Citation: 29 N.Y.2d 124 (1971).
One-Sentence Takeaway: A contract is voidable on the grounds of duress by the party who was forced to agree to it by means of a wrongful threat precluding the exercise of his free will.
Summary: Loral Corp. (“Defendant”) was awarded a lucrative contract by the Navy to provide certain radar systems. The radar systems required 40 precision gear components and Defendant subcontracted the production of 23 of those components to Austin Instrument, Inc. (“Plaintiff”).
Later, the Navy awarded Defendant another contract for radars that again required 40 precision gear components. Plaintiff informed Defendant that this time Plaintiff should be awarded the subcontract for all of the 40 components required under the second contract and, in addition, the price under the second subcontract and the remaining components under the first subcontract will be higher or Plaintiff will not deliver the components remaining under the first subcontract.
Defendant looked around for other manufacturers who could supply the components that remained due from Plaintiff under the first subcontract, but was unable to find any and acquiesced to Plaintiff’s demands.
After delivery of all of the components under the first and second subcontracts, Defendant stopped paying and Plaintiff sued for the $17,750 that remained outstanding. Defendant also sued Plaintiff to recover the $22,250 in increased price that Plaintiff had charged, and Defendant had paid, for the components. The two cases were consolidated.
The trial court ruled in favor of Plaintiff and dismissed Defendant’s complaint. Defendant appealed.
The court of appeal reversed the trial court’s dismissal of Defendant’s complaint and considered this to be a classic case, as a matter of law, of economic duress that renders Defendant’s agreement to pay an increased price voidable. The court noted that, “[t]he existence of economic duress or business compulsion is demonstrated by proof that immediate possession of needful goods is threatened or, more particularly, in cases such as the one before us, 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.” The court cautioned, however, that “a mere threat by one party to breach the contract by not delivering the required items, though wrongful, does not in itself constitute economic duress. 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.”
The court held that Defendant had met the foregoing requirements. After Plaintiff threatened to stop production under the first subcontract, Defendant looked around but was not able to find another manufacturer. Thus, Defendant was facing the threat of losing its contracts with the Navy if it did not succumb to Plaintiff’s demands.