“Don't cross the line” – The UK Supreme Court considers when a legitimate pursuit of commercial interest becomes illegitimate “lawful act duress”

Introduction

In the recent case of Pakistan International Airline Corporation v Times Travel (UK) Ltd. [2021] UKSC 40, the Supreme Court of the United Kingdom confirmed that English law recognizes the concept of “lawful act duress”. However, while all five Justices of the Supreme Court were in agreement on the elements required to establish “lawful act duress”, they had different interpretations on what amounted to an illegitimate threat.

Background Facts

Times Travel (UK) Ltd. (TT) is a company in England carrying on the business of a travel agent. Its business almost entirely comprised of selling tickets for flights to Pakistan on planes owned by Pakistan International Airlines Corporation (PIAC). PIAC is the national flag carrier airline of Pakistan. At the material time, it was the only airline operating direct flights between England and Pakistan.

TT first entered into a contract with PIAC in 2006. Under the contract, TT was paid commission based on ticket sales.

In 2008, TT entered into a new contract with PIAC (the 2008 Contract). Under the 2008 Contract, PIAC would remunerate TT in a manner and amount stated from time to time by PIAC to TT. PIAC could terminate the 2008 Contract at the end of any month by giving at least one month’s notice in writing.

Between 2011 and 2012, a number of UK travel agents commenced proceedings against PIAC to recover unpaid commission. In September 2012, PIAC gave notice to TT to terminate the 2008 Contract at the end of October 2012 and TT’s normal ticket allocation was suddenly cut from 300 to 60. It was not disputed that PIAC was entitled to terminate the 2008 Contract and allocate a lesser number of tickets to TT for sale.

However, PIAC’s conduct was a big threat to TT’s business. As a result, under the pressure of PIAC’s threat, TT did not join in those actions to claim for unpaid commission from PIAC. TT also entered into another new, onerous contract with PIAC (the 2012 Contract). Under the 2012 Contract, TT waived all its claims for unpaid commissions under the previous contracts with PIAC.

In 2014, TT commenced an action against PIAC. TT claimed that it entered into the 2012 Contract under economic duress, so the 2012 Contract should be rescinded. As a result, TT should be entitled to claim for the unpaid commission from PIAC under the previous contracts.

The Elements of Lawful Act Economic Duress

The Justices of the Supreme Court unanimously agreed that lawful acts could amount to duress (including economic duress) which was a ground to rescind a contract. In order to establish economic duress, three elements need to be satisfied:

1. There was a threat exerted by the threatening party that is illegitimate;
2. The illegitimate threat caused the threatened party to enter into the contract; and
3. The threatened party must have had no reasonable alternative but to give in to the threat.

The present case was concerned mainly with the first element, i.e. whether PIAC’s conduct amounted to an illegitimate threat.

As the name indicates, in cases of “lawful act economic duress”, the threat is itself lawful. Therefore, whether a threat is legitimate or not is determined by focusing on the justification of the demand rather than the threat.

What is An Illegitimate Threat

Although all Justices of the Supreme Court agreed that “lawful act economic duress” and the three essential elements for this was recognized in English law , they had different interpretations as to what constituted an illegitimate threat.

Lord Hodge (with whom Lord Reed, Lord Lloyd-Jones and Lord Kitchin agreed) adopted a more conservative, circumspect approach. They held that a threat is illegitimate where there was unconscionable or reprehensible behavior by the threatening party which manoeuvred the threatened party into a vulnerable position. Mere use or exploitation of bargaining power or monopoly position in negotiations does not amount to an illegitimate threat. This is because English law does not recognize any doctrine of good faith in contracting or any doctrine of imbalance of bargaining power. Commercial parties in negotiations are therefore entitled to use their bargaining power during negotiation to obtain contractual rights. Accordingly, pressure applied by a negotiating party will very rarely come up to the standard of illegitimate threat or unconscionable conduct. It will be very rare that a court will find lawful act duress in the context of commercial negotiation. Applying this approach, the majority believed that PIAC’s threat was legitimate, as PIAC was merely using its bargaining power and monopoly position to its advantage during the negotiations of the 2012 Contract.

Lord Burrows formulated another approach to assess whether a threat was illegitimate. His Lordship took the view that a demand is unjustified (and so the 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. A 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. It is implicit in Lord Burrows’ “bad faith demand” formulation that there must be some pre-existing legal right and duty between the parties which is being waived. Applying this approach, Lord Burrows found that PIAC went beyond the realm of mere use of monopoly power. Firstly, PIAC failed to pay commission due to TT and breached the previous contracts. Secondly, PIAC reduced TT’s ticket allocation drastically which increased TT’s particular vulnerability which then PIAC exploited. However, PIAC was not found to have acted in bad faith, so TT’s claim for lawful act economic duress failed.

