Does a party's threat to stop delivering goods under an existing contract unless the price is raised, made when the buyer cannot obtain the goods elsewhere in time to meet its own commitments and an ordinary breach action would be inadequate, constitute economic duress allowing the buyer to recover the price increase?

Loral Corporation held a $6,000,000 Navy contract for radar sets that contained delivery schedules, a liquidated damages clause for late delivery, and a cancellation clause for default. Loral awarded Austin Instrument, Inc. a subcontract for 23 precision gear components, and Austin began delivering in early 1966. In May 1966, Loral won a second Navy contract for more radar sets and solicited bids for the 40 gear components it required. Austin bid on all 40, but on July 15 Loral told Austin's president, Mr. Krauss, that Austin would receive only the items on which it was low bidder. Krauss refused to accept less than all 40 parts and, the next day, told Loral that Austin would stop delivering under the existing subcontract unless Loral agreed to retroactive and prospective price increases and gave Austin the order for all 40 parts. Austin then stopped deliveries. Loral contacted ten manufacturers of precision gears, its entire approved-vendor list, and none could deliver in time to meet its Navy commitments; the best offer was delivery starting sometime in October. On July 22, Loral wrote that it had no choice and agreed to the price increases, and Austin received the second subcontract. Deliveries resumed in August, and Loral met its Navy commitments. After Austin's last delivery in July 1967, Loral notified Austin that it would seek to recover the price increases, which totaled some $22,250 on the first subcontract.

On September 15, 1967, Austin sued Loral to recover over $17,750 still due on the second subcontract. The same day, Loral sued Austin for roughly $22,250, the aggregate price increases under the first subcontract, claiming economic duress. The actions were consolidated and tried. The trial court awarded Austin the amount it sought and dismissed Loral's complaint on the ground that Loral had not shown it could not have obtained the items from other sources in time to meet its Navy commitment. A closely divided Appellate Division affirmed (35 A.D.2d 387). Loral appealed to the New York Court of Appeals.

(Fuld, C.J.)

Yes. The evidence establishes economic duress as a matter of law, and Loral may recover the price increases.

A contract is voidable for duress when a party was forced to agree to it by a wrongful threat that precluded the exercise of free will. Economic duress or business compulsion is shown where one party threatens to breach a contract by withholding goods unless the other party agrees to a further demand. A bare threat to breach is not enough. The threatened party must also show that it 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 question here is one of law: accepting the facts found, did the courts below properly apply the law to them?

Austin's threat to stop deliveries deprived Loral of its free will. Loral faced staggered Navy delivery deadlines for September through November 1966, substantial liquidated damages, the threat of cancellation for default, and the loss of future Government business. These concerns were genuine, not self-imposed, undisclosed, and subjective as the Appellate Division majority had characterized them. Loral's extension of Austin's deadline to resume deliveries until September did not negate Loral's need, because parts arrived only on the eve of the delivery dates and Loral still had to work around the clock to meet its commitments.

Loral also showed it could not obtain the gears elsewhere within a reasonable time. It contacted all ten of its approved vendors for precision gears, and the best offer was delivery starting sometime in October, which would have made it late to the Navy. Given the military nature and exacting specifications of the parts, Loral was not required to turn to unfamiliar or unsatisfactory vendors. It was also not required to ask the Government for an extension, since it could not know how long a delay it would need, and a subcontractor's nonperformance does not excuse default on the main contract.

Loral's normal remedy of accepting the breach and suing for damages was inadequate, because it would still have had to find replacement gears with all the same consequences. Loral also did not waive its claim by waiting until July 1967 to disaffirm. It reasonably feared another stoppage until Austin's last delivery, and it acted within days afterward. The order is modified by reversing the affirmance of the dismissal of Loral's claim, and the matter is remanded to the trial court to compute damages.

Dissent (Bergan, J., joined by Breitel, J. and Jasen, J.) Whether the acts charged constitute economic duress is normally a routine factual issue, and here it was resolved against Loral by the Special Term and affirmed by the Appellate Division, so it should not be reopened. The testimony of the negotiators conflicts sharply. Under Austin's version, the renegotiation arose from Loral's failure to carry out an understanding about the items to be furnished, and no threat was made; rather, Austin asked to accommodate a customary vacation shutdown of its plant. The availability of alternative suppliers, critical to duress, was a highly controverted fact issue, and the Special Referee's findings on it were affirmed. Loral admitted on cross-examination that many suppliers appeared in a trade registry but that it chose to rely only on those it knew. Whether that conduct was reasonable was a fair issue of fact, and describing the facts as undisputed does not change that. The order should be affirmed. The majority answers that the question is one of law: whether the courts below properly applied the law to the facts as found.