UK: Can A Threat To Take A Lawful Act Give Rise To Economic Duress?

Where one party to a contract (A) exerts illegitimate pressure on another (B) such that B has no practical alternative but to accede to A's demands, B may avoid any resulting contract under the doctrine of economic duress. For more information on the doctrine in general, see our insight - The Basics: How easy is it to distinguish between rigorous commercial bargaining and economic duress?

In this insight, we focus on the question in Times Travel (UK) Limited v Pakistan International Airlines Corporation, namely whether a lawful act can ever constitute illegitimate pressure allowing a party to invoke economic duress.

Facts of the Case

Pakistan International Airline Corporation (PIAC) was an airline which was, at the relevant time, the only airline operating direct flights between the UK and Pakistan. Times Travel (UK) Limited (TT) was an appointed ticketing agent of PIAC. TT's business was almost exclusively the sale of flight tickets to members of the Pakistani community in Birmingham and so it was largely dependent on its ability to sell PIAC tickets, for which it needed a contract with PIAC.

In 2012, a number of PIAC's ticket agents were threatening or pursuing legal proceedings against PIAC to recover unpaid commission on ticket sales. PIAC gave notice to terminate the existing agency contracts. It simultaneously offered the agents new contracts, but on terms that the agents waived their claims for past commission. At the same time, PIAC reduced TT's ticket allocation from 300 tickets a fortnight to just 60.

TT accepted the new contract containing the waiver of its commission claims, and its ticket allocation was restored. It subsequently brought proceedings against PIAC to recover the unpaid commission. PIAC argued that the claims waiver in the new contract was a defence to TT's commission claim. TT asserted that the new contract, containing the waiver, had been procured by economic duress, and that the new contract should be avoided1.

High Court decision

In the High Court, Warren J found that:

  • PIAC offered the new contract to TT in the same letter as it gave notice to terminate the existing one - it was therefore clear that PIAC's intention was not to end the agency, but to bring TT's commission claims (which were genuine and arguable) to an end.
  • While the commission terms in the new contract were adequate reward for future services, they did not adequately compensate TT for the "forced waiver" of its existing commission claims.
  • TT considered they had no alternative but to sign the new contract containing the waiver, because they thought the inevitable consequence of not signing it was that they would be put out of business.
  • Although PIAC's actions were lawful (and there was no evidence they were made in bad faith), they nonetheless constituted illegitimate pressure, and had induced TT to enter into the new contract.

Accordingly the judge allowed TT to avoid the new contract, and it succeeded on most of its claims for commission. PIAC appealed the decision.

The Appeal

PIAC did not dispute the judge's findings that TT had no practical alternative but to agree to the new contract, and that the pressure PIAC had applied caused TT to enter into the new contract. It was also not in dispute that PIAC was within its rights both to give notice to terminate the old agreement and to reduce TT's ticket allocation - both of these were steps that PIAC was contractually entitled to take. The appeal therefore turned on a narrow point of law - whether committing or threatening to commit an otherwise lawful act (in this case, terminating a contract or reducing a ticket allocation) as opposed to an unlawful act (e.g. a breach a contract) could amount to illegitimate pressure so as to give rise to economic duress.

Giving the leading judgment, Richards LJ found:

  • Whether pressure is "illegitimate" involves two considerations - first, the nature of the threat; second, the nature of the demand. If the threat is unlawful, duress will be easier to establish. If the acts or threatened acts are lawful, the focus will be on the nature of the demand.
  • Threatening to do something lawful may, when coupled with a demand, become unlawful. Although an imperfect analogy, reporting a crime is lawful; but threatening to report a crime unless a sum of money is paid is blackmail and unlawful. Similarly, the nature of the demand can turn an otherwise lawful threat into illegitimate pressure.
  • "The doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result to which the person exercising pressure believes in good faith it is entitled, and that is so whether or not, objectively speaking, it has reasonable grounds for that belief".

The key question was therefore whether PIAC was acting in good faith and considered it was entitled to demand TT sign a new contract containing a waiver of claims. The trial judge had not found evidence of bad faith, and PIAC genuinely believed it was entitled to demand the waivers as a condition of the new contracts. Whether or not PIAC's view was objectively reasonable was irrelevant to the consideration of economic duress.

The Court therefore found that PIAC's lawful actions did not amount to economic duress, and TT should not have been allowed to avoid the contract.

Policy Considerations

As Lady Justice Asplin acknowledged in her short judgment in the case, the result might be thought to be harsh in circumstances where PIAC left TT no practical choice but to waive its valid claims. However, the court's decision was clearly motivated by policy considerations. The court noted "the need for clarity and certainty in the law of contract, particularly in commercial dealings", and the significance that English common law attaches to the enforceability of contracts. Unnecessarily expanding the scope of economic duress to lawful acts stood to undermine certainty for commercial parties.

Moreover, as Richards LJ said (and Asplin LJ specifically endorsed):

"the economic pressure that PIAC was able to apply in this case resulted from its position at that time as a monopoly supplier of tickets for direct flights between the UK and Pakistan... the common law has always rejected the use, or abuse, of a monopoly position as a ground for setting aside a contract, leaving it to be regulated by statute. In my judgment, it would be unprincipled to develop the doctrine of economic duress as a means of controlling the lawful use of monopoly power... The control of monopolies is... a matter for Parliament"

Summary

  • Where one party applies illegitimate pressure, which causes another party to enter into an arrangement because they had no practical alternative, the contract may be avoidable under economic duress.
  • Illegitimate pressure may be easier to establish where the threatened act is unlawful.
  • Where the threatened act is lawful, the court must enquire into whether the party making a demand genuinely believes it is entitled to do so.
  • If the demand is made in bad faith, the pressure is likely to be illegitimate and so lawful act duress may be invoked to avoid the contract.
  • If the demand is made in good faith, the pressure is legitimate, and so lawful act duress is not invoked. Whether the demand is objectively reasonable is not relevant.

Economic duress is not an answer to inequality of bargaining power or abuse of monopoly position in and of themselves, and the Court will not extend it to that end - these are matters on which Parliament must legislate.

Footnotes

1 In the alternative, TTUK argued that the new contract had been procured by misrepresentation, or that it was unfair under the Unfair Contract Terms Act - these claims failed.

Read the original article on GowlingWLG.com

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