The Court of Appeal has overturned a High Court decision to set aside a contract on the basis of lawful act duress where there was no finding of bad faith on the part of the defendant – an airline company which had used its monopoly position to exert pressure on its sales agent to enter into a new contract: Times Travel (UK) Ltd v Pakistan International Airlines Corporation [2019] EWCA Civ 828.

The decision establishes that, where a party uses lawful acts to apply economic pressure to a counterparty, the court will not set aside the resulting contract on grounds of duress unless bad faith is established. In other words, there is no claim in lawful act duress where the party applying the pressure genuinely believed that it was entitled to make the relevant demand, regardless of whether there were reasonable grounds for that belief.

The Court of Appeal adopted this approach in part in the interests of certainty, commenting that reasonableness is a very uncertain standard in the context of commercial demands, and in part as a matter of principle. As the court put it, it is “very unclear why or on what basis the common law should hold that a party with a private law right, whose exercise is not subject to any overriding duty, cannot use it to achieve a purpose which is both lawful and advanced in good faith”.

Gary Milner-Moore and Maryam Oghanna consider the decision further below.

Background

The defendant (“PIAC”) appointed the claimant (“Times Travel”), a small family owned business, in 2008 as an agent for the sale of its airline tickets in the UK (the “Original Contract”). The terms of the Original Contract included provision for Times Travel to be paid commission for the sale of PIAC tickets and for either party to give notice of termination of the contract.

Times Travel’s business was almost exclusively the sale of flight tickets to the Pakistani community in and around Birmingham for travel to and from Pakistan. Since, at the relevant time, PIAC was the only airline operating direct flights between Pakistan and the UK, Times Travel relied heavily on PIAC for trade and would have been forced out of business if it could not sell PIAC tickets.

At an early stage, disputes arose between Times Travel and PIAC due to unpaid commission. By 2010, a number of PIAC-appointed agents other than Times Travel had begun to threaten legal proceedings against PIAC over unpaid commission.

In September 2012, PIAC sent notices of termination to all of its UK appointed agents, including  Times Travel. The notice of termination ended Times Travel’s appointment as a PIAC agent and heavily reduced their ticket allocation. Almost simultaneously, PIAC offered terms of re-appointment under a new agreement which required Times Travel to waive all claims to commission and remuneration under the Original Contract and restored Times Travel’s ticket allocation (the “New Contract”). Times Travel agreed to the terms of the New Contract as to fail to do so would have resulted in the company going out of business.

Times Travel brought proceedings in 2014 to recover commission and unpaid amounts under the Original Contract. One of PIAC’s defences to the claims was the waiver agreed by Times Travel under the New Contract. Times Travel’s case on this point was that the New Contract should be avoided as it had been entered into as a result of economic duress.

At first instance, Warren J found in favour of Times Travel and held that it was entitled to avoid the New Contract on the ground of economic duress. Analysing the law on economic duress, Warren J identified three necessary ingredients for a successful claim:

  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 a lack of practical choice for, the claimant.

It was the first limb of this test that was relevant to PIAC’s appeal; in circumstances where the pressure applied by PIAC to Times Travel was lawful (it was neither a breach of contract nor an actionable tort), was the judge correct to find that it was illegitimate?

Decision

The Court of Appeal unanimously allowed the appeal. David Richards LJ gave the lead judgment, with which Moylan and Asplin LJJ agreed.

Before providing a thorough analysis of the academic literature and the case law in relation to economic duress, David Richards LJ observed that “…the common law attaches great significance to the enforceability of contracts validly made. … A validly made contract will be set aside or be voidable at the option of a party on only a few grounds which are clearly defined.”

He noted that, historically, duress was confined to acts or threats of personal violence or imprisonment, or unlawful threats to property, but more recently it had been significantly expanded with the acknowledgement that a contract may be avoided on grounds of economic duress.

He referred to CTN Cash and Carry v Gallagher [1994] 4 All ER 714 which, he said, established that where lawful pressure is used to induce a party to concede a demand to which the person exerting the pressure does not in good faith believe itself to be entitled, the agreement would be voidable on the basis of economic duress.

If that belief was reasonably, as well genuinely, held, David Richards LJ could see no basis on which a plea of economic duress could succeed, and such a conclusion would be contrary to the decision in CTN Cash and Carry.

He concluded that the same applied even where the belief was unreasonably held, contrary to the obiter remarks of Leggatt LJ in Al Nehayan v Kent [2018] EWHC 333 (Comm) (which he heard as a first instance judge but gave judgment after his appointment to the Court of Appeal).

The conclusion of the Court of Appeal was, therefore, that economic duress does not extend to the use of lawful pressure to achieve a result to which the relevant party believes in good faith it is entitled, whether or not there are objectively reasonable grounds for the belief.

The court further noted that the economic pressure PIAC was able to apply in this case (by terminating the contract and proposing new terms) resulted from its position as a monopoly supplier. The common law had repeatedly rejected the use of a monopoly position as grounds for setting aside contracts. The control of monopolies was, the court said, a matter for statute, and it would be unprincipled to develop the doctrine of economic duress as a means of controlling the lawful use of monopoly power.

On the question of good faith – ie whether PIAC had a genuine belief that it was entitled to reject Time Travel’s claim for unpaid commission – the first instance judge had said that Times Travel had not established bad faith on the part of PIAC, but nor had PIAC established good faith. The Court of Appeal rejected Warren J’s suggestion that it was for PIAC to establish its good faith. Since Times Travel had not established bad faith, that should have been the end of it. There was no need to consider whether there were reasonable grounds for PIAC’s belief.

Gary Milner-Moore
Gary Milner-Moore
Partner
+44 20 7466 2454
Maryam Oghanna
Maryam Oghanna
Associate
+44 20 7466 2428