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New York Court of Appeals - 29 N.Y.2d 124
Tags: Contracts, Duress, Economic duress
tl;dr:
A subcontractor threatened a general contractor with the denial of performance if the general contractor did not grant the subcontractor other bids and pay them more.Video Summary
Case Summary
In the case of Austin Instrument, Inc. v. Loral Corp. (1971), Austin Instrument sued Loral Corp. for payment after supplying gear components for the US Navy under two contracts. Loral counterclaimed for damages, claiming economic duress. After the initial contract began, Austin demanded a significant price increase for all parts already received and scheduled for shipment. If Loral refused, Austin threatened to stop their deliveries. As no alternative suppliers were available, Loral agreed to pay the higher rate under protest. Loral only paid the original price, however, and Austin sued for the remaining balance.
Initially, Austin won at trial and Loral's counterclaim was dismissed. However, the Court of Appeals reversed this and called for a new trial, stating that Loral had valid grounds for claiming economic duress. The court applied the test of economic duress, asking whether one party was forced into agreement due to a wrongful threat that doesn't allow free will.
The court found that Austin had wrongfully threatened Loral by demanding higher prices after the contract had been agreed upon. Without alternatives, Loral faced penalties if they couldn't meet their Navy contract. Therefore, the court decided that Austin took advantage of Loral's urgent need, and coercively made them agree to new prices.
This case demonstrates the legal principle of economic duress, a valid reason to avoid a contract if one party acts oppressively or unfairly towards another, thereby undermining the voluntary consent needed to form a contract.
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Loral Corporation is seeking payment for goods delivered under a contract with Austin Instrument, Inc. Loral claims that it was forced to agree to an increase in price due to economic duress. Austin refused to accept an order for less than all 40 gear parts and threatened to cease deliveries of the parts unless Loral consented to substantial price increases and placed an order for all 40 parts needed under Loral’s second Navy contract. Loral eventually acceded to Austin’s demands due to military exigencies. The court held that Loral failed to prove that it could not have obtained the items from other sources in time to meet its commitment to the Navy under the first contract. However, the higher court found that Loral was a victim of economic duress, which is when someone is forced into a bad deal because of threats or pressure. The lower courts made a mistake by saying that Loral did not prove they were forced into an unfair economic situation. The law applicable to the case is clear and undisputed by the parties. A contract can be voided on the grounds of duress if it is proven that one party was forced to agree to it due to a wrongful threat that prevented them from exercising their free will. Economic duress or business compulsion can be established if immediate possession of necessary goods is threatened or if one party threatens to breach the contract by withholding goods unless the other party agrees to further demands.
Judge Bergan dissents from the majority opinion and argues that the issue of whether Loral's acts caused damage or not was already resolved against them by the lower courts and should not be reconsidered. However, there are conflicting testimonies from witnesses regarding the renegotiation request made by Austin. The Appellate Division concluded that Loral acted voluntarily and deliberately without immediate pressure, which precludes a recovery on the theory of economic duress. The majority of judges agree with this decision, while Judge Bergan and Judges Breitel and Jasen disagree. The order will be made accordingly.
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