Tipping the Scales – Supreme Court decides whether and if so when and how pressure in commercial relationships becomes unlawful

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Tipping the Scales – Supreme Court decides whether and if so when and how pressure in commercial relationships becomes unlawful

Published 13 October 2021

In August 2021, the Supreme Court handed down judgment in Pakistan International Airlines Corporation v Times Travel (UK) Ltd [2021] UKSC 40/0142. The Court was tasked with assessing the ingredients of lawful act economic duress and specifically whether duress arises where lawful acts or threats are made by a party in the absence of bad faith or unconscionable behaviour. It unanimously decided against a finding of duress on the facts but left the door open to further development in exceptional cases.

The Facts

Times Travel (UK) Ltd (“Times”), a travel agent, entered into an agreement with Pakistan International Airlines Corporation (“PIAC”) to act as a ticketing agent for PIAC. Times’ business was predominantly the sale of flights to Pakistan and it sourced ticket availability almost solely from PIAC, who was the only carrier operating direct flights between the UK and Pakistan at the time.

By 2012, a dispute arose between Times and PIAC regarding commission owed to Times. PIAC served notice to terminate its contract with Times, which it was legally entitled to do, but offered a new contract which released PIAC from Times’ claim for historic commissions. Times entered this new contract and in 2014 brought proceedings against PIAC for the unpaid commission on grounds that the new contract could be rescinded for lawful act economic duress.

Route to the Supreme Court

At first instance, Warren J held that Times was entitled to rescind the contract for economic duress. That decision was overturned by the Court of Appeal; it held that as PIAC’s actions were lawful and duress could only be established if PIAC’s demand for the waiver of commission claims had been made in bad faith (i.e. if PIAC did not genuinely believe that it had a defence to Times’ claims for commission).

The Supreme Court unanimously upheld the Court of Appeal decision but the majority adopted different reasoning to the Court of Appeal.

Lawful Act Economic Duress

Duress in the context of contract law is concerned with an illegitimate threat/pressure that induces a party to enter into a contract. If duress is established, the contract is voidable and can be rescinded. There are two essential elements that a claimant needs to establish to succeed in a claim for duress. The first is the existence of an illegitimate threat or pressure. The second is that that illegitimate threat or pressure caused the claimant to enter into the contract. For economic duress, a third element is required; the claimant must have had no reasonable alternative to giving in to the threat/pressure.

This dispute concerned economic duress but it was solely concerned with the first element: the illegitimacy of the threat or pressure.

Supreme Court Judgment

The majority judgment given by Lord Hodge noted that there were two circumstances where English courts have recognised lawful act duress and provided a remedy:

  1. The defendant uses knowledge of criminal activity committed by the claimant, or a related party, to obtain a personal benefit from the claimant by threatening to report the crime; or
  2. The defendant, having been exposed to a civil claim by the claimant, manoeuvres the claimant into a vulnerable position by illegitimate means and forces the claimant to waive their claim.

This claim fell into the second set of circumstances and Lord Hodge identified two cases of note, namely:

  1. Borelli V Ting [2010] UKPC 21; [2010] Bus LR 1718 – In this case the Judicial Committee of the Privy Council (the “Board”) held that an agreement was invalid because it was entered into as a result of illegitimate economic pressure and that the defendant’s actions, which included resorting to “forgery and false evidence”, amounted to unconscionable behaviour. The adoption of those “illegitimate means” meant the defendant left the claimant with “no reasonable or practical alternative but to enter into” the agreement.

  2. Progress Bulk Carriers Ltd v Tube City IMS LLC (The Cenk Kaptanoglu) [2012] EWHC 273 (Comm); [2012] 2 All ER (Comm) 855, 864 (“The Cenk K”) – In this case the defendant’s breach of contract (failure to supply a chartered vessel), followed by subsequent misleading activity, amounted to illegitimate pressure as it manoeuvred the claimant into a position where they had no option but to accept the defendant’s ‘take it or leave it’ offer (a substitute vessel that did not meet the charterer’s needs and waiving claims for loss and damage). It was also held that “illegitimate pressure” can be constituted by conduct which is not in itself unlawful.

