San Diego Contract Defenses: Doctrine of Economic Duress

If you are sued in California for breach of contract, there are some defenses that your San Diego business can raise that might win the case. The doctrine of duress is a general defense when the claim is made and evidence produced that one was compelled or coerced into making the contract. If, for example, someone threatens to beat you up if you do not sign the contract, that is a form of duress. Those facts, if proven, will result in a California court holding the contract to be invalid or void.

There is a similar doctrine called “economic duress.” This doctrine applies most commonly to settlements and release-type documents. For example, if an employee is terminated, an employer will often require a release or settlement document to be signed. The employee, now having no source of income, might feel coerced or compelled to sign by the economic circumstances. However, under California law, the economic duress must be extreme. Here is a quick rundown of the legal doctrine.

San Diego Corporate Law: Economic Duress in California

For economic duress to be successful as a defense to breach of contract, five aspects must be present:

• Other party must threaten some “sufficiently coercive” wrongful act
• The “wrongful act” — if done — must be of the sort that will cause the victim to suffer “financial ruin”
• The wrongdoer must have known about the victim’s financial vulnerability
• The victim must have had no “reasonable alternative” but to succumb
• The coercive wrongful act actually caused or induced the victim to sign the contract, or release or settlement

An example of a “wrongful act” would be the threat of withholding a payment that is lawfully due (such as wages or debt payments). See Sheehan v. Atlanta International Insurance Co., 812 F.2d 465 (9th Cir. 1987). And, importantly, the nature of the “wrongful act” need not be like tort or crime. But, at the same time, merely driving a hard bargain or placing someone in the position of having to choose among bad choices will not be considered coercion or economic duress.

A good example of the legal principles comes from the case of Johnson v. International Business Machines Corp., 891 F. Supp. 522 (US Dist. Court ND Cal. 1995) (applying California law). In that case, IBM was reducing its labor force. Mr. Johnson was given the choice of accepting a lower-paying job with IBM, accepting two weeks’ severance, or accepting a 26 weeks enhanced severance package with additional health and job-placement benefits in consideration for signing the Release. Mr. Johnson chose the third option. However, IBM later changed the health and benefits plan in a manner that Mr. Johnson did not like. He then sued and argued that the release that he signed was invalid because of economic duress.

However, the court rejected Mr. Johnson’s arguments. The health and benefit plan specifically gave IBM the contractual right to make changes and modifications. That right did not amount to any form of economic coercion. Furthermore, when Mr. Johnson signed the release, he was not facing imminent bankruptcy or financial ruin and, certainly had alternatives. First, he could have taken another job at IBM. The fact that the other job might have paid less was not sufficient coercive to cause financial ruin. Second, the job market at the time for computer programmers — Mr. Johnson’s specialty — was viable at the time so that Mr. Johnson could have found substitute employment. Finally, the evidence showed that Mr. Johnson had some savings, some unused credit accounts, and could have cut back on discretionary expenses.

All told, the court concluded that IBM did not commit any form of economic duress causing Mr. Johnson to sign the Release. As such, the court held the Release to be valid and enforceable.

A more recent case provides an example of how the courts handle the causation element. See Kennedy v. Columbus Manufacturing, Inc., Case No. 17-cv-03379-EMC (US Dist. ND. Cal. April 23, 2018) (applying California law). In that case, Mr. Kennedy signed a settlement release with respect to a lawsuit he filed in which he claimed employment discrimination based on disability. Mr. Kennedy argued that he had been subject to economic duress since he had been fired, was allegedly disabled and unable to find employment, and “had” to sign the settlement agreement. However, the court rejected the argument. On the causation element, the court noted that the settlement agreement was negotiated over a lengthy period of time and that Mr. Kennedy held the “bargaining power.” These facts alone were sufficient for the court to conclude that the employer did not “cause” Mr. Kennedy to sign the settlement agreement. Without causation, of course, there could be no finding of economic duress.

Contact San Diego Corporate Law

For further information, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard was named “Best of the Bar” four years running by the San Diego Business Journal. To schedule a consultation, contact Mr. Leonard via email or call at (858) 483-9200. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Mr. Leonard proudly provides legal services to business owners in San Diego and the surrounding communities.

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