Pakistan International Airline Corp v Times Travel (UK) Ltd, released earlier today, is the first time that the Supreme Court has considered the doctrine of economic duress. The court’s judgment is admirably clear, but many will find it disappointingly conservative.
The court held that economic (or “lawful act”) duress exists and has confirmed its key elements, but emphasised its narrow extent. The court identified just two situations to date where it has applied, and declined to endorse any principled basis for its extension, even where the threat is used to enforce a demand made in bad faith.
This blog post summarises the decision and contrasts it with alternative iterations of the doctrine, including that proposed in Lord Burrows’s powerful minority judgment. The authors of this blog, who acted for the All-Party Parliamentary Group on Fair Business Banking (APPG) as intervener, conclude by a discussion of the judgment’s implications for the consumer banking sector.
Where a person seeks to set aside a contract on the ground that it was entered into under duress, what needs to be shown to make good the claim? Must the conduct that is said to have put the person under duress have been, in itself, unlawful? If not, what are the criteria for discerning whether there was or was not duress?
These were the questions which came before the Supreme Court in this appeal. They do not have easy answers. While duress comprising unlawful acts, such as the threat of violence or the seizure of goods, has long been recognised, the proposition that a threat to carry out a lawful act can amount to duress has engendered judicial uncertainty.
The questions arose because a small travel agent, Times Travel, whose business was the sale of tickets to fly on Pakistan International Airlines, the national flag carrier airline of Pakistan (PIAC), was pressured by PIAC to waive claims for unpaid commissions under its old contract with PIAC, under the threat of PIAC not entering a new contract. PIAC had no obligation to enter the new contract, but its threat placed Times Travel in the position of having no viable alternative but to waive its pre-existing claims. Times Travel did so, but later argued that the waiver should not bind it in light of the circumstances in which it had been obtained.
By the time of the Supreme Court hearing, Times Travel advocated a broad iteration of economic duress based on a multi-factor approach, similar to that adopted in Patel v Mirza in respect of illegality. PIAC, in contrast, suggested that economic duress should be abolished, or in any event applied narrowly.
The Supreme Court hearing featured three interventions. Members of the APPG had long been concerned about the way in which banks sometimes exploit the strength of their bargaining position as against small and medium-sized business customers. In particular, banks have often pressured customers to sign away claims and complaints, or to enter into new and more onerous terms, or both, as the price of avoiding enforcement action and enjoying continued banking support. The APPG intervened to explain its experience of bank customers being placed under lawful but illegitimate pressure. It advocated a restatement of the doctrine based on the principle of good faith.
The two other interveners were Law Debenture Trust (the Trustee) and the State of Ukraine, on opposite sides of pre-existing Supreme Court proceedings, in which they await judgment. In the pre-existing proceedings, the Trustee is trustee of notes with a nominal value of USD3 billion issued by Ukraine. The sole subscriber of the notes was the Russian Federation. The principal amount of the notes fell due for payment in 2015. Ukraine has claimed that it is entitled to avoid the notes for duress arising from allegedly unlawful threats made by the Russian Federation against Ukraine. The Trustee intervened in Times Travel to argue that lawful act duress should be abolished. Ukraine adopted an opposing position.
The judgment comprises two parts. First, a judgment by Lord Hodge, with which all but Lord Burrows agreed. Second, a minority judgment by Lord Burrows. Lord Burrows’ judgment is longer and sets out more background. One is left with the impression that Lord Burrows wrote his judgment believing it would probably be the majority decision.
The whole panel agreed on many aspects of the doctrine. Those included that lawful act duress exists, and that its essential elements are that:
- There is a threat (or pressure exerted) by the defendant that is illegitimate.
- The illegitimate threat (or pressure) caused the claimant to enter into the contract.
- The claimant had no reasonable alternative to giving in to the threat (or pressure).
The court (in the majority judgment) went on to hold that “the boundaries of the doctrine of lawful act duress are not fixed and the courts should approach any extension with caution”. The court identified just two circumstances where economic duress has applied to date, being:
- Exploitation of knowledge of criminal activity by the claimant (or those associated with it).
- Using illegitimate means to manoeuvre the claimant into a position of weakness to force it to waive its claim.
The court did not say that lawful act duress only ever applies in those two circumstances. Rather, those are given as the only instances there have been of the application of what appears to be the general principle, namely that the law will treat as “illegitimate”, for these purposes, conduct identified by equity as giving rise to an agreement that it is unconscionable for the party which had conducted itself in that way to seek to enforce.
However, the court made it abundantly clear that the doctrine should be applied restrictively and rarely. The judgment therefore undoubtedly reflects a narrowing of the doctrine.
Rejection of alternative approaches
That narrowing was reflected, among other ways, by the rejection by the court of various alternative iterations. Those included:
- An approach based on bad faith, where the defendant did not genuinely believe that it had a defence to a pre-existing claim (that is, a “bad faith demand” that the claim be waived) and the defendant deliberately created or increased the claimant’s vulnerability to that demand, as advocated by Lord Burrows.
- An approach based on good faith, as advocated by the APPG.
- A multi-factorial approach, as advocated by the appellant.
- An approach based on transposing the elements of blackmail, as advocated by Leggatt LJ (as he then was) in Al Nehayan v Kent.
Implications for consumer banking
Relationships between banks and their customers are characterised by a particularly stark inequality of bargaining power. Indeed, inequality of bargaining power was the common thread which Lord Diplock MR identified in Lloyds Bank Ltd v Bundy, as tying together duress, undue influence and unconscionable bargains.
The Times Travel judgment will give scant reassurance to bank customers. Considering the two circumstances identified by the court as amounting to economic duress to date, the first, exploitation of knowledge of criminal activity by the claimant is likely to be irrelevant to most borrowers.
The second, using illegitimate means to manoeuvre the claimant into a position of weakness to force it to waive his claim, could be relevant. A typical banking example is where a claimant customer has a good claim against a defendant bank, for example, for mis-selling of a swap, but is forced to waive that claim by the bank threatening to call in a loan in default. This raises grey areas, for example in relation to a claimant who can show that the default was caused by the mis-selling, or a claimant who can show that the default was in bad faith, such as (as the claimant would argue) being for the purposes of obtaining the waiver.
However, ultimately, this is a conservative decision which restricts the doctrine in a way that is unhelpful for bank customers. Many will find it disappointing that the court has given parties a licence to make bad faith demands backed up by lawful threats when, in the banking context, there is such an inequality in parties’ contractual positions. From that perspective, it is disappointing that the approaches adopted not only by the APPG and appellant in submissions, but also by eminent judges such as Lord Burrows, Lord Leggatt and David Richards LJ (in the Times Travel Court of Appeal decision) were not adopted.
The upshot for bank customers is that economic duress claims will be harder to win than before. This reinforces the case for bank customers to have fuller and more robust protection, especially SMEs who are in vulnerable positions, yet largely outside the FCA’s regulatory perimeter.