Under Duress – Avoiding a Contract

14 June 2019

“Sign the agreement or else those pictures of you and the Duchess might end up in the hands of the Daily Mail…”. The English courts have never been fond of blackmail and it is now well-established that a contract may be avoided on the grounds of duress, where one party exerts illegitimate pressure on another such that the other party has no practical alternative but to accede to their demands and enter into a contract.

The greatest area of uncertainty in the scope of the law of duress is the concept of economic duress. In particular; lawful act duress, where a contract results from the threat of a lawful act or omission as opposed to an unlawful act.

The recent Court of Appeal decision in Times Travel (UK) Limited (Times Travel) v Pakistan International Airlines Corporation[1] (PIA) allowed an appeal by PIA against the setting aside of a contract based on lawful act duress and sheds light on the circumstances where the principle  may be invoked to avoid a contract.

Background

Times Travel was a ticketing agent for PIA, the only airline offering direct flights from the UK to Pakistan. In 2012, a number of ticketing agents were attempting to recover unpaid commissions from PIA. PIA’s response was to terminate all existing contracts with such agents and to offer new contracts on terms that the agents waived any claims for past commission. PIA leveraged its monopoly position and Times Travel accepted the new contract.

In 2014, Times Travel brought proceedings against PIA to recover the unpaid commissions due under earlier arrangements. One of PIA’s defences to the claim was the waiver given in the new contract.

First Instance Decision

 The High Court held that Times Travel was entitled to avoid, on the grounds of economic duress, its contract with PIA; as Times Travel was dependent upon PIA for so much of its business, it was said that it had no practical alternative to accepting the new contact if it wished to remain in business.

Court Appeal      

 The Court of Appeal allowed PIA’s appeal that Times Travel could not avoid the new contract on the grounds that it been procured by economic duress. David Richard LJ reiterated the three necessary ingredients for a successful claim, being:

  1. There must be illegitimate pressure applied to the claimant;
  2. The pressure must be a significant cause inducing the claimant to enter into the contract; and
  3. The practical effect of the pressure is that there is compulsion on, or lack of practical choice for, the claimant.

The appeal concerned only the first ingredient and whether the committing of an otherwise lawful act (i.e. terminating a contract) could amount to illegitimate pressure so as to give rise to economic duress.

Richard LJ concluded 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, and that is so whether or not, objectively speaking, it has reasonable grounds for that belief’. PIA considered it was entitled to demand that Times Travel sign a new contract containing a waiver of claims and neither the trial judge nor the appeal judges made a finding of bad faith. On that basis, PIA’s lawful actions did not amount to economic duress and Times Travel should not have been allowed to avoid the new contract.

Comment

 It is clear from the Court of Appeal’s judgment that the critical issue in a finding of lawful act duress is whether or not the demand is made in bad faith. If so then the pressure is likely to be considered illegitimate and so lawful act duress may be invoked to avoid a contract. Whether the demand is objectively reasonable is not relevant.

The decision may seem harsh, but contractual certainty in the context of commercial dealings has been preserved. However, it is notable that both Richard LJ and Asplin LJ felt it necessary to acknowledge that ‘…[T]he control of monopolies is…a matter for Parliament’ and that it was therefore not appropriate for the courts to develop the law of economic duress in a way which would fetter the lawful use of a monopoly position.

[1] [2019] EWCA Civ 828

Tom Bolam Author
Tom Bolam
Senior Associate
About the author

Alex Taylor Author
Alex Taylor
Associate
About the author

Tags: