LAWFUL ACT ECONOMIC DURESS – PAKISTAN INTERNATIONAL V TIMES TRAVEL
It is not common to come across a case of duress. In the recent United Kingdom Supreme Court (“UKSC”) decision of Pakistan International Airline Corporation v Times Travel (UK) Ltd [2021] UKSC 40 (“Pakistan International”), the UKSC considered whether a party can set aside a contract on the ground that it was entered into because of the other party threatening to carry out a lawful act.
Pakistan International is interesting not only because it is a rare decision on duress, but also because there were diverging views expressed on what amounted to an illegitimate threat or pressure. Lord Hodge, with whom Lord Reed, Lord Lloyd-Jones and Lord Kitchin agreed, delivered the majority judgment. Lord Burrows delivered a concurring judgment, in which he agreed with the result, but differed with the majority’s analysis in one (but significant) aspect. Given the constraints of space, in this blog, we will just highlight some of the key holdings made by the majority in Pakistan International.
Summary. We first set out below some of the key points of Pakistan International on which all the justices agreed.
The essential elements of duress. There are two key elements to duress: the existence of a threat (or pressure) that is illegitimate, and that the illegitimate threat (or pressure) caused the party to enter into the contract. A third key element exists for economic duress: there must have been no reasonable alternative to giving in to the threat (or pressure). These are set out in Lord Burrows’ judgment at [78] – [79] Pakistan International.
The existence in English law of the concept of lawful act duress. It was unanimously agreed that lawful act duress is recognized under English law as a ground for rescinding a contract, or for restitution of non-contractual payments. The reasoning for this holding can be found in Lord Burrows’ judgment at [82] – [92] Pakistan International.
The rejection of the use of a wide principle of good faith dealing. It is also important to note that all the justices agree that Pakistan International was not an appropriate case to apply a “standard of what is commercially acceptable or unreasonable behaviour. That would be a radical move forward for the English law of contract and the uncertainty caused by it seems unlikely to be a price worth paying.” See [95] Pakistan International.
The appropriateness of focusing on the nature and justification of the demand, rather than the threat. Lord Hodge also emphasized at [1] Pakistan International that he agreed with Lord Burrows’ judgment at [88] and [96] Pakistan International that the focus should be on the nature and justification of the demand, rather than then threat.
The law’s general acceptance of the pursuit of commercial self-interest in commercial bargaining. And in this regard, Lord Hodge agreed with Lord Burrows’ judgment at [97] – [99] Pakistan International that “… in general, a demand motivated by commercial self-interest is justified. If that were not the case, normal commercial bargaining would be seriously disrupted.”
What amounts to illegitimate pressure. Where the justices differ, however, is what the law recognizes as an illegitimate threat or pressure.
Lord Hodge reasoned that, to date, there are two types of circumstances where the English Courts have recognized and provided a remedy for lawful act duress ([4] Pakistan International):
The first is where “… a defendant uses his knowledge of criminal activity by the claimant or a member of the claimant’s close family to obtain a personal benefit from the claimant by the express or implicit threat to report the crime or initiate a prosecution”.
The second is where “… the defendant, having exposed himself to a civil claim by the claimant, for example, for damages for breach of contract, deliberately manoeuvres the claimant into a position of vulnerability by means which the law regards as illegitimate and thereby forces the claimant to waive his claim.”
Lord Hodge then stated that the “ideas of an improper motive for action or illegitimate pressure are closely aligned with the equitable concept of unconscionability” ([20] Pakistan International).
Hence, lawful act economic duress must be seen against the “backdrop” of the remedies that are already offered by equity and “[u]nconscionability is not an overarching criterion to be applied across the board without context” ([23] Pakistan International).
In addition, since there is no doctrine of inequality of bargaining power in contract in English common law ([26] Pakistan International) nor a general principle of good faith in contracting ([27] Pakistan International), the absence of such doctrines restricts the scope for lawful act economic duress ([28] Pakistan International).
After reviewing various common law jurisdictions (see [31] – [39] Pakistan International) and the case of CTN Cash and Carry Ltd [1994] 4 All ER 714 (see [40] – [44]), Lord Hodge held that Lord Burrows’ position, that lawful act duress would not be confined to a “a claim based on a dishonest assertion by A of a pre-existing legal entitlement to payment” but would be extended to a position where “A’s demand for a waiver by B of a claim against A would amount to lawful act economic duress where (i) A did not genuinely believe that it had a defence to the claim - ie his “bad faith demand”, and (ii) A has deliberately created or increased B’s vulnerability to that demand” ([45] Pakistan International), would extend the doctrine of lawful act duress too far ([46] Pakistan International).
In this regard, Lord Hodge stated that a “bad faith demand” may not be a rare occurrence in commercial life.
Three difficulties. However, Lord Hodge stated that extending lawful act duress to provide a remedy would give rise to at least three difficulties (see [48] Pakistan International):
“First, it would be difficult to anchor the extension in any recognised legal principle… it is not obvious to me that, without more, B could have a claim for economic duress in the absence of a general principle of good faith in contracting or a doctrine of imbalance of bargaining power, neither of which currently exists. …” ([49] Pakistan International).
“Secondly, in the absence of an underlying principle, the extension of lawful act duress in this way would create unwanted uncertainty… Lord Burrows seeks to avoid such uncertainty through the construct of the bad faith demand, but I do not accept that, without more, lawful act economic duress would exist even if there were such a bad faith demand. In my view the doctrine is more limited in the context of commercial relations.” ([50] Pakistan International).
“Thirdly, the extension of lawful act duress in this way might be of limited utility. … first, commercial organisations may enter into a dispute or commence litigation without an informed idea of their legal rights or any intention of seeking judicial resolution but with the aim of reaching a settlement of the dispute on better terms than are currently on offer. … Secondly, it would be very difficult for B to establish its case because B would have to demonstrate A’s subjective bad faith. The application of legal rules to a particular factual circumstance, such as when risk passes on a contract of sale, commonly involves questions of legal judgment on which legal advisers may reasonably differ. …” ([51] Pakistan International).
Observations. It can be seen from the majority judgment that while English law is prepared to recognize, and does recognize, the doctrine of lawful act economic duress, English law remains concerned that the doctrine should not be expanded too widely lest it creates uncertainty that would interfere with the normal commercial life.
We highlight however that under the majority approach, it would be rare for a case in lawful act economic duress to be made out: the two circumstances set out in [4] Pakistan International would be difficult to establish, especially when read in light of [45] – [51] Pakistan International.
Therefore, paraphrasing [58] Pakistan International, even hard-nosed commercial negotiation that exploits a monopoly supplier’s position would not in and of itself amount to lawful act economic duress, unless there were some sort of “reprehensible means” of applying pressure on the other party to manoeuvre the other party into a position of vulnerability to exploit the said vulnerability.
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