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Times Travel Limited v Pakistan International Airways Corporation [2021] UKSC 40

Existence of Lawful Act Economic Duress upheld by the Supreme Court in Times Travel Limited v Pakistan International Airways Corporation [2021] UKSC 40

By Philip Shepherd QC[1] 

 

The Supreme Court has now established beyond challenge the existence of “lawful act” economic duress, rejecting the argument that acts that are lawful in themselves can never qualify as illegitimate pressure for the purpose of setting aside a contract for duress. The leading judgment was given by Lord Hodge (with whom Lords Reed, Lloyd-Jones and Kitchin agreed), the majority disagreed with Lord Burrows in an important respect.

In addition to (i) defining the essential elements of duress; (ii) accepting the existence of lawful act duress in English law; (iii) the Supreme Court stressed the importance of clarity and certainty in our commercial law so that the concept of lawful act duress must not be stated too widely; (iv)  it was this concern that drove the rejection of the range of factors approach that the majority had adopted in Patel v Mirza;[2] (iv) likewise the similar rejection of the use of a wide principle of good faith dealing; (vi) it also agreed with Lord Burrows as to  the appropriateness of focusing on the nature and justification of the demand rather than the legality of the threat; (vii) and also the law’s general acceptance of the pursuit of commercial self-interest as justified in commercial bargaining and the rarity of cases where lawful act duress will be found to exist in such bargaining.

Where the majority disagreed with Lord Burrows was in its analysis of what the law has recognised as an illegitimate threat or pressure. It rejected the theory that a bad faith demand should be treated as lawful act duress as propounded by Lord Burrows who would not confine lawful act duress to a claim based on a dishonest assertion by A of a pre-existing legal entitlement to payment. Instead, he argues that A’s demand for a waiver by B of a claim against A would amount to lawful act economic duress where (i) A did not genuinely believe that it had a defence to the claim – ie his “bad faith demand”, and (ii) A has deliberately created or increased B’s vulnerability to that demand.

Lord Hodge for the majority rejected this as a step too far because he considered it significant that the courts had developed the common law doctrine of duress by drawing on the rules of equity on undue influence. It treated as “illegitimate” conduct that equity judged unconscionable when the law of duress was less developed.  So unconscionable conduct was treated by English common law as illegitimate pressure in the context of duress. In this way the common law followed principles derived from equity.

Importantly, the Supreme Court affirmed that although the boundaries of lawful act economic duress are not fixed, the central theme is that the Courts should approach economic duress with great caution in light of the centrality of certainty and freedom of contract.

So in the context of contractual negotiations, it was important to guard against the rebalancing inequality of bargaining power which is simply a fact of commercial life although inequality of bargaining power may be a relevant feature in some cases of undue influence.[3] The courts have taken the position that it is for Parliament and not the judiciary to regulate inequality of bargaining power where a person is trading in a manner which is not otherwise contrary to law. A powerful commercial party, such as a monopoly supplier or monopoly purchaser can impose onerous terms, for example demanding a premium, as a condition for entering into a transaction with another party.

Likewise, the introduction of general concepts of good faith that English common law has consistently rejected. English law has never recognised a general principle of good faith in contracting. Instead, English law has relied on piecemeal solutions in response to demonstrated problems of unfairness[4].

Lord Hodge considered it significant that lawful act duress had been found in 2 classes of case. The first was where a defendant uses his knowledge of criminal activity by the claimant or a member of the claimant’s close family to obtain a personal benefit from the claimant by the express or implicit threat to report the crime or initiate a prosecution. The second was where the defendant, having exposed himself to a civil claim by the claimant, for example, for damages for breach of contract, deliberately manoeuvres the claimant into a position of vulnerability by means which the law regards as illegitimate and thereby forces the claimant to waive his claim[5]. In both categories of case the defendant has behaved in a highly reprehensible way which the courts have treated as amounting to illegitimate pressure.

The majority held that although cases of bad faith demand was a mischief the law could address it had not and should not do so. Sacrificing contractual certainty and introducing a general principle of good faith in contracting or a doctrine of imbalance of bargaining power, neither of which currently exists was not justified.

On 15 September 2021 at 1pm a webinar will be given to discuss the practical implications of this important judgment by Philip Shepherd QC who acted for the Appellant, Thomas Roe QC and Ned Beale Head of Commercial Litigation at Hausfeld who acted for the 3rd Interveners the All Party Parliamentary Group on Fair Business Banking.

 

Register for webinar here.

 


[1] Counsel for the Appellant leading Heather Murphy instructed by Charles Morgan Lawyers
[2] [2016] UKSC 42 when considering how Courts should respond to illegality https://www.bailii.org/uk/cases/UKSC/2016/42.html
[3] National Westminster Bank Plc v Morgan [1985] AC 686, 708 per Lord Scarman
[4] Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439 per Bingham LJ; MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA 789; [2017] 1 All ER (Comm) 483, para 45 per Moore-Bick LJ.
[5] This was the case argued by Times Travel who was being forced by PIAC to give up accrued commission and whose vulnerability was then increased by an 80% cut in its ticket allocation.