Economic Duress during a deal: A Case Cross-Analysis

Case Cross-Analysis: Austin Instruments v. Loral Corp & Dow Chemical Company v. Occidental Petroleum (Oxy)

The Austin Instruments v. Loral Corp and Dow Chemical Company v. Occidental Petroleum (Oxy) cases can be brought together under one term that affects many companies in different industries: economic duress.

In the case of Dow v. Oxy, The Dow company established a requirements agreement with Oxy, in which Oxy would purchase all of its PBC monomer requirements from Dow. Dow locked in a fixed price schedule, which at that precise moment helped decrease Oxy’s manufacturing costs, which were an issue of its own due to inefficiencies in Oxy’s PBC plant.

The established agreement involved Dow building a monomer plant right next to Oxy’s facility and building a pipeline directly into the Oxy’s manufacturing plant. Oxy’s monomer transportation cost (and the cost of the monomer itself) decreased drastically. However, once a recession hit the economy, the PBC demand within Oxy’s primary industry began to decrease. The decreasing demand caused Oxy to decrease its PBC price in the market in order to be able to stay competitive. This dilemma caused Oxy to buy less monomer from Dow company, thus providing Dow with an excess in monomer it could sell to the outside markets. These prices for excess monomer sold at a lower rate than the fixed price requirements deal between Dow and Oxy.

Oxy seeing this felt it was unfair, asked for a decreased rate – Dow definitively says no, and Oxy then breaches the contract by purchasing monomer thought external markets than directly from Dow company. With Oxy believing they had “no choice” because they were bleeding from the PBC market decrease and the recession, Dow and Oxy’s relationship began to deteriorate. Oxy’s final move was to shut down the pipeline leading to Dow’s monomer plant which after 60 days of being shut down would become a scrap heap due to the chemical waste lying dormant within the facility.

This case compares well with the Austin Instrument v. Loral Corp. case in that economic duress forced the Loral company to purchase from Austin Instrument for military machinery components. Loral had a list of preferred and approved vendors from where they can purchase from and feel comfortable within dealing with their precise machinery requirements to keep up with military standards.

Where this case slightly differed to our understanding was that Austin demanded a price increase in the goods to have them delivered within the timeframe Loral requested for the subsequent contract. Whereas Dow company was standing by and supporting a contract that initially agreed upon with Oxy, the risk of the PBC market dropping was not apart of the monomer price negotiated between the two parties. If Oxy wanted Dow to take on some of that risk, it believed that they would have shown that in an increase in price to hedge said risk. Besides, Austin Instruments had a reputation for delaying orders upon not receiving the full shipment of goods in the past. Loral had waited to file the lawsuit and claim economic duress because they were scared of the potential delays Austin would incur on them.

Economic duress during the deal making process

The idea of economic duress can be very damaging as well as hard to plan for during the deal-making process. The most significant impact that can affect a companies’ ability to exercise their free will throughout the lifespan of a deal/agreement is economic duress. There are ways of countering the risk of economic duress. One way is to hedge for it within the pricing negotiated at the beginning of the contract. The terms of this particular contract would have backed in terms and clauses, which would modify the current pricing due to established circumstances. Another form, shown through the Loral case was to ensure the contingency plan of suppliers for materials needed in short turnaround time. Being backed into a corner and held hostage for pricing is not an ideal position for any business, which is why proactive investigation and expertise deal-making skills are necessary to protect one’s business during the deal-making process.

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