Duress as Rent-Seeking

By Mark Seidenfeld & Murat C. Mungan. Full text here.

The doctrine of duress allows a party to avoid its contractual obligations when that party was induced to enter the contract by a wrongful threat while in a dire position that left it no choice but to enter the contract. Although threats of criminal or tortious conduct clearly are wrongful, under the doctrine of “economic duress” courts have held that other threats can be wrongful and hence the basis of a duress defense. Courts, however, have not developed a coherent understanding of what makes such non-criminal and non-tortious threats wrongful.

This Article proposes that a threat should be wrongful when it is motivated by rent-seeking. Other scholars have previously proposed tests to identify wrongful threats, but they have not focused on a rent-seeking principle. Oren Bar-Gill and Omri Ben-Shahar, for instance, have proposed that an economic threat is not wrongful when the threat is credible. Steve Shavell has suggested that a threat is wrongful when it seeks to exploit a monopoly position of the threat-maker that was created by its own harmful conduct. Our criteria differ from those of Bar-Gill and Ben-Shahar by specifying the circumstances under which a threat that is made credible by investment should be considered wrongful. Our criteria also differ from those of Shavell because we advocate that a threat should not be deemed wrongful even in some situations where the threat-maker created the dire situation that makes the threatened party vulnerable to the threat.

We also carve out an exception to rent-seeking for contract negotiation in which a party turns down an offer that would provide it economic value. Although such conduct technically is rent-seeking, such negotiation provides economic value because it is the least cost mechanism for parties to determine whether a potential contract will create economic surplus. The article then discusses the implications of our criteria for settlements of contract disputes and contract modification.