The final word on lawful act duress?

Articles
17 Nov 2021

This article, written by the counsel team who succeeded before the Supreme Court (Nigel Jones QC and Tom Bell), discusses the recent key decision of the Supreme Court in Times Travel (UK) Ltd v Pakistan International Airlines Corporation concerning the law of economic duress.

The specific issue raised was whether lawful act duress exists, and if so, in what circumstances.  The Supreme Court held that the doctrine does exist, but only in very narrow circumstances.

  1. Introduction
    1. For a long time, the common law has recognised that if Party A enters into a contract as a result of a threat or pressure by Party B which the law regards as illegitimate, the contract may be rescinded on the ground of duress at the option of Party A.
    2. Until the 1970s, only threats of violence were enough (duress of goods also qualified, but only as a basis for obtaining restitution of non-contractual payments). However, in Occidental Worldwide Investment Corpn v Skibs A/S Avanti [1976] 1 Lloyd’s Rep 293, Kerr J rejected the submission that “English law only knows duress to the person and duress to goods”. Similarly, in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705, Mocatta J said that “compulsion may take the form of ‘economic duress’ if the necessary facts are proved. A threat to break a contract may amount to such ‘economic duress.’” A few years later, the doctrine of economic duress was authoritatively recognised by the House of Lords in Universe Tankships Inc of Monrovia v International Transport Workers’ Federation [1983] AC 366, and again a decade or so later in Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152.
    3. In all those cases the illegitimate threat by the defendant was to do something unlawful – either a breach of contract or a tort. The possibility of duress arising from the threat of a lawful act was, however, recognised in obiter dicta. The most famous example is in Universe Tankships, where Lord Scarman said that lawful act duress will depend upon the nature of the demand:
      “Blackmail is often a demand supported by a threat to do what is lawful, e.g. to report criminal conduct to the police. In many cases, therefore, “What [one] has to justify is not the threat, but the demand…”: see per Lord Atkin in Thorne v Motor Trade Association [1937] A.C. 797, 806.”[1]
    4. Times Travel (UK) Limited v Pakistan International Airlines Corporation [2021] UKSC 40, heard at the end of 2020, was the first case before the Supreme Court or its predecessor the House of Lords in which a finding of lawful act duress was critical to the outcome.
  2. The facts
    1. The claimant (“TT”) is a travel agent in Birmingham focusing on the local Pakistani community. The defendant (“PIAC”) is the national flag-carrying airline of Pakistan. At the material time, it operated the only direct flights to Pakistan from the United Kingdom.
    2. In around 2006, PIAC appointed TT as an agent authorised to sell tickets on its flights, paying PIAC commission at 9% on ticket sales. A dispute arose about the payment of commission, which ultimately led to PIAC (lawfully) terminating TT’s contract and insisting that if it wanted to continue as an agent, TT must sign a new agreement containing a waiver of TT’s claims to unpaid commission. TT signed the new agreement, but subsequently issued proceedings against PIAC to rescind it on the ground that it was made under duress, and in turn to claim payment of the disputed commission.
    3. TT’s claim succeeded at trial before Warren J, who held that, by driving so hard a bargain, PIAC applied illegitimate pressure on TT. He reached this view even though he found that PIAC genuinely believed that it did not owe TT the disputed commission. He went on to find that in TT’s favour on most of its commission claim but rejected its claim for what was described as ‘overriding commission’.
    4. PIAC appealed Warren J’s finding of economic duress. Its primary argument before the Court of Appeal was that economic duress could only arise as a result of a threat to do something unlawful. Alternatively, even if lawful act duress was part of English law, it did not arise on the facts of this case because there was no finding that PIAC had acted in bad faith.
    5. The Court of Appeal allowed PIAC’s appeal. David Richards LJ, with whom Moylan and Asplin LJJ agreed, held that in circumstances where, as Warren J had found, PIAC genuinely believed it was not liable to TT, it was not illegitimate to use its superior bargaining power, derived from a position of monopoly, to induce TT into abandoning its claim. Whilst the Court of Appeal did not reject the possibility of lawful act duress, it confirmed that the doctrine only applied in circumstances where the defendant used its position of strength as a means of extortion.
  3. The judgments of the Supreme Court
    1. TT appealed to the Supreme Court, who heard the appeal in November 2020. The Supreme Court unanimously dismissed TT’s appeal, holding that it did not enter into the new agreement with PIAC under duress that fell within the doctrine. Both the majority judgment given by Lord Hodge (with whom Lords Reed, Lloyd-Jones and Kitchin agreed), and the minority judgment given by Lord Burrows, made clear that lawful act duress had little role to play in commercial dealings. In particular, it did not provide a basis for contracts to be set aside merely in circumstances where Party A uses its superior bargaining strength or monopoly position to pressurise Party B to enter into a contract on unfavourable terms: something more would be required.
    2. Where the majority and Lord Burrows disagreed was as to the nature of the ‘something more’. In Lord Burrows’ view, which largely mirrored that of the Court of Appeal, a necessary requirement for lawful act duress is that the defendant makes a ‘bad faith demand’ in the sense that the defendant “does not genuinely believe that it is owed what it is claiming to be owed or does not genuinely believe that it has a defence to the claim being waived by the threatened party”. Thus, so long as the defendant believes he is in the right, then he is free to apply whatever lawful pressure he wishes in order to vindicate his position.
    3. The majority were uneasy about Lord Burrows’ ‘bad faith demand’ requirement. They considered that it jarred with the absence of a general principle of good faith in contract law or a doctrine of imbalance of bargaining power. They also thought it would lead to uncertainty (ironically, Lord Burrows thought the same of Lord Hodge’s approach, as we discuss below). Perhaps their most significant objection of the bad faith demand test, however, was that it would be difficult to apply in practice. As Lord Hodge pointed out, a defendant will not often know his true legal position because:

