## Facts

- Loral Corporation held Navy prime contracts to manufacture radar sets with strict delivery schedules, liquidated damages for delay, and cancellation rights for default.
- Austin Instrument, Inc. supplied precision gear components to Loral under a fixed-price subcontract and began delivering in early 1966.
- After Loral obtained a second Navy contract, it sought bids for additional gear components; Austin bid on all required parts.
- Austin demanded that Loral (1) grant substantial price increases on the existing subcontract (including for items already delivered) and (2) award Austin the entire second subcontract, threatening to stop deliveries if Loral refused.
- Austin stopped deliveries under the existing subcontract shortly after making its ultimatum.
- Loral attempted to obtain substitute performance by contacting ten other manufacturers, but none could meet the Navy delivery schedule in time.
- Facing serious contractual consequences with the Navy, Loral agreed to Austin’s demands, accepted the price increases, and awarded Austin the second subcontract for all parts.
- Austin resumed deliveries; Loral met its delivery obligations to the Navy.
- After performance was completed, Loral sought to recover the price increases as having been exacted under economic duress; Austin sued for an unpaid balance of the increased prices, and Loral counterclaimed for restitution of increases already paid.

## Issues

1. Whether a subcontractor’s threatened breach and actual stoppage of deliveries to extract higher prices and additional work constitutes a wrongful threat sufficient for economic duress.
2. Whether the prime contractor had a reasonable alternative to agreeing to the price modification and second subcontract given time-sensitive Navy obligations and lack of substitute suppliers.
3. Whether the alleged victim’s timing in challenging the modification was sufficiently prompt to avoid waiver or ratification.

## Decision

- The Court of Appeals of New York held that Loral established economic duress as a matter of law.
- The court concluded Austin used a wrongful threat—leveraging nonperformance of an existing duty—to obtain retroactive and prospective price increases and the full second subcontract.
- The court found Loral lacked a reasonable alternative because substitute suppliers could not deliver in time and delay risked liquidated damages or cancellation of the Navy contracts.
- The modification was voidable; Loral was entitled to restitution of amounts paid above the original contract prices.
- The lower courts’ rulings enforcing the increases were modified to limit Austin’s recovery to the original prices and to allow Loral’s recovery of the overpayments.

## Legal Principles

- Economic duress renders an agreement or modification voidable when induced by a wrongful or improper threat that overcomes the victim’s free will.
- A threatened breach of an existing contract duty, used to obtain more favorable terms, may constitute a wrongful threat.
- Lack of a reasonable alternative is assessed in practical terms, including whether timely substitute performance is available and whether refusal would expose the victim to serious contractual loss.
- A party may repudiate or seek restitution after the coercive pressure ends; delay while the party remains dependent on the other’s performance does not necessarily constitute waiver.

## Conclusion

The court held that a subcontract modification obtained by threatening to withhold indispensable deliveries, where the buyer cannot obtain timely substitutes and faces severe consequences for delay, is voidable for economic duress and supports restitution of the coerced price increases.


Austin Instrument, Inc. v. Loral Corp., 29 N.Y.2d 124 (1971)