22. Contracts: Duress

>> We have learned that
to form a contract,

each party must manifest their
ascent freely and voluntarily.

If one party's ascent is coerced
or otherwise not freely given,

the law will not enforce a
contract against the party.

One form of such coercion
is known as duress,

which is dealt with in Sections 174,

175, and 176 of the restatement.

In general, duress involves
instances in which one party

uses an impermissible threat to pressure
the other to enter a new contract.

In such instances, the contract
is voidable by the victim.

Under older contract law,

duress was a defense to enforcement of

a contract only in extreme circumstances.

To invoke duress, a party would have

to show that the other had
induced her into entering

the contract by using actual force

or an unlawful threat of
death or bodily harm.

In other words, under older law,

one would have to argue that a
proverbial gun was held on her head,

and as a result,

the victim had no choice
but to sign the contract.

This basis for avoiding a contract is

still embodied in the
restatement in Section 174,

which deals with the person's
manifesting assent as

a result of being physically
compelled by duress.

In such cases, the parties
assent is not effective.

Obviously, the occasions on which section

174 operates to void a
contract are very rare.

More recently, duress has been expanded
beyond these narrow parameters.

A person can invoke duress to
avoid a contract if they can

show that their free will was
undermined by an unfair pressure,

short of physical compulsion,

or a threat of bodily injury.

In particular, economic duress is now
recognized as a basis for relief.

This more modern doctrine,

embodied in Sections 175
and 176 of the restatement,

is better able to accommodate
situations where one party uses

subtle threats or improper pressure to
gain the others assent to a contract.

Subpart 1 of Section 175
of the restatement sets

forth two requirements for duress.

First, a party must show
that it's ascent to

a contract was induced
by an improper threat.

Second, the party must show that
as a result of that threat,

he was left with no
reasonable alternative,

but to assent to the contract.

If these two requirements are established,

then the contract is
voidable by the victim.

Note that because the contract is
voidable and not automatically void,

the victim can choose to follow through on

its contractual obligations and seek

compensation for the perpetrators
wrongful act in other ways,

such as in a tort suit.

Let's explore the first of
the two requirements for

proving duress in improper threat.

In general, a threat is an indication

of an intent to do something
that will inflict harm,

loss, or injury on a person's body or
their personal or economic interests.

The intent does not have to be explicit.

It can be implied from the words
or the actions of the perpetrator.

The threat can be either of a positive
action or other refraining from action.

Section 176 of the restatement sets out

a number of examples of what
makes a threat improper,

many of which might be described as
instances of extortion or blackmail.

For example, subpart 1b
states that a threat to

institute a criminal proceeding
is an improper form of pressure,

while someone who has a colorable
tort claim against another may

threaten to file that action

assent the other parties
agreeing to a settlement.

Public policy considers
a threat to institute

a criminal prosecution to be
an improper bargaining chip.

Consider a creditor who says to a debtor,

"Pay me what you owe me or I'll sue."

As a result of this threat,

the debtor is induced to enter
into a settlement agreement.

Under such circumstances, it is

unlikely that a court will void
the agreement based on duress.

The creditor was acting
perfectly within her rights.

Similarly, if at the end of the
term of an employment contract,

a very valued employee threatens to

quit unless their salary is
significantly increased,

the employer will not be able to avoid

a new employment contract at a higher
salary on the basis of duress.

Again, the employee is acting
fully within her rights.

In contrast, if at the end of the
term of an employment contract,

the employer threatens to make it
difficult for the employee to obtain

alternative employment unless the employee

signs a release of all
claims against the employer,

that might well be an instance
of an improper threat.

Assuming there is no basis
for the employer to bad-mouth

the employee if the employer could

make good on the threat in
the local business community,

the employee may well be deemed to have

no reasonable alternative
but to sign the agreement.

Under such circumstances,

a court would likely consider the
agreement voidable by reason of duress.

In general, a bad faith
threat to engage in

vexatious litigation
is an improper threat.

