Austin Instrument, Inc. v. Loral Corp.

• Citation: 324 N.Y.S.2d 22,272 N.E.2d 533,29 N.Y.2d 124
• Parties: , 272 N.E.2d 533 AUSTIN INSTRUMENT, INC., Respondent, v. LORAL CORPORATION, Appellant.
• Decision Date: 06 July 1971
• Court: New York Court of Appeals

Page 22

324 N.Y.S.2d 22

29 N.Y.2d 124, 272 N.E.2d 533

AUSTIN INSTRUMENT, INC., Respondent, v. LORAL CORPORATION, Appellant.

Court of Appeals of New York.

July 6, 1971.

Alvin A. Simon, New York City, and Joseph Sachter, Scarsdale, for appellant.

Herbert, L. Ortner, and Joel Salon, New York City, for respondent.

FULD, Chief Judge.

The defendant, Loral Corporation, seeks to recover payment for goods delivered under a contract which it had with the plaintiff Austin Instrument, Inc., on the ground that the evidence establishes, as a matter of law, that it was forced to agree to an increase in price on the items in question under circumstances amounting to economic duress.

In July of 1965, Loral was awarded a $6,000,000 contract by the Navy for the production of radar sets. The contract contained a schedule of deliveries, a liquidated damages clause applying to late deliveries and a cancellation clause in case of default by Loral. The latter thereupon solicited bids for some 40 precision gear components needed to produce the radar sets, and awarded Austin a subcontract to supply 23 such parts. That party commenced delivery in early 1966.

In May, 1966, Loral was awarded a second Navy contract for the production of more radar sets and again went about soliciting bids. Austin bid on all 40 gear components but, on July 15, a representative from Loral informed Austin's president, Mr. Krauss, that his company would be awarded the subcontract only for those items on which it was low bidder. The Austin officer refused to accept an order for less than all 40 of the gear parts and on the next day he told Loral that Austin would cease deliveries of the parts due under the existing subcontract unless Loral consented to substantial increases in the prices provided for by that agreement--both retroactively for parts already delivered and prospectively on those not yet shipped--and placed with Austin the order for all 40 parts needed under Loral's second Navy contract. Shortly thereafter, Austin did, indeed, stop delivery. After contacting 10 manufacturers of precision gears and finding none who could produce the parts in time to meet its commitments to the Navy, ¹ Loral acceded to Austin's demands; in a letter dated July 22, Loral wrote to Austin that 'We have feverishly surveyed other sources of supply and find that because of the prevailing military exigencies, were they to start from scratch as would have to be the case, they could not even remotely begin to deliver on time to meet the delivery requirements established by the Government. * * * Accordingly, we are left with no choice or alternative but to meet your conditions.'

Loral thereupon consented to the price increases insisted upon by Austin under the first subcontract and the latter was awarded a second subcontract making it the supplier of all 40 gear parts for Loral's second contract with the Navy. ² Although Austin was granted until September to resume deliveries, Loral did, in fact, receive parts in August and was able to produce the radar sets in time to meet its commitments to the Navy on both contracts. After Austin's last delivery under the second subcontract in July, 1967, Loral notified it of its intention to seek recovery of the price increases.

On September 15, 1967, Austin instituted this action against Loral to recover an amount in excess of $17,750 which was still due on the second subcontract. On the same day, Loral commenced an action against Austin claiming damages of some $22,250--the aggregate of the price increases under the first subcontract--on the ground of economic duress. The two actions were consolidated and, following a trial, Austin was awarded the sum it requested and Loral's complaint against Austin was dismissed on the ground that it was not shown that 'it could not have obtained the items in question from other sources in time to meet its commitment to the Navy under the first contract.' A closely divided Appellate Division affirmed (35 A.D.2d 387, 316 N.Y.S.2d 528, 532). There was no material disagreement concerning the facts; as Justice Steuer stated in the course of his dissent below, '(t)he facts are virtually undisputed, nor is there any serious question of law. The difficulty lies in the application of the law to these facts.' (35 A.D.2d 392, 316 N.Y.S.2d 534.)

The applicable law is clear and, indeed, is not disputed by the parties. A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will. (See Allstate Med. Labs., Inc. v. Blaivas, 20 N.Y.2d 654, 282 N.Y.S.2d 268, 229 N.E.2d 50; Kazaras v. Manufacturers Trust Co., 4 N.Y.2d 930, 175 N.Y.S.2d 172, 151 N.E.2d 356; Adams v. Irving Nat. Bank, 116 N.Y. 606, 611, 23 N.E. 7, 9; see, also, 13 Williston, Contracts (3d ed., 1970), § 1603, p. 658.) The existence of economic duress or business compulsion is demonstrated by proof that 'immediate possession of needful goods is threatened' (Mercury Mach. Importing Corp. v. City of New York, 3 N.Y.2d 418, 425, 165 N.Y.S.2d 517, 520, 144 N.E.2d 400) 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. (See, e.g., Du Pont de Nemours & Co. v. J. I. Hass Co., 303 N.Y. 785, 103 N.E.2d 896; Gallagher Switchboard Corp. v. Heckler Elec. Co., 36 Misc.2d 225, 232 N.Y.S.2d 590; see, also, 13 Williston, Contracts (3d ed., 1970), § 1617, p. 705.) However, 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 ³ and that the ordinary remedy of an action for breach of contract would not be adequate. ⁴

We find without any support in the record the conclusion reached by the courts below that Loral failed to establish that it was the victim of economic duress. On the contrary, the evidence makes out a classic case, as a matter of law, of such duress. ⁵

It is manifest that Austin's threat--to stop deliveries unless the prices were increased--deprived Loral of its free will. As bearing on this, Loral's relationship with the Government is most significant. As mentioned above, its contract called for staggered monthly deliveries of the radar sets, with clauses calling for liquidated damages and possible cancellation on default. Because of its production schedule, Loral was, in July, 1966, concerned with meeting its delivery requirements in September, October and November, and it was for the sets to be delivered in those months that the withheld gears were needed. Loral had to plan ahead, and the substantial liquidated damages for which it would be liable, plus the threat of default, were genuine possibilities. Moreover, Loral did a substantial portion of its business with the Government, and it feared that a failure to deliver as agreed upon would jeopardize its chances for future contracts. These genuine concerns do not merit the label "self-imposed, undisclosed and subjective" which the Appellate Division majority placed upon them. It was perfectly reasonable for Loral, or any other party similarly placed, to consider itself in an emergency, duress situation.

Austin, however, claims that the fact that Loral extended its time to resume deliveries until September negates its alleged dire need for the parts. A Loral official testified on this point that Austin's president told him he could deliver some parts in August and that the extension of deliveries was a formality. In any event, the parts necessary for production of the radar sets to be delivered in September were delivered to Loral on September 1, and the parts needed for the October schedule were delivered in late August and early September. Even so, Loral had to 'work * * * around the clock' to meet its commitments. Considering that the best offer Loral received from the other vendors it contacted was commencement of delivery sometime in October, which, as the record shows, would have made it late in its deliveries to the Navy in both September and October, Loral's claim that it had no choice but to accede to Austin's demands is conclusively demonstrated.

We find unconvincing Austin's contention that Loral, in order to meet its burden, should have contacted the Government and asked for an extension of its delivery dates so as to enable it to purchase the parts from another vendor. Aside from the consideration that Loral was anxious to perform well in the Government's eyes, it could not be sure when it would obtain enough parts from a substitute vendor to meet its commitments. The only promise...