What is Economic Duress in California?
Defined as a wrongful act sufficiently coercive to cause a “reasonably prudent person” faced with no reasonable alternative to succumb to perpetrator’s pressure.
What is Economic Duress in California?
Economic Duress: Is There A Reasonable Alternative?
Typically, duress, menace, and undue influence are raised in business, elder abuse, and other matters involving intentional torts. One often overlooked, and frequently misunderstood, form of duress is “economic duress.” This claim can be seen as an affirmative claim in cases of rescission or as an affirmative defense in cases of breach of contract. While the doctrine has developed significantly over the last fifty years, it does not have the notoriety of the traditional doctrine of duress.
Litigators on both sides of the bar should be aware of this powerful doctrine. An example would be a claim that, in a negotiation, one party would lose most or all of their assets if they didn’t agree to the deal, which, on its face appears quite one sided.
The History of Economic Duress
California courts have recognized the economic duress doctrine in private sector cases for at least fifty years. Young v. Hoagland (1931) 212 Cal. 426, 430-432. The doctrine is based in equity. Burke v. Gould (1894) 105 Cal. 277, 281. It represents “but an expansion by courts of equity of the old common-law doctrine of duress.” Sistrom v. Anderson (1942) 51 Cal.App.2d 213, 220. In its infancy it was limited to the early statutory and judicial interpretation requiring the commission of an unlawful act in the nature of a tort or crime. Philippine Export & Foreign Loan Guarantee Corp. v. Chuidian (1990) 218 Cal. App. 3d 1058, 1077, (threat to expose former Philippine President Marcos’s investments in U.S. corporations). However, as it has evolved, it is no longer subject to these limitations. Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal. App. 3d 1154, 1158–1159. Rather, economic duress may consist of a wrongful act that is sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator’s pressure. Crosstalk Productions Inc. v. Jacobson (1998) 65 Cal. App. 4th 631, 644; Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal. App. 3d 1154, 1158.
As described in frequently cited opinion, Rich & Whillock, Inc. v. Ashton Development, Inc.:
The underlying concern of the economic duress doctrine is the enforcement in the marketplace of certain minimal standards of business ethics. Hard bargaining, “efficient” breaches and reasonable settlements of good faith disputes are all acceptable, even desirable, in our economic system. That system can be viewed as a game in which everybody wins, to one degree or another, so long as everyone plays by the common rules. Those rules 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. Such exchanges make a mockery of freedom of contract and undermine the proper functioning of our economic system. The economic duress doctrine serves as a last resort to correct these aberrations when conventional alternatives and remedies are unavailing.
Current Legal Standard
The current legal standard under the doctrine of economic duress discards the requirement of the commission of a tort or crime. Under current evaluations wrongful acts that are sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator’s pressure will support a claim of economic duress. Crosstalk Productions Inc. v. Jacobson (1998) 65 Cal. App. 4th 631, 644; Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal. App. 3d 1154, 1158. Often, “wrongful acts will support a claim of economic duress when a reasonably prudent person subject to such an act may have no reasonable alternative by to succumb when the only other alternative is bankruptcy.” Uniwill v. City of Los Angeles (2004) 124Cal.App.4th 537, 545. See also, Louisville Title Ins. Co. v. Surety Title & Guar. Co. (1976) 60 Cal.App.3d 781, 806; Thompson Crane & Trucking Co. v. Eyman (1954) 123 Cal.App.2d 904, 905-907, 909-910; accord, Totem Marine T. & B v. Alyeska Pipeline, Etc. (Alaska 1978) 584 P.2d 15, 22-23 (economic duress found where only alternative was bankruptcy.) Rich & Whillock, Inc. v. Ashton Development, Inc. (1984) 157 Cal. App. 3d 1154, 1159 (economic duress where company faced imminent bankruptcy.) The party subjected to the coercive act, and having no reasonable alternative, can then plead economic duress to avoid the contract. Cross Talk Productions, Inc. v. Jacobson (1998) 65 Cal.App.4th 631, 644.
The “wrongful acts” envisioned by the doctrine may take the form of a bad faith threat to institute civil process, blackmail, an assertion of a claim known to be false, or a bad faith threat to breach a contract or to withhold payment Crosstalk Productions Inc. v. Jacobson (1998) 65 Cal. App. 4th 631, 644–645. However, it has long been recognized that the taking of legal action or the threat to take such action cannot constitute such duress. Louisville Title Ins. Co. v. Surety Title & Guar. Co. (1976) 60 Cal. App. 3d 781, 801; See also, Leeper v. Beltrami (1959) 53 Cal.2d 195 , 204; Taylor v. Ford (1901) 131 Cal. 440, 447. Likewise, courts have determined that opposing views of contract rights is not duress. As recognized in River Bank America v. Diller, “[i]t is not duress…to take a different view of contract rights, even though mistaken, from that of the other contracting party, and it is not duress to refuse, in good faith, to proceed with a contract, even though such a refusal might later be found to be wrong…A mere threat to withhold a legal right for the enforcement of which a person has an adequate [legal] remedy is not duress.” River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1424-1425.
