For economic coercion to be applied, there is an additional element: this is the first time that the Supreme Court has clarified the doctrine of legal coercion, confirming its existence in English law and clarifying the importance of the illegitimate threat associated with the coercion of lawful acts. It further limited the extent to which a legal act that forces the defence could succeed, but left the door open for its borders to be drawn in the future. The principle of the illegal act of economic coercion is well established in English law. A threat of violence or a threat of breach of contract.B, i.e. forcing a party to accept a modification of the contract on unfavourable terms, is likely to be the basis of illegal economic coercion. Provided that the party receiving the coercion acts reasonably quickly, the contract may be cancelled. The Supreme Court ruled that there was no evidence that the defendant had used improper means to put the plaintiff in a position of vulnerability. Under existing contractual agreements, the defendant had the right to reduce the plaintiff`s flight allocation and terminate the contract with one month`s notice. Although the „take it or leave it” offer to the plaintiff to sign the new contract (which waived any claim for unpaid commission) amounted to „persistent business negotiations that exploited [the defendant`s] position as a monopoly supplier”,” it was not an unscrupulous means of pressure that would lead to legal economic coercion. The defendant`s sincere belief, as determined by the High Court, that she had a defence against the plaintiff`s claim was further evidence that her conduct was not unscrupulous.
„Both judges stressed the importance of clarity and certainty in commercial law, which means that the concept of legal coercion should not be too widespread.” The majority agreed that if „a person is authorized to do something, he or she is generally authorized to do so for any reason or no reason. In the context of contract negotiations, this position allows people to know where they stand and provides certainty about what is acceptable behavior in the negotiation process, but it leaves many forms of socially offensive behavior unchecked. Again, this is a solid foundation, as judges should not, as a general rule, be the arbiters of what is socially unacceptable and impose legal consequences on such conduct. 1 The plaintiff, Times Travel (UK) Ltd („TT”), was a travel agency whose business was almost exclusively focused on the sale of airline tickets for the defendant, Pakistan International Airlines Corporation („PIAC”), was instructed. A legal dispute arose in connection with TT`s request for the payment of commissions, which PIAC truly believed were not due. PIAC threatened TT with legally terminating its contractual relationship unless TT waived all of its rights to these payments. As a result, TT entered into a new contract with PIAC, which exempted it from its payment obligations under the old agreement, but then attempted to circumvent the new contract on the basis of legal coercion in order to recover the commission due. The key question was whether a treaty could be avoided if it was concluded under pressure with the threat of doing something legitimate. The applicant subsequently brought an action for recovery of the unpaid commission of the previous contract, claiming that the new contract had to be terminated because of an economic constraint.
At first instance, the High Court ruled in favour of the plaintiff, but acknowledged that the defendant sincerely considered that the commission was not due. On appeal, the Court of Appeal held that, since the termination of the previous contract was lawful, coercion could only be established if the defendant had acted in bad faith during negotiations with the plaintiff regarding the new contract. Since the defendant did indeed have a defence against the Commission`s appeal, the High Court`s decision was set aside. The applicant appealed to the Supreme Court. However, Lord Hodge (with whom the other judges agreed) focused on the influence of equality and the notion of „lack of scruples” on the development of the right to coercion, noting that in cases where the English courts found legal coercion, the courts treated the conduct in question as unscrupulous and used „illegitimate” as a synonym for „unscrupulous”. Lord Hodge added that lack of scruples is not a primary criterion that must be applied widely, regardless of the context, noting that justice takes into account the factual and legal context of a case. TT then initiated proceedings against PAC to recover the unpaid commission. TT argued that it could repeal the new agreement due to a legitimate economic deficiency. At first instance, the trial judge agreed with TT. The Court of Appeal upheld PAC`s appeal and ruled that legal economic coercion does not apply when a party exerts legal pressure that it believes in good faith to achieve the desired result. Both judges stressed the importance of clarity and certainty in commercial law, which means that the notion of legal coercion should not be too widespread.
They rejected the appeal for a general principle of good faith, noting that there is no doctrine of unequal bargaining power in English law, meaning that the parties can generally pursue their own interest in trade negotiations, and agreed that this would only be a rare case of legal coercion in such negotiations. They also considered it appropriate to focus on the nature and justification of the claim and not on the legality of the threat or pressure. The Court`s minority decision advocated an alternative approach to determining the illegality of a threat or pressure. Legal coercion in connection with a claim waiver request requires that the claim be made in bad faith. In other words, TT would have been successful if PIAC had not really believed that it had a defense against TT`s claim for the payment of commissions. At first instance, the court sided with TT and ruled that it was entitled to cancel the new contract for economic reasons. However, the Court of Appeal reversed this decision, finding that PIAC was legally entitled to terminate its original contract with TT, so the threats to do so were lawful. Coercion could only have been established if PIAC`s claims that TT should waive commission for the contract had been inadmissible, which the court interpreted as bad faith.
There was no indication that PIAC was acting in bad faith in making its requests, so the new contract could not be avoided. Our article on the Court of Appeal`s decision in March 2020 is available here. The court ruled that there are two essential elements that a plaintiff must prove to terminate a contract due to coercion: However, it is clear that the argument of economic coercion in a commercial context is not for the faint of heart. The Supreme Court of the United Kingdom unanimously upheld the Court of Appeal`s decision to dismiss TT`s appeal. The court ruled that the economic pressure exerted by PAC was legal and did not constitute economic coercion. The Court recognized the controversy surrounding the doctrine of legal coercion, in part because of widespread fears of disrupting commercial security. However, the judgment unanimously stated that the doctrine of the lawful act „exists and should exist” under the English Repeal Act, but that it should be applied restrictively in a commercial context. The Court of Appeal and Lord Burrows (in his dissenting judgment) concluded that there are lawful acts of coercion when a legitimate claim is made in bad faith. However, the majority of the Supreme Court rejected this view. „A `bad faith claim` based on an allegation that already exists may not be a rare event in business.
Implausible behavior can be a characteristic of business activities. This is a controversial topic and it is not difficult to understand why. As Lord Burrows noted, many contracts are entered into in circumstances involving some form of pressure, both in commercial and non-commercial contexts. If such pressure is unlawful, it is clearly appropriate that the other party is entitled to terminate this contract. However, allowing a party to avoid a contract on the basis of legal pressure could lead to uncertainty and disruption, especially for commercial parties. Economic coercion after legal action can only be expected in situations where the threatening party behaves in an unscrupulous manner that the court considers illegitimate pressure. In case law, the doctrine has been applied in two circumstances. First, when a defendant exploits knowledge of criminal activity.
Second, if a defendant maneuvered the plaintiff into a weak position to force him to waive a claim. Although the Supreme Court has made it clear that the doctrine is not limited to these circumstances, its decision should be used to restrict the application of the doctrine in other areas. The line between bad faith (not enough for economic coercion) and morally reprehensible behavior (enough for economic coercion) is not always easy to see. The examples to which the majority referred concerned breaches of their obligations or dishonesty. In the present case, it was common ground that the applicant had concluded the new contract under pressure from the defendant and that it had no reasonable alternative to it ….