Download Economic Duress Defense in Alabama: Elements, Cases, Challenges and more Schemes and Mind Maps Law in PDF only on Docsity!
Economic Duress: A Poor Excuse for Non-Performance
_George M. Walker and Robert S. Walker_* In commercial litigation it is often the case that a party has failed to meet or comply with some contractual requirement, causing the party serious annoyance or inconvenience in the litigation. In order to avoid the breach of contract or promise and the consequences of such breach to the rights and remedies available in the litigation, the breaching party sometimes invokes economic duress as a defense to the claim of breach of contract or other contention based on non-performance. 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 releases, arbitration agreements, loan and loan modification agreements, and employment agreements. Over the course of the defense’s 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. The Definition of Economic Duress Economic 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.” The Development of the Economic Duress Defense in Alabama The 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. In 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 bank’s argument that it was entitled to 12% interest on a $600,000 loan that it had initially committed to make with a 10% interest rate. Interest rates rose between the date the commitment was signed and the date that plaintiff was ready for the funds, and when the loan was provided a year later, it was at the 12% rate. Id. at 765-766. Ralls signed the loan agreement with the 12% interest rate in it because he had substantial financial commitments that he could meet only by obtaining the loan. The bank later contended 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 10% 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 entirely vitiate a contract. Id. at 766. There was evidence from which the jury could have concluded that a bank representative misled Mr. Ralls about the availability of an extension of the commitment with the 10% interest rate, and there was also evidence that Mr. Ralls in reliance thereon committed himself financially 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 remand to the trial court. Id. The first occasion the Alabama Supreme Court had to flesh out the elements of the economic duress defense was in International Paper Company v. Whilden , 469 So. 2d 560 (Ala. 198 5). International Paper had entered into a series of contracts with Whilden for the cutting and
So. 2d 416, 431 (Ala. 2010); Wright Therapy Equip., LLC v. Blue Cross and Blue Shield of Alabama , 991 So. 2d 701, 707 (Ala. 2008); Clark v. Liberty Nat’l Life Ins. Co. , 592 So. 2d 564, 567 (Ala. 1992). While the economic duress defense is alive and well and recognized in Alabama by the appellate courts, there are difficulties of proof in the elements of the prima facie case that make it a very difficult defense to establish and to get past a summary judgment motion or motion for judgment as a matter of law. An examination of each of the elements, and the evidence required to meet each of the elements, demonstrates the extent of the difficulty in establishing economic duress as a legitimate excuse for non-performance. A. Wrongful Acts The Whilden Court had much to say about what constitutes a wrongful act sufficient to invoke the economic duress defense. First, quoting from the Ralls decision, which in turn quoted from 17 C.J.S. Contracts §177 (1963), the court stated that economic duress: “applies only to special, unusual, or extraordinary situations in which unjustified coercion is used to induce a contract, as where extortive measures are employed, or improper or unjustified demands are made, under such circumstances that the victim has little choice but to accede thereto.” 469 So. 2d at 563. The Court appears to have intended to adopt the defense for only the most serious cases of misconduct. Second, the Court emphasized that it is the conduct of the wrongdoer that must be the focus of the fact finder: “Tantamount to a claim of economic duress is the wrongful pressure exerted by one party which overcomes the will of another.” Id. at 563. Lest there be some confusion about the true nature or scope of the wrongdoing that would support invocation of economic duress as an excuse for non-performance, the Court quoted with approval language from an Alabama Court of Civil Appeals decision describing the wrongful act requirement:
‘It is said that economic duress must be based on conduct of the opposite party and not merely on the necessities of the purported victim. The entering into a contract with reluctance or even dissatisfaction with its terms because of economic necessity does not, of itself, constitute economic duress invalidating the contract. Unless unlawful or unconscionable pressure is applied by the other party to induce the entering into a contract, there is not economic compulsion amounting to duress. Chouinard v. Chouinard , 568 F.2d 430 (5th^ Cir. 1978).’ 469 So. 2d at 573 (quoting from Board of School Commissioners of Mobile County v. Wright , 443 So. 2d 35, 38-39 (Ala. Civ. App.), rev’d on other grounds, 443 So. 2d 40 (Ala. 1983)). Accordingly, a “wrongful act” for economic duress purposes requires employment of unlawful or unconscionable pressure by a party to coerce the execution of a contract. In modern times (since 1982), the Supreme Court of Alabama has found evidence of wrongful acts sufficient to create a jury issue on an economic duress defense in only three cases. In Ralls , supra , the Court concluded that a jury could conclude that plaintiff was a victim of economic duress based on the bank’s conduct in forcing him to accept the loan with a 12% interest rate after committing to loan the money at a 10% interest rate. Ralls , 422 So. 2d at 766. In Whilden , the court concluded that International Paper’s refusal to pay Mr. Whilden for the timber he cut unless he signed an indemnity agreement protecting the company amounted to a wrongful act. Whilden , 469 So. 2d at 563-64. And in Newburn v. Dobbs Mobile Bay, Inc. , 657 So. 2d 849, 851 (Ala. 1995), the court held that a jury question existed relative to economic duress where the defendant truck dealer would not return plaintiffs’ truck to them after making repairs until they signed a general release of all claims they had against the defendant. Id. at 852. From these decisions, it is clear that a “wrongful act” consists of some act or conduct on the part of one party that it has no right to do that is intended to coerce, and does coerce, the other party to sign a document that he or she would not have signed but for the improper coercion.