In Borelli V Ting, the Board described the defendant’s conduct as unconscionable and treated “illegitimate” as a synonym for “unconscionable”. This was a central theme in Lord Hodge’s judgment.

Lord Hodge observed that lawful act duress has been developed by the English courts drawing upon (a) the equitable doctrine of undue influence and (b) treating illegitimate conduct as “morally reprehensible behaviour” that would make an agreement “unconscionable” to enforce. However, under neither limb is inequality of bargaining power sufficient to entitle the threatened party to relief. Likewise there is no common law doctrine of inequality of bargaining power, and although it has been a feature in some cases of undue influence, the courts have taken the view that it is for Parliament to regulate inequality in trading which is not otherwise contrary to law.

While the boundaries of lawful act duress are not fixed, Lord Hodge felt “the courts should approach any extension with caution” because an extension could severely restrict commercial negotiations and cause commercial uncertainty. English law seeks to protect and fulfil the reasonable expectations of honest parties under the contract and there is no principle of good faith; accordingly it was not unjustifiable for a party to be motivated by “the pursuit of commercial self-interest”, and if that resulted in “hard-nosed commercial negotiation” it would not cross the threshold of unconscionable behaviour. Furthermore, Lord Hodge was of the view that a “powerful commercial party, such as a monopoly supplier….can impose onerous terms” without it straying into the realms of unconscionable behaviour.

On the facts, Lord Hodge did not consider that PIAC’s exploitation of their monopoly power involved the same “reprehensible means” utilised in Borelli and The Cenk K. The threat levied by PIAC was reducing Times’ ticket allocation, which was merely tough negotiating. In the absence of a doctrine of unequal bargaining power in English law, this could not by itself amount to illegitimate pressure. The Supreme Court found, as a matter of fact, that PIAC did not manoeuvre Times into a position of vulnerability through this reduction and PIAC’s genuine belief that it was not liable to pay the commission supported the argument that their behaviour was not “reprehensible”.

Minority judgment

In his minority judgment, Lord Burrows also concluded that Times was not entitled to rescind the contract on the grounds of lawful act duress. However, he differed from the majority judgment on the basis that he considered a “necessary requirement” for lawful act economic duress to be that the defendant’s demand was made in ‘bad faith’. By this Lord Burrows meant a demand made by a defendant who “does not genuinely believe that it is owed what it is claiming to be owed or does not genuinely believe that it has a defence to the claim being waived”.

In coming to his conclusion, Lord Burrows’ argued that simply relying on the defendant’s conduct being “reprehensible”, “unconscionable” or “illegitimate” would lead to uncertainty as none of the terms are sharply defined. Conversely, if a narrow definition of “bad faith dealing” is included as part of the test for lawful act economic duress, contracting parties will have greater certainty over whether or not their actions will amount to acceptable behaviour.

Lord Hodge considered this view but argued that due to the absence in English law of an overriding doctrine of good faith in contracting or a doctrine of unequal bargaining power, even if PIAC had made a “bad faith demand” the claim still would not have succeeded.

Where does this leave us?

The Supreme Court expressly recognised that lawful act duress was controversial. The judgments of both Lord Hodge and Lord Burrows have made it clear that to the extent that lawful act economic duress exists (and Lord Burrows was very much in favour of it), the bar is set high in any claim for rescission of a contract on these grounds. The Supreme Court’s judgment clearly recognises the reality of the disparity of bargaining power in commercial relationships and that, further, there is nothing inherently wrong with a party exploiting its commercial advantage. What may constitute an illegitimate threat will be a question of fact and the door is not closed to the Court making further determinations and extensions of the law in this area in the future. However, it is fair to say that it ought to be considered as the last port of call for claimants.

Authors

Jonathan Brogden

Jonathan Brogden

London - Walbrook

+44 (0)20 7894 6290

Benjamin Jones

Benjamin Jones

London - Walbrook

+44(0)20 7894 6147

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