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28 August 2019
Court of Appeal decision
It is clear that English law permits a party to avoid a contract on the grounds of economic duress, but there is some uncertainty as to the circumstances in which a contract may be avoided in this regard. Cases involving lawful act duress require particular clarification – will English law provide protection where a contract results from a threat of a lawful act (or omission) to cause economic harm? This question was considered by the Court of Appeal in Times Travel (UK) Limited v Pakistan International Airlines Corporation.(1)
In 2008 Pakistan International Airlines Corporation (PIAC) was the principal provider of direct flights between the United Kingdom and Pakistan. Times Travel (UK) Limited operated a business to sell flight tickets, focusing almost exclusively on flights to Pakistan from the United Kingdom. Therefore, Times Travel's principal source of revenue was from the commission it made from selling tickets to PIAC customers.
From the beginning of the relationship, there had been disputes between Times Travel (and other PIAC-appointed travel agents) with PIAC about PIAC's failure to pay a not insubstantial amount of commission that was owed to Times Travel pursuant to the original commission arrangements.
In 2012, as the dispute continued, PIAC served a notice on Times Travel to terminate the existing agency arrangements and reduced its fortnightly allocation of tickets from 300 to 60. This reduction in the number of tickets available would have "had a major impact on Times Travel's business and, if continued for much longer, would have put it out of business".(2) This action by PIAC was not in breach of the original commission arrangements.
In this context, PIAC required Times Travel to enter into new commission arrangements for the sale of its flight tickets, arrangements that also "released PIAC from all such claims arising under the arrangements in force prior to the making of the [new commission arrangements]".(3)
Given the hardship that Times Travel would suffer if it did not enter into the new arrangements with PIAC, it felt compelled to agree to the terms, including the waiver of the existing claims for unpaid commission.
In 2014 Times Travel brought proceedings to recover the commission which it claimed was due under the earlier arrangements, arguing that the new arrangements which had been entered into, including the waiver, were the result of economic duress and that it should therefore be entitled to avoid the new arrangements.
The first-instance judge agreed with Times Travel and found that this hardship and the economic leverage that PIAC held over Times Travel constituted economic duress as:
PIAC appealed the first-instance decision on the grounds that the pressure it had applied was not illegitimate.
On appeal, the court found that PIAC's actions did not amount to economic duress.
First, the court determined that the pressure had not been illegitimate in the sense that it was unlawful: PIAC had not acted unlawfully in pressuring Times Travel to enter into the new arrangements – to do so was not a breach of contract, a tort or any other actionable wrong.
Accordingly, it would be necessary to consider if a lawful act or threat thereof could amount to economic duress. Here it had to be established that there had been bad faith on the part of the pressuring party as:
the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result 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.(5)
The judgment appears to draw a distinction between bad faith and a lack of good faith, defining the latter as:
a clear criterion involving conduct which all can agree is unacceptable and which is a fact capable of proof, often as it happens by reference to the lack of any reasonable grounds for the belief.(6)
The court referred to the judgment of the lower-court judge who had accepted that Times Travel had not established bad faith on the part of PIAC and held that, in the absence of bad faith, a lack of reasonable grounds was insufficient to engage the doctrine of duress where the pressure involved the commission or threat of a lawful act.
Accordingly, Times Travel's claim for economic duress failed.
The court also noted that it did not want to use the doctrine of economic duress as a means of controlling the lawful use of monopoly power (as PIAC had here) noting that the court in CTN Cash and Carry had said that:
The control of monopolies is, however a matter of Parliament. Moreover, the common law does not recognize 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.(7)
The court's decision reinforces the fundamental importance of ensuring contractual clarity and certainty as a matter of English law – if parties make an agreement, the courts will seldom intervene to undo that agreement and will certainly not do so where no party can be said to have acted unlawfully or lawfully but out of bad faith.
For companies operating in the aviation sector, where there may be an unequal power dynamic (eg, on certain flight routes or with respect to the availability of specialist maintenance facilities), parties will be unable to look to economic duress to undo a lop-sided bargain unless there is some unlawful action or provable bad faith on the part of the party with greater power.
For further information on this topic please contact John Pearson or Martina Glaser at Vedder Price LLP by telephone (+44 20 3667 2900 ) or email (firstname.lastname@example.org or email@example.com). The Vedder Price LLP website can be accessed at www.vedderprice.com.
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