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Economic duress: when is a threat not an (illegitimate) threat?

31 May 2019. Published by Jonathan Cary, Partner and Suzan Kurdi, Senior Associate

In what circumstances can a threat not to enter into a contract amount to economic duress? Broadly speaking, when pressure is exerted "in bad faith", according to the Court of Appeal in Times Travel (UK) Limited v Pakistan International Airlines Corporation [1]

The facts

 

The Claimant, Times Travel (TT), is a travel agency whose business was almost exclusively the sale of flight tickets to the Pakistani community in and around Birmingham for travel to and from Pakistan. In 2009, TT was appointed as agent for Pakistan International Airlines Corporation (PIAC) by which TT was authorised to sell PIAC flight tickets to the public. At the time, PIAC was the only airline operating direct flights between the United Kingdom and Pakistan.

 

The three relevant provisions in TT's 2009 contract with PIAC were:

  • the payment of commission to TT
  • the right for PIAC to modify the fortnightly ticket allocation
  • termination by notice.

In September 2012, PIAC gave notice of termination to TT and PIAC reduced TT's fortnightly ticket allocation from 300 to 60. This had a significant impact on TT's business. A new contract was offered by PIAC but only on terms that TT waived its existing claims to unpaid commission under the earlier arrangements. It was understood that TT's fortnightly ticket allocation would be restored if it entered into the new contract. As TT depended on PIAC for so much of its business, TT had no practical alternative to entering into the new contract if it wished to remain in business. Accordingly, TT accepted the terms offered by PIAC.

 

In 2014, TT brought proceedings to recover commission and other payments which it said were due under the 2009 contract. The issue before the court was whether or not the waiver contained in the 2012 new contract had resulted from economic duress on the part of PIAC. The case reached the Court of Appeal.

 

Test for economic duress

 

The three necessary ingredients for a successful claim of economic duress are that:

  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 effect of the pressure is that there is a lack of practical choice for the claimant.

The second and third ingredients had been satisfied. Was the significant economic pressure that was applied to TT by PIAC illegitimate?

 

The pressure applied by PIAC was in all respects lawful; it was neither a breach of contract nor a tort or other actionable wrong for PIAC to reduce TT's ticket allocation or to give notice of termination of the 2009 contract or to insist on the inclusion of the waiver of past claims in the new contract. That being the case, was the significant economic pressure applied by PIAC illegitimate?

 

When is lawful conduct illegitimate pressure?

 

The Court of Appeal explored its decision in CTN Cash and Carry Limited v Gallagher Limited[2] in which a consignment of cigarettes was stolen on its journey between a supplier and CTN Cash and Carry. The supplier terminated its credit facilities and refused to reinstate them unless its invoice for the stolen cigarettes was paid. CTN Cash and Carry paid the invoice and brought a claim to recover that payment on the grounds that it had been procured by means of economic duress.

 

In rejecting the claim of economic duress, the court in CTN stressed three points:

 

  1. There was no protected or consumer relationship between the parties
  2. The defendant was lawfully entitled to refuse to enter into further supply contracts with the claimant and to withdraw credit facilities and 
  3. The defendant bona fide thought that the claimant owed it the sum in question.

It also observed that, in a purely commercial context, lawful act duress would be difficult to establish, and it might be particularly difficult to show duress if the defendant acts in good faith.

 

Decision of the Court of Appeal

 

In judging the use of lawful acts as commercial pressure, there is a sharp distinction between such use to pursue demands made in good faith and those made in bad faith. Relying on CTN, the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result to which the coercer believes in good faith it is entitled. That is so whether or not, objectively speaking, it has reasonable grounds for that belief.

 

The threat made by PIAC in this case was not to enter into the 2012 new contract, and the demand was to accept the non-negotiable terms of the 2012 new contract (including the waiver of past claims for commission)[3]. The claimant had failed to establish that PIAC's demand had been made in bad faith. The suggestion by the judge at first instance that it was for PIAC to establish good faith was rejected by the Court of Appeal.

 

The economic pressure that PIAC was able to apply in this case resulted from its position at that time as a monopoly supplier of tickets for direct flights between the UK and Pakistan. The use, or abuse, of a monopoly position as a ground for setting aside a contract is not one that has been recognised by the common law. It was not considered appropriate to develop the law of economic duress in a way which would fetter the lawful use of a monopoly position. The control of monopolies is a matter for Parliament.

 

Comment

 

The main thread running through the Court of Appeal's decision is the need for clarity and certainty in the law of contract, particularly in commercial dealings. Introducing a concept of fair, honest or conscionable dealing to the question of whether lawful pressure was illegitimate was not considered to be appropriate, particularly where the party exercising lawful pressure was doing so in the genuine belief that it was entitled to the demand it was making.

 

The Court of Appeal also resisted the temptation to interfere in the lawful use of a monopoly position on the ground of economic duress, even if the result was an objectively unreasonable use of that position. The control of monopolies was a matter for Parliament.

 

 

[1]  [2019] EWCA Civ 828

[2]  [1994] 4 All ER 714

[3]  Future commission was covered by a new commission scheme introduced by the 2012 new contract