Centric Corp. v. Morrison-Knudsen Co.

• Decision Date: 16 December 1986
• Docket Number: No. 66376,MORRISON-KNUDSEN,66376
• Citation: Centric Corp. v. Morrison-Knudsen Co., 731 P.2d 411, 1986 OK 83 (Okla. 1986)
• Parties: CENTRIC CORPORATION, Appellant, v.COMPANY, Appellee.
• Court: Oklahoma Supreme Court

Page 411

731 P.2d 411

1986 OK 83

CENTRIC CORPORATION, Appellant, v.MORRISON-KNUDSEN COMPANY, Appellee.

No. 66376.

Supreme Court of Oklahoma.

Dec. 16, 1986.

Patricia A. Howard, Thomas N. Frisby, Michael E. Krasnow, Oklahoma City, for appellant.

James A. Jennings, III, Ronald R. Hudson, Oklahoma City, for appellee.

KAUGER, Justice.

The origins of this case reach back to May, 1977, when Morrison-Knudsen, a Colorado construction company, appellee, the construction manager for the General Motor assembly plant in Oklahoma City, Oklahoma, solicited bids from Centric Corporation, appellant, to subcontract concrete work at the proposed site.The specifications for the $12.5 million dollar contract included laying a slab of reinforced concrete eight inches thick and building a number of concrete pits in a three million square foot floor in the main assembly plant owned by the Oklahoma Industrial Authority.

On June 1, 1977, Centric signed a contract with Morrison-Knudsen and subsequently began work on the slab-on-grade and basement areas.According to Centric, trouble began immediately after it moved equipment and personnel onto the job site.Centric asserted that Morrison-Knudsen, because of its status as construction manager, was responsible for scheduling and coordinating the work among the various contractors and for supervising the entire project in accordance with the milestone schedule included in the contract and the bid package.Centric alleged that Morrison-Knudsen, in violation of the inherent contractual duties and covenants contained in the milestone schedule, failed to provide access roads and drainage in the work areas.Centric also alleged that: because the work sites were not designated in proper contractual sequence, other contractors were still working in Centric's construction area causing substantial delays in Centric's work performance; numerous changes were made in the final design after the contract was signed and shop drawing submittals were not approved on a timely basis; subgrade problems at Centric's job location had to be corrected; and although changes and extra work were ordered beyond the contemplation of the contract causing the work to be more difficult, costly and time consuming, Morrison-Knudsen refused Centric's requests for extension of time to compensate for the delays precipitated by Morrison-Knudsen.

Centric also alleged that Morrison-Knudsen knew that mechanical interferences would obstruct its job performance and that this fact was intentionally concealed.Despite this, however, Centric charges that Morrison-Knudsen, in bad faith, materially interfered with its work, subjected Centric to harassment, showed callous unconcern for human life, and then ordered Centric, at its own expense, to accelerate performance of its contract under the threat of termination for non-compliance with Morrison-Knudsen's unreasonable and unwarranted demands.As the result of these allegations, Centric asserted that Morrison-Knudsen substantially and materially breached the construction contract, and that the settlement agreement should be avoided because of misrepresentations, concealments, and economic duress.Centric also alleged that it should recover on a second claim for relief based on Morrison-Knudsen's negligence which caused financial damage to Centric's business.

Upon completing the contract, Centric was paid the $12.5 million dollar contract price and, thereafter, the parties entered into negotiations to settle disputed issues arising from Centric's cost overruns.Centric was represented by counsel from September, 1977, until shortly before the settlement; it opened negotiations with a $2.2 million dollar demand which it later lowered to $1.8 million dollars.Morrison-Knudsen, which Centric alleges was fully aware of its precarious financial position, presented a "take it or leave it" offer of $1.4 million dollars.On April 21, 1978, Centric, which now claims that it had no real alternative but bankruptcy, accepted the counter-offer and executed a settlement agreement.

