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Lawful Act Economic Duress: the Supreme Court's decision in Pakistan International Airline Corp v Times Travel (UK) Ltd [2021] UKSC 40

Lawful Act Economic Duress: the Supreme Court's decision in Pakistan International Airline Corp v Times Travel (UK) Ltd [2021] UKSC 40

Overview

In a judgment handed down on 18 August 2021, the Supreme Court has confirmed the existence of the doctrine of lawful act economic duress in English law, but has emphasised the narrowness of its scope, citing just two specific sets of circumstances in which the doctrine may apply.

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Facts

The case concerned a claim brought by Times Travel ("TT"), a small family-owned travel agent, against Pakistan International Airline Corporation ("PIAC"), the national flag carrier airline of Pakistan.

In 2008, TT and PIAC entered into a contract under which TT agreed to act as ticketing agent for PIAC, and would receive commission on the sale of tickets on PIAC flights to the general public.  TT's business depended almost exclusively upon selling tickets for flights to Pakistan on planes owned by PIAC (which was the only airline then operating direct flights between the UK and Pakistan).

By 2012, a dispute had arisen between TT and PIAC over the commission due to TT in respect of its sales of tickets on PIAC flights.  TT alleged that it was owed c.£1.5m in unpaid commission by PIAC.

PIAC subsequently sought to persuade TT to enter into a new contract with it, under which, inter alia, TT would agree to waive any commissions-based claims against PIAC arising from the parties' prior contract.  During the discussions between the parties, PIAC significantly reduced TT's allocation of tickets on its planes, and threatened to terminate its contractual relationship with TT in its entirety, unless TT entered into the new contract.  These were both actions that PIAC was legally entitled to take.

TT entered into the new contract, but subsequently brought a claim seeking to rescind it on the basis that PIAC's actions in cutting its ticket allocation, and threatening to terminate the contractual relationship between the parties altogether, constituted lawful act economic duress.

In the High Court, Warren J held that TT could rescind the new contract on this basis.  That decision was overturned in the Court of Appeal.  The matter was appealed to the Supreme Court.

Legal backdrop

The doctrine of duress essentially enables a party to rescind a contract that they have been induced to enter into as a result of an illegitimate threat.  Over time, the courts have expanded the concept of an illegitimate threat from its starting point of physical threats to a person's body, to encompass threats to a person's economic interests (known as "economic duress").  It has long been established that economic duress can be founded on an unlawful threat to damage a person's economic interests (e.g. a threat to commit a crime, or a tort, or to commit a breach of contract).  This is known as "unlawful act economic duress". It has been less clear whether economic duress can also be founded on a threat to do something which is lawful (known as "lawful act economic duress").

The main questions for the Supreme Court to resolve here were (i) does the doctrine of lawful act economic duress exist at all in English law; and (ii) if so, what legal test should be applied to determine whether a particular set of facts amounts to lawful act economic duress.

The decision

The Supreme Court's ruling consists of a leading judgment by Lord Hodge, with whom Lord Reed, Lord Lloyd-Jones and Lord Kitchin agreed, and a dissenting judgment from Lord Burrows.  Notwithstanding Lord Burrows' dissent, there was consensus between the Justices on many aspects of the two questions above.  Not only did the Justices agree that the doctrine of lawful act economic duress exists in English law (paras 82-92), but also that it has three essential elements (paras 78-80) as follows:

  • There must be a threat (or pressure exerted) by the defendant that is illegitimate;
  • The threat (or pressure) caused the claimant to enter into the contract; and
  • The claimant must have had no reasonable alternative to giving in to the threat (or pressure).[1]

The main point of contention concerned what could constitute an "illegitimate" threat or pressure for these purposes.


Lord Hodge's judgment

Lord Hodge identified only two circumstances which could constitute "illegitimate" threats or pressure:

  • the exploitation by a defendant of knowledge of criminal activity by the claimant; and

  • the use by a defendant of "illegitimate means" to manoeuvre the claimant into a position of weakness to force them to waive a pre-existing claim.

Exploitation of knowledge of a criminal activity covers a clearly circumscribed set of circumstances: namely, where a defendant induces a claimant to enter into a contract under threat that the defendant will report criminal behaviour by the claimant (and/or the claimant's family members), or pursue a prosecution of the claimant (and/or the claimant's family members).

