Thu 30 Dec 2021

Lawful Act Economic Duress and Commercial Contracts

Pakistan International Airline Corporation v Times Travel (UK) Limited

In July 2020, I wrote about economic duress in the context of a review of the case of Morley (trading as Morley Estates) v The Royal Bank of Scotland plc [2020] EWHC 88 (Ch).  That article can be viewed here and here.

In Morley the plaintiff sought recission of a financial restructuring transaction entered into with RBS on a number of legal bases, but most interestingly (in my opinion) on the grounds that he had been induced to enter into the agreement by intimidation and economic duress.  The facts of Morley are detailed and complicated, but suffice to say for present purposes that Mr Morley was not successful on any of the grounds pled, including the economic duress claim.  As I pointed out in my article referred to above:

"The case sets a high bar for establishing a cause of action based on intimidation or economic duress.  The fact that a "threat" used to induce a contract might involve an element of illegality in its implementation is not sufficient to engage the causes of action.  There must be clear illegality specifically threatened giving rise to a compulsion which is illegitimate."

Mr Morley appealed the first instance judgment of Kerr LJ, but his appeal was unsuccessful with the Court of Appeal holding that[1]:

"[t]he straightforward answer to the appeal on the issues of intimidation and economic duress is that, on the facts, the judge was plainly right to decide that Mr Morley was not coerced by the bank's threat into concluding the agreement in question."

The main problem Mr Morley had in trying to establish economic duress was that the thing threatened by RBS was a legal action (or at least, it was not obviously an illegal action) and it has long been an established principle of the law in this area that duress is difficult to establish unless the course of action threatened is an illegal act; with the most obvious example perhaps being where a person is threatened with physical violence to person or damage to property if he or she does not sign a particular contract.  What is known as "lawful act duress" (i.e. where the thing threatened is a legal action) is very hard to establish and that is particularly so in the context of contracts and transactions concluded between commercial persons.

In Morley RBS presented Mr Morley with two options: he either (1) sign-up to the restructuring documents as RBS presented them (which involved, amongst other things, a debt write-off, a substantial payment by Mr Morley to RBS in return for retaining title to various properties in his portfolio and a consensual transfer of the remainder of the properties owned by Mr Morley to an RBS subsidiary called West Register) or (2) RBS would appoint an LPA receiver to his entire portfolio of properties (all of which were subject to RBS's security) and implement a "pre-pack" transaction under which all of the properties would be transferred to West Register in return for the discharge and release of the secured debt obligations.  Mr Morley alleged that the "pre-pack" option would be illegal, but the court did not agree (although it did not discount the possibility that there may be illegality depending upon how it was structured).  The difficulty for Mr Morley's case was therefore the fact that he was not threatened with anything which, if carried out, would have been demonstrably illegal.  Mr Morley's debt facilities were in default and he could not repay the accelerated payments due, and so RBS was perfectly entitled to appoint an LPA receiver and implement the "pre-pack" transaction as threatened in accordance with its rights under the finance documents and at law.

So, in what circumstances might "lawful act duress" arise in arrangements between commercial persons?  Well, the Supreme Court has recently handed down a judgment arising from the passenger aviation sector in which the law of economic duress is subjected to an interesting and detailed analysis.  The case in question is Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40.  This article will go on to analyse the case in more detail.

Facts of the case and lower court decisions 

Facts of the Case

The facts of the case are relatively straightforward and can be summarised as follows:

  1. Times Travel (UK) Limited ("TT") is a travel agent business based in Birmingham which had entered into a sales and commission contract with Pakistan International Airlines Corporation ("PIAC"), which is the national flag carrier airline of Pakistan.
  2. At the relevant time, PIAC was the only airline which flew direct passenger flights from the UK to Pakistan and it was therefore in a monopolistic position as regards the UK to Pakistan passenger air travel market.
  3. TT's business at that time consisted solely of selling flights to Pakistan on PIAC aircraft, in return for which TT was entitled to commission payments from PIAC.
  4. A dispute arose between PIAC and various UK based travel agents as to whether certain commission payments were due and payable by PIAC, with PIAC contending that the payments were not so due.  The finding in the first instance proceedings was that PIAC had genuinely believed that it had a valid defence to the claims for past commission and was therefore not in bad faith in this regard.
  5. PIAC applied pressure to TT not to join in the dispute proceedings in respect of the payment of past commission.  PIAC then gave notice to TT that the current contract between them was to be terminated.  PIAC also cut TT's allocation of tickets from 300 to 60 thereby drastically reducing the commission payments due to TT for ticket sales.  It was not disputed between the parties that PIAC was within its legal rights in both respects - in other words, it was entitled to terminate the existing contract, and it was entitled to cut TT's allocation of tickets.
  6. At that time, PIAC then presented TT with a new contract, which contained an onerous waiver term in respect of TT's claims for payment of past commission, and informed TT that if it did not sign the new contract in this form then the relationship between PIAC and TT would come to an end.  The termination of the relationship would have put TT out of business and TT therefore reluctantly signed the new contract including the onerous waiver provision.
  7. Two years later, TT commenced a claim against PIAC alleging, inter alia that it was entitled to rescission of the new agreement because TT had entered into it under economic duress; and, consequent to the rescission of the new agreement, TT was entitled to payment of the past commission which had been under dispute.

It will be seen that, because of the fact that none of the steps taken by PIAC above were unlawful or illegal, the case therefore involved "lawful act economic duress".

Lower Court Decisions

TT was successful at first instance in the Chancery Division of the High Court, with Warren J holding that TT was entitled to rescind the contract for economic duress.

However, that decision was overturned by the Court of Appeal, which held that, as the relevant threats and actions in respect of contract termination and the reduction in ticket allocation were lawful, duress could only be established if PIAC had been in bad faith on the basis that it had not genuinely believed that it had a defence to TT's claims for past commission.  Since at first instance Warren J had established based on the evidence that PIAC did have a genuine belief that it had a defence to the claims, lawful act duress had not been made out.  It was not sufficient that PIAC's belief that it had a defence was unreasonable since, in the context of lawful act duress, there is a critical distinction between bad faith demands and unreasonable demands.

The Court of Appeal judgment therefore appeared to introduce an element of "bad faith" into "lawful act duress" which would mean that, if a claimant could establish bad faith on the part of the party making the threat (which was otherwise a lawful threat), then lawful act duress could be made out. 

TT appealed the decision of the Court of Appeal to the Supreme Court.

Decision of The Supreme Court 

A Court Divided

The Supreme Court ultimately refused the appeal and decided in favour of PIAC on a unanimous basis, but the Supreme Court was split on the question of the "bad faith" element to the analysis introduced by the Court of Appeal.

Lord Burrows delivered the dissenting decision of the Supreme Court in this regard, holding that the Court of Appeal had been correct to decide that, had PIAC been in bad faith when threatening to terminate the existing contract on the basis that it knew its defence to TT's claims for the past commission payments was not valid, then lawful act economic duress would have been made out.

The majority decision of the Supreme Court was set out in the judgment of Lord Hodge, with whom Lord Reed, Lord Lloyd-Jones and Lord Kitchin agreed.

The Agreed Scope of Lawful Act Economic Duress

As pointed out by both Lord Hodge and Lord Burrows, there was much in their respective judgments that they each agreed with.  Therefore, if we leave the "bad faith demand" element which was the subject of disagreement to one side, then their Lordships were in agreement on the following elements of the law of "lawful act duress":

  1. Lawful act duress, including lawful act economic duress, exists in English law.  The case therefore puts to an end the academic debate on this issue in which many commentators have expressed the view that "lawful act duress" simply ought not to exist in law at all since, if the thing threatened is a legal act, then the courts are essentially being asked to make a moral judgment as to the repugnancy or unconscionability or otherwise of the actions of the threatening party.  Lord Burrows referred to Peter Birks, in An Introduction to the Law of Restitution revised ed (1989), at p 177 in this regard as follows:

“Can lawful pressures also count? This is a difficult question, because, if the answer is that they can, the only viable basis for discriminating between acceptable and unacceptable pressures is not positive law but social morality. In other words, the judges must say what pressures … are improper as contrary to prevailing standards. That makes the judges, not the law or the legislature, the arbiters of social evaluation.”

