Cabot Corp. v. AVX Corp.
2007 Mass. LEXIS 188, 863 N.E.2d 503, 448 Mass. 629 (2007)
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Rule of Law:
A contract entered under alleged economic duress is not voidable where the stronger party merely took advantage of market conditions through hard bargaining without a wrongful or unlawful act, and where the allegedly coerced party, being sophisticated and represented by counsel, failed to promptly disavow the contract and instead performed under its terms, thereby ratifying it.
Facts:
- AVX Corporation (AVX) manufactured capacitors for electronic products, which required tantalum, a rare metal supplied by Cabot Corporation (Cabot).
- For many years, AVX purchased tantalum from Cabot under annual 'letters of intent,' which AVX considered binding contracts for specified quantities and prices, but Cabot viewed as for planning purposes only, with sales often deviating from the documents.
- In late 2000, a global shortage of tantalum developed, leading to unprecedented demand for electronic products using tantalum capacitors and a steep rise in tantalum prices.
- Leveraging the seller's market, Cabot notified customers that it proposed to commit its limited production capacity to those prepared to enter into binding, long-term supply contracts.
- Between August and November 2000, AVX and Cabot, both large, publicly traded corporations with annual sales over a billion dollars and represented by highly competent legal counsel, negotiated a new five-year supply contract.
- On November 7, 2000, AVX's president and chief executive officer expressed satisfaction with the agreed-upon terms, which included prices no higher than current market rates, a 'most favored customer' protection for AVX, and a mutual release of all claims under prior agreements.
- AVX and Cabot formally executed the supply contract in January 2001.
- AVX performed under the contract, purchasing over $342 million in tantalum from Cabot and benefiting from over $6 million in price reductions through the 'most favored customer' clause; in July 2001, AVX's executive group rejected proposed contract modifications negotiated with Cabot.
Procedural Posture:
- Eighteen months after executing the supply contract, AVX Corporation (AVX) commenced an action against Cabot Corporation (Cabot) in Federal court, alleging the contract was void due to economic duress.
- The Federal court dismissed AVX's action for lack of diversity jurisdiction.
- Cabot Corporation (Cabot) subsequently commenced this action in Massachusetts Superior Court, seeking a declaration that the supply contract was valid and binding.
- Cabot filed a motion for partial summary judgment in the Superior Court.
- The Superior Court judge granted summary judgment for Cabot, concluding that there was no economic duress and that AVX had, in any event, ratified the contract.
- AVX appealed the Superior Court's grant of summary judgment.
- The Supreme Judicial Court of Massachusetts transferred the case from the Appeals Court on its own motion.
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Issue:
Is a long-term supply contract voidable for economic duress when a sophisticated buyer claims a supplier leveraged a market shortage and threatened to withhold product under prior non-binding agreements, but the buyer was represented by counsel, had an adequate legal remedy, and performed under the contract for 18 months before alleging duress?
Opinions:
Majority - Cordy, J.
No, the supply contract is not voidable for economic duress, because Cabot's actions did not constitute wrongful or unlawful threats that deprived AVX of its unfettered will, and even if they had, AVX ratified the contract through its subsequent performance and significant delay in asserting duress. The court reasoned that economic duress requires a showing of a wrongful or unlawful act or threat that deprives the victim of their unfettered will, resulting in a disproportionate exchange of values, citing International Underwater Contrs., Inc. v. New England Tel. & Tel. Co. Hard bargaining, even with an economic advantage in a seller's market, is not unlawful; Cabot merely took advantage of existing market conditions, which it did not create. The prior 'letters of intent' were largely non-binding, except for one specific product (C606) for which no threat of withholding was proven; thus, Cabot's alleged threats to withhold supply were not 'wrongful' in the context of duress. Furthermore, AVX, as a sophisticated party represented by highly competent counsel, had an adequate legal remedy by seeking preliminary injunctive relief promptly, which would have been quicker than the four months of negotiations. Even if duress existed, AVX ratified the contract through its conduct. AVX waited 18 months after execution to allege duress, during which it performed under the contract, accepted benefits (over $342 million in purchases, $6 million in price reductions), and demanded strict compliance from Cabot. The court emphasized that a party must complain promptly of coercive acts or the defense of duress is waived, citing Beaconsfield Townhouse Condominium Trust v. Zussman. AVX’s rejection of modifications in July 2001 demonstrated its capacity to exercise free will, yet it waited another 12 months to file suit, a lengthy period of silence inconsistent with disavowal.
Analysis:
This case establishes a high threshold for proving economic duress, especially between sophisticated commercial entities represented by counsel, emphasizing that merely leveraging a strong bargaining position in favorable market conditions does not, absent an unlawful act or breach of a binding agreement, constitute duress. The decision also strongly reinforces the doctrine of ratification, underscoring that delayed challenge and continued performance under a contract—including accepting benefits—will likely be construed as an affirmation of the agreement, precluding a later claim of coercion. This ruling promotes contractual stability by discouraging parties from adopting a 'wait and see' approach before attempting to void a contract.
