The Supply Contract and the Unforeseen Price Surge
In January, Company A contracted with Company B to supply 10,000 units of a specialised component at £50 per unit, with delivery scheduled for July. The contract contained no price adjustment clause. In March, a global shortage of the raw material caused market prices to triple. Company A informed Company B that it could not perform at the agreed price and would need £80 per unit to continue. Company B, desperate to meet its own customer orders, agreed in writing to the higher price. After delivery and payment, Company B discovered that Company A had actually secured raw material at the original price through a long-term supply agreement. Company B now seeks to recover the extra £30 per unit paid. Company A argues that the variation was freely agreed and binding. Discuss whether Company B can recover the additional payment under the law of contract.
1. Advise Company B on whether the variation agreement is enforceable, applying the doctrine of consideration and the principle in Foakes v Beer and related exceptions.
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Company B's claim hinges on whether its promise to pay an extra £30 per unit was supported by consideration. Under the doctrine of consideration, a promise to perform an existing contractual duty owed to the promisor is not good consideration (Stilk v Myrick). Company A was already contractually obliged to deliver the components at £50; its promise to perform that same duty does not constitute fresh consideration for Company B's promise to pay more. The variation therefore lacks consideration and is prima facie unenforceable. However, exceptions exist: (1) if Company A had provided a practical benefit beyond the original obligation, such as avoiding a penalty or ensuring timely delivery, the variation may be enforceable (Williams v Roffey Bros). Here, Company A did not incur any additional detriment; it had already secured raw material at the original price, so no practical benefit was conferred on Company B beyond what it was already entitled to. (2) The doctrine of promissory estoppel might assist Company B, but it operates as a shield, not a sword, and cannot be used to recover money paid. (3) Part-payment of a debt is not satisfaction of the whole (Foakes v Beer), but this is not a debt scenario. Thus, the variation is unsupported by consideration and Company B can recover the additional £30 per unit as money paid under a void variation, subject to any defence of estoppel or the presence of a genuine practical benefit. The fact that Company A had already secured the raw material cheaply negates any suggestion of a practical benefit; thus Company B is likely to succeed.
2. If Company B had agreed to the higher price because Company A threatened to breach the contract and cause Company B to lose a lucrative onward contract, how would that affect enforceability?
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If Company A threatened to breach the contract unless Company B agreed to pay more, the variation would be obtained by economic duress. Economic duress renders a contract voidable at the instance of the innocent party. The threat to breach a contract can constitute illegitimate pressure if it leaves the victim with no practical alternative but to submit (Pao On v Lau Yiu Long). Company B would need to show that the pressure was illegitimate, that it had no reasonable alternative, and that it protested or took steps to avoid the contract promptly. If established, Company B could rescind the variation and recover the extra payments. However, if Company B affirmed the contract after the duress ceased, the right to rescind would be lost. In the original scenario, there was no threat; Company A simply stated it could not perform. But if a threat were present, the variation would be vulnerable to challenge. Additionally, the threat to breach may also negate any practical benefit argument. Thus, the presence of duress would strengthen Company B's position to recover the additional sums.