Well, that debate is now at an end and the Supreme Court has clarified beyond doubt that "lawful act duress" exists as a legal concept in English law from which, if established, remedies of recission of contract and damages will flow.

  1. Three elements need to be established for lawful act economic duress: (1) an illegitimate threat; (2) sufficient causation - in other words, that the illegitimate threat caused the threatened party to enter into the contract; and (3) that the threatened party had no reasonable alternative to giving in to the threat.  In PIAC v TT the court was solely focussed on the first element - in other words, was it legitimate for PIAC to threaten to terminate its relationship with TT altogether if TT did not agree to enter into the new contract containing the onerous waiver of prior claims provision.  Causation was not in dispute, and nor was it in dispute that TT had no alternative but to enter into the new contract because of PIAC's position as a monopoly provider of direct flights between the UK and Pakistan meaning that not entering into the new contract would have put an end to TT as a viable business.
  2. As the threat is lawful, the illegitimacy of the threat is determined by focusing on the justification of the demand.  In so holding, Lord Burrows drew an analogy with the law of blackmail per Lord Atkin in the case of Thorne v Motor Trade Association [1937] AC 797:

“The ordinary blackmailer normally threatens to do what he has a perfect right to do - namely, communicate some compromising conduct to a person whose knowledge is likely to affect the person threatened. Often indeed he has not only the right but also the duty to make the disclosure, as of a felony, to the competent authorities. What he has to justify is not the threat, but the demand of money.”

In PIAC v TT the demand was not for the payment of money, but rather that TT must waive its claims against PIAC for payment of past commission, but the doctrine remained applicable (if not engaged)

  1. A demand motivated by commercial self-interest is, in general, justified. Lawful act economic duress is essentially concerned with identifying rare exceptional cases where a demand, motivated by commercial self-interest, is nevertheless unjustified.

The Disagreement re "Bad Faith"

As mentioned above, the only point between their Lordships was therefore this element of "bad faith" as enunciated by Lord Burrows and rejected by Lord Hodge (with whom the other judges agreed).  Lord Burrow's opinion was that it would be possible to make out a claim for lawful act economic duress if the claimant could establish that the threatening party was in bad faith when it made its demand of the threatened party.  Thus, in the case of a demand for payment of money, the threatening party would be in bad faith if it knew it had no legal entitlement to the money.  And in the case of PIAC v TT in Lord Burrow's opinion, had PIAC known that it had no defence to the claims for past commission when it demanded the waiver in the new contract under threat of termination of the existing contract, then PIAC would have been in bad faith and lawful act economic duress would have been made out by TT.

Lord Hodge rejected this bad faith element.  He did so largely on the basis that, in English law there is no doctrine of inequality of bargaining power and there is also no general principle of good faith in contractual dealings.

  1. No doctrine of inequality of bargaining power - Lord Hodge described the position in English law as regards inequality of bargaining power as follows:

"…… [I]n commercial life many acts are done under pressure and sometimes overwhelming pressure. In negotiating a commercial contract each party to the negotiations seeks to obtain contractual entitlements which he or she does not possess unless and until the parties agree the terms of the contract. Inequality of bargaining power means that one party in the negotiation of a commercial contract may be able to impose terms on a weaker party which a party of equal bargaining power would refuse to countenance. Equally, a party in a strong bargaining position, such as a monopoly supplier, may refuse outright to enter into a contract which the weaker party desires or may impose terms which the weaker party considers to be harsh. 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."

  1. No general principal of good faith in contractual dealings - Lord Hodge had the following to say on this:

"The English law of contract seeks to protect the reasonable expectations of honest people when they enter into contracts. It is an important principle which is applied to the interpretation of contracts….. But, in contrast to many civil law jurisdictions and some common law jurisdictions, 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…"[2]

Lord Hodge then went on to quote with approval from chapter 5 of Professor Beatson's book "The Use and Abuse of Unjust Enrichment" (Oxford 1991) where at pp 129-130, Professor Beatson explains the basic approach of the English common law when it comes to the law of economic duress in dealings between commercial persons:

“All that is not prohibited is permitted and there is no general doctrine of abuse of rights. If therefore a person is permitted to do something, he will generally be allowed to do it for any reason or for none. In the context of contractual negotiations this position enables people to know where they stand and provides certainty as to what is acceptable conduct in the bargaining process but it does leave many forms of socially objectionable conduct unchecked. Again, this is soundly based for judges should not, as a general rule, be the arbiters of what is socially unacceptable and attach legal consequences to such conduct."

Accordingly, the scope for "lawful act economic duress" in commercial dealings is therefore, in Lord Hodge's judgment, "extremely limited" and he goes on to say at para 30 of his judgment that:

"…. the pressure applied by a negotiating party will very rarely come up to the standard of illegitimate pressure or unconscionable conduct. It will therefore be a rare circumstance that a court will find lawful act duress in the context of commercial negotiation."

In Lord Hodge's judgment, introducing a "bad faith" element in the absence of the general principles specified above would be to extend the law of "lawful act economic duress" in a manner which is not supported by any underlying legal principle or case law.  It therefore follows that, even if a threatening party can be shown to be in bad faith in the sense enunciated by Lord Burrows (i.e. it demanded a payment to which it knew it had no legal entitlement or demanded the waiver of a set of rights to which it knew it had no defence), that would not be sufficient to lead to economic duress since the threatening party would simply be engaged in negotiating the best position it could achieve for itself, even if it were taking advantage of an unequal bargaining position (i.e. a monopolistic position in the applicable market) to do so.

Lord Hodge therefore concluded at paragraph 60 of his judgment as follows:

"In this case, on the facts found by Warren J, PIAC believed in good faith that it was not liable for breach of contract as a result of its failure to pay past commission and, in any event, the pressure which it applied to obtain the waiver was the assertion of its power as a monopoly supplier."

What Is Needed to Establish Lawful Act Economic Duress?

It is clear from Lord Hodge's judgment that the scope of this doctrine is extremely limited.  Lord Hodge pointed out that the law on "lawful act economic duress" has been developed by the English courts by drawing on the rules of equity in respect of undue influence, and in this context, the law has regard to actions on the part of the threatening party which are unconscionable or morally reprehensible.  Bad faith in that context is not sufficient.

Lord Hodge identified two lines of cases in which lawful act economic duress has been made out in English law.  The first is where the threatening party uses his knowledge of criminal activity by a person or a member of that person's close family in order to obtain a personal benefit through an express or implicit threat to report that crime to the authorities[3].  The second is where a person, having exposed himself to a civil claim by another person (e.g. a damages claim 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.  Lord Hodge observes at para 4 of his judgment that (my emphasis):

"…. in both categories of cases, the defendant has behaved in a highly reprehensible way which the courts have treated as amounting to illegitimate pressure."

The first category of cases in respect of the threat of reporting criminality borders on blackmail, which would of course be a criminal offence.  It is perhaps more relevant to dealings between non-commercial individuals, although it may have some commercial application if there was a threat of exposing corporate crime, such as insider trading or similar.

The second line of cases is more interesting in a commercial context.  By way of example, Lord Hodge examined the case of Borreli v Ting [2010] UKPC 21, which involved the collapse of a company called Akai Holdings Ltd into insolvent liquidation.  Mr Ting held an indirect minority shareholding in Akai and had been a former director of the company.  He failed to perform his duty as a former officer of Akai to assist the liquidators by providing information relevant to the liquidation and he also sought to use the votes of his holding companies to block the scheme of arrangement proposed by the liquidators with a view to depriving the liquidators of funds to pursue claims against him for his conduct of the affairs of Akai whilst he had been a director.  He also forged a document and procured the provision of false evidence to the liquidators in his opposition to the scheme.  The liquidators therefore entered into a settlement agreement with Mr Ting under which he dropped his opposition to the scheme of arrangement in return for the liquidators agreeing to drop all investigations and claims against Mr Ting in respect of his past conduct and behaviour.  The Privy Council found that the settlement agreement was invalid because it had been entered into as a result of illegitimate economic pressure and that Mr Ting's behaviour had been unconscionable.