On December 29, 1978, Centric notified Morrison-Knudsen of its intent to repudiate the settlement agreement, and on July 10, 1980, it instituted an action in the United States District Court for the Western District of Oklahoma to set aside the settlement agreement alleging economic duress.Centric charged that Morrison-Knudsen's breach of contract and negligence resulted in substantially increased costs creating losses of $3.4 million dollars, placing Centric on the brink of financial disaster.Centric alleged that at the time it bid on the General Motors project it was successful and financially secure; and, that as the direct result of losses incurred on this job, it suffered cash flow problems, was unable to raise additional capital, borrow money, or secure bonding.The federal district court sustained Morrison-Knudsen's motion for summary judgment after finding that Oklahoma law does not recognize economic duress and even if it did, the doctrine is confined to unlawful settlements induced by unlawful acts committed during the course of negotiations, as distinguished from acts necessitating negotiation.Centric appealed to the Tenth Circuit Court of Appeals.

On August 14, 1980, almost simultaneously with the filing of the federal case, Centric filed an action in the district court of the State of Oklahoma against the Oklahoma Industrial Authority.Sometime later, the Authority filed a motion for summary judgment which was overruled by the trial court as was the Authority's subsequent motion to reconsider.Four days after the federal district court granted summary judgment, the Authority renewed its motion for summary judgment, and this time the trial court granted the motion.On appeal from the state court action, the Oklahoma Court of Appeals held that controversial material facts existed concerning whether the settlement agreement was signed under economic duress, and it ordered the cause reversed and remanded.The Oklahoma Supreme Court denied certiorari on February 26, 1986.

I

ECONOMIC DURESS MAY BE A BASIS FOR AVOIDING A MUTUAL RELEASE

AND SETTLEMENT OF CLAIMS.

The rationale underlying the principle of economic duress is the imposition of certain minimal standards of business ethics in the market place.Hard bargaining efficient breaches, and reasonable settlements of good faith disputes are acceptable, even desirable, in our economic system.However, the minimum standards are not limited to precepts of rationality and self-interest--they include equitable notions of fairness and propriety which preclude the wrongful exploitation of business exigencies to obtain disproportionate exchanges of value which, in turn, undermine the freedom to contract and the proper functioning of the system.The doctrine of economic duress comes into play only when conventional alternatives and remedies are unavailable to correct abberational abuse of these norms.It is available solely to prevent injustice, not to create injustice.²

Compromises are favored in the law, and because litigants should turn to the courts only as a last resort, a necessary legal tension exists between enforcement of valid settlement agreements and those obtained through misrepresentation, fraud, or economic duress.Courts are reluctant to set aside agreements or to interfere with the freedom of contract because of the desirability of finality in private dispute resolutions.However, there is an increasing recognition of the court's role in correcting inequitable or unequal exchanges between parties of disproportionate bargaining power, and courts are becoming more skittish about enforcing agreements which were entered into under coercive circumstances.³The majority of jurisdictions now hold that settlement agreements are not impervious to a valid attack under the doctrine of economic duress.⁴

A settlement agreement coerced by economic duress may be avoided depending on the facts of each case.⁵In Samuels Shoe Co. v. Frensley, 151 Okla. 196, 3 P.2d 216, 221(1931), this Court, after finding that a mortgage procured from a father by threats of the arrest and prosecution of his son could be set aside regardless of the son's innocence or guilt, held that:

1.Duress exists if one, by the unlawful act of another, is induced to make a contract or perform some act under circumstances depriving one of the exercise of a free will.

2.Duress exists if one is deprived of an unfettered will or understanding, by threats or other unlawful means, resulting in an involuntary execution of a contract.

3.The existence of duress is measured not by the nature of the acts or threats but by the state of mind induced by the threats or acts.

4.If the threats extinguish the exercise of free will power, the contract may be avoided for duress.

The lone dissenter in Samuels clung to the common law's notion of duress, and argued that the Court's evolutionary doctrine ignored the explicit language contained in Comp.St.1921 § 4993(first codified in 1910 and recodified unchanged as 15 0.S. 1981 § 55), ⁶ and that the Court had circumvented the statutory requirement that duress must, among other things, result in false imprisonment.⁷This Court, in Newsom v. Medis, 205 Okla. 574, 239 P.2d 784,786(1952), acknowledged that the common law rule had been relaxed and that duress may consist of acts other than those proscribed by 15 0.S. 1981 § 55.

At common law, actionable duress was limited to false imprisonment and threats of physical violence or serious bodily harm culminating in a grossly unfair transaction.Duress was tested by whether the threat would overcome the will of a person of ordinary firmness, ignoring the unique characteristics and individual weaknesses of the victim.This purportedly objective test obviated the defense of economic duress for those who did not measure up to the legal standard of ordinary firmness, courage, and will.

The evolving...