Id. at 707-08. The fact that a claimed victim of economic duress had the benefit of legal advice makes it very difficult to make a persuasive economic duress argument. See Wilson v. Southern Medical Association , 547 So. 2d 510, 513 (Ala. 1989) (rejecting invocation of the economic duress defense where plaintiff acted on advice of legal counsel); Anderson v. Amberson , 905 So. 2d 811, 814 (Ala. Civ. App. 2004) (economic duress defense rejected where plaintiff’s own attorney drafted and negotiated the release sought to be avoided). In Bama’s Best Housing, Inc. v. Hodges , 847 So. 2d 300 (Ala. 2000), plaintiff contended that an arbitration agreement he executed was signed under economic duress because defendants had delivered a mobile home he had agreed to buy but refused to set it up until he signed the arbitration agreement. Id. at 301-02. Since plaintiff had not made a down payment on the mobile home that he would forfeit if he failed to sign the arbitration agreement, the court concluded that he had not offered sufficient evidence to create a material factual dispute relative to his economic duress defense. Id. at 303-04. While the Court did not clearly say so, this decision establishes that economic duress cannot be established unless the claimed wrongful act caused financial distress to the claimed victim. In Ponder v. Lincoln Nat’l. Sales Corp. , 612 So. 2d 1169 (Ala. 1992), the Court affirmed dismissal of a Complaint seeking an affirmative recovery based on a claim of economic duress predicated upon the refusal of a holder of a renewal option on a lease to exercise the option at the option price. The holder instead negotiated a lower, more favorable, rate. Id. at 1170. The Court noted that “merely taking advantage of another’s financial difficulty is not duress,” and affirmed the dismissal because the allegations of the Complaint “suggest nothing more than that the modification of the lease agreement occurred by mutual agreement of sophisticated parties engaged in an ordinary commercial real estate transaction.” Id. 1171. The Court has to date
rejected invitations to adopt economic duress as a substantive tort, leaving it to be invoked only as an affirmative defense. See Cahaba Seafood, Inc. v. Central Bank of the South , 567 So.2d 1304, 1306 (Ala. 1990); Guillot v. Beltone Electronics Corp. of Chicago , 540 So. 2d 648, 650 (Ala. 1988). In Clark v. Liberty Nat’l Life Ins. Co. , 592 So. 2d 564 (Ala. 1992), Clark sought to avoid the terms of his agent agreement with Liberty National because it contained a non-compete agreement that he conceded he had violated after terminating his relationship with Liberty National. Id. at 565. The court rejected this invocation of the economic duress defense, stating: The fact that Liberty National required Clark to sign the new contract in order to continue his employment at Liberty National does not amount to economic duress. Liberty National did not apply any unlawful or unconscionable pressure to force Clark to sign the contract. Id. at 567. The Court also could have noted that Liberty National did not take advantage of any financial distress into which it had placed Mr. Clark in order to coerce him to sign the contract. In Rose v. Delaney , 576 So. 2d 232 (Ala. 1991), the court rejected defendant’s argument that an indemnity agreement could not be enforced against him because defendant “took advantage of the fact that he was unemployed and had no money, to coerce him to enter into the indemnity agreement.” Id. at 233-34. The evidence was to the contrary, and the court affirmed the judgment against defendant. In Wilson , supra , plaintiff sought to avoid the terms of a resignation letter he had written, contending that he was coerced to sign it by his employer’s threat to forestall and withhold payments of funds from an escrow account if he did not sign it. Id. at 513. Noting the statement in Whilden that “mere withholding of payment of a debt, without more, is insufficient to constitute economic duress,” 469 So. 2d at 563, and noting that Wilson acted on advice of
