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Economic duress for lawful threats limited to bad faith demands

25 June 2019

The Court of Appeal has held that there is no economic duress in commercial situations where a party uses lawful pressure or threats to achieve a result to which it genuinely believes itself to be entitled, even if is not objectively reasonable for it to have that belief. An agreement will only be voidable for economic duress where a party applies lawful pressure or threats to induce another party to agree to a demand to which it does not genuinely believe it is entitled: Times Travel (UK) Ltd v Pakistan Airlines Corporation [2019] EWCA Civ 828.

Economic duress: a reminder

Economic duress recognises that threats to a party’s economic interests may give grounds for the avoidance of a contract entered into by the innocent party as a result of the threat. The necessary ingredients for economic duress are: (i) illegitimate pressure applied to the claimant; (ii) which induces the claimant to enter the contract; (iii) in circumstances where the claimant has no practicable choice but to submit. In commercial dealings, threats of acts, which are in themselves lawful – “lawful-act duress” – (eg threats to terminate a contract or not to enter into a contract), will usually only amount to illegitimate pressure when coupled with a demand which goes significantly beyond what is the norm in commercial arrangements.

Underlying facts

Times Travel (TT) sold tickets on behalf of the defendant, Pakistan Airlines Corporation (PAC), which at the time was the only airline operating direct flights between the UK and Pakistan. TT’s business largely depended on the ability to sell PAC tickets. In September 2012, PAC greatly reduced TT’s allocation of tickets which had a major impact on its business. Shortly afterwards, PAC gave notice to terminate its existing contract with TT (the Old Agreement), and offered a new contract (the New Agreement) on condition that TT waive all existing claims for unpaid commission against PAC under the Old Agreement. It also stated that if the New Agreement were signed, TT’s allocated ticket stock would be restored. TT’s dependence on PAC was such that it felt it had to accept the New Agreement. TT subsequently sued PAC for various commission payments due under the Old Agreement. This included “Basic Commission” which the first instance the court found PAC had mistakenly, but genuinely, believed had ceased to be payable. By way of defence, PAC relied on the waiver in the New Agreement, but TT successfully challenged the validity of the New Agreement on the basis of economic duress. PAC appealed. 

Appeal

The appeal focused solely on whether there had been any illegitimate pressure by PAC in procuring the New Agreement. The Court of Appeal, in a unanimous decision (David Richards LJ giving the leading judgment), pointed out that the particular feature of this case was that the pressure applied by PAC (termination of the Old Agreement, ticket allocation reduction and the waiver) were all, in themselves, lawful. Where the act or threatened act is lawful, only the nature of the demand must be considered (in contrast to unlawful act duress where the nature of the threat must also be considered).1

The court focused on the Court of Appeal case of CTN Cash and Carry Ltd v Gallagher2, which had not been brought to the trial judge’s attention and which had considered the possibility of lawful act duress. The Court of Appeal in that case had emphasised that the “critically important” characteristic is that the defendant in good faith believes that it is entitled to make the demand in question of the claimant – even if it is mistaken in this belief. 

Only bad faith demands sufficient for economic duress

The court considered that an agreement would be voidable for economic duress under CTN only where A applies lawful pressure to induce B to concede a demand to which A does not believe in good faith it is entitled. The court refused to extend CTN to the situation where the party genuinely, but unreasonably, believes itself entitled to make a demand, holding reasonableness not to be relevant. The court identified that there is little or no support in other authorities or in academic literature for such an extension of the scope of lawful act duress. 

Since the court at first instance had found that PAC genuinely believed, in good faith, it had a right to reject TT’s right to Basic Commission, there was no economic duress and PAC’s appeal was allowed in relation to all heads of TT’s claim.

COMMENT

In commercial dealings, economic pressure of some kind is virtually inevitable, particularly if one party is in a stronger bargaining position than the other. In seeking to limit the scope of lawful-act duress only to those cases of bad faith, the Court of Appeal sought to reflect the conclusion in CTN that in a purely commercial context it will be relatively rare for lawful-act duress to be established. The court was also clearly concerned to limit the “undesirable uncertainty” which would have followed from the introduction of a requirement of reasonableness; in common situations of parties using lawful commercial pressure in support of a purely commercial demand, there would be no yardstick by which to judge that demand. Such demands will be very fact-specific, depending on the parties’ negotiations against the background of the “pressures operating” on them. Although the court felt that a demand made in bad faith is a “clear criterion”, capable of proof, in practice it may be difficult to identify demands made in bad faith as against those made in good faith, albeit unreasonably. 

The court noted that the harsh economic pressure that PAC was able to apply resulted from its position as a monopoly supplier of tickets for direct flights between the UK and Pakistan. However, this is not relevant in the context of commercial dealings where there is freedom of contract: the courts have repeatedly rejected both inequality of bargaining power and the use of monopoly position as grounds for setting aside contracts under the common law, as these areas are regulated by statute. The court was clear that it would be inappropriate to use economic duress as a back-door to control the lawful use of monopoly power.

Footnotes:

1. Universe Tankships Inc. of Monrovia v International Transport Workers Federation [1983] AC 366.
2. [1994] 4 All ER 714.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards