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Economic duress or commercial leverage? The Court of Appeal clarifies the scope of “lawful act duress”

Insights / / Economic duress or commercial leverage? The Court of Appeal clarifies the scope of “lawful act duress”

It is a well-established principle of English law that a contract resulting from a threat of an unlawful act or omission may be avoided at the option of the aggrieved party. The Court of Appeal’s decision in Times Travel (UK) Ltd v Pakistan International Airlines Corporation (Rev 2) [2019] EWCA Civ 828 provides a long-awaited clarification on whether a contract may be avoided if it is entered into following pressure involving a threat to do something lawful i.e. “lawful act duress”.

Facts

Time Travel (“TT”) was a small family-owned travel agency based in the UK which sold Pakistan-bound flight tickets on behalf of Pakistan International Airlines Corporation (“PIAC”). The survival of TT’s business was largely dependent on its ability to sell tickets for PIAC which, at the time, was the sole operator of direct flights between Pakistan and the UK.

In September 2012, PIAC served a notice on TT lawfully terminating its agency agreement and reducing its fortnightly flight ticket allocations from 300 to 60. Simultaneously, PIAC offered to re-appoint TT as its agent on terms similar to those of the terminated agreement only if TT agreed to waive its rights to accrued commission under the previous arrangement. TT accepted the new offer, but commenced proceedings later in 2013 seeking to recover the commission due under the terminated agreement. TT’s main argument was that it entered into the new agreement due to economic duress by PIAC and such an agreement could therefore be avoided. 

As a matter of law, to rely on economic duress TT needed to establish that the pressure applied by PIAC:

  1. was illegitimate;
  2. significantly influenced TT’s decision to enter into the new agreement; and
  3. left TT with no practical alternative but to agree if it did not want to be put out of business.

The Court of first instance’s decision

At first instance, Warren J sided with TT, holding that the three elements of economic duress were satisfied. On the legitimacy aspect, which turned out to be the most problematic in the judgment, the Court concluded that the pressure applied against TT was not legitimate although PIAC’s actions were totally lawful. The Court’s reasoning was, among other things, that such a pressure was aimed at stripping TT from a ‘very strong’ claim to commission which was bound to succeed under the old agreement. Importantly, neither good nor bad faith was established on the part of PIAC, and Warren J decided that such a question was immaterial to his findings of illegitimacy. PIAC appealed.

The Court of Appeal’s decision

The Court of Appeal unanimously reversed Warren J’s judgment and ruled in PIAC’s favour. It was acknowledged that neither the termination of the contract nor the demands that TT waive its contractual rights to the unpaid commission were unlawful. There was no contractual breach, tort, or other actionable wrongdoing by PIAC.

The Court of Appeal emphasised that bad faith was required to render PIAC’s pressure illegitimate.   There was however no authority as to whether such a belief had to be objectively reasonable. The Court of Appeal held that it did not. 

For a lawful act duress claim to succeed, bad faith must be subjectively proved on the part of the party who uses lawful pressure to induce another to enter into an agreement. 

The nature of PIAC’s pressure as well as its demands were both legitimate and lacked evidence of subjective bad faith on its part. The new agreement was therefore valid.

Comment

The Court of Appeal’s ruling reaffirms the English doctrine of freedom of contract and reminds contractors that merely striking a hard bargain is, in itself, no justification to set aside a freely negotiated agreement. It also sets the burden of proving lawful act duress so high such that the aggrieved party now needs to show pressure in the sense of pursuing demands to which the other party subjectively believes itself not to be entitled. Whilst this may seem harsh, especially for small businesses, it provides much needed clarity.

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

Tarek Taha

Tarek Taha Associate

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