      “[t]he application of legal rules to a particular factual circumstance… commonly involves questions of legal judgment on which legal advisers may reasonably differ.”

    4. Lord Hodge traced lawful act duress to two categories of cases. The first comprised cases from the late-nineteenth and early-twentieth century in which the claimant agreed to enter into an onerous contract to avoid a threat by the defendant to prosecute a family member. Although the judges in these cases used the language of undue influence when holding that the contracts were rendered voidable by the threat, Lord Hodge regarded “undue influence” and “duress” as interchangeable for this purpose following cases such as Halpern v Halpern [2007] EWCA Civ 291.
    5. Lord Hodge’s second category consists of (only) two cases. In the first, Borrelli v Ting, the defendant used his minority shareholding in a company to veto a scheme of arrangement proposed by its liquidators. In so doing, he provided false evidence, forged a document and, more generally, failed to comply with his statutory duty to assist in the winding-up. To ensure the scheme went through, the liquidators entered into a settlement agreement with Mr Ting in which they agreed not to investigate his conduct as director. After the scheme received court approval, the liquidators sought to rescind the agreement on the basis that it was procured by duress. The claim reached the Privy Council, who upheld the liquidators’ claim on the basis that Mr Ting’s conduct was “unconscionable”. In the present case, Lord Hodge said the decision could be explained on the basis that:

      “Mr Ting’s illegitimate or unconscionable acts… placed the liquidators in the position of vulnerability with the result that they had no reasonable alternative but to agree to his demands.”

