Voiding a Contract on the Basis of Economic Duress

• Posted on: Nov 25 2019

Economic duress, like duress, generally, provides an injured party with grounds to void a contract. Proof of the existence of economic duress requires a showing that one party to a contract has threatened to breach the agreement by withholding performance unless the other party agrees to some further demand. A party cannot be guilty of economic duress, however, for refusing to do that which it is not legally required to do or for threatening to do that which it is legally authorized to do. Thus, a plaintiff is not entitled to rescind a contract on the ground of economic duress where the harm alleged by the plaintiffs is the exercise of a legal right.

A party seeking to void a contract on the basis of economic duress must show that he/she was compelled to agree to it because of a wrongful threat precluding the exercise of his/her free will. Austin Instrument v. Loral Corp., 29 N.Y.2d 124, 130 (1971). See also 16 N.Y. Jur. 2d Cancellation of Instruments § 22 (“Economic duress is also not present where one party offers the other a business arrangement that the offeree is free to accept or reject”). An aggrieved party can demonstrate the existence of economic duress by proving that the other party(ies) to the contract “has threatened to breach the agreement by withholding performance unless the [aggrieved] party agrees to some further demand.” 805 Third Ave. Co. v. M.W. Realty Assoc., 58 N.Y.2d 447, 451 (1983) (citation omitted). Importantly, a mere threat to breach a contract does not constitute economic duress if the party who has been threatened can obtain performance of the contract from another source and pursue normal legal remedies for a breach of contract. Austin Instrument, 29 N.Y.2d at 130-131.

The party relying on economic duress has the burden of proving that the agreement could not have been performed by another party.

In CRG at Arnot Mall, Inc. v. Feehan, 2019 N.Y. Slip Op. 08467 (3d Dept. Nov. 21, 2019) (here), the Appellate Division, Third Department, addressed the economic duress doctrine in a dispute over the purchase and sale of four McDonald’s restaurants, holding that the doctrine did not apply.

CRG at Arnot Mall, Inc. v. Feehan

Background

In March 2014, plaintiffs, CRG at Arnot Mall, Inc., CRG at Main Street, CRG at Southport, Inc. and CRG at Horseheads, Inc. (collectively, “CRG”), and Coastal Restaurant Group, Inc., the parent of CRG, and defendant, Courtney Feehan (“Feehan”), entered into a purchase and sale agreement whereby Feehan would purchase four McDonald’s restaurants that were owned and operated by CRG. According to the agreement, the closing would take place on May 6, 2014, and $300,000 would be held in escrow as security for CRG’s obligations. The agreement also provided that the purchase price would be $4.2 million, plus the value of the inventory at the time of the sale. Feehan, however, would be entitled to a credit for required reinvestments, the amount of which would be determined following an inspection under McDonald’s Capital National Restaurant Business and Equipment Standards program (in which a McDonald’s representative would inspect and identify any capital improvements needed to meet franchise standards) and by items put on a punch list by the parties. The amount of the reinvestment credit was anticipated to be approximately $200,000.

In April 2014, McDonald’s inspected the four restaurants and determined that the reinvestment amount was approximately $725,000 for all of them. On May 5, 2014, the day before the scheduled closing, a final walk through of the restaurants was conducted and a punch list was created. The required repairs under the punch list was estimated to cost approximately $120,000. That same day, CRG and Feehan entered into an amendment to the agreement that, as relevant to the appeal, changed the purchase price from $4.2 million to $3.85 million and eliminated the reinvestment credit available to Feehan. Feehan thereafter assigned her rights under the agreement and the amendment to defendants Cayuga Arnot Mall LLC, Cayuga Grand Central LLC, Cayuga N. Main LLC and Cayuga Southport, LLC (wholly owned subsidiaries of Cayuga Restaurant Group, a management company of which Michael Feehan, Feehan’s spouse, is the president).

In August 2014, plaintiffs commenced the action seeking, among other things, the release of the $300,000 held in escrow, in addition to an inventory payment of $65,868.13 as required under the agreement. Defendants answered and sought, as its fourth counterclaim, to have the amendment to the agreement declared void. Thereafter, plaintiffs moved for summary judgment, arguing that they were entitled to the $300,000 held in escrow and the inventory payment and that defendants’ counterclaims should be dismissed. Defendants opposed and cross-moved for, among other things, summary judgment on their fourth counterclaim.

In October 2018, the motion court, among other things, granted defendants’ cross motion for summary judgment on its fourth counterclaim. In finding the amendment void, the court awarded defendants $172,775 of the $300,000 placed in escrow – an amount representing what defendants overpaid as a consequence of the amendment. The court also granted other parts of defendants’ cross motion seeking summary judgment on their counterclaims and awarded them $20,455.98 from the escrow funds. As to plaintiffs’ motion, the court granted it to the extent of awarding them the remaining balance of the escrow funds. Finally, the court did not award counsel fees in favor of any party. Plaintiffs appealed.

The Third Department’s Decision

The Court modified the motion court’s order by reversing the portion that (1) denied plaintiffs’ motion for summary judgment (a) on its claim for the $65,868.13 inventory payment and (b) dismissing defendants’ fourth counterclaim, and (2) granted defendants’ cross motion for summary judgment on its fourth counterclaim.

In reversing the dismissal of defendant’s fourth counterclaim, the Court rejected defendants’ contention that they were economically forced to close the transaction.

Defendants maintained that CRG wrongfully threatened not to go forward with the closing unless Feehan agreed to amend the agreement. In this regard, Feehan testified that she was “extorted.”

Plaintiffs countered, arguing that the amendment was the product of a sophisticated negotiation between the parties.

The Court agreed with plaintiffs, finding that the agreements at issue were the product of extensive discussions among the parties. Slip Op. at *1. Thus, held the Court, defendants were not under economic duress at the time they agreed to the amendment, as the motion court found. Id.

The Court explained that “although the documentary evidence demonstrate[d] that defendants would have lost their financing if the closing did not take place on May 6, 2014,” that fact was not conveyed to CRG’s counsel until May 5, 2014. Slip Op. at *1. The Court observed that there was nothing in the record to show that CRG “leveraged this fact in order to secure the amendment. Nor [did] the record indicate that [CRG] put defendants in the position of losing their financing by a particular date.” Id., citing Edison Stone Corp. v. 42nd St. Dev. Corp., 145 A.D.2d 249, 256 (1st Dept. 1989).

The Court also held that the record failed “to establish that other legal remedies were not available to defendants.” Slip Op. at *1. The Court pointed to testimony by Michael Feehan that he and Feehan had explored their options before agreeing to the amendment, i.e., “whether to take possession of the restaurants and then sue to have the original agreement enforced or not to take possession and then sue plaintiffs for specific performance.” Id. The Court explained that “[b]ecause defendants could resort to legal recourse, they [could not] claim economic duress.” Id. (citations omitted).

Takeaway

The doctrine of economic duress requires the party asserting it to demonstrate that the duress involved a wrongful act and that he/she had no reasonable alternative. If the party asserting the defense has a reasonable alternative, the doctrine is unavailable to him/her. As noted, according to the CRG Court, the record showed that Feehan not only had alternatives but weighed them before deciding on a course of action.

Tagged with: Breach of Contract, Business Litigation, Commercial Litigation, Economic Duress, Rescission