Pao On v Lau Yiu Long [1980] AC 614

The Paos sold their company shares to Fu Chip, receiving Fu Chip shares as payment with restrictions on selling. They later demanded a guarantee from the Laus against share price falls, threatening not to complete unless given. The Privy Council held valid consideration existed and rejected the economic duress defence, establishing key principles on past consideration and economic duress.

Facts

The Paos owned shares in Tsuen Wan Shing On Estate Company Ltd and agreed to sell them to Fu Chip Investment Company Limited, controlled by the Laus. The purchase price of $10.5 million was satisfied by allotment of 4.2 million Fu Chip shares. Under the main agreement, the Paos undertook not to sell 60% of these shares before April 1974. A subsidiary agreement provided that Lau would buy back these shares at $2.50 per share, intended as protection against a fall in value.

When Mrs Pao realised the subsidiary agreement disadvantaged them (preventing benefit from any rise in share value), the Paos demanded its cancellation and substitution with a true guarantee of indemnity. They refused to complete the main agreement unless this was provided. Lau, fearing damage to Fu Chip’s public reputation if the deal collapsed, agreed. On 4th May 1973, a guarantee was executed and the subsidiary agreement cancelled. Share prices subsequently collapsed, and the Paos claimed under the guarantee.

Issues

Issue 1: Was there valid consideration for the guarantee?

Whether the consideration stated in the written guarantee was past consideration incapable of supporting the Laus’ promise, or whether valid consideration existed.

Issue 2: Was extrinsic evidence admissible to prove additional consideration?

Whether evidence outside the written agreement could establish additional valid consideration.

Issue 3: Was the guarantee voidable for economic duress?

Whether the Laus’ consent was vitiated by duress such that the contract should be set aside.

Judgment

Consideration

Lord Scarman, delivering the judgment of the Board, held that valid consideration existed. The stated consideration was not merely past consideration because it incorporated the Paos’ promises to Fu Chip (made at Lau’s request) which remained to be performed.

“An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisors’ request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance.”

The Board confirmed that a promise to perform a pre-existing contractual obligation to a third party can constitute valid consideration:

“Their Lordships do not doubt that a promise to perform, or the performance of, a pre-existing contractual obligation to a third party can be valid consideration.”

Public Policy

The Board rejected the argument that public policy should invalidate consideration obtained by threatening to breach a contract with a third party:

“Their Lordships’ conclusion is that where businessmen are negotiating at arm’s length it is unnecessary for the achievement of justice, and unhelpful in the development of the law, to invoke such a rule of public policy.”

Economic Duress

The Board accepted that economic duress could in principle render a contract voidable, but found none present on the facts. Lord Scarman stated:

“Duress, whatever form it takes, is a coercion of the will so as to vitiate consent.”

Relevant factors include whether the alleged victim protested, had alternative remedies available, received independent advice, and took steps to avoid the contract. Here, Lau had legal advice, chose not to pursue litigation against the Paos, and made a calculated business decision:

“In short, there was commercial pressure, but no coercion.”

Implications

This case is of fundamental importance to contract law. It clarifies the rule in Lampleigh v Braithwait regarding past consideration, confirming that an act done at the promisor’s request can support a subsequent promise if remuneration was always contemplated. It authoritatively confirms that performing (or promising to perform) a duty owed to a third party constitutes good consideration. The case also provides the leading statement on economic duress in English law, recognising its existence whilst setting a high threshold requiring coercion of will vitiating consent, not merely commercial pressure.

Verdict: Appeal allowed. The judgment of the trial judge was restored, ordering the defendants to pay $5,392,800 with interest. The guarantee was held enforceable as valid consideration existed and no economic duress was established.

Source: Pao On v Lau Yiu Long [1980] AC 614