The Law of Duress and the Economics of Credible Threats

This paper argues that enforcement of an agreement, reached under a threat to refrain from dealing, should be conditioned solely on the threat’s credibility. When a credible threat exists, enforcement promotes social welfare and the threatened party's interests. If agreements backed by credible threats were not enforceable, the threatening party would not extort them and would instead refrain from dealing—to the threatened party's detriment. The doctrine of duress, which invalidates such agreements, hurts the coerced party. By denying enforcement when a credible threat exists, the duress doctrine precludes the threatened party from making the commitment necessary to reach agreement. Paradoxically, the duress doctrine renders performance less likely, thereby reducing incentives to invest. The paper suggests that courts should replace the duress methodology with a credibility inquiry. It discusses factors that would be relevant under such an inquiry. Finally, it demonstrates applications of this approach to leading contract modification cases.