Austin Instrument, Inc. v. Loral Corp., 29 N.Y.2d 124 (1971)
A contract is voidable for economic duress when one party is forced into it by a wrongful threat, precluding the exercise of free will, and lacks an adequate alternative source or legal remedy.
Summary
Loral, under contract with the Navy, subcontracted with Austin for gear components. When Loral won a second Navy contract, Austin refused to supply parts unless Loral agreed to price increases on both contracts and awarded Austin the second subcontract. Facing potential damages and default on its Navy contracts, Loral agreed but later sought to recover the increased payments, claiming economic duress. The New York Court of Appeals reversed the lower courts, holding that Loral had indeed acted under economic duress because Austin’s threat deprived Loral of free will, and Loral lacked alternative sources or adequate legal remedies.
Facts
Loral secured a $6 million Navy contract with delivery deadlines, liquidated damages for lateness, and a cancellation clause.
Loral subcontracted with Austin for 23 precision gear components.
Loral won a second Navy contract and solicited bids for components, including from Austin.
Austin, initially a low bidder on some items, refused to supply any parts unless Loral agreed to price increases on the original subcontract and awarded Austin the entire second subcontract.
Austin ceased deliveries, and Loral, unable to find alternative suppliers to meet Navy deadlines, agreed to Austin’s demands in a letter stating they had “no choice or alternative.”
Loral met its Navy commitments but later sought to recover the price increases, alleging economic duress.
Procedural History
Austin sued Loral to recover the remaining balance on the second subcontract.
Loral sued Austin for damages based on economic duress concerning the price increases on the first subcontract; the cases were consolidated.
The trial court ruled for Austin, dismissing Loral’s duress claim, finding Loral could have found other suppliers.
The Appellate Division affirmed the trial court’s decision.
The New York Court of Appeals reversed, finding economic duress as a matter of law and remanding for damages calculation.
Issue(s)
Whether Austin’s threat to withhold parts constituted economic duress, rendering the price increases in the first subcontract voidable.
Whether Loral demonstrated it lacked an alternative source of supply for the needed parts.
Whether Loral’s legal remedy for breach of contract was adequate under the circumstances.
Whether Loral’s delay in disaffirming the contract until after Austin’s final delivery waived its right to claim duress.
Holding
Yes, because Austin’s threat deprived Loral of its free will, and Loral reasonably feared the consequences of failing to meet its Navy contract obligations.
Yes, because Loral contacted all approved vendors and could not obtain timely delivery from any other source.
No, because suing for breach of contract would not have provided Loral with the needed parts in time to meet its Navy obligations and avoid significant damages and potential contract cancellation.
No, because Loral’s delay was reasonable, stemming from a fear of further disruptions by Austin until all parts were delivered.
Court’s Reasoning
The court applied the established rule that a contract is voidable for duress when a party is forced to agree due to a wrongful threat that precludes free will. The court emphasized 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…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.”
Austin’s threat to stop deliveries unless prices increased deprived Loral of free will. Loral’s concern about liquidated damages, potential default, and jeopardizing future government contracts made its situation an emergency.
The court found Loral adequately demonstrated it could not obtain parts from another source. Loral contacted its entire list of approved vendors, none of whom could deliver quickly enough. The court noted that Loral “contacted all the manufacturers whom it believed capable of making these parts” (35 A.D.2d, at p. 393), satisfying its burden.
The court found that suing for breach of contract was an inadequate remedy because Loral still needed to obtain the gears to meet its Navy obligations. Loral “actually had no choice, when the prices were raised by Austin, except to take the gears at the ‘coerced’ prices and then sue to get the excess back.”
The court found Loral’s delay in disaffirming the contract reasonable because Loral feared further disruptions from Austin until all deliveries were complete. As such, Loral did not waive its rights.