HomeInsightsCourt of Appeal finds that the doctrine of lawful act duress does not extend to the use of lawful pressure by a contracting party to achieve a result to which it believes in good faith it is entitled, whether or not it has reasonable grounds for that belief

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At the relevant time the defendant, Pakistan International Airlines Corp, was the only airline operating direct flights between the UK and Pakistan. The business of the claimant, Times Travel (UK) Ltd, was almost exclusively the sale of flight tickets to members of the Pakistani community in and around Birmingham for travel to and from Pakistan. Its business was therefore largely dependent on the ability to sell PIAC tickets pursuant to a contract with PIAC.

By 2012, a significant number of PIAC’s agents had commenced or were threatening proceedings against PIAC to recover substantial sums said to be due by way of commission. PIAC gave notice of termination of existing agency contracts and offered new contracts, but only on terms that the agents waived their existing claims. Times Travel accepted the terms offered by PIAC, but subsequently issued proceedings against PIAC to recover the commission and other payments that it said were due under the earlier arrangements.  One of PIAC’s defences to the claim was the waiver given by Times Travel. At first instance, this defence was defeated by the judge’s acceptance of Times Travel’s case that the new contract containing the waiver had resulted from economic duress on the part of PIAC. As a result, the judge found that Times Travel could avoid the new contract. The judge held that, because of its dependence on PIAC for so much of its business, Times Travel had no practical alternative to accepting those terms if it wished to remain in business. PIAC appealed.

Giving the lead judgment, Lord Justice Richards noted that the particular point in this case was that the pressure applied by PIAC was lawful. It was neither a breach of contract, a tort, an offence or other actionable wrong for PIAC to reduce Times Travel’s ticket allocation, to give notice of termination of the existing contracts or to insist on the inclusion of the waiver of past claims in the new contract. The judge had held that lawful conduct can in some circumstances amount to economic duress.

Richards LJ observed that the common law attaches great significance to the enforceability of contracts validly made. A contract that is not validly made, for lack of an essential element, such as agreement on terms or lack of consideration or for want of capacity or consent, is necessarily unenforceable. By contrast a validly made contract will be set aside or be voidable on only a few, clearly defined grounds, which usually involve fault, sometimes limited to bad faith, on the part of a party. Examples are fraudulent misrepresentation, unilateral mistake, unconscionable transactions and, in some cases, undue influence.

The equitable doctrines of unconscionable transactions (or undue pressure) and undue influence are particularly relevant in the context of economic duress, Richards LJ said. Both involve the court setting aside a contract where one party has been pressurised into entering into it, and there is no lack of clarity in the criteria that must be satisfied for their application. Undue influence is based on the relationship between the parties. The doctrine of unconscionable transactions applies where a party is suffering from a particular kind of vulnerability, the terms of the transaction are oppressive and the other party knowingly took advantage of his vulnerability. It was not suggested that the new agreement in the present case could be set aside under either of these equitable doctrines.

Richards LJ noted also that the common law and equity have not countenanced factors such as inequality of bargaining power or the exploitation of a monopoly position as grounds for setting aside contracts. Intervention in relation to these factors has been, through legislation, directed to consumer contracts and consumer credit. Commercial dealings have been left largely untouched by statute.

One important case considered was CTN Cash and Carry v Gallagher [1994] 4 All ER 714, which Richards LJ said established that where A uses lawful pressure to induce B to concede a demand to which A does not bona fide believe itself to be entitled, B’s agreement is voidable on grounds of economic duress. However, it could not be taken to establish that if A genuinely, but unreasonably, believes the demand to be well founded, the same result follows.

Richards LJ’s conclusion was that the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result to which the person exercising pressure believes in good faith it is entitled. That was so, he said, whether or not, objectively speaking, it has reasonable grounds for that belief.

In Richards LJ’s view, it was very unclear why or on what basis the common law should hold that a party with a private law right, whose exercise was not subject to any overriding duty, could not use it to achieve a purpose that was both lawful and advanced in good faith.

In this case, the economic pressure applied by PIAC resulted from its position as a monopoly supplier of tickets for direct flights between the UK and Pakistan. As already mentioned, the common law has always rejected the use, or abuse, of a monopoly position as a ground for setting aside a contract, leaving it to be regulated by statute. In Richards LJ’s judgment, it would be unprincipled to develop the doctrine of economic duress as a means of controlling the lawful use of monopoly power. As Steyn LJ said in CTN Cash and Carry: “The control of monopolies is … a matter for Parliament. Moreover, the common law does not recognise 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.

Richards LJ concluded that the judge had been wrong to hold that Times Travel was entitled to avoid the new contract. The judge had accepted that Times Travel had not established bad faith and that should have been the end of the discussion of good or bad faith, Richards LJ said. It was not for PIAC to establish its good faith. As for whether PIAC had reasonable grounds for advancing or rejecting an agent’s claim, Richards LJ said that this question did not need to be answered because a lack of reasonable grounds was, in any event, insufficient to engage the doctrine of duress where the pressure involved the commission or threat of lawful acts.

The appeal was allowed. (Times Travel (UK) Ltd v Pakistan International Airlines Corp [2019] EWCA Civ 828 (14 May 2019) — to read the judgment in full, click here).