The determination of whether there is a reasonable alternative in the context of a claim of economic duress is governed by the reasonably prudent person standard—an objective standard. This evaluation of whether there was a “reasonable alternative” is made by resolving whether a reasonably prudent person would follow the alternative course. Louisville Title Ins. Co. v. Surety Title & Guar. Co. (1976) 60 Cal. App. 3d 781, 802. Thus, the decision must be made by conducting an objective analysis and rejecting the individuals own subjective conclusion.
Economic Duress As Compared to Duress, Menace, and Undue Influence
The economic duress doctrine is similar to the general doctrine of duress, menace, and undue influence. However, each involves subtle differences and individual determinations. While they often appear interchangeable, and sometimes involve similar analysis, each requires an individual determination and evaluation. Given the similar analysis, a party’s acts may subject him or her to liability under one or all theories.
General Doctrine of Duress
The general doctrine of duress envisions some unlawful action by a party by which one’s consent is obtained through fear or threats. Keithley v. Civil Service Bd. (1970) 11 Cal. App. 3d 443, 450 (internal citations omitted). As defined in California Civil Code Section 1569:
Duress consists in:
Unlawful confinement of the person of the party, or the husband or wife of such party, or of an ancestor, descendant, or adopted child of such party, husband, or wife;
Unlawful detention of the property of any such person; or,
Confinement of such person, lawful in form, but fraudulently obtained, or fraudulently made unjustly harassing or oppressive.
As such, the general doctrine of duress often addresses threats of confinement, in stark contrast to the “financial” threats of economic duress. Thus, determinations of duress under the general doctrine are not confined to financial determinations, but may consist of a range of “harassing” behavior.
Duress is often used interchangeably with menace, but in California menace is technically a threat of duress or a threat of injury to the person, property, or character of another. Civ. Code § 1570; Odorizzi v. Bloomfield Sch. Dist. (1996) 246 Cal. App. 2d 123, 128. California Civil Code Section 1570 defines “menace” as “a threat: 1. [o]f such duress as is specified in subdivisions one and three of the last section; 2. [o]f unlawful and violent injury to the person or property of any such person as is specified in the last section; or, 3. [o]f injury to the character of any such person.” Civ. Code § 1570. Unlike economic duress, claims of menace typically involve physical threats often not present in cases of economic duress.
California Civil Code section 1575 defines “undue influence,” 1. In the use, by one in whom a confidence is reposed by another, or who holds a real or apparent authority over him, of such confidence or authority for the purpose of obtaining an unfair advantage over him; 2. In taking an unfair advantage of another’s weakness of mind; or, 3. In taking a grossly oppressive and unfair advantage of another’s necessities or distress.. Several courts have observed that undue consists of “persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment.” Odorizzi v. Bloomfield Sch. Dist. (1966) 246 Cal. App. 2d 123, 130. “The hallmark of such persuasion is high pressure, a pressure which works on mental, moral, or emotional weakness to such an extent that it approaches the boundaries of coercion. In this sense, undue influence has been called overpersuasion.” Id. Indeed, the Odorizzi Court noted [o]verpersuasion is generally accompanied by certain characteristic elements which, when simultaneously present in a significant number, characterize the persuasion as excessive. These elements are ‘(1) discussion of the transaction at an unusual or inappropriate time, (2) consummation of the transaction in an unusual place, (3) insistent demand that the business be finished at once, (4) extreme emphasis on untoward consequences of delay, (5) the use of multiple persuaders by the dominant side against a single servient party, (6) absence of third-party advisers to the servient party, (7) statements that there is no time to consult financial advisers or attorneys.’ Thus, the concept of undue influence may also mirror issues found in cases of economic duress, with economic duress being more narrowly focused on financial pressures.
Application to Litigated Cases
In the early 1980s, the California Legislature first acknowledged that elders and “dependent adults” deserve special protection against abusive behaviors and have since developed a comprehensive statutory scheme protecting California citizens over the age of 65, including prohibitions on financial abuse. Accordingly, California’s statutory prohibition on financial elder abuse may often involve instances of economic duress.
