In this post, Stephanie Cheung, Mitchell Abbott and Jana Blahova, who all work at CMS, preview the appeal heard by the UK Supreme Court on 2 and 3 November 2020 in the matter of Pakistan International Airline Corporation v Times Travel (UK) Ltd.

On 2 and 3 November 2020, the UK Supreme Court heard Times Travel (UK) Limited’s (“Times Travel”) appeal in its action against Pakistan International Airlines Corporation (“PIAC”). The appeal focuses on whether lawful actions taken in good faith, but with the intention to exert pressure on a commercial party, can amount to economic duress and render a contract voidable.

In this case preview, we consider the background to the case and the issues addressed in the appeal. The Supreme Court’s judgment is expected over the coming months.

Background: The scope of economic duress

Economic duress is a form of duress where illegitimate economic pressure is used with the effect that the weaker party has no other practical option but to agree to enter into a contract or accept particular terms. For example, in North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] Q.B. 705, one of the earliest cases which addressed the concept of economic duress, a shipbuilder’s threat to terminate a contract for the construction of a ship without legal justification unless the price was raised by 10% was held to be economic duress. The court held that the purchaser, who had already chartered out the vessel in advance of its completion, had no choice but to accede to the shipbuilder’s illegitimate demand and therefore the purchaser had the option to void the contract.

The illegitimate pressure and/or threats do not, however, need to be illegal. The courts have held that even legal or lawful pressure may, in certain circumstances, give rise to economic duress. This appeal will consider whether lawful acts or threats can amount to economic duress where the that party genuinely believes it is entitled to act in the way it has.

The circumstances of Times Travel’s claim

PIAC is a major provider of flights from the UK to Pakistan. Times Travel is a Birmingham based travel agency whose business primarily relied upon its ability to sell tickets for PIAC’s flights to Pakistan to the local Pakistani community.

Various disputes arose between PAIC and its agents regarding the commission and other payments that were to be paid by PIAC to its various agents. A trade association, the Association of Pakistan Travel Agents (the “APTA”), was formed to represent the interests of PIAC’s agents in these disputes.

In 2010, Times Travel became aware of APTA members threatening legal proceedings against PIAC. PIAC advised Times Travel not to join the APTA and not to bring proceedings, suggesting instead that an amicable solution would be reached. In February 2011, a series of court actions began between PIAC and its various agents regarding the rate of commission due under their applicable contractual agreements.

In September 2012, PIAC sent a notice of termination to all of its agents in the UK (including Times Travel) which legally terminated the various contracts with PIAC. The termination was stated to be effective 47 days from the date of the notice of termination. Significantly, PIAC offered its agents reappointment on different terms at the same time as it served notice of termination. Shortly thereafter, PIAC (as permitted by the terms of their agreement) significantly reduced Times Travel’s fortnightly ticket allocation from 300 to 60 tickets.

At a meeting in September 2012, PIAC showed Times Travel a new draft agreement (the “New Agreement”). PIAC refused to provide Times Travel with a copy of the New Agreement to allow Times Travel to consider it or obtain legal advice. PIAC asserted that the New Agreement was to be signed by all agents, and if the agents did not sign, the consequences would be out of the hands of PIAC’s managers. The “consequences” referred to by PIAC were understood to mean that Times Travel would no longer be able to sell PIAC’s tickets if it refused to enter into the New Agreement. PIAC also said Times Travel’s ticket allocation would be restored to the original amount if it signed the New Agreement. On this basis, Times Travel entered into the New Agreement.

The New Agreement also contained a clause which released PIAC from Times Travel’s claims under its previous agreement and therefore Times Travel waived its right to seek recovery of the disputed commission.

In 2014, Times Travel brought proceedings seeking to recover commission and other payments due under the original agreement. PIAC defended the claim on the basis that Times Travel had waived its right to the commission and other payments by accepting the terms of the New Agreement.

As we noted above, Times Travel was not the only agent in dispute with PIAC. Thirty other agents applied for an injunction to prevent the termination of their agreements with PIAC from taking place; at which time PIAC gave an undertaking to those agents that their entry into the New Agreement would not prejudice their claims and PIAC undertook to restore these agents’ ticket allocations to the previous levels. At least one case proceeded to trial and judgment was entered against PIAC; and shortly thereafter PIAC settled with some of the other litigating APTA agents by enhancing their commission. Times Travel requested a similar commission enhancement from PIAC at that time and was refused.

The Court at first instance held that Times Travel would have been forced out of business if it could not sell PIAC’s tickets and Times Travel’s business could not have survived if the ticket reduction continued for much longer than it otherwise did. The practical effect of this was that Times Travel had no choice but to accept the terms of the New Agreement. It was held that, as a result of PIAC’s actions, Times Travel entered into the New Agreement under economic duress. It is notable that the first instance Court held that Times Travel had not established bad faith on the part of PIAC or that PIAC’s actions were lawful.

The Court of Appeal’s decision

The Court of Appeal’s decision included an in depth analysis of the case law and academic texts relating to economic duress and it acknowledged the importance of certainty in contracts and enforceability where contracts are validly made.

Giving the decision of the Court, Lord Justice Richards referred to the case of CTN Cash and Carry Gallagher [1994] 4 All ER 714 which had not been referred to by the lower court and stated that, where lawful pressure is used to induce a party to concede to a demand, if the person exerting the pressure does not in good faith believe it is entitled to be exerting that pressure, then the agreement would be voidable on grounds of economic duress. However, if the party exerting the pressure reasonably and genuinely believed it was entitled to do so, it would be contrary to the decision in CTN Cash and Carry to allow the agreement to be voidable on grounds of economic duress.

Lord Justice Richards went on to state that this applied even where the belief was unreasonably held. Therefore the Court of Appeal’s decision means economic duress does not extend to the use of lawful pressure to achieve a result if the party exerting the pressure believes in good faith it is entitled to do so, irrespective of whether, objectively, there are unreasonable grounds for that belief.

In Lord Justice Richards’ view, a lack of reasonable grounds is insufficient to engage the doctrine of duress where pressure involves the commission or threat of lawful acts. PIAC was held to have genuinely believed that it was entitled to reduce Times Travel’s ticket allocation, give notice of termination and insist on a waiver of past claims as a term of the New Agreement. It did not matter whether PIAC had reasonable grounds for that belief.

The reasons given by the lower court (Warren J) were not capable of sustaining the conclusion that Times Travel established its claim based on economic duress. The Court of Appeal held that Times Travel had not established bad faith – as far as it was concerned that should have been the end of the discussion of good or bad faith. It was not for PIAC to establish its good faith and the illegitimacy of the pressure did not require an answer. Given there was no finding of bad faith on the part of PIAC, the Court of Appeal unanimously overturned the first instance court’s decision.

PIAC was able to apply pressure to terminate the original agreement and insist on new terms because it was a monopoly supplier. The Court of Appeal confirmed that the application of pressure by a monopoly supplier was not, in itself, a ground for setting aside a contract. The control of monopolies was said to be a matter for parliament and not the courts.

Practical considerations

Times Travel have appealed the UK Supreme Court and a decision is awaited over the coming months.  The decision of the Supreme Court will demonstrate how, in commercial settings, the courts balance the need for justice and commercial certainty. Ordinarily the court will only intervene when pressure exerted by one party goes beyond what might be expected in commercial negotiations, and it will not intervene where a party has simply made a bad bargain. The Supreme Court will also confirm whether or not a party that holds a monopoly position will, by virtue of its position, be penalised for exerting pressure on the other parties. The judgment, expected in due course, is therefore eagerly awaited.