.
The majority, however, thought that this bad faith formulation was too wide and that lawful act economic duress should be more restricted. As Lord Hodge put it, "bad faith demands may not be a rare occurrence in commercial life. Discreditable behaviour can be a feature of commercial activity." In the majority judgment, illegitimate pressure is therefore something more than bad faith or the exploitation of an inequality of bargaining power - it is morally reprehensible behaviour, which renders the resulting agreement unconscionable to enforce.
Limited scope for lawful act economic duress
Whether or not the court succeeded in their aim of upholding the certainty of English contract law, or setting out clear and workable boundaries for the doctrine of lawful act duress is questionable. In particular, a formulation reliant on the court identifying "morally reprehensible" behaviour seems to sail close to judges becoming arbiters of what is morally and socially acceptable - something the majority seemed keen to avoid. Case specific context will therefore be key in future cases, and the law will develop incrementally. What is clear though, is that the scope for lawful act economic duress in commercial transactions is extremely limited, and it will be found only in rare exceptional cases.
Read the original article on GowlingWLG.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.