Contract LAW2040 Case Note First-Class Answer (Awarded an 80)

Updated: Nov 2, 2020

Submitted by: Peter Donnelly


Issue: Inequality of Bargaining Power within the commercial realms of hard-bargain trading world of business.


LAWFUL ACT ECONOMIC DURESS: A CASE NOTE –

NOVEMBER 2019 LAW YR 2 QUB


Judicial recognition of the common law doctrine of economic duress has been established for over forty years in the United Kingdom.[1] Despite the recognition of lawful act duress, construing its constituent elements and the boundaries thereof have posed a significant challenge for the courts, as is established in the present appeal. Duress emerged from the courts as a protection against parties threatening recourse to unlawful action, including physical intimidation.


The nature of the commercial context has further frustrated the courts’ ability to determine when a lawful act within the hard-bargaining realms of commercial dealings can stray into the realms of illegitimate pressure. The difficulty in defining these boundaries was most recently demonstrated in Times Travel Ltd v Pakistan International Airlines Corporation[2]; the subject of this present appeal.


(I) Facts

This case centred around an appeal, from the High Court to the Court of Appeal in 2018. At the material time the defendant company (now the appellants), Pakistan International Airlines Corporation (PIAC) was the sole airline operating direct UK flights to Pakistan. PIAC’s agent based in Birmingham, Times Travel (TT) (now the respondents) were financially dependent on the 2008 contract, with PIAC, due to the fact that their main source of custom came from the local Pakistani community. Richards.LJ stressed that PIAC were an “important trading partner” for TT.


In 2010 agents of PIAC determined to commence proceedings, against PIAC, pertaining to unpaid commission which they were contractually owed.

2012 saw PIAC submitting a notice of termination to their appointed agents, including TT. Within the termination were terms for a ‘New Agreement,’ providing that agents would agree to waive any existing claims arising from the commission dispute.

Following PIAC’s decision to reduce the number of fortnightly tickets from 300 to 60 on 17th September 2012, TT proceeded to sign the ‘New Agreement’ on account of their business’ future survival, on September 23rd. By so doing, TT released PIAC from the commission and remuneration claims.


TT subsequently sued PIAC for outstanding commission payments, they believed, that were due under the previous contract, including basic commission which the first instance court found PIAC had mistakenly believed it was entitled to. By way of defence, PIAC relied on the waiver in the New Agreement, but TT successfully challenged the validity of the New Agreement under economic duress.


In a unanimous ruling, Richards LJ held that where lawful pressure is utilised by a party to achieve an outcome to which it genuinely believes entitled, regardless of its objective reasonability, a claim under economic duress cannot proceed. Resultantly, Warren J’s High Court judgment[3] was overruled in favour of PIAC, due to their genuinely held belief that they were not entitled to reimburse TT for unpaid commission from a defunct contract.

(II) Judgement

The appeal was largely confined to focusing on whether there had been illegitimate pressure applied by PIAC, in 2012, to procure the New Agreement with TT. Richards LJ commenced his judgement of the appeal by exploring the development of the doctrine of lawful act economic duress and the “ingredients” necessary to establish such a claim; including proof of illegitimate pressure applied to the claimant, this as a cause of the contract being entered into and the limited practical choice for the claimant. It was the first of these “ingredients” that predominated the discussion in this judgement.


Economic duress is an area of the common law which has been protracted in its development, and the courts have thus reflected this in their conservative approach towards intervention in litigation, involving commercial actors invoking such a claim. Lord Diplock in the context of an industrial dispute, for instance, dismissed a prospective examination of the position concerning lawful act economic duress and the precise circumstances surrounding when commercial pressure can be deemed as illegitimate.[4]


The court noted that Commonwealth jurisdictions, including Australia, restricted recognition of duress “to threatened or actual unlawful conduct”[5] and rejected lawful act duress, instead aligning it with equitable principles, including unconscionable transactions. The actions of PIAC, in their action of terminating the contract with TT, do not demonstrate them contravening their lawful contractual responsibilities.


