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Vedder Thinking | Articles Economic duress: will English law assist a party who enters into a contract as a result of a lawful threat of causing economic harm?

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It is clear that English law permits a party to avoid a contract on the grounds of economic duress but there is some uncertainty as to the circumstance in which a contract may be avoided for economic duress. Requiring particular clarification are cases involving lawful act duress – will English law provide protection where a contract results from a threat of a lawful act (or omission) to cause economic harm? This question was considered by the Court of Appeal in Times Travel (UK) Limited v Pakistan International Airlines Corporation.1

Background

At the applicable time, in 2008, Pakistan International Airlines Corporation (PIAC) was the principal provider of direct flights between the UK and Pakistan. Times Travel (UK) Limited (Times Travel) operated a business to sell flight tickets, with its almost exclusive focus being on flights to Pakistan from the UK. Times Travel’s principal source of revenue, therefore, was from the commission it made from selling tickets to PIAC customers.

From the beginning of the relationship, there were disputes between Times Travel (and other PIAC-appointed travel agents) with PIAC about PIAC’s failure to pay a not insubstantial amount of commission that PIAC owed to Times Travel pursuant to the original commission arrangements.

In 2012, as the dispute continued, PIAC served a notice on Times Travel to terminate the existing agency arrangements and also reduced its fortnightly allocation of tickets from 300 to 60. This reduction on the number of available tickets, would have “had a major impact on Times Travel’s business and, if continued for much longer, would have put it out of business2. This action by PIAC was not in breach of the original commission arrangements.

It was in this context that PIAC required Times Travel to enter into new commission arrangements for the sale of its flight tickets, arrangements that also “released PIAC from all such claims arising under the arrangements in force prior to the making of the [new commission arrangements]”.3

Given the hardship that Times Travel would suffer if it did not enter into the new arrangements with PIAC, Times Travel felt compelled to agree to the terms, including the waiver of the existing claims for unpaid commission.

In 2014, Times Travel brought proceedings to recover the commission which it claimed was due under the earlier arrangements, arguing that the new arrangements which had been entered into, including the waiver, were the result of economic duress and that it should therefore be entitled to avoid the new arrangements.

The first instance judge agreed with Times Travel and found that this hardship, and the economic leverage that PIAC held over Times Travel, constituted economic duress:

  • there was illegitimate pressure applied to Times Travel;
  • that pressure was a significant cause in inducing Times Travel to enter into the applicable contract; and
  • the practical effect of the pressure is that there was a compulsion or, or a lack of practical choice for, Times Travel.4

PIAC appealed the decision of the first instance judge, on the grounds that the pressure it applied was not illegitimate.

Court of Appeal

On appeal, the court found that PIAC’s actions did not amount to economic duress.

First, the court determined that the pressure was not illegitimate in the sense that it was unlawful: PIAC had not acted unlawfully in pressuring Times Travel to enter into the new arrangements – to do so was not a breach of contract, a tort or any other actionable wrong.

Accordingly, it would be necessary to consider if a lawful act or a threat of a lawful act could amount to economic duress. Here it had to be established that there was bad faith on the part of the pressuring party as “the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result which the person exercising pressure believes in good faith it is entitled, and that is so, whether or not, objectively speaking, it has reasonable grounds for that belief”.5

The judgment appears to draw a distinction between bad faith and the lack of good faith, defining a lack of good faith as “a clear criterion involving conduct which all can agree is unacceptable and which is a fact capable of proof, often as it happens by reference to the lack of any reasonable grounds for the belief”.6 The court referred to the judgment of the lower court judge who had accepted that Times Travel had not established bad faith on the part of PIAC and held that, in the absence of bad faith, a lack of reasonable grounds was insufficient to engage the doctrine of duress where the pressure involved the commission or threat of lawful act.

Accordingly, Time Travel’s claim for economic duress failed.

Monopolies

The court also noted that it did not want to use the doctrine of economic duress as a means of controlling the lawful use of monopoly power (as PIAC had here), noting that the court in CTN Cash and Carry7 had said “The control of monopolies is, however a matter of Parliament. Moreover, the common law does not recognize the doctrine of inequality of bargaining power in commercial dealings… The fact that the defendants were in a monopoly position cannot therefore by itself convert what is not otherwise duress into duress."

Conclusion

The court’s decision reinforces the fundamental importance of ensuring contractual clarity and certainty as a matter of English law – if parties make an agreement, the courts will seldom intervene to undo that agreement and will certainly not do so where no party can be said to have acted unlawfully or lawfully but out of bad faith.

For companies operating in the aviation market, where there may be an unequal power dynamic – for example on certain flight routes or with respect to the availability of specialist maintenance facilities – parties will not be able to look to economic duress to undo a lop-sided bargain unless there is some unlawful action or provable bad faith on the part of the holder of the position of increased power.


1 [2019] EWCA (Civ) 828.

2 Para. 13, supra

3 Para. 17, supra

4 Para. 29, supra

5 Para. 105, supra 

6 Para. 106, supra

CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714



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