A threat to embarrass or
do something spiteful to

the other party to a contract might
also be considered an improper threat.

A violation of the duty of good faith and

fair dealing under Subpart
1d of Section 176.

Let's now turn to the
second element of duress.

No reasonable alternative.

An improper threat does
not amount to duress

unless it leaves the victim
with no reasonable alternative,

but to succumb to the threat.

In determining whether there is a
reasonable alternative, two issues arise.

The first relates to the victim's
emotional state and whether or

not he had the fortitude to stand up
to the perpetrator of the threat.

Under older law in determining whether

a party was left with no
reasonable alternative,

courts looked whether the
threat was serious enough to

compel a person of ordinary
courage to yield to it.

Realizing that a bully should
not be able to enforce

a contract merely because his
victim is easily intimidated.

Modern courts take a more relaxed view

and now consider subjective
attributes of the victim.

The modern test is whether,

under the circumstances,

the duress substantially overcame
the free will of the victim,

leaving him no reasonable
alternative but to acquiesce.

As noted in comments C under Section 175,

persons of a weak or cowardly nature
are the very ones that need protection.

The courageous can usually
protect themselves.

But in addition to considering the
emotional fortitude of the victim,

there is a second issue that bears on

whether the victim had a
reasonable alternative.

That issue concerns the exigencies
in which the victim finds himself.

If the victim faces financial ruin where

the perpetrator to follow
through on the threat,

then a court might well
conclude that the victim had

no reasonable alternative but to succumb
to the threat and sign the contract.

Let's consider two cases.

First, assume that Joan enters
into a contract with Bill,

whereby Bill will supply
one million widgets to

Joan's factory on January 1st
at a cost of a buck per widget.

Joan is purchasing the widgets to fulfill

a contract with the federal
government, her major client.

Performance of which comes
due on January 15th.

On December 31st, one day before

he's contractually bound
to deliver the widgets,

Bill calls Joan and states
that he refuses to supply

the widgets unless Joan
signs a new contract,

whereby she agrees to pay
two bucks per widget.

If Joan signs the new contract,

will she have the defense of duress
available to avoid the new agreement?

Stated in terms of the doctrine of duress,

did Joan have no reasonable
alternative but to sign the contract?

The answer is, it depends.

On the one hand,

if Joan could walk across the street and

purchase the widgets at another factory,

it's doubtful that she would
have the defense of duress

available to avoid Bill's
enforcing the new contract.

She's not in exigent circumstances.

Rather, she could refuse to succumb
to Bill's extortion to threat and

go buy the widgets somewhere else
and sue Bill for breach of contract.

On the other hand, if there is no
alternative source of widgets,

Joan might agree to the
new contract in order to

avoid breaching her own
agreement with a major client.

Under such circumstances, a court is
more likely to determine that Joan

had no reasonable alternative but to

agree to buy the widgets
at a higher price.

Accordingly, a court would
likely conclude that

the new agreement with Bill is
voidable under the doctrine of duress.

One problematic aspect of the
modern concept of duress is

distinguishing between economic
duress on the one hand,

and simple hard bargaining on the other.

In general, a seller may refuse
to sell property to a buyer,

or only to sell at

an exorbitantly high price even

though the seller knows the buyer
is desperate to make a deal.

In general, parties are free to drive
as hard to bargain as they wish.

Let's consider an example.

Suppose that Bill is desperate
to sell his restaurant because

he needs the money to pay for
life-saving operation for his son.

Jane is aware of Bill's
situation and knows

that it will be hard for Bill to
find a buyer in the current market,

and as a result,

offers to buy the business
at a below market price.

Because he's desperate,

Bill feels he has no alternative
but to accept Jane's lowball offer.

Though Jane is taking advantage
of Bill's unfortunate plight,

the only threat involved is
Jane's refusal to enter into

a contract other than at the
lowball price that she's offered.

In general, unless one party is

responsible for the other
party's desperate plight,

that party is taking advantage of
the desperation of the other party

is an example of hard bargaining
and not an improper threat.