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On appeal from: [2019] EWCA Civ 828

The issue in this appeal is whether, and if so in what circumstances, a party can set aside a contract on the ground that it was entered into as a result of the other party threatening to do a lawful act.

The appellant was a travel agent whose business consisted almost exclusively of selling plane tickets to and from Pakistan. The respondent was the sole operator of those flights. It allocated tickets to the appellant and paid them commission for the tickets it sold. This contractual arrangement could be terminated by the respondent at one month’s notice.

A dispute arose in 2011 and 2012 when certain travel agents, including the appellant, alleged that the respondent had not been paying them certain commission payments. Claims were brought to recover the unpaid commission. Under pressure from the respondent, the appellant did not join those claims. However, in September 2012 the respondent cut the appellant’s normal fortnightly ticket allocation from 300 to 60 tickets, as it was entitled to do, and gave notice that it would terminate their existing arrangement at the end of October 2012. This would have put the appellant out of business and so on 24 September 2012 they agreed to accept new terms (the “New Agreement”) by which it waived any claims it might have for the previously unpaid commission.

The appellant subsequently brought a claim for the unpaid commission. It argued that it could rescind the New Agreement for lawful act economic duress. The trial judge agreed but also found that the respondent had genuinely believed that the disputed commission was not due. The Court of Appeal allowed the appeal as the respondent had not acted in bad faith in that sense. The appellant appealed to the Supreme Court.

 

HELD – The Supreme Court dismisses the appeal. The New Agreement cannot be rescinded for lawful act economic duress.

 

When it is alleged that a defendant has induced a claimant to enter into a contract by duress, there are two essential elements that the claimant needs to establish to rescind the contract: (i) the threat or pressure by the defendant must have been illegitimate and (ii) the threat or pressure must have caused the claimant to enter the contract. Economic duress also has a third element: (iii) the claimant must have had no reasonable alternative to giving in to the threat or pressure. This appeal solely concerns the first element: was the respondent’s threat illegitimate.

Lord Hodge explains that there are two circumstances in which the English courts have recognised lawful act duress. The first is where a defendant uses their knowledge of the claimant’s criminal activity, or that of a person close to the claimant, to threaten the claimant. The second is where the defendant, having exposed himself to a civil claim by the claimant, uses reprehensible means to manoeuvre the claimant into a position of vulnerability to force him to waive his claim.

What constitutes an illegitimate threat or pressure is closely aligned with the equitable concept of unconscionability. This does not mean that judges are arbiters of what is morally and socially acceptable. Rather, equity has identified specific contexts which call for judicial intervention to protect the weaker party. In the absence of a doctrine of inequality of bargaining power or a general principle of good faith in contracting, it will be rare that a court will find lawful act economic duress in the context of commercial negotiation. Lawful act economic duress should not depend on whether the defendant genuinely believed that it had a defence to the claimant’s claim.

Lord Hodge holds that the New Agreement cannot be rescinded. Giving notice that the previous contract would be terminated and cutting the appellant’s ticket allocation was not reprehensible conduct in the sense used in the case law. The respondent’s genuine belief that it was not liable to pay the disputed commission further supports the view that its behaviour was not reprehensible.

Lord Burrows agrees with Lord Hodge that the appeal should be dismissed but disagrees on what is meant by illegitimate threats in relation to economic duress. As the threat or pressure is of a lawful act, the question of whether it is illegitimate should focus on the justification for the demand.

Judgment:

Press Summary:

Non-PDF judgment on BAILII:

 

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02 November 2020 Morning session Afternoon session
03 November 2020 Morning session Afternoon session