The Supreme Court’s recent decision in Pakistan International Airline Corporation v Times Travel (UK) Ltd  UKSC 40, highlights the limited nature of the doctrine of lawful act duress.
Whilst the Supreme Court refused to jettison the concept of lawful act duress entirely (as proposed by one intervener in these proceedings and several distinguished commentators), it concluded that the doctrine should be applied restrictively and acknowledged that it would rarely arise in a commercial context.
The Claimant, Times Travel UK Ltd ("Times Travel"), a small family-owned travel agency based in Birmingham, had entered into a contract with the Defendant, Pakistan International Airline Corporation ("PIAC"), to sell tickets for flights to Pakistan on planes owned by PIAC. At the time, Times Travel’s business almost entirely comprised selling tickets on behalf of PIAC (with PIAC being the only airline operating direct flights between the UK and Pakistan).
By 2012, several of PIAC’s ticketing agents had either commenced or threatened proceedings against PIAC for non-payment of commission which they claimed was owed to them on the sale of PIAC tickets. In September 2012, PIAC, as permitted by the terms of the contract, reduced Times Travel’s ticket allocation and threatened to end any contractual relationship with it, unless Times Travel entered into a new contract with PIAC. The terms of the new contract contained a waiver of all claims that Times Travel might have against PIAC in relation to unpaid commission under the previous contract. Times Travel accepted and signed the new contract.
In 2014, Times Travel brought proceedings against PIAC. Times Travel sought to rescind the new contract for duress and to recover the unpaid commission due under the previous contract.
At first instance, Warren J held that Times Travel was entitled to rescind the contract with PIAC for economic duress. The Court of Appeal overturned that decision. It held that as the relevant threat (i.e. to terminate the contract) was lawful, duress could only be established if PIAC’s demand (i.e. for Times Travel to waive its right to payment of commission) had been made in bad faith. As Warren J at first instance had found that PIAC had not been acting in bad faith as he held that PIAC genuinely believed it had a defence to the main claims for past commission; accordingly lawful act economic duress was not made out.
Times Travel appealed that decision to the Supreme Court.
The Supreme Court’s decision
The Supreme Court unanimously dismissed the appeal. Times Travel could not rescind the new contract for lawful act economic duress.
Lawful act economic duress – essential elements and scope
In considering the Claimant’s appeal, the Supreme Court confirmed three essential elements required to establish lawful act economic duress:
- A threat or pressure exerted by the defendant that is illegitimate;
- The illegitimate threat or pressure must have caused the claimant to enter the contract; and
- The claimant must have had no reasonable alternative to giving in to the threat or pressure.
In this case, both parties accepted that Times Travel could establish elements (2) and (3) detailed above (i.e. causation and that it had no reasonable alternative to giving in to the threat). The appeal therefore concerned solely the first element: whether PIAC’s threat to end the contractual relationship and/or the reduction in the ticket allocation to Times Travel was illegitimate.
In determining whether PIAC’s threat/pressure was illegitimate, the Supreme Court noted that there have only ever been two circumstances in which the English court recognised lawful act duress (i.e. considered the threat/pressure to be illegitimate):
- Where a defendant uses their knowledge of the claimant’s criminal activity (or that of a close family member), to obtain a personal benefit by threatening (explicitly or implicitly) to report the crime; and
- Where the defendant was exposed to a civil claim by the claimant but forced the claimant to waive its claim by deliberately manoeuvring the claimant into a position of vulnerability using illegitimate means.
In considering the development of lawful act economic duress, the Supreme Court reflected on several factors, including:
- The boundaries of the doctrine of lawful act duress are not fixed – however, Lord Hodge stressed that any extension to the boundaries should be approached "with caution, particularly in the context of contractual negotiations between commercial entities". In this regard, Lord Burrows noted that "within the realm of commercial contracts…English law has a long-standing reputation for certainty and clarity and there is a significant danger that that reputation will be lost if the law on lawful act economic duress is stated too widely or within insufficient precision".
- Analogous remedies exist in equity – such as doctrines of undue influence and unconscionable bargains.
- There is no overriding doctrine of good faith in contracting or any doctrine of imbalance of bargaining power – Lord Hodge acknowledged that the law’s general acceptance of the pursuit of commercial self-interest as justified in commercial bargaining and "the absence of these doctrines restricts the scope for lawful act economic duress in commercial life."
The Supreme Court concluded unanimously that PIAC’s reduction of the ticket allocation and threat to end its contractual relationship with Times Travel did not amount to illegitimate pressure. Lord Hodge (for the majority) recognised that PIAC’s threat 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." Something more was required such as morally reprehensible behaviour which rendered the enforcement of the contract unconscionable. PIAC’s genuine belief that it had a defence to the commission claims further supported that its behaviour was not reprehensible.
Whilst Lord Burrows agreed that PIAC’s behaviour did not amount to illegitimate pressure, he proposed that if the defendant had not genuinely believed it had a defence to the pre-existing claim (i.e. it acted in bad faith in demanding that such claims be waived) and the defendant deliberately created or increased the claimant’s vulnerability to that demand, then such should amount to an illegitimate threat. Lord Hodge (for the majority) disagreed with the proposal that a "bad faith requirement" would be sufficient to amount to an illegitimate threat, further limiting the applicability of the doctrine.
In the cut-and-thrust of business relationships, the pressures applied by a negotiating party is highly unlikely to come up to the standard of illegitimate pressure or unconscionable conduct required to amount to lawful act economic duress. The doctrine’s application in commercial negotiations will therefore continue to be extremely rare and, no doubt, its utility will remain under scrutiny by those who support its abolition.