Lord Hodge also analysed the case of Progress Bulk Carriers Ltd v Tube City IMS LLC (The Cenk Kaptanoglu) [2012] EWHC 273 (Comm), which involved a charterparty in respect of a merchant ship called the Cenk K for the carriage of scrap metal to China.  The owners of the Cenk K, in repudiatory breach of the contract with the charterparty, chartered the vessel to a third party as a result of which the charterparty failed to deliver the scrap metal on time, incurring damages as a result.  The owners undertook to provide an alternative vessel and provide a reduction in charterparty costs to compensate the charterparty for the damages incurred by it.  However, the charterparty costs reduction ultimately offered was substantially insufficient to compensate the charterparty in full, and so the charterparty intimated it would accept the alternative vessel at the price stipulated, but reserved its rights to pursue a damages claim against the owners.  The owners thereafter submitted a "take it or leave it" offer of the substitute vessel at the price stipulated and a waiver of all damages claims, which the counterparty was forced to accept because of the time pressure it was under to deliver the scrap metal cargo and mitigate its losses.  The Court of Appeal found that the owner's actions in this regard were illegitimate since it had (a) breached the original contract in the first instance by chartering the Cenk K to a third party and (b) promised to provide an alternative vessel and compensate the charterparty for its losses, a promise which it then subsequently reneged on.  The Court of Appeal was clear that the owners had behaved in this way in a clear attempt to manipulate the charterparty into a position in which it had no choice but to waive its damages claims against the owners, and that was illegitimate.


The majority decision of the Supreme Court is, in my view, a welcome clarification to the law in this area, which will provide comfort to counterparties who negotiate favourable terms in contracts based on their stronger bargaining position.   That stronger bargaining position may result from the fact that, as in PIAC v TT one of the parties is a monopoly provider or supplier within the particular market.  However, it often arises also in the financial sector.

In Morley v RBS the party with the stronger bargaining position was RBS and it is not uncommon in the financial sector to find that the party providing the financial services in question is in a much stronger bargaining provision (e.g. a lender in respect of debt facilities to a borrower with a comparatively weak covenant; or a lender negotiating a restructuring transaction in respect of defaulted debt facilities).

Had "bad faith" been established as an indicator of illegitimacy in respect of "lawful act economic duress", the Supreme Court would have in essence been establishing the courts as arbitrators in a fact finding analysis as to what was in the mind of the threatening party at the relevant time to establish whether it was in bad faith or not, which would be imposing an objective analysis in respect of what was a subjective decision making process or negotiating tactic  This would have led to much uncertainty as to where the line was drawn and would have given rise to the very real risk that legitimate commercial "rough and tumble" in negotiations would cross the line into illegitimate actions. 

As it is, the restrictive approach taken by the majority of the judges in the Supreme Court admits that "lawful act economic duress" exists in English law, but only in very restricted circumstances in which the actions of the threatening party are morally reprehensible or repugnant, or the behaviour is unconscionable or bordering on criminality.  Thus, in Borelli v Ting the actions of the threatening party included breach of fiduciary duty and forgery, and bordered on criminality.  In The Cenk K the actions of the threatening party were reprehensible because they involved the commission of a contractual breach followed by a breach of promise in order to manoeuvre and manipulate the charterparty into a position in which it had no option but to waive its damages claims.

The Supreme Court has therefore set a very high bar for establishing lawful act economic duress, which in itself brings a large degree of certainty to the doctrine and significant comfort for contracting parties, particularly those holding the whip hand in negotiations.

[1] [2021] All ER (D) 53 (Mar).

[2] An example of such a piecemeal solution arises in the context of entitlements a party may have under a contract to make a determination on a particular matter, from which consequences may flow as a result of the determination made.  In such cases., so-called Wednesbury standards of good faith and reasonableness have been held to apply even in commercial contracts.  See Braganza v BP Shipping Ltd and another [2015] 4 All ER 639, Socimer International Bank Ltd (in liq) v Standard Bank London Ltd [2008] EWCA Civ 116 and Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223, CA.

[3] See Williams v Bayley (1866) LR 1 HL 200, Kaufman v Gerson [1904] 1 KB 591 and Mutual Finance Ltd v John Wetton and Sons Ltd [1937] 2 KB 389.

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