The question of when a defendant will have been said to have used "illegitimate means" to manoeuvre a claimant into a position of weakness to force them to waive a pre-existing claim is more difficult to resolve.  However, Lodge Hodge made clear that such scenarios would arise only very rarely in ordinary commercial negotiations.  He stressed that it was both usual – and permitted – for  parties to apply (sometimes very significant) pressure upon one another during such negotiations, and for a stronger party to exploit inequalities of bargaining power to force the weaker party to make a concession or give up a claim.  Equally there was no general duty in English law for parties to such negotiations to act in good faith.  Pressure by one party on another in such circumstances would only become illegitimate if it contained an element of "unconscionability", a concept that Lord Hodge effectively borrowed from the equitable doctrine of undue influence.

Helpfully, Lord Hodge gave two key examples from the historic case law in which pressure had tipped over into being illegitimate.

The first was a case[2] where liquidators required the approval of a company's minority shareholder for a scheme of arrangement to fund the company's liquidation, within a certain timeframe.  The shareholder did everything that he could to oppose/delay the scheme, including failing to provide the liquidators with certain information which he was under a legal duty to provide, procuring the provision of false evidence to them, and forging a document. Then, when time was running out for the scheme to be approved, he dropped his opposition to it, but only if the liquidators entered into a settlement agreement by which they agreed not to pursue any claims against him. That settlement agreement was subsequently set aside on the basis of (what the Supreme Court has now characterised as) lawful act economic duress: the shareholder had been legally entitled to withhold his consent to the scheme, but through his illegitimate conduct he had manoeuvred the liquidators into a position where they had no option but to give up any claims against him in return for that consent.

The second was a case[3] where the claimant charterers had entered into a charterparty with the defendant ship owners for the hire of a ship.  The owners committed a repudiatory breach of contract and chartered the ship to someone else.  The charterers needed to find a replacement ship within a certain window, failing which they would be in breach of their underlying contract with the purchasers of the goods they intended to ship.  The owners assured the charterers both that they would find an alternate vessel and that they would compensate them for any damages arising from the breach, leading the charterers to down tools on searching for a replacement ship.  Then, at the last moment, when the charterers would otherwise have been in breach of their underlying contract, the owners stated that they would only provide the replacement ship in return for a waiver of a portion of the charterers' claims against them.  The waiver agreement was subsequently found to be voidable on the basis of (what was again characterised as) lawful act economic duress: the owners had not been legally obliged to make the replacement ship available, but they had through their conduct manoeuvred the charterers into a position where they had no option but to waive their claims against the owners and accept the new ship.

On the facts of the current case, Lord Hodge held that there had been no lawful act economic duress.  PIAC had engaged in hard-nosed commercial negotiation and had legitimately used its stronger bargaining position to pressure TT into signing up to the new contract, but its conduct had not tipped over into the realms of illegitimacy.

 

Lord Burrows' decision

Lord Burrows agreed with Lord Hodge's decision in almost every respect, save that he contended that the test for what should constitute an "illegitimate" threat or pressure in this context should be couched differently to Lord Hodge.  Specifically, Lord Burrows considered that a demand by A for a waiver by B of a claim against A would amount to lawful act economic duress where: (i) A did not genuinely believe that it had a defence to the claim (i.e. the demand was being made in bad faith), and (ii) A had deliberately created or increased B's vulnerability to A's demand.  Lord Hodge (and the other Justices) rejected this approach.  Lord Hodge considered that "bad faith" demands of this nature may not be uncommon in commercial life and that, where B was induced to meet A's demand because of a simple inequality of bargaining power, giving B no effective choice but to meet the demand even though it was unjustified, something more would be needed before A's demand would tip over into lawful act economic duress.  Lord Hodge also considered that Lord Burrow's test would generate uncertainty: it would potentially be difficult to determine whether A (subjectively) believed that it had a good defence to B's claim at the time A's demand was made, particularly where no legal advice had been sought, and where merits advice could often involve shades of grey.

Implications of the decision

The decision in this case confirms the existence of the doctrine of lawful act economic duress in English law and the test to be applied to determine whether such duress exists.  However, it also confines the doctrine to two very narrow sets of circumstances.  Commercial counterparties will be reassured by the Supreme Court's confirmation that lawful economic duress will arise only very rarely in the course of ordinary, arm's length commercial negotiations, and that a premium continues to be placed on certainty when it comes to developing the law of contract in this jurisdiction.

 

 

 

Footnotes

[1] Note that the third element is unique to economic duress; the position appears to be different in relation to other forms of duress, which only require the first and second elements (para 79).

[2] Borrelli v Ting [2010] UKPC 21

[3] Progress Bulk Carriers Ltd v Tube City IMS LLC [2012] EWHC 273 (Comm)

 

This case summary was authored by Alexander Hill, Dispute Resolution Paralegal, and Hannah Hartley, Dispute Resolution Knowledge Counsel.

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