Out-Law News | 06 Sep 2021 | 1:05 pm | 6 min. read
A recent decision by the UK’s highest court has clarified the circumstances in which a party to a commercial contract is entitled to rescind that contract on the grounds of ‘economic duress’ under English law.
The Supreme Court ruled against Times Travel, a Birmingham-based family-run travel agency, as it was unable, on the facts of the case, to establish the existence of ‘lawful act economic duress’, which may arise where a contract results from a threat to do an act which is itself lawful. This meant that Times Travel was not entitled to rescind a new contract it had entered with the national carrier airline of Pakistan, Pakistan International Airline Corporation (PIAC).
At the relevant time, PIAC was the only airline that offered direct flights between the UK and Pakistan. Under the new contract, Times Travel waived its right to bring a claim for unpaid commission (worth around £1.1million) under a previous agreement between the parties.
Legal experts at Pinsent Masons, the law firm behind Out-Law, said that the decision was of general commercial relevance. The case confirms that the doctrine of lawful act duress, including lawful act economic duress, does exist despite the arguments of some academic commentators. It also provides guidance to distinguish between what the court described as “hard-nosed commercial negotiation” from genuine economic duress.
The court has firmly restated that there is no general doctrine of good faith or inequality of bargaining power in English contract law – and Scottish law is likely to follow suit
The decision is also interesting due to an intervention by the All-Party Parliamentary Group on Fair Business Banking (APPG), a cross-party group of members of the House of Commons and the House of Lords. The APPG was given permission to provide written and oral submissions to the court on how the doctrine of lawful act duress operates in the banking context. The APPG had expressed concerns about the doctrine restricting small business banking customers from challenging settlements, including renewed facilities, with their lenders entered under alleged duress.
Commercial and financial services litigation expert Joanne Gillies said that the overriding message from the Supreme Court is that claims for lawful act economic duress will face a very high bar to success.
“The court has firmly restated that there is no general doctrine of good faith or inequality of bargaining power in English contract law – and Scottish law is likely to follow suit,” she said.
“The difficulty for claimants of establishing lawful act duress is illustrated by the court declining here to find duress despite a number of notable findings, such as that: PIAC’s defence to the waived claims was unreasonable; the waiver of claims was an ‘onerous’ term; the court would likely have awarded summary judgment to Times Travel on some aspects of the commission due but for the waiver it agreed; PIAC prevented Times Travel from seeking advice before signing the new agreement; and PIAC exploited its monopoly position. The decision is consistent with the principles of freedom of contract and contractual certainty in English and Scots law, and large businesses in particular are likely to welcome that,” she said.
Gillies added, however, that businesses should be aware that the case leaves the door ajar for claimants to try to bring claims arguing, for example, that the behaviour of a particular defendant was “unconscionable” or “reprehensible”. While successfully running these arguments would require extreme facts, Gillies said potential defendants - typically a business with ostensibly greater bargaining power than its counterparty – may wish to take additional steps to guard against claims.
“For example, when agreeing new terms with an existing counterparty, businesses should be careful if insisting on a waiver of previous claims against them, especially if their defence to those claims is weak,” she said. “They may also wish to record details of contractual negotiations and what leverage was applied, including any demands which might be regarded as onerous. Finally, whilst the case shows that using commercial leverage to extract increased demands from a commercial counterparty is generally an acceptable part of doing business, companies should be very wary of making a legal threat concerning a matter which sits outside the scope of the commercial relationship between the parties or the contract being negotiated.”
Times Travel was a travel agent whose business consisted almost exclusively of selling plane tickets to and from Pakistan on flights operated by PIAC. PIAC had arrangements with several travel agents under which it allocated them a certain number of tickets, and then paid commission to the agents for the number of tickets each sold. The airline was entitled to terminate these arrangements at any time by giving the agents one month’s notice.
In 2011 and 2012, some travel agents, including Times Travel, alleged that PIAC had not been paying it some of the commission it was due. Some of the agents brought claims to recover the unpaid sums. Under pressure from PIAC, Times Travel did not join in the claims. However, in September 2012, PIAC cut Times Travel’s normal fortnightly ticket allocation from 300 to 60, as it was entitled to do, and gave notice that it would terminate the contract the following month. PIAC presented Times Travel with a new contract, without the ability to take that agreement away to obtain advice, under which Times Travel waived any right to claims under the previous agreement. Times Travel entered the new contract, and its ticket allocation was restored.
Times Travel later brought a claim against PIAC for the unpaid commission, arguing that it was entitled to rescind the new contract. It said that it only entered the new contract as it would otherwise have gone out of business. In response, PIAC argued that it had not acted in bad faith as it genuinely believed that the disputed commission was not due. The High Court found in favour of Times Travel, but this was overturned by the Court of Appeal, which held that lawful act economic duress could only be established if PIAC had acted in bad faith – in other words, if PIAC had made the request for Times Travel to waive its claims whilst knowing it had no defence to those claims.
Lord Hodge gave the leading majority judgment of the Supreme Court. Lord Burrows gave a separate judgment that reached the same outcome.
The two judgments disagreed on how to determine what was an “illegitimate threat”, being one of the two necessary elements of a claim for lawful act duress along with causation to enter the contract. Lord Burrows said there were two elements to an illegitimate threat: the defendant must deliberately increase a counterparty’s vulnerability to a demand, and then make that demand in bad faith. He considered that these elements were necessary and sufficient to show an illegitimate threat. However, Lord Hodge said there must be “reprehensible” or “unconscionable” behaviour by the defendant for a threat to be illegitimate; acting in bad faith is not necessary, but nor is it sufficient to show reprehensible or unconscionable behaviour.
Both judges warned that the courts should approach with caution any extension to the doctrine, “particularly in the context of contractual negotiations between commercial entities”. Lord Hodge said: “In any development of the doctrine of lawful act duress it will also be important to bear in mind not only that analogous remedies already exist in equity, such as the doctrines of undue influence and unconscionable bargains, but also the absence in English law of any overriding doctrine of good faith in contracting or any doctrine of imbalance of bargaining power”.
Lord Hodge found that PIAC had not “used any reprehensible means” to increase or exploit Times Travel’s vulnerability nor did he find any bad faith on the part of PIAC. The airline’s actions were that of “hard-nosed commercial negotiation that exploited PIAC’s position as a monopoly supplier”, but “did not involve the reprehensible means of applying pressure which gave rise to the findings of lawful act economic duress” in previous cases, he said.
Notably, Lord Burrows – who had agreed with the findings of the Court of Appeal - found that PIAC did not act in bad faith, as it believed its defence to the claims for commission to be genuine. He accepted that his proposed test placed a significant burden on a claimant, who would have to prove the bad faith of the defendant. Lord Burrows also referred to a claimant’s potential ability to invoke the law of unconscionable bargain - the exploitation of weakness to induce someone to enter a contract who has not obtained advice. Whilst typically reserved for individuals, Burrows stated that “it is not inconceivable that the relevant weakness could be the very weak bargaining position of a company”.
Additional research by Joe Young of Pinsent Masons.
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