Kelsey-Hayes Co. v. Galtaco Redlaw Casting Corp.

United States District Court for the Eastern District of Michigan · Contracts

Contractseconomic duresscontract modificationsale of goodssummary judgmenteconomic duressbusiness compulsioncontract modification

Facts

Kelsey-Hayes and Galtaco had a 1987 three-year requirements contract under which Galtaco would supply certain castings at fixed and then reduced prices. In May 1989, after sustained losses, Galtaco decided to discontinue foundry operations but offered to keep supplying castings for several months only if customers accepted a 30 percent price increase, and in June demanded an additional 30 percent increase from Kelsey-Hayes. Kelsey-Hayes concluded it could not obtain adequate substitute castings for 18 to 24 weeks and feared shutdowns at major customers' assembly plants, so it accepted both increases while vigorously protesting Galtaco's conduct as a breach of the 1987 contract. Kelsey-Hayes later refused to pay for most of the final shipments in amounts approximating the agreed price increases, and Galtaco sued for those amounts by counterclaim.

Issue

Whether Kelsey-Hayes produced sufficient evidence to allow a reasonable factfinder to conclude that the 1989 price-increase agreements were entered under economic duress, such that they would not supersede or waive claims under the 1987 contract. Also, whether the common-law doctrine of economic duress remains available despite the UCC's good-faith standard for contract modifications.

Rule

A later, inconsistent agreement ordinarily rescinds and supersedes an earlier contract and waives unreserved claims for breach of the earlier contract. But a subsequent contract or modification is invalid and does not supersede the earlier contract if it was entered under economic duress. Economic duress exists when a party's assent is induced by an improper or wrongful threat that leaves the victim no reasonable alternative, and in the contract-modification setting the coerced party must at least display some protest to put the other side on notice that assent is not freely given.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Blue Mesa Machines, a manufacturer in Denver, had a fixed-price supply contract with Iron Vale Components, a fictional foundry in Toledo, for specialized housings. Two weeks before a major production run, Iron Vale told Blue Mesa it would stop shipping unless Blue Mesa signed a 20% price increase, even though the existing contract still had six months left.

If Blue Mesa seeks to avoid the price increase, which fact most strongly supports a claim of economic duress under the governing rule?

Explanation. A modification is voidable if assent was induced by an improper or wrongful threat that leaves the victim no reasonable alternative. The strongest supporting fact is the supplier's threat to stop deliveries already owed under an existing contract unless the buyer accepted higher prices. Under the majority opinion, such a threatened breach may be treated as wrongful even if not independently tortious or criminal. (Derived from Kelsey-Hayes Co. v. Galtaco Redlaw Casting Corp. (n.d.).)