Richards LJ was keen to emphasise, from the outset, that the present case did not constitute unlawful act duress whatsoever. Steyn LJ’s obiter comments in CTN[6] had an overarching significance for the ultimate conclusion reached in the appeal, which will become apparent later. Steyn LJ said that the nature of the demand only required examination, by virtue of the act’s lawfulness. Richards LJ also cited the finding in Occidental;[7] due to the lawfulness of the act itself the question was whether the nature of the demand constituted illegitimacy?

Richards LJ acknowledged that for a validly constituted contract containing the requisite legal elements, of agreement and consideration, to be deemed as void needed to cross a high threshold. Such a claim of inequality of bargaining power would not suffice. Such a departure from dicta which has preserved freedom of contract would be deemed as being a significant encroachment upon the independence of contracting parties. It was indeed the case, of course, that the mutual agreement of both TT and PIAC were in evidence at the time of signing the ‘New Agreement.’


Richards LJ inserted a corollary to the dissention of Lord Wilberforce[8] that a successful claim under duress can be raised where there is a threat by party A to exceed their contractual responsibilities; saying that the courts may make a value assessment based on the facts, such that a threat or pressure to advance such a threat may not be illegitimate for party B. Furthermore, the judge identified that illegitimate pressure could constitute conduct which is not itself unlawful, albeit with the caveat that this would be unlikely to occur in a commercial context.[9]

Given the rather vague concept of morally and socially unacceptable conduct formulated in CTN5, it is unsurprising that the court was directed towards blackmail in order to rationalise the concept of lawful duress. Obiter remarks by Leggatt LJ suggested that lawful act duress could be widened with reference to blackmail in circumstances where a defendant had “no reasonable grounds”[10] for making a ‘lawful’ demand. Furthermore, the demand coupled with a threat would need to be regarded as unreasonable by honest people.


Indeed, Warren J, at first instance3, by way of analogy addressed blackmail as justification for the existence of lawful act duress accompanied by illegitimate pressure on the part of PIAC. However, such an analogy was immaterial, as Richards LJ himself noted, when it is considered that blackmail by its very nature is a criminal offence which would indisputably render any species of contract void. Furthermore, TT was perfectly entitled to refuse to enter into a contractual arrangement with PIAC. PIAC are after all a commercial entity and pressure is a recognised feature of such environments. Applying legitimacy as a gauge by which to measure pressure, in commercial context would arguably be redundant. McAleer noted, ‘There is a large difference between a gun to the head and being subject to a pushy salesman.’[11] PIAC’s conduct in these negotiations may be categorised as being akin to the latter.


Warren J, at first instance, was insistent that the presence of good or bad faith was something “which different minds might take different views.” This was arguably a central failure of the High Court’s judgement, which Richards LJ emphasised. In the opening stages of the appeal, Richards.LJ was clear that one of the determining situations whereby a validly made contract could be avoided was one where bad faith could be said to exist.

He further cited CTN5 where it had been stated that if a defendant genuinely believes that they are entitled to advance a demand, this will be a key factor in determining whether lawful pressure was applied to a claimant. Warren J’s approach of omitting a faith requirement from these situations, had the potential to create unceasing uncertainty for future commercial contractual dealings. However, the faith requirement, arguably runs counter to Lord Ackner’s seminal assessment that a duty to conduct “negotiations in good faith is inherently repugnant”[12] English law values.


PIAC’s defence that they were exercising what they reasonably believed to be their lawful contractual rights, to both modify the system by which commission was paid and propose new contractual terms, was therefore reinforced. It would be unlikely that PIAC were wilfully applying illegitimate pressure to TT; with the aim of TT’s acceptance of revised contractual terms. This prospect would seem even more improbable when one considers the cordial relations which characterised both parties’ business relationship, until the advent of this dispute.


The preponderance of jurisprudence highlighted that there was scant support for an extension of lawful act duress. The avoidance of a contract based upon the application of a form of lawful economic duress advanced by pressure which was legitimate within the cut and thrust of contractual negotiations was deemed as being an extension of the common law which the courts could not credibly countenance.

(III) Concluding Remarks

The void in the jurisprudence concerning the requisites for a successful claim under lawful act duress has been filled with a degree of clarity. The Court of Appeal held that no economic duress exists in commercial situations whereby a party utilises lawful pressure to achieve a result to which it genuinely believes itself to be entitled; regardless if the belief is objectively unreasonable.


