Landmark Decision on the Scope of Economic Duress in English Contract Law

What follows here is a brief overview of the facts and the reasoning of the Court before some concluding observations. References to paragraph numbers will be to the speeches of the Supreme Court Justices unless indicated otherwise.

Facts

The underlying facts were outlined at the start of the speech of Lord Burrows (see paragraph 63 onwards). The Claimant (Times Travel (UK) Ltd, ‘TT’) is a travel agent whose business ‘almost entirely comprised selling tickets for flights to Pakistan on planes owned by the Defendant, Pakistan International Airlines Corporation’ (‘PIAC’, paragraph 63).

In essence, a series of disputes had arisen between various travel agents and PIAC as to the ‘non-payment of commission that the travel agents claimed was owed to them on the sale of PIAC tickets’ (paragraph 63) and the PIAC threatened to end any contractual relationship with the TT unless it ‘entered into a new contract under which ‘TT released PIAC from all claims that TT might have against PIAC in relation to commission under the previous contract’ (paragraph 63). It was not in dispute that TT were heavily reliant on PIAC for its business and that a termination of the contract could ‘effectively end its business’, as was acknowledged by counsel for PIAC (paragraph 67). This led to TT seeking to rescind the new contract that had been entered into for duress, which would then have allowed it to seek the commission that it said was owed (paragraph 63).

Although TT had been found at first instance to be entitled to rescind the contract for economic duress, this was overturned by the Court of Appeal. Its reasoning was summarised by Lord Burrows at paragraph 64: ‘The Court of Appeal held that, as the relevant threat was lawful, duress could only be established if PIAC’s demand, that TT give up its claims for commission, had been made in bad faith in the sense that PIAC must not have genuinely believed that it had a defence to TT’s claims for commission’.

Decision

The appeal was dismissed. The Supreme Court judgment comprised of two speeches, one majority decision given by Lord Hodge and one further speech by Lord Burrows. There was a wide degree of agreement between Lord Hodge and Lord Burrows on various elements of doctrine, although the ultimate conclusion that the appeal be dismissed was reached via slightly different means (summarised below). For instance, their Lordships were agreed on the following:

• Essential elements of lawful act economic duress (paragraphs 1, 78 – 79 and 136): the Court confirmed that there were essentially two elements which a claimant must demonstrate in order to successfully rescind a contract on the basis of an allegation that a party has induced another to enter the contract by duress and these are (paragraph 78 - 79): first, ‘a threat (or pressure exerted) by the defendant that is illegitimate’, second, ‘that that illegitimate threat (or pressure) caused the claimant to enter into the contract)’. A third element existed, specifically in the context of economic duress, namely ‘that the claimant must have had no reasonable alternative to giving in to the threat (or pressure)’.

• Existence of the concept of lawful act duress in English law (paragraphs 1, 82 – 92 and 136): Lord Burrows explained that the doctrine of lawful act duress ‘does, and should, exist as a ground for rescinding a contract’ for three reasons: first, in classic earlier decisions of the House of Lords, the Court chose ‘to use the language of the pressure needing to be “illegitimate” not “unlawful”’ (paragraph 87); second, that the crime of blackmail includes threats of lawful action and thus it would ‘very odd for the civil law of duress not to include threats of lawful acts when the criminal law of blackmail does so’ (paragraph 88); third, there had been several cases in which it had been accepted that ‘threats of lawful action should entitle the threatened party (the claimant) to rescind a contract (or to have the restitution of non-contractual payments)’ (paragraph 89).

Where their Lordships disagreed was as to the approach in defining an ‘illegitimate threat or pressure’, the first element identified above (paragraph 2). The Court was agreed that the concept of lawful act duress ‘must not be stated too widely’ (paragraph 1 and 93), that it was appropriate to focus on the ‘appropriateness of focusing on the nature and justification of the demand rather than the legality of the threat’ (paragraphs 1 and 96) and the ‘law’s general acceptance of the pursuit of commercial self-interest as justified in commercial bargaining and the rarity of cases where lawful act duress will be found to exist in such bargaining’ (paragraphs 1, 97 – 99).

