Setting Aside a Contract

August 18th, 2021

The issue before the Supreme Court in Pakistan International Airline Corporation v Times Travel (2021) UKSC 40 was whether, and, if so, in what circumstances, a party can set aside a contract on the ground that it was entered into as a result of the other party threatening to do a lawful act. The Supreme Court examines the elements of the doctrine of lawful act economic duress.

There are 2 essential elements that a claimant needs to establish in order to rescind the contract: (1) the threat of pressure by the defendant must have been illegitimate (rather than unlawful); and (2) the threat of pressure must have caused the claimant to enter into the contract. Economic duress has a 3rd element in addition: the claimant must have had no reasonable alternative to giving in to the threat or pressure. The threat can however be a threat of lawful action.

As to what constitutes “illegitimate” threats or pressure, this may occur in either of 2 circumstances: (1) where a defendant uses their knowledge of the criminal activity of the claimant or a person close to the claimant to threaten the claimant; and (2) where the defendant, having exposed himself to a civil claim by the claimant, uses “reprehensible” or “unconscionable” means to manoeuvre the claimant into a position of vulnerability in order to force him to waive his claim.

It will be rare that a Court will find lawful act economic duress in the context of commercial behaviour in commercial negotiation. The scope for lawful act duress in contractual negotiations is extremely limited. It remains the case that in contracting there is no general principle of good faith, albeit the reasonable expectations of honest people when they enter into contracts are sought to be protected,  and no doctrine of inequality of bargaining power, albeit such inequality may be a relevant feature in some cases of undue influence.

Comments are closed.