Supreme Court clarifies requirements for tort of lawful act economic duress

The Supreme Court has dismissed an appeal against a Court of Appeal decision which found that a contract should not be rescinded on the basis of lawful act economic duress, in circumstances where the defendant had threatened to end any contractual relationship with the claimant (as it was entitled to do) unless the claimant waived all claims it might have against the defendant for commission due under a previous contract: Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40.

The Supreme Court was unanimous in its decision and as to the basic elements for establishing liability for the tort of lawful act economic duress, namely that: (i) the defendant's threat or pressure must have been illegitimate; (ii) it must have caused the claimant to enter the contract; and (iii) the claimant must have had no reasonable alternative to giving in to the threat or pressure. However, there was a significant disagreement between Lord Burrows and Lord Hodge (with whose judgment the rest of the justices agreed) as to what amounts to an illegitimate threat for these purposes. Interestingly, both Lord Hodge and Lord Burrows considered that the opposing view was undesirable on the basis that it would lead to increased uncertainty for commercial parties.

In Lord Burrows's view, in agreement with the Court of Appeal's decision in this case (considered here), the key question was whether the defendant was acting in good or bad faith, in the sense of whether it genuinely believed it was not liable for the claim it demanded the claimant waive. Lord Hodge (for the majority) disagreed that a "bad faith requirement" of this sort should be seen as sufficient to establish that a threat was illegitimate for the purposes of the tort. Instead, the question is whether the defendant’s conduct was “reprehensible” in a sense which rendered the enforcement of the contract “unconscionable”. Questions of good or bad faith may be relevant to that question, but a finding of bad faith in the sense propounded by Lord Burrows is not itself sufficient.

Importantly for commercial parties, and despite their disagreement as to the what makes a threat illegitimate, both Lord Hodge and Lord Burrows emphasised that the court will not lightly conclude that a commercial party has made an illegitimate threat in the context of negotiating a commercial contract, particularly in light of the absence in English law of any doctrine of inequality of bargaining power or any general principle of good faith in contracting. A finding that a commercial contract should be rescinded for lawful act economic duress is therefore likely to be rare.

Background

The claimant, TT, is a travel agent in Birmingham whose business, at the relevant time, almost entirely comprised selling tickets for flights to Pakistan on planes owned by the defendant, PIAC (which was the only airline operating direct flights between the UK and Pakistan).

Disputes arose between PIAC and TT (and other travel agents) regarding unpaid commission. PIAC sent a notice of termination to TT (as it was legally entitled to do), ending their appointment as a PIAC agent and heavily reducing their ticket allocation. Almost simultaneously, PIAC offered terms of re-appointment under a new contract which required TT to waive all claims TT might have against PIAC in relation to commission under the previous agreement.

TT agreed to the new contract, as it would otherwise have gone out of business. However, it subsequently sought to rescind that contract for duress and to recover the commission which it claimed it was owed under the previous contract.

The High Court found that TT was entitled to rescind the contract for economic duress, but that decision was overturned by the Court of Appeal, with the leading judgment being given by David Richards LJ.

The Court of Appeal held that economic duress could not be established because PIAC had used lawful pressure to achieve a result to which it believed in good faith it was entitled, ie because the trial judge had found that PIAC genuinely believed it had a defence to TT’s claims for commission. The Court of Appeal found that it would be insufficient for lawful act duress to establish that PIAC’s belief was unreasonable.

TT appealed to the Supreme Court.

Decision

The Supreme Court unanimously dismissed the appeal. Lord Hodge gave the leading judgment, with which Lord Reed, Lord Lloyd-Jones and Lord Kitchin agreed. Lord Burrows gave a concurring judgment, in which he agreed with the result but disagreed with the majority's analysis in one respect.

All of the justices were agreed on the following aspects of the legal analysis, as set out by Lord Burrows:

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. As the threat is lawful, the illegitimacy of the threat is 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.

There was, however, disagreement as to what the law recognises as an illegitimate threat or pressure - ie the first element identified at (2) above. In Lord Burrows's opinion, where a defendant had demanded a waiver of some claim the claimant might have against the defendant, the threat would be illegitimate if: first, the defendant had deliberately created or increased the claimant's vulnerability to the demand; and, secondly, the demand was made in bad faith, in the sense that the defendant did not genuinely believe it had any defence to the claim being waived.

Lord Hodge (for the majority) disagreed that this "bad faith requirement" should be seen as sufficient to establish that a threat was illegitimate for the purposes of the tort. Instead, he said, the courts should treat 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, what was required was morally reprehensible behaviour which rendered the enforcement of the contract unconscionable.

