Travel agent loses Supreme Court appeal alleging lawful economic duress by monopoly supplier

The UK Supreme Court has dismissed an appeal by a travel agent against a decision that it could not set aside a contractual agreement with an airline with a monopoly on flights between the UK and Pakistan for reasons of lawful act economic duress.

Times Travel UK had originally brought a claim against Pakistan International Airline Corporation for unpaid commission from the parties’ previous contractual arrangement. The respondent argued that it had been entitled to dismiss the original contract and its conduct did not amount to economic duress.

The appeal was heard by the President of the Supreme Court, Lord Reed, sitting with the Deputy President, Lord Hodge, and Lord Lloyd-Jones, Lord Kitchin, and Lord Burrows. Philip Shepherd QC appeared as lead counsel for the appellant and Nigel Jones QC for the respondent. Interventions were also made by Ukraine, the Law Debenture Trust Corporation Plc, and the All-Party Parliamentary Group on Fair Business Banking.

Genuine belief

The business of the appellant consisted nearly exclusively of selling airline tickets to and from Pakistan. The respondent was the only airline that operated these flights, for which it allocated a number of seats per flight to the appellant. Under the terms of the parties’ original contract, which could be terminated by the respondent with one month’s notice, it paid the appellant a commission based on the number of tickets it sold.

Around 2012, a dispute arose when the appellant and other travel agents alleged that the respondent had not been paying them certain commission payments between 2010 and 2012, which were said to total some £1.2 million. Following a number of legal claims, which the appellant was not part of, in September 2012 the respondent cut the number of tickets allocated to the appellant and gave the stipulated notice for termination.

A new contract was proposed, under which any previous liability for commission payments by the respondent was waived. The appellant alleged that it accepted the new contract as otherwise it would have been put out of business, and subsequently sought to have it reduced on the grounds of economic duress.

The trial judge at first instance held that it was entitled to reduce the contract on grounds of duress but that the respondent had genuinely believed the commission was not due. The respondent appealed this decision.

On appeal, the Court of Appeal held that, as the relevant threat was lawful, it had to be established that the respondent had acted in bad faith in demanding that the appellant give up its claim for commission. As it had been found that the respondent genuinely believed it did not owe the disputed amounts, it had a defence to lawful act duress. The appellant challenged this finding in the Supreme Court.

Hard-nosed negotiation

Delivering the leading judgment, with which Lords Reed, Lloyd-Jones and Kitchin agreed, Lord Hodge summarised the law of lawful act economic duress, saying: “There are to date two circumstances in which the English courts have recognised and provided a remedy for such duress. The first circumstance is where a defendant uses his knowledge of criminal activity by the claimant or a member of the claimant’s close family to obtain a personal benefit from the claimant by the express or implicit threat to report the crime or initiate a prosecution.”

He continued: “The second circumstance is where the defendant, having exposed himself to a civil claim by the claimant, for example, for damages for breach of contract, deliberately manoeuvres the claimant into a position of vulnerability by means which the law regards as illegitimate and thereby forces the claimant to waive his claim.”

Lord Hodge went on to say: “There is no doctrine of inequality of bargaining power and no general principle of good faith in contracting in English law. A commercial party in negotiation with another commercial party is entitled to use its bargaining power to obtain by negotiation contractual rights which it does not have until the contract is agreed. A powerful commercial party, such as a monopoly supplier or monopoly purchaser, can impose onerous terms, for example demanding a premium, as a condition for entering into a transaction with another party.”

Addressing the Court of Appeal’s judgment, he said: “The court was correct to conclude that it would be rare that in a commercial context the use by A of lawful pressure to induce B to concede to a demand would amount to economic duress. Significantly, there are no findings that PIAC had used any reprehensible means to manoeuvre Times Travel into a position of increased vulnerability in order to exploit that vulnerability.”

Lord Hodge concluded: “PIAC gave Times Travel a ‘take it or leave it’ option: to sign the new agreement with the waiver and thus regain its prior allocation of tickets, or its agency would come to an end on the expiry of the existing contract. While this entailed hard-nosed commercial negotiation that exploited PIAC’s position as a monopoly supplier, it did not involve the reprehensible means of applying pressure which gave rise [to] findings of lawful act economic duress. There are also no findings that PIAC acted in bad faith in making the demands which it did.”

For these reasons, the appeal was refused. A concurring judgment was written by Lord Burrows, who mainly agreed with Lord Hodge but differed on points relating to whether lawful act economic duress had been established.

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