Economic Duress

The Supreme Court has recently restated the English law relating to economic duress in the case of Pakistan International Airlines Limited v Times Limited (UK) Limited UKSC 2019/0142.

Whilst the Court considered the history of the tort (i.e. civil wrong) from both a link to criminal law and civil law, it is the latter that is predominantly likely to be of more interest to businesses in England and Wales.

What is economic duress?

In criminal law, economic duress occurs when X procures a financial advantage by entering into an agreement with Y not to report criminal activities. This contrasts with the tort of economic duress, which occurs when X manoeuvres Y into a vulnerable position by reprehensive behaviour – and whilst Y is in that vulnerable position, Y has no alternative but to waive its pre-existing rights in favour of X.

Pakistan International Airlines Limited v Times Limited (UK) Limited

Case summary

The Court considered earlier cases containing examples of ‘dishonest behaviour’ and ‘misleading activity’ as examples of the reprehensible acts of parties that had been held by previous Courts to be liable.

The principles that the Supreme Court looked at were when an innocent party seeks to overturn, or set aside, a contract that is entered into as a result of the other party threatening to carry out a lawful act. The threat does not necessarily have to be a threat to do something illegal; but could also be a threat to do something which in itself was, on the face of it, actually lawful –  but nevertheless reprehensible and in equity unconscionable.

Times Travel’s (TT) business was the sale of air tickets to Pakistan from the United Kingdom.  The Airline was its sole customer; and in the normal course of events, TT were paid commission on sales of tickets. A dispute arose as to the payment of those commissions.  A number of other travel agents had claimed that they had similar claims in respect of unpaid commissions. Following alleged pressure by the Airline on TT, the company did not join in the legal proceedings began by the other travel agents.

The Airline then, it is alleged, dramatically reduced the allocation of tickets, that it would make available to TT; and gave TT a notice of termination of the contract. Both the reduction of ticket allocation and the termination were lawful acts that the Airline was perfectly entitled under the contract to do.

The parties then entered into a new contract, a term of which was said to be that TT would waive all of its existing entitlement to unpaid commissions. It was alleged that in the negotiations, a representative of TT was shown a copy of the contract that was intended by the Airline to be entered into but refused permission to take it away and obtain legal advice.

TT later sued for the previously unpaid commission and claimed that they were entitled to rescind the new agreement on the basis of ‘lawful act economic duress’.  The claim was upheld in the High Court but overturned in the Court of Appeal.  The Airline’s case was that there was a genuine dispute as to the commission payments anyway, and they had not acted in bad faith.  In this case, TT were unsuccessful in the Supreme Court, which dismissed the appeal.

The Court held for the tort of lawful act economic duress to be made out, there must be illegitimate activity by the Defendant. It is important to understand though, that “illegitimate” does not equate to unlawful. If one considers the crime of blackmail for a moment that can be seen to be correct.  It is not unlawful to report a person to the police for committing a crime of course.  It is, however, unlawful to make ‘an unwarranted demand with menace’ of that person by threatening to make the report unless the person complies with a request which will cause them a loss or someone else a gain. In those circumstances:

As outlined in the Crown Prosecution Service Legal Guidance.

Hence the distinction in tort between what is still a lawful act in itself; and an act that is nevertheless illegitimate (and reprehensible).  The Supreme Court held that that the illegitimate threat or pressure must have caused the Claimant to enter the contract and that the Claimant must have had no reasonable alternative to giving in to the threat or pressure.

TT’s case though failed as the Court accepted that the Airline genuinely believed it was not liable for the unpaid commission.

Comment

This re-stating of the law of economic duress will be of great assistance to those involved in commercial litigation; as it is now clear how far the tort extends, and what has to be established by the claimant to succeed.