In a typical old-time cowboy movie, there is always a scene where the bad guy says something like, “Give me the deed to your ranch or I'll shoot you.” Without question, the rancher's signature would be obtained by duress and the transaction would be void. But what of economic duress not involving physical threats? For example, “Drop your claim or I will not make final payment.”
The courts have long struggled to apply the concept of economic duress as a basis for nullifying a contract or other financial arrangement. Many types of duress are lawful-for example, the threat of foreclosure for nonpayment on a note or the threat of default termination for failure to achieve scheduled progress.
Other types seem wrong and, we think, should not be allowed. In one of my cases, the owner threatened to withhold liquidated damages unless the contractor agreed to extend his warranty period. That was surely analogous to a “gun to the head.”
Restatement of contracts and torts
Restatements are compilations and reformulations of the laws of the states drafted by scholars and practicing attorneys in an effort to make some logical sense of massive amounts of court decisions and to propose improvements.
A restatement is not the law unless the courts in that state have adopted at least part of it. In some jurisdictions, for example, economic duress is accepted as a civil wrong (a tort) giving an injured party rights to set aside a contract or to obtain monetary damages. The concept is a part of the Restatement (Second) of Torts, but in other states it is addressed as a contractual issue as set forth in the Restatement (Second) of Contracts.
The contracts versus torts distinction is important. If an act is treated as a civil wrong, punitive damages may be recoverable, and the place where the lawsuit can be brought is affected.
In contrast, if the act is considered a contract issue, duress is an argument for setting aside a charge order on an entire contract.
In Houston North Hospital Properties v. Telco Leasing, Inc., 688 7.2d 408 (5th Cir. 1982), the court adopted the civil wrong approach. It cited the Restatement (Second) of Torts and held:
“The primary purpose of making exertion of economic duress a tort is to deter or punish the misuse of economic power, not to compensate the plaintiff for its injuries. Therefore, the state where the conduct took place ... is [the proper venue].”
With this reasoning, the tort claim was not considered to be merely a rephrasing of a contract claim. As such, it could be used to defeat a forum selection clause in the contract.
On the other hand, the United States Court of Federal Claims has held that economic duress is a contractual issue. This court, therefore, adopted the relevant portions of the Restatement (Second) of Contracts in Davis Nassif Assocs. v. U.S., 644 7.2d 4 (Ct.Cl. 1981).
In either case, economic duress can be the basis for a lawsuit. In order to know what kinds of recovery are available and how to formulate your claim, you need to consult your state's law.
Reported cases in this area are enormously fact-specific, making generalizations a chancy business. In large part, there is a dominant aspect of “fairness” which, in many ways, puts economic duress in the proverbial eye of the beholder. Hard-nosed negotiations and business maneuverings are not enough, but the other extreme of threats of physical harm are not needed either.
In David Nassif, the following contractual approach was explained:
“To render an agreement voidable on grounds of duress it must be shown that the party's manifestation of intent was induced by an improper threat which left the recipient with no reasonable alternative save to agree.”
Translated, two elements are necessary: (1) an improper threat, and (2) no reasonable alternative but to accept. These are not easy criteria to prove.
1. The owner refused to take occupancy of a building, an event that would trigger final payment among other things, until the contractor signed an extended maintenance agreement. A court found no duress.
2. The government's delay in reaching settlement of the contractor's claims took advantage of the contractor's deteriorating financial condition. No duress.
3. The owner threatened to deny a valid claim unless the contractor withdrew an unrelated claim. Duress.
4. The owner threatened to terminate a contract for default unless the contractor withdrew its delay claim. Duress.
Fruhauf Southwest Garment Co. v. U.S., 126 Ct. Cl. 51 (1953), defines duress as: “[T]he mere stress of business conditions will not constitute duress where the [other party] was not responsible for those circumstances.”
In other words, if a company is financially strapped for reasons unrelated to the contract at issue, its weakened negotiation position does not lead to a claim of unfair advantage. There must be a showing of bad faith (an improper threat) on the part of the coercing party that led to a lack of will to fight for the other party. An extremely broad rendition of this criterion is from Aurora Bank v. Hamlin, 609 S.W. 2d 486 (Mo. App. 1980):
“Duress occurs if threats caused the party ... to be deprived of the free exercise of his will power.”
Consider a circumstance where the contractor is required to sign a final waiver of liens and claims in order to obtain final payment, and the owner had no back charges. The contractor desperately needed his retention, but also could not afford to withdraw its sizeable claims, which he believed were legitimate.
Facts similar to these were involved in R.M. Taylor, Inc. v. General Motors Corp., 187 F.3d 809 (8th Cir. 1999). Taylor ended up in bankruptcy and alleged that GM's economic coercion caused his losses. The jury's verdict in Taylor's favor was overturned on appeal. Although the doctrine of economic duress was not expressly invoked in Taylor, the facts in that case fit the pattern of duress.
Taylor had six design-build contracts with GM, ranging in size from $2.7 million to $14.2 million. During construction, GM used “emergency field orders” (EFOs) to require Taylor to incur more than $20 million in extra costs for these projects. The issuance of EFOs meant that Taylor had to fund the changes and negotiate for added money later.
Taylor argued that GM exhibited an intent to abandon the contracts by ordering too many changes, using EFOs and abusing the negotiation process to intentionally delay payment of field orders and leverage Taylor into accepting less money for its work.
The Catch-22 was that Taylor ran short of cash, could not fully pay its subcontractors and, unless Taylor signed lien waivers, could not obtain payment even for progress billings. The court decided that Taylor was at fault because “the primary cause of the delay in payment was [Taylor's] failure to submit lien waivers from subcontractors.”
As an aside, the appeals court evidenced a shocking naiveté by saying that Taylor could have protected itself by demanding a contract clause requiring GM to pay for “impact costs” caused by EFOs.
Economic duress is a difficult claim to prove, especially between two experienced business entities. As a result, whether in tort or contract, the allegations of overreaching, bad faith, coercion, threats, etc., tend to be arguments of last resort. That being said, there are many instances where the concept of economic duress applies and can be used to right wrongs. EC