UKSC provide some clarity on the evolving law in relation to Lawful act duress
In the recent case of Pakistan International Airlines Corporation v Times Travel (UK) Ltd  UKSC 40, the Supreme Court helpfully clarified that lawful act duress exists, identified the elements required to establish it, and stated that the boundaries are not fixed. The Court added that any extension of the doctrine should be approached with caution, particularly in the context of contractual negotiations between commercial entities. In so doing, it has arguably narrowed the scope of economic duress.
A contract which a party is induced to enter into under duress or through illegitimate pressure can be avoided or set aside. Economic duress, in the form of threats to commit unlawful acts, was first recognised in the 1970s. More recently, the courts have begun to recognise ‘lawful act duress’, where the pressure is constituted by a threat to takes steps that are, of themselves, lawful.
In its recent decision in Pakistan International Airlines Corporation v Times Travel (UK) Ltd  UKSC 40, the Supreme Court examined in some detail the case law through which the law of economic duress has developed, as well as academic commentary. The resulting judgment provides some helpful clarity in respect of this evolving area of the law. This included, first and foremost, that “although controversial, lawful act duress does and should exist as a matter of English law” and that there are three elements to lawful act duress: (i) an “illegitimate” threat; (ii) sufficient causation and (iii) that the threatened party had no reasonable alternative to giving in to the threat.
In providing their analysis of the current state of the law, the Supreme Court stated that whilst “[t]he boundaries of the doctrine of lawful act duress are not fixed …the courts should approach any extension with caution, particularly in the context of contractual negotiations between commercial entities”. The court recognised that pressure or the pursuit of commercial self-interest is accepted and often brought to bear between parties negotiating a contract and clarified that “[i]t will be a rare circumstance that a court will find lawful act duress in the context of commercial negotiation”. This is particularly so given the absence of the doctrines of good faith or imbalance of bargaining power in contract law - and bearing in mind that remedies already exist in equity in respect of undue influence and unconscionable bargains.
The facts of Pakistan International Airlines Corporation v Times Travel (UK) Ltd
The case in question concerned a travel agent, Times Travel (UK) Limited (TT) whose business consisted almost solely of selling flight tickets to Pakistan. Pakistan International Airline Corporation (PIAC) was the sole operator of those flights under a contract which was terminable by PIAC upon one month's notice. PIAC paid TT commission for the tickets that it sold.
A dispute arose between certain travel agents and PIAC over unpaid commissions. Under pressure from PIAC, TT did not join those claims. Subsequently, PIAC substantially cut TT's fortnightly allocation of tickets, as it was entitled to do, and gave notice to terminate the contract. This would have put TT out of business and therefore, TT agreed to a new agreement under which TT waived any claims it might have for the previously unpaid commission. One of the directors of TT had been shown a draft of the new agreement a few days before, but PIAC had refused his request to take a copy with him in order to discuss it and obtain legal advice. Subsequently, TT brought a claim for the unpaid commission arguing that it could rescind the new agreement for lawful act economic duress. The trial judge agreed, but also found that PIAC had genuinely believed that the commission was not due. The CA allowed PIAC's appeal as PIAC had not acted in bad faith.
The Supreme Court dismissed the appeal, which was only concerned with the first element of lawful act duress, the illegitimacy of the threat or pressure to enter into the new agreement on the basis of TT waiving any claims it might have to the previously unpaid commissions. It was not disputed that TT could establish causation and that it had no reasonable alternative to giving in to the threat. The threat at issue was, however, that of PIAC discontinuing the contractual relationship – action which PIAC was legally entitled to take. It was this, and the associated risk of its business failing, that induced TT to accept the new contract.
How to determine the illegitimacy of the threat to establish lawful economic duress
The question which then arises is, in what circumstances would pressure in commercial negotiations become “illegitimate”?
In the minority, Lord Burrows expressed the view that “a demand is unjustified, so that the lawful act economic threat is illegitimate, where, first, the threatening party has deliberately created, of increased, the threatened party’s vulnerability to the demand, and secondly, the “bad faith demand” requirement is satisfied”. Lord Hodge, with whom the majority agreed, disagreed with Lord Burrows’ analysis, and instead concluded that the common law had developed in such a way as to draw upon the rules of equity in developing lawful act economic duress and treating “unconscionable conduct” as the touchstone of illegitimate pressure in the context of duress. In the absence of any doctrine of good faith or imbalance of bargaining power in contracting in English law, Lord Hodge did not consider that “bad faith” was a necessary component of economic duress.
There are only a few cases to date in which a remedy has been provided for lawful act duress. In each such case the defendant has either:
- threatened to report criminal activity by the claimant or a family member;
- used illegitimate means to manoeuvre the claimant into a position of weakness to force him to waive his claim.
These are only examples of what the court will treat as unconscionable and illegitimate for the purposes of lawful act duress and are not exclusive, but the Supreme Court indicated that doctrine should be applied rarely and restrictively and (as noted above) indicated that the courts should approach any extension with caution. As Lord Hodge said in his judgment, “the scope for lawful act economic duress is extremely limited in the sphere of commercial transactions”.
It remains to be seen if and how the law around economic duress will develop further. In the meantime, this judgment has provided some helpful certainty and clarity, particularly for commercial parties. It was recognised by the court that, whilst inequality of bargaining power in commercial negotiations means that one party may be able to impose terms on a weaker party which seem harsh, that it not (of itself) a basis upon which the resulting contract can be impugned as having been secured through economic duress.