When Do Contract Negotiations Cross the Line?

Nearly all business negotiations involve power differentials, which the parties often seek to use to their advantage to broker a better deal...

Nearly all business negotiations involve power differentials, which the parties often seek to use to their advantage to broker a better deal. However, there are situations where exerting power over the other party can rise to the level of undue influence or duress and potentially make the agreement unenforceable.  The case law still cited in this regard includes decisions going back to the 19^th Century.

Undue Influence

Undue influence is generally defined as mental, moral or physical exertion that destroys free agency and prevents a person from following his own will and instead, forces him to accept the domination and influence of another. If a party makes a contract or a will because of undue influence by another party, the contract or will is voidable and may not be enforced.

In order to prove a contractual defense or to defeat provisions of a will based on undue influence, the defendant or objectant must prove that a party’s influence prevented the defendant or testator from deciding, based on his or her own free will, to make the contract or will. To prevail, it must be proven that a party’s influence forced the signer to do something that would not otherwise have been done.

It is important to recognize that not every type of influence can be characterized as undue. Honest persuasion, advice, suggestion, affection, solicitation and even argument are not, of themselves, undue influence unless they prevent the other party from acting based on his/her own will.

Economic Duress

New Jersey and New York courts also recognize that an otherwise enforceable contract may be invalidated on the ground that it was entered into under “economic duress.” To prove that the contract was made under duress, the defendant must show that he or she was the victim of a wrongful or unlawful act or threat by the plaintiff which forced the defendant to do what he or she would not have done voluntarily. As the New Jersey Supreme Court described in Woodside Homes, Inc. v. Morristown, 26 N.J. 529, 544 (1958), “Before the doctrine of business compulsion can be invoked there must be an assent by one party to an improper or wrongful demand by another under circumstances in which the former has little choice but to accede to the demand, i.e., ‘to do what he otherwise would not have done.’”

It is important to note that the pressure exerted must be wrongful. As the court explained in Continental Bank v. Barclay Riding Academy, Inc., 93 N.J. 153 (1983), “Merely taking advantage of another’s financial difficulty is not duress. Rather, the person alleging financial difficulty must allege that it was contributed to or caused by the one accused of coercion.” In determining whether the act or threat forced the other party to do what he or she would not have done voluntarily, the court will look at the state of mind, age, and the relationship between the defendant and the person whom the defendant claims threatened the defendant. Courts will also consider other surrounding circumstances, such as did defendant have legal counsel; did defendant have time to reflect about the transaction; could the defendant have resisted the threat by getting relief from the courts; and did defendant resist such threats in the past?

New York Contract and Will Contest Factors

Undue influence is rarely proven by direct evidence and is usually proven by circumstantial evidence.  Matter of Walther, 6 NY2d 49 [1959]; Rollwagen v Rollwagen, 63 NY 504 [1875]; Matter of Burke, 82 AD2d 260 [1981]

Among the factors that have been held to indicate the exercise of undue influence in a line of cases that includes decisions as far back as the 19^th Century are:

1. the physical and mental condition of the defendant or testator;
2. whether an attorney who represented the defendant or testator was involved in the drafting of the contract or will;
3. whether the propounded contract or will deviates from the signer’s prior stated or demonstrated intent, dealings  or testamentary pattern;
4. whether the person who allegedly wielded undue influence was in a position of trust or strength of position equivalent to coercion; and
5. whether the contract signer or testator was isolated from other resources and support or the objects of his or her natural affection.

With all this in mind, it is also important to remember that in order to defeat a motion for summary judgment, the objectant must demonstrate that there is a genuine triable issue by allegations which are specific and detailed, substantiated by evidence in the record and that mere conclusory assertions will not suffice.

Key Takeaway for Contracts

Parties may often have unequal bargaining power when negotiating a contract. While the law does not prevent a party from “driving a hard bargain,” the line between lawful and unlawful conduct is not always clear cut. To avoid crossing the line and risking the enforceability of your agreement, it is essential to always negotiate and act in good faith.

If you have questions, please contact us

If you have any questions or if you would like to discuss these issues further,
please contact Dan Brecher or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.