The Doctrine of Lawful Act Economic Duress: Will the PIAC Decision Impact Voidable Contracts in India?

By Vallari Dronamraju, Final Year Student at National University of Advanced Legal Studies, Kochi

Introduction

Coercion in Indian law that renders an agreement voidable, is considered as duress in English law.. In English law, a contract may be voidable on the same grounds as India (coercion, undue influence, fraud or misrepresentation) and set aside as the wrong was part of the process by which the victim’s consent was taken. The doctrine of duress will be applicable here, where one party threatens another party with a demand to be complied with and the threatened party accedes to this and enters into the contract. However, if the demand of the threatening party is unlawful (duress to person, goods, threatened breach of contract, or future[i] unlawful act), the contract may be set aside. Further, the doctrine of lawful act economic duress is a threat of serious financial consequences, that gives the threatened party no practical choice but to enter into the said contract.

On 19th August 2021, the United Kingdom Supreme Court (SC) in Pakistan International Airline Corporation v. Times Travel Limited (“PIAC Decision”), a landmark judgement, ruled that under the doctrine of lawful act economic duress, unless the condition for a contract is in bad faith, the contract will not be deemed to be invalid. The author in this article aims to explore the concept of lawful act economic duress and the conditions that lead to a voidable contract in the context of the PIAC decision and the Indian contractual structure of economic duress.

The English Law on Voidable Contracts

English commercial law aims to encourage fair exchange between parties. Under this, economic duress as a defence in a contract renders it voidable when a party exerts illegitimate pressure on another party, wherein the threatened party has no choice but to comply. There is no particular principle that is contrary to recognising economic duress as a factor for a voidable contract, provided that the basis of such a recognition amounts to coercion of will, vitiating consent. It is necessary that the contract entered into, or payment made is not a voluntary act.

Further, in the case of CTN Cash and Carry Limited v. Gallagher Limited, the Court of Appeal held that in a purely commercial contract, lawful act duress is difficult to establish especially if the defendant has acted in good faith. It also observed that there could be a future possibility of lawful act duress in a commercial sense and that threatened withdrawal of future credit was not duress. Yet, this introduced an undesirable element of ambiguity in commercial bargaining processes. This point of law was later clarified in the PIAC decision.

The Primary Considerations of the PIAC Decision

The factual matrix of the case of 2019, i.e., Times Travel Limited v. Pakistan International Airlines Corporation (Appeal), entails the commercial contract between the claimant, a travel agent (Agency) that sold tours to Pakistan, and the defendant, Pakistan International Airlines Corporation (PIAC). The Agency’s business depended on an agency agreement with PIAC which was at the time the sole operator of direct flights between the United Kingdom and Pakistan. These parties were trading under the agreement that provided that the Airline pay a flat rate of commission on sales by the Agency, which the Agency claimed that PIAC owed between 2009 and 2012.

In 2012, PIAC served a notice to the Agency that terminated the agreement and reduced the allocated number of tickets by 80%. The Agency was subsequently presented an agreement which when complied with, would increase ticket allocation significantly but the claim of the previously unpaid commission would be waived. By agreeing to the terms of the new agreement, the Agency’s ticket allocation was restored, however, it initiated its claim for unpaid commission on the grounds of economic duress. The Court of First Instance decided in favour of the Agency and observed that PIAC had acted illegitimately.

The Court of Appeals held that a threat made in good faith by a company would not constitute illegitimate pressure for economic duress, even if the threat was potentially reasonable or if the person is entitled to do so in good faith. For the act to be invalid and unlawful, there must be deliberate wrongdoing or an illegitimate action that would include an act that is morally or socially unacceptable.

The Agency took this decision to the SC, but it unanimously upheld the decision of the Court of Appeal. The SC laid down three elements to be established for a claimant to rescind a contract on the grounds of economic duress including illegitimate threat, sufficient causation, and that the threatened party had no reasonable alternative other than giving in to the threat. If the threat is lawful, the illegitimacy must be determined by looking into the intention and justification of the demand. In addition to this, the SC went on to hold observe that the boundaries of the doctrine of lawful act duress are not limited and the courts should approach any expansion with caution.

The Doctrine of Economic Duress in India and Voidable Contracts

Section 10 of the Indian Contracts Act, 1872 determines the constituents of a valid contract that includes free consent. Free consent as expressly provided in Chapter II of the Indian Contracts Act, 1872 (“Act”) does not explicitly provide for economic duress as a vitiating factor but can be understood as an invalidating factor through liberal interpretation. Section 13 and 14 of the Act define consent and free consent respectively. Section 19 of the Act explains the factors leading to voidability of agreements without free consent, which include coercion, fraud, or misrepresentation, and Section 19A makes an agreement that has been caused by undue influence, voidable.

Further, the SC in the PIAC decision observed that a demand that is motivated by commercial self-interest is justified. In the Indian case of Dai-ichi Karkaria Private Ltd., Bombay v. Oil and Natural Gas Commission Bombay and Ors., the court ruled that business compulsion would amount to economic pressure if two ingredients were fulfilled, i.e., pressure leading to changes in the will of the victim and the illegitimacy of the exerted pressure. Economic duress is, therefore, the combination of illegitimate pressure and the absence of practical choice. The existence of real and apparent authority and the unequal positioning of the parties are imperative to establish the existence of duress. Thus, in India, a contract that is affected by lawful act economic duress will be voidable. However, India does not have a judicial decision at present on whether a lawful or unlawful act of economic duress in specific, will affect the validity of a contract.

Impact on the Contractual Environment in India and UK

Through Indian decisions and the PIAC decision, it is clear that the law of economic duress acts as a ground for treating contracts voidable. It is intriguing to note that, Indian courts have time and again referred to common law decisions to determine social, economic, governance, and contractual issues. In Central Inland Water Transport Corporation Ltd. v. Brojo Nath, several common law cases were accepted, and it was stated that Courts in England recognised the possibility of an unconscionable bargain which that could be brought about by economic duress between parties who have different economic statuses.

Conclusion

It is evident that the courts in India and UK have based their opinions on the consent of the parties where the doctrine of lawful act is extended to economic duress. The Indian courts have interpreted the clause of economic duress by making such agreements voidable. The UK courts went a step ahead with the PIAC decision wherein a narrow approach was introduced wherein only if a mala-fide intent is observed in the condition that has been imposed by the contract, then it would be considered void. It would be interesting to see if the Indian courts adopt the finer approach of the UK courts or a wider understanding through the judicial decisions that have been previously awarded in India. The PIAC decision will thus pave the way for a progressive mechanism in the doctrine of economic duress, by making it narrower in implementation. The voidability of contracts in UK and India will see a modification in the contractual obligations and consent given by parties, thus giving the judicial system intricate considerations whilst deciding the validity of a contract.


[i] Chitty on Contracts, Sweet & Maxwell, 30th Ed., p. 7-37 (2011).