‘Lawful act’ duress

Pakistan International Airline v Times Travel (Supreme Court)  [2021]

This case involved questions regarding the existence and scope of so called ‘lawful act’ or ‘economic’ duress – pressure exerted in the course of the negotiation of a contract, thereby potentially entitling the party subject to the duress to rescind the contract in question. When does a particular demand made in the course of contract negotiations amount to illegitimate [unlawful] economic pressure, as opposed to the pressure of normal [lawful] commercial bargaining?  

Facts:

The facts are as stated in our previous report on this case (http://www.trglaw.com/news290.html) but, essentially, the Airline had validly served notice terminating a contract under which Times Travel acted as a seller of PIA’s tickets and earned commission. There was a dispute about unpaid commissions and PIA would only enter into a new agreement if Times Travel agreed to waive their claim to unpaid commissions.

The original High Court judge held that Times Travel was entitled to rescind the new contract for duress, allowing it to claim the historic unpaid commissions that it had expressly waived when entering into the new contract. However, the High Court had also found that the Airline had genuinely believed that the disputed commission which it had required Times Travel to waive was not actually due. The Airline appealed.

The Court of Appeal upheld the Airline’s appeal, on the basis that a claim for ‘lawful act’ duress could not succeed in a commercial context where a party was making lawful demands to support a position that it genuinely and reasonably believed it was entitled to take. The Airline had not acted in bad faith. Times Travel appealed to the Supreme Court.  

Decision:

The Supreme Court dismissed Time Travel's appeal.  

All of the judges agreed that the doctrine of lawful act duress exists and comprises the following elements:

  • A threat (or pressure exerted) by the defendant that is illegitimate.
  • That illegitimate threat (or pressure) caused the claimant to enter into the contract.
  • The claimant had no reasonable alternative to giving in to the threat (or pressure).

    • The majority judgment stated that "the boundaries of the doctrine are not fixed [but] the courts should approach any extension with caution". The majority stressed the need to consider the law of economic duress against the backdrop of other relevant available remedies. The court discussed the absence of any common law doctrine of ‘inequality of bargaining power’. It also noted that English law does not recognise a general principle of good faith in contracting. The court considered that the absence of these doctrines restricted the scope for lawful act duress in commercial life and accordingly pressure applied by a party in negotiations will rarely reach the standard of illegitimate pressure or unconscionable conduct.  

    Lawful act economic duress treats as “illegitimate”, conduct leading to an agreement which makes it unconscionable for the party who had conducted himself or herself in that way to seek to enforce the agreement. That is a very high bar. The Airline’s “hard-nosed commercial negotiation” did not cross the line into what equity would have regarded as unconscionable behaviour, and so did not constitute duress at common law. In the majority’s view, what matters is the defendant’s behaviour, not its belief or otherwise as to the legitimacy of its demand.

    The minority judgment advocated an approach based on a demand for the waiver of a claim being made in bad faith (in the sense that the threatening party does not genuinely believe it has a defence to the claim being waived by the other party). Where the claimant was induced to meet the other party's demand because of the stark inequality of bargaining power, which otherwise gave the claimant no effective choice but to meet the demand, that would not be sufficient to establish a claim for economic duress without a general principle of contractual good faith or a doctrine of imbalance of bargaining power, neither of which exist. They stated that allowing such claims would permit unwanted contractual uncertainty.

    The majority added that:

  • The demand for a waiver, to which the defendant must know that it had no prior entitlement, is no different in principle to asking for a sum of money as a pre-condition to a contract in a commercial negotiation.
  • There is no support for the proposition that the mere assertion of bargaining power, such as a lawful threat to terminate an existing contract, or to reduce the supply of goods under the contract in a way which the contract allowed, could (without more) amount to illegitimate pressure.

    • An approach based on good faith was rejected on the basis that it could require a court to "try to apply a standard of what is commercially unacceptable or unreasonable behaviour", which one law lord described as a "radical move forward" in the law. Concerns were expressed that the courts "risk rendering the law on lawful act duress too uncertain and would potentially jeopardise the stability of the English law of contract.

    The court rejected the use of a wide principle of good faith dealing and accepted the law’s general acceptance of the pursuit of commercial self-interest as being justified in commercial bargaining.

    Points to Note:

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