Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner
Supreme Court clarifies lawful act of duress
In Times Travel (UK) Ltd v Pakistan International Airlines Corporation (Rev 2)  EWCA Civ 828, the Supreme Court confirmed the existence of the doctrine of ‘lawful act duress’ under English law and its limited scope in commercial transactions.
The claimant, Times Travel (UK) Ltd (“TT”) was a travel agent whose business was almost exclusively reliant on selling flight tickets for the defendant, Pakistan International Airlines Corporation (“PIAC”). A dispute arose in relation to TT’s entitlement to commission payments which PIAC genuinely believed were not owed. PIAC threatened TT to lawfully terminate their contractual relationship, unless TT waived all rights for such payments. Accordingly, TT entered into a new contract with PIAC releasing it from its obligations to pay under the old agreement, but subsequently sought to avoid the new contract on the basis of lawful act duress in order to recover the commission owed. The key question was whether a contract could be avoided if it was entered into following pressure involving a threat to do something lawful.
At first instance, the court sided with TT holding that it was entitled to rescind the new contract for economic duress. However, the Court of Appeal overturned that decision and found that PIAC was legally entitled to end its original contract with TT so the threats to do so were lawful. Duress could have only been established if PIAC’s demands, that TT gives up the commission for the contract, were illegitimate, which the court interpreted as being made in bad faith. There was no evidence that PIAC acted in bad faith in making the demands it did, so the new contract could not be avoided. Our article on the Court of Appeal’s decision in March 2020 can be accessed here.
TT subsequently appealed and the case went to the Supreme Court.
The Supreme Court decision
The Supreme Court (the “Court”) dismissed the appeal holding that lawful act duress was not established and the new contract could not be rescinded.
The Court acknowledged the controversy surrounding the doctrine of lawful act duress which partly stemmed from wide-ranging fears of disrupting commercial certainty. However, the ruling unanimously asserted that the doctrine of lawful act duress “does, and should, exist” under the English law of rescission, but that it should be applied restrictively in a commercial context.
The Court re-affirmed the three essential elements required to establish lawful act economic duress:
- the presence of illegitimate threat or pressure;
- influencing the claimant’s decision to enter into the new contract; and
- there is no reasonable alternative but to give in to the threat.
The meaning of illegitimate economic pressure, as opposed to the pressure of normal commercial bargaining, was the focal point of this appeal. The Court identified only two circumstances from previous cases where the defendants’ behaviour amounted to illegitimate pressure:
- The exploitation of knowledge of criminal activity by the claimant or its close family members to obtain a personal benefit; and
- Using illegitimate means to manoeuvre the claimant into a position of weakness to force it to waive its civil claims against the defendant.
The Court’s majority ruling, recognised the role of equity in determining what constitutes an illegitimate threat and the need for some ‘unconscionable’ or ‘reprehensible’ conduct in certain contexts for judicial intervention to protect the weaker party. However, it warned of using such concepts as overarching criteria to determining lawful act duress and stressed the need to consider the context of each case against other available remedies.
The Court said PIAC’s conduct was a “hard-nosed exercise” in which it exploited its monopoly power. However, PIAC was not unconscionable or reprehensible, thus the new agreement could not be avoided. The fact that PIAC were not acting in bad faith and genuinely believed it had a defence against TT’s claim supported this conclusion but, in the majority’s view, bad faith alone would not be capable of determining the illegitimacy of PIAC’s threat.
The Court’s minority ruling advocated an alternative approach on how illegitimacy of a threat or a pressure should be determined. Lawful act duress in the context of a demand for the waiver of a claim requires that the demand be made in bad faith. In other words, TT would have succeeded had PIAC not genuinely believed it had a defence to TT’s claim for commission payments.
This is the first time the Supreme Court has shed light on the doctrine of lawful act duress, confirming its existence under English law, and providing clarity on the meaning of illegitimate threat in the context of lawful act duress. It further limited the scope in which a lawful act duress defence might succeed but left the door open for its boundaries to be drawn in the future.
The differences between the majority’s and minority’s approaches to determining illegitimate threat should be considered carefully as the law in this area continues to develop.