In the recent decision of Times Travel (UK) Ltd -v- Pakistan International Airlines Corp  EWCA Civ 828, the Court of Appeal has provided long-awaited clarification on the scope of lawful act duress.
It is a long-established legal principle that when a contract is entered into as a result of duress, the contract is voidable at the instance of the aggrieved party. One such form of duress is economic duress, for which a three-stage test will apply:
- The pressure applied to the party must have been illegitimate
- The pressure applied must have influenced dthe decision to enter into the contract, and
- The practical effect tmust have been that the claimant had no practical choice but to enter into the contract
The scope of the first element of the test (illegitimacy) has been unclear for some time. Although ‘illegitimate’ pressure will usually take the form of an unlawful act, there have been numerous cases in which the circumstances under which a party entered into a contract were lawful, but unethical in some way. To ‘drive a hard bargain’ will undoubtedly be the strategy of most contractual parties at the negotiation stage, but few will have considered the extent to which this could amount to duress. To date, the courts have rarely had the opportunity to consider and clarify the scope of lawful act duress.
The dispute concerned the dealings between a travel agent and an airline. At the time, the airline was the sole operator of direct flights between the UK and Pakistan, and the travel agent’s business relied heavily upon its ability to sell tickets for these flights pursuant to an agency agreement. In 2012, against a backdrop of numerous claims by agents for allegedly unpaid commission, the airline gave notice terminating all of its existing agency agreements. It offered agents new contracts, but one of the overriding terms was that the agent must waive any claim for commission accrued under their previous agency agreements.
The travel agent in question entered into the new contract, but later issued a claim against the airline alleging that the contract had been procured by economic duress, believing that the agency would otherwise have been put out of business. The claim succeeded in the first instance, but the airline appealed the decision.
The key question for the Court of Appeal to consider was whether lawful act duress existed at all and, if so, in what circumstances the doctrine could be invoked.
The Court of Appeal allowed the airline’s appeal: it held that a claim for lawful act duress would not succeed in a commercial context where the contracting party used lawful pressure to achieve a result to which it believed, in good faith, it was entitled. David Richards LJ clarified that ‘a lack of reasonable grounds is insufficient to engage the doctrine of duress where the pressure involves the commission or threat of lawful acts’. The position is therefore irrespective of whether the party had objectively reasonable grounds for this belief and relies on a purely subjective test.
The Court of Appeal further noted that it was necessary to frame the doctrine of lawful act duress in this way in order to avoid undesirable uncertainty in commercial contracts and in order to ensure that the Court is not itself using the doctrine as a means of controlling the lawful use of monopoly power. Asplin LJ acknowledged that the result in this instance seemed ‘harsh’ but clarified that ‘the control of monopolies is a matter for parliament’.
What does this mean for commercial parties?
The Court of Appeal’s decision has provided some much-needed clarity in respect of the application of the doctrine of lawful act duress and the doctrine has been narrowly confined in an attempt to create further certainty in commercial contracts.
The result is, however, likely to attract some criticism. In the absence of a concept of fair or honest dealing regarding the question of illegitimacy of lawful pressure, contractual parties will now find themselves barred from relief in circumstances where the opponent believes of its entitlement in good faith, but where this belief does not appear reasonable by objective standards. Parties may therefore ultimately be able to derive an advantage from their own poor moral judgement.
Following the Court of Appeal’s decision, parties will be required to go far beyond an argument that the opponent has simply ‘struck a hard bargain’ in attempting to avoid a contract. In circumstances in which the act is lawful, the aggrieved party will bear the burden of proving that the opponent did not truly believe that it was entitled to exercise pressure by such means. Contractual parties should take note of the narrowly defined scope of the doctrine and we anticipate further case law on this issue in which the doctrine will succeed.