Issue 39 October 2021 - Journal - Page 134
UK Supreme Court Clarifies Scope
of ‘Lawful Act Economic Duress’
signing the new agreement; and PIAC exploited its
monopoly position. The decision is consistent with the
principles of freedom of contract and contractual certainty in English and Scots law, and large businesses
in particular are likely to welcome that,” she said.
A recent decision by the UK’s highest court has
clarified the circumstances in which a party to a commercial contract is entitled to rescind that contract on
the grounds of ‘economic duress’ under English law.
The Supreme Court ruled against Times Travel, a
Birmingham-based family-run travel agency, as it was
unable, on the facts of the case, to establish the existence of ‘lawful act economic duress’, which may arise
where a contract results from a threat to do an act
which is itself lawful. This meant that Times Travel
was not entitled to rescind a new contract it had
entered with the national carrier airline of Pakistan,
Pakistan International Airline Corporation (PIAC).
Gillies added, however, that businesses should be
aware that the case leaves the door ajar for claimants
to try to bring claims arguing, for example, that the
behaviour of a particular defendant was “unconscionable” or “reprehensible”. While successfully running these arguments would require extreme facts,
Gillies said potential defendants - typically a business
with ostensibly greater bargaining power than its
counterparty – may wish to take additional steps to
guard against claims.
At the relevant time, PIAC was the only airline that
offered direct flights between the UK and Pakistan.
Under the new contract, Times Travel waived its right
to bring a claim for unpaid commission (worth
around £1.1million) under a previous agreement
between the parties.
“For example, when agreeing new terms with an
existing counterparty, businesses should be careful if
insisting on a waiver of previous claims against them,
especially if their defence to those claims is weak,” she
said. “They may also wish to record details of contractual negotiations and what leverage was applied,
including any demands which might be regarded as
onerous. Finally, whilst the case shows that using commercial leverage to extract increased demands from a
commercial counterparty is generally an acceptable
part of doing business, companies should be very wary
of making a legal threat concerning a matter which
sits outside the scope of the commercial relationship
between the parties or the contract being negotiated.”
Legal experts at Pinsent Masons, the law firm behind
Out-Law, said that the decision was of general commercial relevance. The case confirms that the doctrine
of lawful act duress, including lawful act economic
duress, does exist despite the arguments of some academic commentators. It also provides guidance to distinguish between what the court described as
“hard-nosed commercial negotiation” from genuine
The decision is also interesting due to an intervention
by the All-Party Parliamentary Group on Fair Business Banking (APPG), a cross-party group of members
of the House of Commons and the House of Lords.
The APPG was given permission to provide written and
oral submissions to the court on how the doctrine of
lawful act duress operates in the banking context. The
APPG had expressed concerns about the doctrine restricting small business banking customers from challenging settlements, including renewed facilities, with
their lenders entered under alleged duress.
Times Travel was a travel agent whose business
consisted almost exclusively of selling plane tickets to
and from Pakistan on flights operated by PIAC. PIAC
had arrangements with several travel agents under
which it allocated them a certain number of tickets,
and then paid commission to the agents for the number of tickets each sold. The airline was entitled to terminate these arrangements at any time by giving the
agents one month’s notice.
In 2011 and 2012, some travel agents, including
Times Travel, alleged that PIAC had not been paying
it some of the commission it was due. Some of the
agents brought claims to recover the unpaid sums.
Under pressure from PIAC, Times Travel did not join
in the claims. However, in September 2012, PIAC cut
Times Travel’s normal fortnightly ticket allocation
from 300 to 60, as it was entitled to do, and gave
notice that it would terminate the contract the following month. PIAC presented Times Travel with a new
contract, without the ability to take that agreement
away to obtain advice, under which Times Travel
waived any right to claims under the previous agreement. Times Travel entered the new contract, and its
ticket allocation was restored.
Commercial and financial services litigation expert
Joanne Gillies said that the overriding message from
the Supreme Court is that claims for lawful act
economic duress will face a very high bar to success.
“The court has firmly restated that there is no general
doctrine of good faith or inequality of bargaining
power in English contract law – and Scottish law is
likely to follow suit,” she said.
“The difficulty for claimants of establishing lawful act
duress is illustrated by the court declining here to find
duress despite a number of notable findings, such as
that: PIAC’s defence to the waived claims was unreasonable; the waiver of claims was an ‘onerous’ term;
the court would likely have awarded summary
judgment to Times Travel on some aspects of the
commission due but for the waiver it agreed; PIAC
prevented Times Travel from seeking advice before
EXPERT WITNESS JOURNAL
Times Travel later brought a claim against PIAC for
the unpaid commission, arguing that it was entitled to
rescind the new contract. It said that it only entered
the new contract as it would otherwise have gone out
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