The contract being considered in Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40 was undeniably one-sided. TT is a travel agent which at the time of the dispute specialised in selling direct flights between the UK and Pakistan. PIAC, Pakistan’s national flag carrier, was the only airline making those direct flights. TT has been contracting with PIAC since 2006. PIAC, something acknowledged by its counsel before the Supreme Court, “recognised that TT was the weaker party” because it had built up a business which relied on PIAC without any recognisable legal safeguards. Indeed, PIAC could effectively end TT’s business by giving at least one month’s written notice.
Key point
The Supreme Court has confirmed that it will be very difficult for a party to a commercial contract to rescind the agreement because of lawful act economic duress
In both 2011 and 2012, a number of travel agents commenced proceedings, alleging non-payment of commission by PIAC. Under pressure from PIAC, TT did not join those proceedings. Notwithstanding that, in September 2012, PIAC forced TT (without letting TT’s director take a copy so that he could discuss it within the business and obtain legal advice on its terms) to sign a new contract which reduced its ticket allocation from 300 to 60 and required TT to waive any claims it might have had against PIAC for unpaid commission under earlier contracts. At all times, PIAC was acting within its legal rights, albeit using a threat to terminate the entire contract (which would have put TT out of business) in order to get TT’s agreement.
The proceedings
At the end of 2014, TT issued proceedings against PIAC, attempting to rescind the September 2012 contract because it had entered into it under economic duress. Rescission would have the effect of setting the entire contract aside and returning the parties to the position they would have been in before it had been entered into. TT also claimed for the unpaid commission it would otherwise have earned had it not signed the September 2012 contract.
At first instance, Warren J agreed with TT on the economic duress argument and, while accepting that PIAC genuinely believed that commission was not due, awarded TT unpaid commission of more than £1.2m. The Court of Appeal overturned that decision on the basis that PIAC had not acted in bad faith. TT appealed to the Supreme Court.
Lawful act economic duress
Lord Hodge, who gave the leading judgment, dismissed TT’s appeal. There are three key elements which a claimant must establish in order to persuade a court to rescind a contract for lawful act economic duress. The first two apply to duress more widely. The third is specific to economic duress. First, the threat or pressure by the defendant must be illegitimate. Second, the threat or pressure must have caused the claimant to enter into the contract (Dimskal Shipping Co SA v International Transport Workers’ Federation (the Evia Luck) (No 2) [1992] 2 AC 152). Third, for economic duress only, the claimant must have had no reasonable alternative to giving in to the threat or pressure (see, for example, DSND Subsea Ltd v Petroleum Geo-Services ASA [2000] BLR 530).
What is illegitimate pressure?
The concept of illegitimate pressure – the first element – has been the subject of academic criticism, linked to the idea that lawful act duress should not exist at all. At the heart of the criticism is that many contracts are entered into under some form of pressure exerted by one party and the law would not want to undermine them all. And, while it is easy to see duress applying where the threat is to do an unlawful act, it is more nuanced when the threat is a lawful one. When the threat is lawful, what counts as duress and what is merely a commercial threat?
Lord Hodge answered this by stressing that there were two instances where English law expressly recognises lawful act duress. The first is where a defendant uses their knowledge of the criminal activity of the claimant (or someone close to them) to threaten the claimant (as happened in Williams v Bayley (1866) LR 1 HL). The second is where the defendant, having exposed itself to a civil claim by the claimant, illegitimately or reprehensibly manoeuvres (for example, by dishonesty or fraud) the claimant into a position of vulnerability which forces the claimant to waive its claim (see, for example, Borelli v Ting [2010] UKPC 21).
The judge also acknowledged that what does and does not constitute an illegitimate threat or pressure is closely aligned to the equitable concept of unconscionability. He stressed that this does not mean that judges become arbiters of what is and is not morally or socially acceptable behaviour. Rather, equity has identified specific contexts which call for judicial intervention to protect the weaker party. And while, in the absence of a doctrine of inequality of bargaining power or a general principle of good faith in contracting, it will be rare for a court to find lawful act economic duress in the context of commercial negotiations, that does not mean that the concept has no application in English law.
The decision
Unfortunately for TT, this was not one of those rare cases where a court was going to hold that lawful act economic duress did apply to a commercial negotiation. PIAC threatening to terminate the earlier contract and cutting TT’s ticket allocation was not illegitimate or reprehensible conduct of the required type. Indeed, PIAC’s genuine belief that it was not liable to pay the disputed commission supported that view.
I think we can expect more litigation on what is illegitimate pressure or reprehensible behaviour.
Stuart Pemble is a partner at Mills & Reeve