    6. In the second case, Progress Bulk Carriers, the owners of a ship called the Cenk K had agreed to charter it to the claimants, but in repudiatory breach of contract ended up chartering it to someone else. The owners promised to provide a substitute vessel and to pay damages resulting from their failure to provide the Cenk K. Relying on this, the claimants did not look elsewhere. At the last minute, however, the owners reneged on their promise and told the claimants that, if they wanted a substitute vessel, they had to waive their claim for damages. The claimants had no choice but to agree, because otherwise they would default on their contract with the Chinese buyer of the cargo being transported.
    7. In Lord Hodge’s view, the finding of duress in these cases is best explained on the basis that the defendants had used “reprehensible means” to put the claimants into a position of vulnerability so that they had no practical choice but to succumb to the defendants’ demand. But unlike Lord Burrows, he did not regard it is critical that Mr Ting and the owners in Progress Bulk Carriers both acted in bad faith, in the sense that they were deliberately using their leverage over the claimants to escape their liabilities.
    8. The fundamental difference between Lord Hodge’s and Lord Burrows’ approaches, which centred on the role of bad faith, came to a head in their discussions of CTN Cash and Carry Ltd v Gallaher Ltd [1994] 4 All ER 714. In that case, the claimant (“CTN”) regularly bought consignments of cigarettes from the defendant (“Gallaher”), who was the sole distributor of certain brands. Gallaher provided CTN with a credit facility, which was seemingly essential to CTN’s way of business. On one occasion, Gallaher delivered a consignment to the wrong place, but before it was redelivered it was stolen. Gallaher believed that the stolen cigarettes were at CTN’s risk and that it still had to pay for them. CTN disagreed and initially refused to pay, but eventually succumbed when Gallaher threatened to withdraw CTN’s credit facility (as was Gallaher’s right). CTN subsequently brought a claim to be repaid the purchase price on the ground that it was paid under economic duress.
    9. Steyn LJ, who gave the leading judgment in the Court of Appeal, dismissed CTN’s claim. By that time, it was common ground that CTN was in the right – i.e. that the cigarettes had been at Gallaher’s risk. However, Steyn LJ, with whom Farquharson LJ and Sir Donald Nicholls VC agreed, did not think that Gallaher applied illegitimate pressure. “Critically important” in his view was the fact that Gallaher had not acted in bad faith, in the sense that it genuinely (albeit wrongly) believed that it was owed the price of the cigarettes at the time it threatened to withdraw CTN’s credit.
    10. In Lord Hodge’s view, Gallaher would not have been guilty of duress even if it knew it was not owed the price of the cigarettes. As he saw it, such a result would require the introduction into English contract law of either a general principle of good faith, or a doctrine of imbalance of bargaining power, neither of which currently exists.
    11. Lord Burrows, on the other hand, saw CTN itself, along with Progress Bulk Carriers and Borrelli v Ting, as providing sufficient precedent for his “bad faith demand” requirement. He also rejected Lord Hodge’s view that his approach involved the introduction of a general principle of good faith, because that ignored the narrowness of his “bad faith demand” requirement.
  4. Discussion
    1. The Supreme Court agreed without hesitation that TT did not enter into the new agreement under duress. The five justices nevertheless also agreed that lawful act duress existed as a concept. What they could not agree on were its parameters. Lord Hodge, for the majority, thought that duress could arise where the defendant used “reprehensible means” or acted “unconscionably” – with the defendant’s state of mind being, at most, a relevant factor in this regard. Lord Burrows, on the other hand, thought that Lord Hodge’s approach would make it difficult for litigants to know where they stood because reasonable minds may differ as to whether the defendant’s conduct was “unconscionable” or not.
    2. The fact that the Supreme Court thought that lawful act duress could arise only in rare cases but could not agree what the facts of those rare cases needed to be, suggests that the best way forward might have been to jettison the concept entirely. However, if lawful act duress is to exist, we prefer Lord Burrows’ approach. Although a defendant should be entitled to vindicate its legal rights or to acquire new rights by way of contract using whatever lawful means possible, in our view a line should be drawn at the point where the defendant exploits its position of commercial strength to avoid paying its debts.
  5. Parallel with the tort of intimidation
    1. It will be interesting to see whether the ‘never say never’ approach taken by the Supreme Court is adopted in other areas. Take, for example, the tort of intimidation, which has many parallels with economic duress. In Berezovsky v Abramovich [2011] EWCA Civ 153, the Court of Appeal assumed without positively deciding that a threat to do something “illegitimate” but not unlawful could lead to liability in tort; and similarly in Morley v The Royal Bank of Scotland plc [2021] EWCA Civ 338 the Court of Appeal declined to engage with that issue, focusing instead on the issue of coercion. One suspects that, if the issue of ‘lawful act intimidation’ does fall for determination, the Court is likely to follow the approach of the Supreme Court in Times Travel and say that whilst lawful act intimidation is theoretically possible, it would be a very rare occurrence.
  6. Impact on the banking sector
    1. Although neither judgment in the Supreme Court mentioned it, TT’s appeal was supported by the All-Party Parliamentary Group on Fair Business Banking (“the APPG”), who was given permission to intervene in the appeal. The APPG’s principal concern was to overturn the “subjective” nature of the Court of Appeal’s bad faith test. Bad faith, it was argued, should be assessed objectively by reference to the standard of “ordinary, decent people” rather than the defendant’s state of mind or belief about the legitimacy of its demand. The APPG submitted that such an approach would avoid “undesirable implications… for the maintenance of standards in the banking sector”.
    2. By rejecting Lord Burrows’ “bad faith demand” requirement, Lord Hodge agreed with the APPG that the test for duress should not require the claimant to prove “subjective bad faith” on the part of the defendant. However, this will come as little comfort to the APPG as it will be highly unlikely that the sort of pressure applied to defaulting customers by banks or financial institutions would, as Lord Hodge’s approach requires, involve the use of “reprehensible means” to manoeuvre the claimant into a position of increased vulnerability. If a customer is in a vulnerable position, that is far more likely to stem from a combination of an imbalance of bargaining power and financial distress.
    3. We would expect the banking and financial sectors to welcome the result in Times Travel. It provides certainty (or close to certainty) that the courts will not intervene in ‘tough cases’ such as where the bank threatens to exercise its rights over security unless the customer agrees to refinance on onerous terms. A recent example is Morley (see above), in which the claimant pleaded duress and intimidation following his agreement to transfer a number of properties to the Royal Bank of Scotland’s “West Register” subsidiary to avoid the bank appointing receivers over his entire portfolio. As discussed above, Mr Morley’s claim failed on the issue of coercion, but even if he was found to have been coerced his claim would have failed because there was no suggestion that the bank deliberately manoeuvred him into a position of vulnerability. Rather, his vulnerability stemmed from a combination of the falling property market and the bank’s pre-existing contractual right to appoint receivers.

This article first appeared in the November 2021 issue of the Journal of International Banking & Financial Law.

[1] Page 401.

Authors

Nigel Jones QC

Call: 1976 | Silk: 1999

Tom Bell

Call: 2006

Disclaimer

This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

Contact

Please note that we do not give legal advice on individual cases which may relate to this content other than by way of formal instruction of a member of Gatehouse Chambers. However, if you have any other queries about this content please contact: