In this post, Stephanie Cheung, Mitchell Abbott and Jana Blahova of CMS Cameron McKenna Nabarro Olswang LLP, comment on the decision handed down by the UK Supreme Court in Pakistan International Airline Corporation v Times Travel (UK) Ltd  UKSC 40 and consider how the decision impacts on the doctrine of lawful economic duress.
A claimant needs to establish the following in order to succeed with a claim of economic duress (1) that there was an illegitimate threat or pressure, (2) that illegitimate threat or pressure caused the claimant to enter into the agreement (which the claimant is now trying to rescind) and (3) the claimant had no reasonable alternative but to give in to the threat or pressure. This case concerns the scenarios in which lawful actions (e.g. the lawful termination of a contract) will amount to an illegitimate threat or pressure.
The facts of the case are as follows: Times Travel is a travel agency whose business primarily relied upon its ability to sell tickets for Pakistan International Airlines Corporation’s (“PIAC”) flights to Pakistan. Disputes arose between PIAC and a number of its affiliated travel agents concerning the commission payable by PIAC to its agents (following the events discussed below, some agents were successful in legal proceedings).
In response to the disputes, PIAC reduced Times Travel’s fortnightly ticket allocation from 300 to 60 tickets and it gave notice that it intended to exercise its right of termination (which existed in all its contracts with its agents). PIAC subsequently offered Times Travel new terms of appointment as an affiliated travel agent, and those the new terms included a provision that waived Times Travel’s right to claim for unpaid commission. PIAC also advised Times Travel that its ticket allocation would be restored to 300 tickets if it agreed to the new terms. Times Travel agreed to the new terms.
Times Travel subsequently issued proceedings against PIAC arguing (1) it felt it had no alternative but to agree the new terms and (2) the new terms should be rescinded on grounds of economic duress.
Times Travel was successful at first instance, however, as set out in our Case Preview, the Court of Appeal overturned the decision and rejected Times Travel’s claim of economic duress. The Court of Appeal’s decision hinged upon the fact that PIAC did not make its demands in bad faith – PIAC mistakenly believed that its position in the disputes was correct. The Court of Appeal was unwilling to find that PIAC’s termination of Times Travel’s contract (which was legal) and its demand that new terms were entered into amounted to economic duress without bad faith.
Leading Judgment: Lord Hodge
The leading judgment which was given by Lord Hodge who dismissed Times Travel’s appeal. Lord Hodge identified two categories of cases where, historically, the courts have accepted lawful actions have amounted to economic duress:
The first category of cases concerns where one party has exploited knowledge of criminal activity by an individual or a member of their family to procure an agreement.
For example, in Williams v Bayley 1 HL 200 a son forged his father’s signature to obtain promissory notes from a bank. The bank threatened to prosecute the son unless the father agreed to undertake to repay the sums, which he did. Upon the father’s application, the House of Lords rescinded the contract.
The second category of cases concerns where illegitimate means have been used to manoeuvre the claimant into a position of weakness to force him or her to waive their claim.
For example, in The Cenk K  EWHC 273 (Comm) Party A chartered a vessel from Party B. The contact specified a date of return of the vessel to permit it to be sent on to its next charter. However, Party A did not return the vessel, instead, it chartered it out to a third party. Party A promised Party B that it would provide another vessel to allow Party B to meet its next charter and promised to pay damages arising from the failure to provide the contracted vessel. When it was too late for Party B to do anything but accept, and in breach of their prior agreement, Party A advised it would not pay the damages – and it refused to provide the vessel unless Party B waived its claim for damages. Left with no alternative, Party B agreed to waive its claim. The court later upheld an arbitrator’s award finding that the settlement was rescinded on grounds of economic duress.
The majority agreed PIAC’s actions did not fall within the categories of cases identified above, and more was needed for Times Travel to succeed, in particular – “morally reprehensible behaviour” which rendered the contract “unconscionable” was required in order to establish an illegitimate threat or pressure.
In reaching its decision, the majority noted that there are no general principles of “inequality of bargaining power” or “good faith” in English law. The courts have generally taken the view that unequal bargaining power is a matter that should be regulated by the legislature and whilst good faith might be relevant in limited circumstances, generally, English law has never adopted a general requirement of good faith in contractual dealing. As a result, the doctrine of lawful act economic duress, particularly in commercial contexts, must be “extremely limited”. Leverage and/or pressure applied in negotiations will rarely meet the required standard of “illegitimate pressure or unconscionable conduct”.
The majority did not accept that PIAC used illegitimate means to expert pressure on Times Travel and in the absence of the principles referred to above there was no lawful act economic duress. The majority were satisfied that the approach adopted by other common law jurisdictions with similar contract law foundations (and no general principles of good faith) supported the restrictive approach they had chosen to adopt. Whilst Lord Hodge did not rule out scope for development of the doctrine of economic duress, he identified 3 difficulties in doing so, namely:
In the absence of a general principle of inequality bargaining power and/or good faith, there was no recognised principle on which to base another interpretation/approach;
A broader interpretation may give rise to uncertainty; and
A broader interpretation may be of limited use because it will be difficult to establish subjective bad faith.
Dissenting Judgment: Lord Burrows
Lord Burrows’ dissenting judgment reached the same conclusion as those of the majority, he accepted that it was necessary to dismiss Times Travel’s appeal. However, Lord Burrows had a different view on what constitutes an “illegitimate threat or pressure”. The main focus of Lord Burrows’ dissent, similar to the Court of Appeal, concerned the requirement of a “bad faith demand”.
In Lord Burrows’ view, if a party deploys a bad faith demand whilst, at the same time, creating or worsening the other party’s vulnerability, then that could constitute an illegitimate threat and it should be relevant for the purposes of a claim of lawful act economic duress.
Lord Burrows stated the illegitimacy of the threat would have been determined with reference to the justification for the demand. A demand motivated by commercial self-interest is, in general, justified. For the demand to be unjustified, PIAC would have had to deliberately create or increase Times Travel’s vulnerability to the demand.
Whilst this judgment clearly confirms that the concept of lawful act economic duress does exist in English law (the majority rejected academic commentary suggesting the contrary), this doctrine is, as stated by Lord Burrows, “in its infancy”.
Beyond the two categories of case law already identified by Lord Hodge it is not clear what other actions (if any) might amount to “morally reprehensible conduct” and/or what behaviour might render a contract “unconscionable”. Claimants who feel that they have been subjected to illegitimate threats or pressure may choose to pursue alternative causes of action (for example, undue influence) following this judgment because of the cautious approach adopted by the Supreme Court.