Financial elder abuse occurs when any person or entity “takes, secrets, appropriates, obtains or retains real or personal property of an elder for a wrongful use or with intent to defraud.” California Welfare & Institutions Code § 15600 et seq. While financial elder abuse can take many forms, the most widespread abuses include telemarketing fraud, identity theft, predatory lending and home improvement and estate planning scams, which often involve oppressive contracts. Attorneys seeking to rescind a contract in cases involving elderly clients should also consider including allegations of economic duress, which are likely present in cases of financial elder abuse.
To date, there have not been any published opinions addressing economic duress in the context of elder abuse claims. Despite this fact, attorneys dealing with financial elder abuse claims should also be aware of the related arguments of economic duress.
Claims of economic duress in business litigation is becoming more frequent. Typically, they occur when where one party is at a significant disadvantage in a deal and is on the brink of financial disaster if the deal isn’t done. Below are a handful of cases demonstrating the Court’s analysis of the doctrine.
Rich & Whillock, Inc. (1984) 157 Cal. App. 3d 1154. An excavating company filed an action against a general contractors for breach of contract for refusing to pay the full amount owed under a contract. The trial court found appellants were responsible for the balance due under the contract and that a settlement agreement and release were not valid defenses due to economic duress. On appeal, the court agreed with the findings of the trial court. The Appellate Court agreed that the evidence presented by the excavating company sufficiently established duress because the general contractor knew that the excavating company faced imminent bankruptcy if not paid its final billing, the excavating company strenuously objected to general contractor’s coercive tactics, and the excavating company succumbed to the settlement offer only to avoid economic disaster.
The doctrine of economic duress was also raised in River Bank America v. Diller (1995) 38 Cal. App. 4th 1400. There, the defendant tried to prevent the enforcement of guarantees it had signed on the ground that it signed them only when the plaintiff had changed the structure of a project development transaction at the last minute from a joint venture to a loan and guarantees. According to the defendant, because it had already started development of the project and had incurred expenses and other obligations, it was too late to obtain other financing and it had no choice but to go ahead and sign the loan and guarantees. In rejecting the defendant’s economic duress theory, the court ruled that the defendant made a business decision to proceed with the contract (loan plus guarantees) rather than sue to enforce the alleged joint venture agreement.
Although it stems from an Alaskan lawsuit, California courts frequently refer to Totem Marine T. & B v. Alyeska Pipeline, Etc. (Alaska 1978) 584 P.2d 15, 21, when discussing the doctrine of economic distress. Totem, a new corporation, contracted with Alyeska to transport pipeline construction materials from Houston, Texas to a port in southern Alaska, with the possibility of one or two cargo stops along the way. Totem chartered the equipment necessary to perform the contract. Unfortunately, numerous unanticipated problems arose from the outset which impeded Totem’s performance. When Totem’s chartered tugs and barge arrived in the port of Long Beach, California, Alyeska caused the barge to be unloaded and unilaterally terminated the contract. Totem then submitted termination invoices totaling somewhere between $260,000 and $ 300,000. At the same time, Totem notified Alyeska it was in urgent need of cash to pay creditors and that without immediate payment it would go bankrupt. After some negotiations, Alyeska offered to settle Totem’s account for $ 97,500. In order to avoid bankruptcy, Totem accepted Alyeska’s compromise offer and signed an agreement releasing Alyeska from all claims under the contract. About four months after signing the release agreement Totem sued Alyeska for the balance due under the contract. The trial court entered summary judgment for Alyeska based on the release agreement. The Supreme Court of Alaska reversed, relying almost exclusively on the doctrine of economic durses.
The doctrine of economic duress has also been applied in the family law context. The opinion In re Marriage of Baltins (1989) 212Cal. App. 3d 66, is a prime example of the doctrine’s application in the family law setting. The husband drafted a marital settlement agreement which gave his wife only 10-15% of the marital community property. The wife signed the agreement only after the husband threatened that he would file for bankruptcy and avoid paying the wife (or their daughter) if she did not sign immediately. Although the wife was represented by counsel, the lawyer was not consulted about the settlement agreement (inasmuch as the husband told her that he would not deal with lawyers) and the wife was clearly distressed, distraught and having difficulty coping. The court noted that “[p]erhaps the most significant mark [indicia of duress] is Wife’s consent to a grossly unfair agreement by which she received only 10 to 15 percent of the community property and inadequate support for herself and the minor child …. The evidence reveals no consideration for such an unequal agreement….” Thus, the court employed the doctrine of economic distress, and the wife was entitled to a modification of the judgment of dissolution of marriage.