A Closer Look at the Judgment

We can see from the above that it is not easy to distinguish between a legitimate threat (such as mere use of bargaining power and monopoly) and an illegitimate threat.

In the judgment, Lord Hodge did not provide any criteria or objective standards by which to judge whether a certain threat is illegitimate. It would seem that the court retained significant discretion in this regard. This would explain why the same conduct by PIAC was held by the majority as a mere use of bargaining power and monopoly position, while Lord Burrows believed PIAC’s conduct went beyond the realm of mere use of monopoly power. Lord Burrows stated in the judgment that had PIAC acted in “bad faith”, he would have found PIAC’s threat illegitimate. This shows that the boundary of what is within the acceptable realm of flexing commercial power, and what is outside of it, is not completely clear.

Further, Lord Burrows’ approach seems inapplicable to circumstances where there was no prior existing legal right and duty between the parties. An example would be where the threatened party was pressured into signing a fresh contract by the threatening party where both parties were negotiating and cooperating for the very first time. This limitation is not present in the majority’s approach, which does not require any pre-existing legal right or duty between the parties.The process of defining the boundary of acceptable behavior in commercial negotiations is also complicated by the fact that there are conflicting policy considerations. On one hand, the court is mindful to protect certainty and flexibility in commercial negotiations. On the other hand, the court is also aware of the need to protect victims who are subject to threats which tread into the territory of unconscionability and “bad faith”. It is expected that this tug-of-war and the law of “lawful act economic duress” will slowly be resolved and developed incrementally in future case law.

In the section below, we will use a recent arbitration case that our firm handled to put in context the above difficulties when trying to apply the decision in the Pakistan International Airline Corporation v Times Travel (UK) Ltd. case.

Case Scenario

Earlier this year, our firm represented the respondent in an arbitration seated in Hong Kong. The dispute was in relation to a license agreement regarding the broadcasting of sporting matches. The license agreement was governed by English law.

Under the license agreement, the licensee paid license fees in return for broadcast signals of the sporting matches. There was a delay in the payment of the license fees. In retaliation, the licensor withheld the broadcast signals while maintaining the license agreement, which was not something which was provided for by the terms of the license agreement. The licensor required the licensee’s parent company (which was our client) to sign a guarantee as a precondition for releasing the broadcast signals to the licensee. Under pressure to enable the licensee to sustain the business, our client signed the guarantee.

When the licensor commenced arbitration under the guarantee against our client, one of the defences pleaded by our client to rescind the guarantee was economic duress. As summarized by the Supreme Court of the United Kingdom in the Pakistan International Airline Corporation v Times Travel (UK) Ltd. case, in order to succeed in this defence, our client needed to establish the following. There needed to have been an illegitimate threat from the licensor. The threat had to have caused our client to enter into the guarantee. Our client had to have no other reasonable alternative but to give in to the threat. There was no doubt that our client agreed to enter into the guarantee due to the licensor’s threat to withhold broadcast signals. There was also no doubt that our client had no other reasonable alternative but to yield to the demand. The licensee’s only business was to broadcast the sporting matches and there was no other available means to obtain the same broadcast signals from another party. The only issue was whether the licensor’s threat was illegitimate.

Applying the majority’s reasoning in Pakistan International Airline Corporation v Times Travel (UK) Ltd., it would appear that the licensor was merely exercising its monopoly and bargaining power in order to obtain the guarantee as security for the license fees. However, applying Lord Burrows’ approach, it would appear that the licensor could not have had reasonable grounds to believe it was entitled to withhold the broadcast signals, rendering the demand for the guarantee one of “bad faith”.

Furthermore, it is not clear whether an illegitimate threat directed at the threatened party (i.e. the licensee) would suffice for rescinding a contract entered into by the threatened party’s parent company (i.e. our client and the licensor).

In any event, on the eve of the hearing, the parties were able to settle the arbitration for an amount significantly lower than the amount claimed.

Key Takeaways

The UK Supreme Court has helpfully clarified that:

1. Lawful act duress, including lawful act economic duress, exists in English law.
2. Three elements need to be established for lawful act economic duress: an illegitimate threat, sufficient causation and that the threatened party had no reasonable alternative to giving in to the threat.
3. If the threat is lawful, then the illegitimacy of the threat is to be determined by focusing on the justification of the demand.
4. A demand motivated by commercial self-interest is, in general, justified. Lawful act economic duress is essentially concerned with identifying rare exceptional cases where a demand, motivated by commercial self-interest, is nevertheless unjustified.

Therefore, although it is generally difficult for a contract to be rescinded by reason of economic duress and that such cases would be rare, this is a helpful reminder from the Court that there is a line which, in certain exceptional circumstances, can be crossed.