However, Lord Hodge in the majority opinion, stated a disagreement with Lord Burrows on the prior position of the law on the illegitimacy of the threat or pressure and noted that:

‘the courts have developed the common law doctrine of duress to include lawful act economic duress by drawing on the rules of equity in relation to undue influence and treating as “illegitimate” conduct which, when the law of duress was less developed, had been identified by equity as giving rise to an agreement which it was unconscionable for the party who had conducted himself or herself in that way to seek to enforce. In other words, morally reprehensible behaviour which in equity was judged to render the enforcement of a contract unconscionable in the context of undue influence has been treated by English common law as illegitimate pressure in the context of duress.’ (paragraph 2)

His Lordship also noted in particular that there were two circumstances in which the English courts have provided a remedy for duress:

‘The first circumstance is where a defendant uses his knowledge of criminal activity by the claimant or a member of the claimant’s close family to obtain a personal benefit from the claimant by the express or implicit threat to report the crime or initiate a prosecution. The second circumstance is where the defendant, having exposed himself to a civil claim by the claimant, for example, for damages 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. In both categories of case the defendant has behaved in a highly reprehensible way which the courts have treated as amounting to illegitimate pressure.’ (paragraph 4)

In considering any extension to the concept, the Court needs to consider that ‘analogous remedies already exist in equity, such as the doctrines of undue influence and unconscionable bargains, but also the absence in English law of any overriding duty of good faith in contracting or any doctrine of imbalance of bargaining power’ (paragraph 3).

Lord Burrows disagreed with the approach and held that:

‘In relation to a demand for a waiver by the threatened party of a claim against the threatening party, a demand is unjustified, so that the lawful act economic threat is illegitimate, where, first, the threatening party has deliberately created, or increased, the threatened party’s vulnerability to the demand and, secondly, the “bad faith demand” requirement is satisfied. The demand is made in bad faith where the threatening party does not genuinely believe that it has any defence (and there is no defence) to the claim being waived.’ (paragraph 136(v))

His Lordship’s view was that a limited concept of ‘bad faith demand’ was essential, as the alternative focus on the defendant’s conduct being ‘unconscionable’ may permit ‘lawful act economic duress to create considerable uncertainty in the realm of commercial contracts’, given that Lord Hodge for the majority made reference to ‘bad faith’ being relevant in some situations ‘but it is not clear to me what Lord Hodge means by that and how that approach is consistent with his rejection of a “good faith dealing” principle’ (paragraph 133).

Further Observations

The Supreme Court decision will no doubt be considered a landmark judgment for seeking to clarify the existence and parameters of this doctrine. However, the scope of the concept of economic duress is clearly going to remain a topic for debate amongst contract lawyers for some time, as the detailed consideration of different academic positions in the judgment shows.

Perhaps this is because the concept acts as a flashpoint for the ongoing discussion as to what limits can be imposed on normal commercial bargaining and the purported role of contract law in giving effect to the ‘reasonable expectations of honest people when they enter into contracts’ (per Lord Hodge at [27]). It operates in the somewhat more ambiguous terrain where the pressure which one would ordinarily find in normal commercial transactions tips over into something which the courts cannot uphold, as indeed, Lord Burrows found at paragraph 82:

‘Lawful act duress is controversial. This is essentially because many contracts are entered into under some form of pressure exerted by the other party and, plainly, one would not wish to undermine all such contracts. An insistence that the threat must be one to do something unlawful draws a clear line with a standard that is easily understood and can easily be applied. But once one crosses that line to include threats of lawful acts, it is not easy to distinguish between threats that will count as duress and threats that will not.’

Much attention will no doubt be given to the debate about how ‘illegitimate pressure’ will be defined in future situations, with a particular focus on the discussion between Lord Hodge and Lord Burrows and the role of any ‘bad faith’ requirement.