Day and Davies have noted their understanding that this judgement will be referred to the Supreme Court, providing leave of appeal is granted.[13] In principle, they express their concurrence with Richards LJ’s constraining approach compared with that of the High Court. However, they have expressed their disappointment that Richards LJ did not “jettison”13 the concept entirely. Gardiner[14] has suggested that the present appeal is testament to a swift retreat on the part of the judiciary to place the concept of lawful duress on a stable basis.

Vitally important as it is for the law to facilitate the healthy functioning of competitive markets, there is arguably, somewhat of a dismissive abdication, on the part of the courts to adequately provide a degree of protection for the vulnerability of small, family businesses, such as TT. Perhaps Richard LJ’s rigid adherence to the doctrinal, Diceyan view of private law, what “is not prohibited is permitted,”[15] signals a failure to elucidate the position of small companies pressured by the impervious terms of international monopolies.

Lord Steyn is amongst numerous justices, who recognised that if inequality of bargaining power is to be codified, it is Parliament’s responsibility. Parliament, however, has failed to act on the Law Commission’s recommendations[16] to extend, to smaller business, legislative protections to tighten the reigns of large, commercial firms. Legislation pursuant to the protection of the rights of individual consumers[17] is in place. Why then place small, commercial entities in isolation, in the absence of protective legislation?


The present appeal further highlights the myriad of ambiguities surrounding lawful act duress and its persisting uncertainty will undoubtedly continue to feed the quest for clarity in this area.

BIBLIOGRAPHY


CASES

Al.Nehayan.v.Kent [2018] EWHC 333

Australia and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344

Barton v Armstrong [1976] AC 104

CTN Cash and Carry Ltd v Gallaher Ltd [1993] EWCA Civ 19

Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152

Occidental Worldwide Investment Corp v Skibbs A/S Avanti [1976] 1 Lloyd's Rep 293

Progress Bulk Carriers Ltd v Tube City IMS LLC, The Cenk Kaptanoglu [2012] EWHC 273

Times Travel (UK) Ltd v Pakistan International Airlines Corporation [2017] EWHC 1367

Times Travel (UK) Ltd v Pakistan International Airlines Corporation (Rev 2) [2019] EWCA Civ 828

Walford v Miles.[1992].1.All.ER.453

BOOKS


Jack Beatson, The Use and Abuse of Unjust Enrichment (first published 1991, OUP), 129

Andrew Burrows, Anson's Law of Contract (first published 2016, OUP), 67

JOURNAL ARTICLES


Paul Davies & William Day, ‘”Lawful act” duress (again)’ [2019] LQR 2020

Jodi Gardiner, ‘Does Lawful Act Duress Still Exist?’ [2019] CLJ

LEGISLATION


Consumer Rights Act 2015


Law Commission Report No 292, 2005, Part5

[1]Occidental Worldwide Investment Corporation v Skibs (The Sibeon & The Sibotre) [1976] 1 Lloyds Rep 293 [2]Times Travel (UK) Ltd v Pakistan International Airlines Corporation (Rev 2) [2019] EWCA Civ 828 [3]Times Travel (UK) Ltd v Pakistan International Airlines Corporation [2017] EWHC 1367 [4]Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152 [5]Australia and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344 [6]CTN Cash and Carry Ltd v Gallaher Ltd [1993] EWCA Civ 19 [7]Occidental Worldwide Investment Corp v Skibbs A/S Avanti [1976] 1.Lloyd's Rep 293 [8]Barton v Armstrong [1976] AC 104 [9]Progress Bulk Carriers Ltd v Tube City IMS LLC, The Cenk Kaptanoglu [2012] EWHC 273 [10]Al.Nehayan.v.Kent [2018] EWHC 333 [11]Andrew Burrows, Anson's Law of Contract (first published 2016, OUP) 67 [12]Walford v Miles.[1992].1.All.ER.453 [13]Paul Davies & William Day, ‘”Lawful act” duress (again)’ [2019].LQR.2020 [14]Jodi Gardiner, ‘Does.Lawful.Act.Duress.Still.Exist?’ [2019] CLJ [15]Jack Beatson, The Use and Abuse of Unjust Enrichment (first.published.1991,.OUP),.129 [16]Law Commission No.292 (2005), Part.5 [17]Consumer Rights Act 2015