sought to avoid. Bama’s Best Housing, Inc. , 847 So. 2d at 304. In Ponder , the court rejected invocation of the economic duress defense and stated specifically that “taking advantage of another’s financial difficulty is not duress.” Ponder, 612 So. 2d at 1169. Finally, in Rose , the court rejected defendant’s contention that he was the victim of economic duress based on the fact that he was unemployed and had no money, presumably because there was no evidence that plaintiff had committed some wrongful act that caused him to be unemployed and have no money. Rose , 576 So. 2d at 233-34. Perhaps there will be further development of this issue in future decisions. For now, it appears very clear that a party invoking economic duress as a defense will be able to establish the second element of the defense only by showing that he or she signed the challenged contract as a result of some existing financial distress that the offending party both wrongfully created and took advantage of. It is certainly not enough simply to demonstrate a party’s own “exigent financial circumstances.” See Haston v. Crowson, 808 So. 2d 17, 23 (Ala. 2001). C. Reasonable Alternatives This is another element of a prima facie claim of economic duress that Alabama’s appellate courts have not had many occasions to address. In Penick v. Most Worshipful Prince Hall Grand Lodge F&AM of Alabama, Inc. , 46 So.3d 416, 431-32 (Ala. 2010), the outcome was in fact based on this third and final element as the court noted that “Penick cites no evidence in the record showing that his only reasonable alternative to the allegedly wrongful foreclose was to sign the modification agreement as it was presented to him.” Id. at 431-32. See also, Brown v. First Federal Bank , ___ So. 3d ___, ___, 2012 WL 415568, *12 (Ala. Civ. App., Feb. 10, 2012)(finding insufficient evidence of economic duress where plaintiff had “reasonable alternatives” to refinancing her home loan). In affirming the trial court’s rejection of Penick’s invocation of the economic duress defense, the Court also made it clear that, because duress is an
affirmative defense under Rule 8(c) of the Alabama Rules of Civil Procedure , the burden of establishing economic duress, and the risk of non-persuasion, falls to the party invoking it. Id. at 432 n.14. Although not clearly articulated, in two other decisions where the courts rejected invocation of the economic duress defense and mentioned the fact that the proponents of the defense were represented by counsel at and prior to the execution of the challenged agreements, it appears implied that plaintiff had failed to establish the lack of reasonable alternative as required by the third element. See Wilson v. Southern Medical Ass’n , 547 So. 2d 510, 513 (Ala. 1989)(reiterating that “the victim must show that he had no reasonable alternative but to agree to the other party’s terms or face serious financial hardship.”); Anderson v. Amberson , 905 So. 2d 811, 819 (Ala. Civ. App. 2004). In rejecting Anderson’s challenge to a release that he had signed, the court noted that: Further, the record indicates that Anderson’s own attorney allegedly drafted and negotiated the release. At the time he signed the release, Anderson was aware of the claims he now brings against the defendants. Anderson could have executed a release with more favorable terms, perhaps reserving certain claims against the defendants, or he could have abstained from signing the release altogether; however, he chose to sign the release and waive his claims against the defendants. Given the foregoing, we cannot say that Anderson has demonstrated error with regard to this issue. Id. at 819. It appears clear from these decisions that in any case in which a party seeking to void a contract has had the benefit of advice of counsel at the time of or prior to execution of the contract, satisfaction of the third element of the economic duress defense is quite unlikely.
CONCLUSION
Any party inconvenienced by a prior release or other troublesome document that
he or she signed prior to litigation will naturally wish to avoid the consequences of the
**Robert S. Walker is a third year student at Cumberland School of Law, where he has been on the Dean’s List in each of his first four semesters. He is a 2010 Cum Laude graduate of Birmingham Southern College, where he obtained his degree in History. (^1) For example, in Sterling Oil of Oklahoma, Inc. v. Pack , 291 Ala. 727, 745, 287 So. 2d 847, 862 (1973), the Alabama Supreme Court noted that “This Court apparently has not heretofore expressly applied the [economic duress] doctrine in the context of business compulsion... .” The Court did not apply the doctrine in that case either, deciding to “deter fuller treatment to a more appropriate case.” Id. n. 7.
