Today, we will examine the duress defense. If someone holds a gun to your head and demands that you sign a contract, that contract as you might suspect becomes voidable at your option. Threats of "Your Money" or "Your Life" do not produce valid evidence of welfare enhancing trade. But not all forms of duress are of this kind of physical threat. What if someone threatens to breach a contract, unless you agree to modify its terms? Economic duress can also make a contract voidable. We will explore the concept of economic duress in Austin v. Loral, decided by the Court of Appeals of New York in 1971. The defendant and buyer Loral is a frequent government contractor. Loral contracted with the US Navy to provide radar headsets. In order to have the necessary parts to make these radar headsets, Loral had to subcontract with the plaintiff and seller, Austin instrument. Loral was awarded a second Navy contract and informed Austin that Austin would be awarded only those subcontracts for which it was the lowest bidder. Austin, unhappy with this change, decided to play hardball. Austin threatened to cease delivery under its first subcontract unless the defendant agreed to a substantial increase in the contract price. Loral contacted 10 alternative precision gear manufacturers but couldn't find any that could provide the parts in time. Faced with the prospect of being unable to meet the government's deadline, Loral knuckled under and agreed to Austin's demands and awarded the second subcontract to Austin at the higher cost. After the parts were delivered, Loral refused to pay the full price. Austin brought sued to recover 17,750 bucks allegedly due on the second subcontract. Loral itself brought suit claiming recovery of the price increase on the first subcontract. The two actions were consolidated. The trial judge found for Austin in the first complaint and dismissed the second. The appellate division affirmed and the ensuing court affirmed as to the first action and reversed as to the second. So, what were the prevailing military exigencies mentioned in the opinion? Well, the answer is the Vietnam War. This is relevant because our soldiers lives were potentially at stake. If Loral couldn't produce the radar sets, then American soldiers might be killed. This important political background may have influenced the court's decision, and as a more general matter it's useful to keep track of whether there was an economic or military crisis happening when a court is deciding the case. The main issue in this case is whether a contractual modification, made under economic duress is voidable. The court found that yes economic duress can void a contract. Economic duress exists when three conditions are met. One, one party threatens to breach a contract. Two, the threatened party cannot cover their obligation with another source. And three, the ordinary remedy for a breach of contract is inadequate. The court found that all three of these conditions were met. In his dissent, Judge Bergan argued that a finding of economic duress relies on the determination of fact and that the trial court found no duress. More generally, the court attempted to define the legal standard for economic duress. It stated that, "A contract is voidable on the grounds of duress, when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will." Let's break down the key terms of this legal standard. The wrongful threat, in this case, was a threat to breach the contract. Why was failure to deliver a wrongful threat? Well, because there was a prior contract and a pre-existing duty to provide radar headsets. This is different from the skier hypothetical that we've discussed in past lectures, where a rescuer demands a million dollars to take a skier with a broken leg down a mountain because in this case the rescuer has no pre-existing duty to take the skier down the mountain. Here, Austin had a pre-existing duty to deliver the parts under this first contract. One of the key sources of duress is the failure of contractual damages. If expectation damages fully compensated the promisee for a breach of contract, there would not be anything threatening about a breach. The promisee could say, "Go ahead and breach, I won't even notice if you breach because, I'll be made whole and put in such a good position as if the breach had not occurred." But legal damages often do not fully compensate. Promisees are not awarded their attorney's fees and more importantly a promisor sometimes have shallow pockets and cannot pay the damages that are awarded. The duress doctrine therefore is a substitute for failure of damages in contractual actions. It's noteworthy that this court disposed of the case in terms of the duress element without so much as a mention of the pre-existing duty doctrine or UCC Section 2-209. Recall that 2-209-1 deals with modifications to contracts and states that, "A modification to an existing contract does not need consideration." But it does need to still be in good faith. Austin's attempt at modifying the contract in this case, was in bad faith. Can it ever be unlawful to threaten what one has a legal right to do? Well, on first glance it might appear that it's always lawful to threaten what one has a legal right to do, but this is actually not the case. A common counterexample is the threat of criminal prosecution as an improper means of inducing the recipient to a contract which constitutes a misuse for personal gain of the power given for other legitimate ends. The person making the threat is legally allowed to call the authorities and report a criminal violation, but the threat itself is still unlawful in the eyes of contract law. Even a threat of civil process may, under exceptional circumstances, be abusive. "If the threat is shown to have been made in bad faith." For instance, it's wrongful for a husband to threaten to inform the IRS of his wife's tax evasion if she does not sign a settlement agreement. Duress as such, is seldom recognized as an independent tort. The victim does not usually maintain an action for damages. In the usual case, duresses pleaded as a defense or as a basis for avoiding a transaction and securing restitution relief. Moreover, the issue seldom arises in connection with the initial contract formation. Most often, there is an attempt to bar enforcement of a contract, modification or a settlement agreement. Loral was an example of trying to stop the enforcement of a modification. There are two main types of duress discussed in the second restatement. The first is, physical duress. Normally, duress by physical compulsion prevents formation of a contract, whereas duress by other threats makes a contract voidable. Restatement Second Section 175 discusses how non physical duress, can render a contract voidable. "If a party's manifestation of assent is induced by an improper threat by the other party, that leaves the victim no reasonable alternative, the contract is voidable by the victim." Another related but separate concept is, undue influence. The rule for duress was developed by courts of law. While the rule of undue influence is similar to that of duress, it was developed by courts of equity. Undue influence is characterized by unfair persuasion that may fall short of constituting actual duress. The key is usually high pressure that approaches the boundaries of coercion, limited to situations where there is a relationship of trust or confidence such as a parent and child, a husband and wife or attorney and client. But it also can include dysfunctional relationships of domination. Undue influence has also been found where a confidential relationship, in the usual sense does not exist. In one case, a school teacher was arrested on criminal charges of homosexual activity and after conferring with school officials, submitted a letter of resignation the very next day. A month later, the criminal charges were dismissed and the teacher sued for rescission of the resignation and other appropriate relief. The court found that undue influence, "Over persuasion, " existed because of several factors including discussing the resignation at an unusual and inappropriate time, extreme emphasis on untoward consequences of delay, and stating that there is no time to consult financial advisers or attorneys. In summary, economic duress can render a contract voidable. The threat to breach of contract can constitute economic duress if the innocent party cannot cover its obligations from another source. An ordinary contract damages or inadequate. Physical duress usually prevents the formation of a contract whereas non-physical wrongful threats, render a contract voidable. Finally, many courts also recognize the defense of undue influence. High pressure exerted in relationships of trust or confidence or domination which can also render a contract voidable.
