mad formal executive man yelling at cameraKey Business Court Decisions

To Rescind a Contract, the Duress Must Come from Outside Any Threatened Breach

To rescind an unfavorable agreement based upon duress, a party must show factors other than the opposing party’s mere threat to breach an agreement.  Loyd v. Griffin, 2021 NCBC 77 (J. Robinson).  Absent such outside factors, the Business Court held, a shareholder was not entitled to rescind the the shareholder agreement.

In 2004, Plaintiff started selling insurance for Griffin Insurance Agency, Inc. (“GIA”) and its owner, James Griffin (“Griffin”).  Although Griffin had promised Plaintiff that he could eventually take over GIA if he produced enough revenue and even made him a partner, in 2018 Griffin allegedly demanded Plaintiff enter into a shareholder agreement for GIA. The agreement divided ownership in GIA to roughly 2/3 to Griffin and 1/3 to Plaintiff, notwithstanding that Plaintiff was allegedly responsible for the majority of GIA’s revenue.  Plaintiff objected, but Griffin allegedly threatened to fire Plaintiff from GIA if he didn’t sign the agreement.  Plaintiff signed the shareholder agreement.  Later, Griffin terminated Plaintiff, accusing him of issuing fraudulent certificates of insurance.   Plaintiff filed suit against Griffin and GIA, asserting a claim, inter alia, to rescind the shareholder agreement on the basis that he had entered into it under duress.  Griffin filed a motion to dismiss the claim, contending that Plaintiff failed to allege facts sufficient to show duress.

The Business Court agreed.  Recognizing that an agreement can be rescinded where one party shows that coercion or duress existed at the time of the agreement’s formation, the Business Court nonetheless held this type of coercion requires something more than a mere threat by the other party to breach a then-existing agreement. In addition to any such threat, the Business Court explained, there must exist a “source of power” that is external to the contract which, when combined with the threatened breach, creates the requisite duress.  (Opinion, ¶55).   Examples of such external power sources included an independent threat by a government agency to end a particular project or even the bad actor’s own position as the sole supplier of a product.  (Id., ¶54).  Because Plaintiff’s complaint failed to allege any “external source of power,” Griffin’s mere termination threat was insufficient to create the duress necessary to rescind the shareholder agreement.            

Based upon this decision, a business should understand that its mere threat to terminate other agreements while negotiating a new contract might not, standing alone, be sufficient for the other party to later rescind the unfavorable agreement on the basis of duress.

Additional legal points:

  • To maintain a claim for unjust enrichment, the conferred benefit can either be direct (i.e., to the defendant himself) or indirect (i.e., to the defendant’s spouse), so long as the defendant obtains some benefit therefrom. (Opinion, ¶64-66).

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