Economic Duress

Economic duress (also called business compulsion) is a defense to contract enforcement that arises when one party coerces the other into agreeing to contract terms through improper economic threats or pressure. Unlike physical duress, economic duress does not involve threats of physical harm but rather threats of economic harm that leave the victim with no reasonable alternative but to agree.

The doctrine requires three elements: (1) a wrongful or improper threat; (2) that leaves the victim with no reasonable alternative but to agree to the terms; and (3) the threat actually induces the victim's assent. The threat must go beyond ordinary commercial pressure — hard bargaining is not duress. Rather, the threatening party must act in bad faith, such as by threatening to breach an existing contract unless the other party agrees to modified terms.

Austin Instrument v. Loral Corp. is the leading case. Austin threatened to stop delivering parts that Loral needed to fulfill a government contract unless Loral agreed to buy parts at higher prices under a new contract. Because Loral had no alternative source for the parts, the court found economic duress and allowed Loral to recover the price increase.

The key distinction is between legitimate leverage and improper coercion. A party who takes advantage of the other's weak bargaining position is engaging in lawful hardball negotiation. But a party who creates the other's vulnerability through wrongful conduct — such as threatening to breach an existing contract — crosses the line into duress.

Economic duress makes the contract voidable, not void. The coerced party must act promptly to avoid the contract; waiting too long may constitute ratification. The remedy is typically rescission of the contract and restitution of any benefits conferred.

On exams, economic duress arises when a party modifies a contract under pressure. The analysis should focus on whether the threat was improper, whether the victim had reasonable alternatives, and whether the victim acted promptly to disaffirm.