Tips For Addressing Claims of Economic Duress
Tip #1—The Alleged Economic Duress Must Force the Specific Conduct
To establish economic duress there must be causation, that is, the alleged duress must force the detrimental conduct. See, Rich & Whillock, Inc. (1984) 157 Cal. App. 3d 1154 (“the doctrine now may come into play upon the doing of a wrongful act which is sufficiently coercive to cause a reasonably prudent person faced with no reasonable alternative to succumb to the perpetrator’s pressure.”); Cross Talk Productions, Inc. v. Jacobson (1998) 65 Cal.App.4th 631 (“the doctrine ofeconomic duress can apply when one party has done a wrongful act which is sufficiently coercive to cause a reasonably prudent person, faced with no reasonable alternative, to agree to an unfavorable contract.”) Thus, practitioners should be mindful that any purported economic duress must cause the injurious conduct.
Tip #2—Exercising Legal Rights Is Not Economic Duress
Another important element to remember is that “threats” to exercise a party’s legal rights is not considered duress. While unfounded threats of litigation may support a claim of economic duress, the taking of legal action or the threat to take such action cannot constitute such duress. Louisville Title Ins. Co. v. Surety Title & Guar. Co. (1976) 60 Cal. App. 3d 781, 801; See also, Leeper v. Beltrami (1959) 53 Cal.2d 195, 204; Taylor v. Ford (1901) 131 Cal. 440, 447.
Even disputes in which the parties take differing views of contract rights, which are later are found to be wrong are not considered economic duress. River Bank America v. Diller (1995) 38 Cal.App.4th 1400, 1424-1425 (“[i]t is not duress…to take a different view of contract rights, even though mistaken, from that of the other contracting party, and it is not duress to refuse, in good faith, to proceed with a contract, even though such a refusal might later be found to be wrong…A mere threat to withhold a legal right for the enforcement of which a person has an adequate [legal] remedy is not duress.”)
Tip #3—Economic Duress Must Involve A “Wrongful” Act
While the doctrine no longer requires the commission of a tort or crime, it still requires a “wrongful” act. California courts have recognized “wrongful” acts sufficient to find economic duress to include bad faith threats to institute civil process, blackmail, an assertion of a claim known to be false, or a bad faith threat to breach a contract or to withhold payment Crosstalk Productions Inc. v. Jacobson (1998) 65 Cal. App. 4th 631, 644–645. More often than not, it involves a threat that the party knows to be false. Leeper v. Beltrami (1959) 53 Cal.2d 195.
Tip #4—Party Must Have No Reasonable Alternative
Frequently the analysis of economic duress hinges on the determination of whether the party had no reasonable alternative.
A number of cases require the party to face bankruptcy or financial ruin. Louisville Title Ins. Co. v. Surety Title & Guar. Co. (1976) 60 Cal. App. 3d 781, 801; See also, Leeper v. Beltrami (1959) 53 Cal.2d 195 , 204; Taylor v. Ford (1901) 131 Cal. 440, 447; Goldstone-Tobias Agency, Inc. v. Barbroo Enterprises Productions, Inc. (1965) 237 Cal.App.2d 720, 723-724; London Homes, Inc. v. Korn (1965) 234 Cal.App.2d 233, 240; Fio Rito v. Fio Rito (1961) 194 Cal.App.2d 311, 325; Nesbitt Fruit Products, Inc. v. Del Monte Beverage Co. (1960) 177 Cal.App.2d 353, 361; Marshall v. Packard-Bell Co. (1951) 106 Cal.App.2d 770, 774; Sistrom v. Anderson (1942) 51 Cal.App.2d 213, 22; Simmons v. Sweeney (1910) 13 Cal.App. 283, 290 ; and Standard Box Co. v. Mutual Biscuit Co. (1909) 10 Cal.App. 746, 761-762.
Another California court recognized that allowing one’s home to be sold at a foreclosure sale is not a reasonable alternative. Leeper v. Beltrami (1959) 53 Cal.2d 195, 204-205.
Courts have rejected claims of economic duress where the plaintiff agreed for good business reasons to pay more than originally required. London Homes, Inc. v. Korn (1965) 234 Cal.App.2d 233, 240
In Sistrom v. Anderson (1942) 51 Cal. App. 2d 213, a turkey farmer had a contract with a buyer in the retail meat business. After acceptance and payment of the first delivery of turkeys, the buyers noticed that the turkeys were in a “green” condition. The buyer then told the seller that unless he accepted his check for the second lot of turkeys and as a cancellation of the contract, he would not pay for the second lot and would stop payment of the first check. The Court while buyers took an advantage of the farmer, it was not an advantage which would constitute economic duress, or any other form of duress.
Attorneys should be aware of the powerful doctrine of economic duress and its intricacies in litigation.
If you need assistance in understanding this area of the law, contact the California experts Brown & Charbonneau, LLP at 714-505-3000