Majority reasoning

Lord Hodge noted that the boundaries of the doctrine of lawful act duress are not fixed and the courts should approach any extension with caution, particularly in the context of contractual negotiations between commercial entities.

Lord Hodge identified two circumstances in which the English courts had recognised and provided a remedy for lawful act duress (though the cases were not necessarily analysed in those terms at the time): first, where a defendant used their knowledge of criminal activity by the claimant (or a close relative) to obtain a personal benefit by threatening to report the crime; and second, where the defendant was exposed to a civil claim by the claimant (eg for damages for breach of contract) and forced the claimant to waive its claim by deliberately manoeuvring the claimant into a position of vulnerability by means which the law regards as illegitimate. In both categories, Lord Hodge said, the defendant had "behaved in a highly reprehensible way which the courts have treated as amounting to illegitimate pressure".

Lord Hodge said it was important to bear in mind, in considering the development of lawful act economic duress, that there is in English law no doctrine of inequality of bargaining power and no general principle of good faith in contracting, and the absence of these doctrines restricts the scope for lawful act economic duress in commercial life. As Lord Hodge put it:

"Against this commercial background the pressure applied by a negotiating party will very rarely come up to the standard of illegitimate pressure or unconscionable conduct. It will therefore be a rare circumstance that a court will find lawful act duress in the context of commercial negotiation."

In the course of his judgment, Lord Hodge considered the Court of Appeal judgment in CTN Cash and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714, which had featured prominently in the reasoning of David Richards LJ in the present case. In finding that the claimant in CTN could not recover on grounds of economic duress a payment made to the defendant, the court had regarded as “critically important” that the defendant believed in good faith that the sum it was demanding was due to it. Lord Hodge described this judgment an important stepping stone in the development of the doctrine of lawful act duress, but said it was "authority for what is not such duress and not for what is". Lord Hodge recognised that the Court of Appeal in CTN may (as Richard LJ and Lord Burrows thought) have decided the case differently if the defendant had sought the payment in bad faith in the knowledge that it was not due, but he did not think it would have been right to do so.

As English law does not recognise a doctrine of inequality of bargaining power, nor a general principle of good faith, Lord Hodge said, a commercial party is entitled to use its bargaining power to obtain from another commercial party by negotiating contractual rights which it does not have until the contract is agreed - and may be able to impose onerous terms, for example demanding a premium, as a condition for entering into a transaction with another party.

Lord Hodge did not accept that the lawful act duress doctrine could be extended to a circumstance in which, without more, a commercial organisation exploited its strong bargaining power to extract a payment (or a waiver of some liability) by asserting in bad faith a pre-existing legal entitlement which it did not believe to be correct, or a defence which it did not believe it had. He reached this conclusion for a number of reasons, including because it was in principle no different from demanding a sum of money as a pre-condition for entering into contractual relations in the context of a commercial negotiation, which would not give rise to a claim for economic duress. And because, in his view, it would increase uncertainty in commercial transactions.

Lord Hodge accepted, however, that bad faith plays a role in lawful act duress. In some of the earlier cases the conduct by which the defendant applied pressure to the claimant "involved bad faith or behaviour which was similarly reprehensible". In other words, he said, bad faith is potentially relevant both to the content of the demand and to the context in which the defendant makes its demand.

On the facts of the present case, Lord Hodge said, the Court of Appeal was correct to conclude that the claimants had not made out a case of economic duress. While PIAC's conduct entailed "hard-nosed commercial negotiation", there was no finding that it had used reprehensible means of applying pressure such as those which had given rise to findings of economic duress in previous cases. On the facts as established, PIAC had believed in good faith that it was not liable for breach of contract as a result of its failure to pay past commission and, in any event, the pressure which it applied to obtain the waiver was simply the assertion of its power as a monopoly supplier.

Lord Burrows's reasoning

As noted above, Lord Burrows differed from the majority with respect to the test for what amounts to an illegitimate threat for the purposes of lawful act economic duress.

Lord Burrows regarded it as essential that, on the High Court's findings, PIAC was not acting in bad faith (in the sense that it genuinely believed it was not contractually liable for the unpaid commission that was being waived). In his view (contrary to that of Lord Hodge), if there had been a contrary finding of bad faith in that sense, TT’s claim would have succeeded.

Lord Burrows said he was very concerned that, if the “bad faith demand” requirement was rejected in favour of a test of whether the defendant’s conduct was “reprehensible” or “unconscionable” or used “illegitimate means” (distinct from unlawful means), lawful act economic duress could create considerable uncertainty in the realm of commercial contracts.