Economic Duress - Does 'Lawful Act Duress' Exist?

• Published date: 25 August 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation
• Law Firm: Gowling WLG
• Author: Mr Andrew Smith and Christopher Richards

Where one party induces another to enter into a contract by applying threats or pressure, that contract is liable to be set aside for economic duress. It is well established that threatening some unlawful act (for instance threatening to breach a contract or commit a tort) can give rise to economic duress. More controversial though is whether, and in what circumstances, threatening to commit a lawful act (e.g. threatening to exercise a contractual termination right) can amount to economic duress. These were the questions the Supreme Court grappled with in its judgment in Pakistan International Airline Corp v Times Travel (UK) Ltd.

The resulting decision is important for those negotiating and operating commercial contracts - particularly where the parties have unequal bargaining power.

Summary

• Threatening to do something lawful can, in certain circumstances, amount to economic duress; such that any agreement procured by the threat can be set aside.
• However, for a lawful act to be deemed to amount to duress illegitimate pressure must be applied.
• Illegitimate pressure is more than simply hard-nosed commercial self-interest or leveraging a bargaining position. The pressure must be morally reprehensible; such that it is unconscionable to enforce the agreement induced by that pressure.
• 'Lawful act economic duress' therefore has very limited scope of application in commercial dealings - it will apply only in rare exceptional cases.

Background

For background on economic duress in general, see our article 'The Basics: How easy is it to distinguish between rigorous commercial bargaining and economic duress?'. For a summary of the background facts and lower court decisions in this particular case, see our earlier article on the Court of Appeal's decision.

In short though, threatened with no longer being able to sell the airline tickets that were the mainstay of its business as a travel agent, Times Travel agreed to waive claims it had against the airline for unpaid commission on past ticket sales. Times Travel nonetheless subsequently sought to pursue those claims, asserting that its waiver was procured under economic duress and so should be set aside. The Court of Appeal held that the pressure exerted by the airline did not amount to economic duress, effectively meaning the waiver was binding and Times Travel could not pursue its claims for commission. Times Travel appealed to the Supreme Court.

Supreme Court appeal

As this is the first time the Supreme Court has...