Economic Duress- Austin Instrument, Inc. v. Loral Corp. Citation: Austin Instrument, Inc. v. Loral Corp, 35 A.D.

2d 387 (1970) Parties: Austin- Plaintiff/Appellee/subcontracted by Loral to supply parts Loral- Defendant/Appellant/contract by Navy Facts: Loral was contracted by the US Navy to produce radar sets. Loral subsequently subcontracted Austin for parts and assemblies for the sets. After Austin began performing under the initial subcontract, Loral accepted another contract from the government. At about that time, Austin demanded retroactive price increases on the items from the first subcontract and also demanded that it be given the entire second subcontract which Loral was negotiating to fulfill the second contract with the government. According to Loral, Austin stopped all work under the first subcontract and refused to proceed unless its demands were met. After continuing negotiations, Loral wrote a note to Austin saying that because it feared drastic consequences if it were to default on a government contract, they were left with no other choice but to meet Austin s conditions. Loral issues revised purchase orders and delivered them to Austin with another letter. Issue(s): Should Loral be able to recover damages for duress caused by Austin s demands and threats of nonperformance? Holding(s): Trial and Appellate Court: No, Loral acted deliberately and voluntarily and without the immediate pressure of severe business reverses and thus is precluded from recovery on the theory of economic duress. Supreme Court: Yes, Loral should be able to recovery under the theory of economic duress because they effectively had no choice but to accept Austin s demands and then sue to get the excess back. Reasoning in Appellate Court: Loral, despite claiming that Austin stopped performing under the first subcontract, received parts from Austin. Loral states that they had a fear of defaulting on the government contract and thus were obliged to yield and capitulate to Austin, but the court finds that at no time was Loral under any immediate urgency or government pressure for deliveries under the Navy contract and the fear and stress must have been self-imposed. This is demonstrated by the fact that Loral did not even seek an extension from the government and extended the time under which Austin could deliver the parts covered under the first sub-contract. Austin s threat to breach does not constitute the basis for recovery under duress because before the coercive effect of the threatened action can be inferred, there must be evidence of some probable consequences of it to person or property for which the remedy afforded by the courts is inadequate. Austin was a responsible manufacturer and acted in good faith when retroactively raising its prices under the first contract. Further, Loral did not proffer that it undertook reasonable efforts to obtain the parts from someone else in time to fulfill the contracts. Loral acted deliberately and voluntarily, without being under immediate pressure of incurring severe business reverses, and is therefore precluded from recovery. Loral failed to show that (1) it was the victim of a wrongful or unlawful threat and (2) such act or threat must be one which deprives the victim of his unfettered will. The key element is the state of mind of the party alleged to be threatened and whether there was such a severe impairment of bargaining power that it may be found the victim was precluded from exercising free will and judgment in the transaction. Loral, having weighed all of the considerations determined as a matter of business judgment to continue with Austin and acted voluntarily. Reasoning in Supreme Court: A contract is voidable on 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. The existence of economic duress or business compulsion is demonstrated by proof that immediate possession of needful goods is threatened or by proof that one party to a contract has threatened to breach the agreement by withholding goods unless the other party agrees to some further demand. Further, it must also appear that the threatened party could not obtain the goods from another source of supply and that the ordinary remedy of an action for breach of contract would not be adequate. It is clear that Austin s threat deprived Loral of free will. Loral s genuine concerns about failing to supply under the government contract were not self-imposed, but were a result of Austin s threat. This placed Loral in what it considered to be an emergency, duress situation. While Austin claims that Loral s extension of the delivery date negates its alleged

dire need for the parts, the extension was a formality and, considering that the best alternative Loral could get from the other vendors was a delivery date will after the already extended one, Loral s claim that it had no choice but to accede to Austin s demands is conclusively demonstrated. Loral contacted all of the manufacturers whom it believed capable of making the parts and this is all that the law requires. Further, Loral was not obligated to contact the government and ask for an extension. There is precedent that the nonperformance by a subcontractor is no excuse for default on the main contract. Loral s claim of economic duress is not insufficient because it failed to request an extension. Loral did not seek an ordinary remedy for breach of contract and decided to wait until three days after the last delivery to seek remedy because it feared another stoppage of deliveries by Austin which would again put them in an untenable situation. All of the evidence demonstrates that Loral agreed to the price increases in consequence of the economic duress employed by Austin. Disposition: Trial court held for Austin. Appellate Court confirmed. Supreme Court reversed and remanded.