On 14 May 2019, the Court of Appeals ruled the case Times Travel (UK) Ltd. (“Times Travel”) v Pakistan International Airlines Corporation (“PIAC”) and decided that the economic pressure exerted by PIAC against Times Travel in that context was lawful and not considered as economic duress.
From 2008 to 2012 Times Travel and PIAC were engaged in a contractual relationship which authorised Time Travel to sell PIAC flight tickets within the UK with a basic commission (the “Original Agreement”). At that time, PIAC was the only airline operating direct flights between Pakistan and the UK, and Times Travel’s business was almost entirely focused on that route and thus relied heavily on PIAC’s business.
Due to a dispute between Times Travel and PIAC relating to the rate and payment of the commission, in September 2012, the latter sent a notice to the former to terminate the Original Agreement. Such termination would end Times Travel’s appointment as a PIAC agent and heavily reduce their ticket allocation. Almost simultaneously, however, PIAC offered terms of re-appointment under a new agreement, which, among other aspects, required Times Travel to waive all claims to commission and remuneration under the Original Agreement (the “New Agreement”). In turn, Times Travel agreed to the terms of the New Agreement, since failing to do so would have resulted in the company going out of business.
Nevertheless, in 2014 Times Travel brought proceedings against PIAC, claiming that the New Agreement had been signed due to economic duress. Time Travel argued that PIAC had taken advantage of Time Travel’s dependence on PIAC’s business to negotiate the New Agreement with unfair terms for Time Travel.
In the first instance, the Court ruled that the New Agreement could be avoided on the grounds of economic duress. Times Travel’s almost total dependence on PIAC’s business made the former compelled to accept the terms of the New Agreement, which included the waiver by Times Travel to all previous commission. Such waiver, according to the Court, was a result of economic duress by PIAC.
Then, PIAC appealed against the above decision.
THE COURT OF APPEALS RULING
The key issue sustained by the Court of Appeal was when lawful act of duress (where an agreed term or condition results from a lawful act or omission) can be applicable.
In this sense, the Court of Appeal set out the following principles applicable to lawful act of duress: (1) the lawful act of duress cannot be applicable when the person exercising pressure to achieve a result believes, in good faith, that it is entitled to a certain demand; (2) the court will not examine whether or not there were reasonable grounds for such belief; (3) the lawful act of duress is only applicable when bad faith is proved; and (4) the lawful act of duress cannot be applicable if it affects the lawful use of a monopoly position.
The conclusion of the Court of Appeal was, therefore, that the lawful act of duress could not be invoked in the present case, considering the following:
First, the economic pressure was made by PIAC in a support which such company genuinely believed it was entitled to make, regardless of the reasonable grounds for the belief.
Second, lawful pressure applied in good faith will not be subject to claims of duress, but commercial pressure made in bad faith will. Where only lawful acts have been committed, economic duress cannot be used as a defence unless bad faith can be proved.
Third, the Court of Appeal further noted that the economic pressure that PIAC was able to apply in the present case (i.e., terminating the agreement and proposing new terms) resulted from its position as a monopoly supplier. The common law has repeatedly rejected the use of a monopoly position as grounds for setting contracts aside. The control of monopolies was, the Court said, a matter for statute, and it would be unprincipled to develop the doctrine of economic duress as a means of controlling the lawful use of monopoly power.
The Court of Appeal’s ruling in this case is important because it reminds us of the narrow nature of claims of duress, serving as a relevant indicator of the acceptable limits in a commercial negotiation and the circumstances in which the defence of duress may be available. While the parties cannot perform unlawful acts to exert illegitimate pressure (such as crimes, torts, breach of contract and bad faith), standard lawful acts (when the party that exerts pressure genuinely believes it is entitled to make it so) are acceptable forms of commercial pressure within the law. Additionally, the Court of Appeal’s ruling also reminds us of the importance of respecting contractual certainty.
To view the Court’s ruling, click here.
For more information and any guidance or advice on the lawful act of duress in commercial negotiations, Cleveland & Co External In-house counselTM, your specialist outsourced legal team, are here to help.