A contract cannot be avoided if economic duress was lawful

Author: Laura Alliss

Date: 24 May 2019

 

Commercial contract not avoided on economic duress grounds where duress was lawful (Times Travel (UK) Ltd v Parkistan International Air-lines Corporation)

Dispute Resolution analysis: In the case of Times Travel (UK) LTD v Pakistan International Airlines Corporation the court considered the issue of whether a contract may be avoided on the grounds of economic duress stemming from a lawful act of duress, such as a threat of a lawful act or omission. The Court of Appeal held that in a commercial context, if one party is exerting lawful economic pressure to achieve a result which it believes in good faith it was entitled to (irrespective of whether such a belief was reasonable), such as taking advantage of its position as a monopoly, then such actions will not amount to economic duress so as to avoid the contract. Written by Laura Alliss, associate director/solicitor at DJM Solicitors.

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

What are the practical implications of this case?

This decision highlights that contracts cannot be avoided on the basis of economic duress if:

  • the act of duress is lawful, and
  • the person exerting the pressure believes in good faith that they are entitled to do so, even in the circumstances where it could be said that such belief was unreasonable

The case further highlighted that there is very little by way of legislation in terms of commercial contracts and that such contracts cannot be avoided for reasons of the lawful exercise of a monopoly position or inequality of power/bargaining position. Development of the law in these areas can only take place by way of intervention by Parliament, not by common law.

What was the background?

Times Travel (TT) was a small family-owned travel agency, based in Birmingham which, in 2008, was approved by the International Air Transport Association (IATA) as a Passenger Sales Agent. The same year, TT was appointed as an agent for the appellant, Pakistan International Airlines Corporation (PIAC). The contract between the parties was not straightforward, however the sum of 9% commission was payable to TT on the price of tickets sold.

By 2012, PIAC owed sums to TT by way of unpaid commission and gave notice to terminate its contract with TT. At the time, PIAC were the only airline operating direct flights between the UK and Pakistan and TT’s business was almost exclusively the sale of flight tickets to members of the Pakistani community in and around Birmingham for travel to and from Pakistan. TT’s business was largely dependent on its ability to sell PICA tickets and therefore it had to have a contract with PIAC.

A new contract was entered into between TT and PIAC, the terms of which included a waiver by TT of unpaid commission accrued under previous contracts between the parties, and changed the commission payments in that, instead of a commission being paid on a percentage of the ticket price, PICA would give TT a 7% discount on the price that it would sell tickets to the public. Commission would only be payable after specific tiered sales targets were met (the New Agreement).

In 2014 TT issued proceedings to recover commission and other payments which had not been paid under the contracts in place between 2008 and 2012.

At first instance, Warren J found that TT was ‘under pressure to sign the New Agreement in light of the fall in ticket sales since the reduction in the ticket allocation and did not want TT to be put out of business, an outcome which they saw as the inevitable consequence of the withdrawal of TT’s agency. They did not want to sign but considered that they had no alternative because of that pressure’ and held that the New Agreement had resulted from economic duress and therefore could be avoided. Warren J ordered accounts to be taken with an interim payment of £725,000 being payable by PIAC. PIAC appealed.

What did the court decide?

When considering whether the New Agreement could be avoided by reason of economic duress, the Court of Appeal identified three necessary ingredients for a successful claim:

  • there must be illegitimate pressure applied to the claimant
  • the pressure must be a significant cause inducing the claimant to enter into the contract, and
  • the practical effect of the pressure is that there is compulsion on, or a lack of practical choice for the claimant. The appeal was concerned with the first of these ingredients

The appeal itself related to (a) as there was no challenge to Warren J’s findings that (b) and (c) had been made out by TT. The important aspect of this case was that the pressure applied by PIAC was lawful and was not a breach of contact nor an actionable tort.

The court observed that the common law attaches great significance to the enforceability of contracts validly made and that, when it comes to commercial dealings, there are no grounds for setting aside contracts for reasons such as inequality of bargaining or the exploitation of a monopoly position.

When reviewing the historical case law relating to avoidance on the grounds of economic duress, it was noted by the court that such duress comprised of unlawful threats such as fraudulent statements or threatened breach of contact. The illegality of the threat has been at the heart of previous economic duress precedents.

The court considered the case of CTN Cash and Carry Ltd v Gallagher Ltd [1994] 1 All ER 714 and found that it:

‘can be taken to establish that where A uses lawful pressure to induce B to concede a demand to which A does not bona fide believe itself to be entitled, B’s agreement is voidable on the grounds of economic duress. It cannot be taken to establish that if A genuinely but unreasonably believes the demand to be well-founded, the same result will follow’ (at para [62]).

In reaching its decision to uphold the appeal, the court found that although the pressure applied by PIAC could be viewed as harsh, it was in all respects lawful. The court also found that the demand was one which PIAC had genuinely believed it was entitled to make. The court then turned to consider further the findings of CTN Cash and Carry, to consider what the position would be if although PIAC believed that it was entitled to make the demand, that it was in fact unreasonable to do so.

When considering this issue the court reviewed case law from the commonwealth countries, Texas and academic publications and finally determined that:

‘the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result to which the person exercising pressure believed in good faith it is entitled, and that is so whether or not, objectively speaking, it has reasonable grounds for that belief.’ (at para [105]).

In his judgement, Richards LJ explained that it would not be desirable for uncertainty to be created in commercial contracts and that it would be unprincipled to develop the doctrine of economic duress as a mean of controlling the lawful acts of a monopoly power.

Asplin LJ further commented that:

‘despite the harsh result in circumstances such as these, it is not appropriate to develop the law of economic duress in a way which would fetter the lawful use of a monopoly position. As Steyn LJ noted in the CTN Cash and Carry case, the control of monopolies is a matter for Parliament’ (at para [117]).

The appeal was upheld and the judgement in favour of TT reversed.

Case details

  • Court: Court of Appeal, Civil Division
  • Judges: David Richards, Moylan and Asplin LJJ
  • Date of judgment: 14 May 2019

This article was first published by Lexis®PSL on 16/05/2019

Laura Alliss - Published 24th May 2019

 

 

 

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