Economic duress: Overview, definition and example
What is economic duress?
Economic duress occurs when one party forces another party into a contract or agreement through pressure that threatens their financial stability. This pressure might include threats of financial harm, such as withholding essential services, refusing to pay money owed, or other actions that would leave the pressured party with no reasonable choice but to agree to unfavorable terms.
Why is economic duress important?
Economic duress is important because it ensures that agreements are made freely and fairly. When one party uses financial threats to force another party into a contract, the agreement may be considered invalid. In business, if economic duress is proven, the pressured party may be able to get out of the contract or negotiate for more favorable terms.
Understanding economic duress helps businesses protect themselves from being taken advantage of in negotiations. If a business feels coerced into a deal under financial threats, they may have legal grounds to challenge the contract and seek remedies.
Understanding economic duress through an example
Imagine a company, TechCo, is in the process of negotiating a contract with a supplier for critical parts. Midway through the negotiations, the supplier threatens to stop providing the parts unless TechCo agrees to a price increase that would severely impact their bottom line. TechCo, fearing that a lack of parts would cause major disruption, agrees to the terms under pressure.
In this case, TechCo might be able to claim economic duress because the supplier’s threat to withhold critical supplies put TechCo in a position where they had no reasonable choice but to accept the unfair terms. If proven, TechCo may be able to void the contract or seek compensation for the harm caused.
An example of economic duress in a contract clause
Here’s how a contract clause might address economic duress:
"Any agreement made under economic duress, including but not limited to any pressure exerted on either party through financial threats, shall be deemed voidable by the affected party. The party claiming duress must notify the other party within a reasonable time."
Conclusion
Economic duress is a legal concept that protects businesses from being forced into agreements due to financial pressure or threats. It ensures that contracts are entered into voluntarily and fairly. By understanding economic duress, businesses can better recognize when they’ve been coerced into unfavorable deals and seek the appropriate legal recourse to protect their interests.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.