\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Frequently in commercial litigation, a party fails to meet or comply with a contractual requirement, causing the party serious annoyance or inconvenience in the litigation. To avoid the breach of contract and the consequences of such breach, the breaching party sometimes tries to justify its nonperformance by invoking economic duress as a defense to the claim of breach of contract. While economic duress can be pled in an effort to avoid the requirements of any contract, it is most often invoked in efforts to avoid the effects of arbitration agreements, loan and loan modification agreements, releases and employment agreements. Over the course of the defenses existence in Alabama, economic duress has been frequently invoked but only rarely found to be available as an excuse for non-performance. The cases analyzing invocations of economic duress point out why.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The Definition of Economic Duress
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Economic duress has been described as "[a]n unlawful coercion to perform by threatening financial injury at a time when one cannot exercise free will." Black's Law Dictionary, p. 543 (8th ed. 2004). It has been similarly defined in the Restatement (Second) of Contracts, §175(1) (1979): "If a party's manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim."
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The Development of The Economic Duress Defense in Alabama
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The concept of economic duress as a defense to a contract claim has been recognized in Alabama since as early as 1834. See Hatter's Ex'ors v. Greenlee, 1 Port. 222, 225, 26 Am. Dec. 370 (Ala. 1834) (If a warrant of arrest is obtained by false pretenses, any act produced by the arrest warrant will be void). While there were a few cases addressing economic duress over the following 150 years, 1 the real development of the law of economic duress in Alabama began in earnest in the 1980s.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In Ralls v. First Fed. Sav. & Loan Ass'n of Andalusia, 422 So.2d 764 (Ala. 1982), the court recognized economic duress as a valid defense to the banks argument that it was entitled to 12 percent interest on a S600.000 loan that it had initially committed to make with a 10 percent interest rate. Interest rates rose between the date the commitment was signed and the date that the plaintiff was ready for the funds. Thus, when the bank provided the loan a year later, the bank imposed the 12 percent rate. Id. at 765-766. Ralls signed the loan agreement with the 12 percent interest rate because he had substantial financial commitments that he could meet only by obtaining the loan. The bank later contended that the loan agreement was an accord and satisfaction, but Ralls argued that he signed the loan agreement under economic duress and was entitled to the initially agreed-upon 10 percent rate. The trial court directed a verdict for the bank, but the supreme court reversed, finding that economic duress could be invoked to avoid a defense of accord and satisfaction as well as to vitiate a contract entirely. Id. at 766. There was evidence from which the jury could have concluded that a bank representative misled Ralls about the availability of an extension of the commitment with the 10 percent interest rate, and there was also evidence that Ralls relied on such representation up to the point where he had no choice but to accept the loan at the higher rate to complete his project. The court therefore concluded that there was a jury question presented as to economic duress, requiring a remand to the trial court. Id.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The Alabama Supreme Courts first opportunity to flesh out the elements of the economic duress defense was in International Paper Company v. Whilden, 469 So.2d 560 (Ala. 1985). International Paper had entered into a series of contracts with Whilden for the cutting and hauling of timber on a certain tract of land owned by the Loftin family. Only certain specifically marked trees were to be cut, but it turned out that unmarked trees on the Loftin tract had also been cut. At the conclusion of the cutting, International Paper owed Whilden approximately 37, 000, but it refused to pay him unless he would, in return, execute a blanket indemnity agreement holding International Paper harmless against any claim made by the Loftins for the cutting of the unmarked trees. Id. at 561-562. Whilden signed the agreement after being told by International Paper that only about 30 unmarked trees had been cut (in fact the number was over 650), and he signed it because he needed the money to payback a bank loan he had obtained to purchase logs from International Paper in a separate agreement. Id. at 562.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0After International Paper was held liable to the Loftins for damages due to the cutting of the unmarked trees, it pursued a third-party claim against Whilden based upon the indemnity agreement. The trial court entered judgment for Whilden, concluding that he had executed the indemnity agreement under economic duress and that the agreement therefore was not enforceable. Id. The supreme court affirmed this judgment, concluding that the "trial court could reasonably have found that International Paper took unfair advantage of Whilden's economic necessities to coerce him into making the agreement." Id. at 564.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In its decision, the court referred to a three-element prima facie case for economic duress: