Pao On v Lau Yiu Long
Citations:  AC 614;  3 WLR 435;  3 All ER 65; (1979) 123 SJ 319;  CLY 331.
The claimants owned shares in a private company. The defendants were the majority shareholders in a public company. In February 1973, the claimants agreed to sell their shares to the public company. In return, the public company would issue the claimants shares in the public company.
The defendants were concerned that this would depress the public company’s share price. They agreed with the claimants that the claimants would retain 60% of the shares issued until the 30th of April 1974. The claimants wanted protection against any fall in the share price until then. Accordingly, the parties made a subsidiary agreement whereby the defendant would buy 60% of the claimant’s shares on or before the 30th of April 1974 at a set price.
The claimants later realised that this arrangement would deprive them of profit if the value of the shares went up. They refused to complete the contract with the public company unless the defendant agreed to cancel the subsidiary agreement and instead agree to an indemnity of the share price. The defendant was concerned about the company’s reputation if the dispute continued, so they agreed.
The share price later dropped, and the claimants sought to rely on the indemnity. The defendants refused, so the claimants sued them for breach of contract. The defendants responded that the indemnity was unenforceable, because the claimants provided no consideration and extracted it by duress.
- Had the claimant provided consideration for the indemnity?
- Was the agreement voidable for economic duress?
The Privy Council held in favour of the claimants. This case fell into one of the exceptions against using past consideration as valid consideration. The claimants’ agreement to sell their shares and retain the new shares until April was at the defendants’ request. It was also done in the expectation that the defendants would remunerated them in some way. It was therefore good consideration.
In any case, the claimants provided additional consideration by promising to the defendants that they would perform their obligations owed to the public company under the sale contract. This was clear from extrinsic evidence: it did not matter that it was not mentioned in the written contract.
While the defendants were subject to commercial pressure, they were not sufficiently coerced into entering into the agreement. Economic duress was therefore inapplicable.
This Case is Authority For…
While past acts and promises are not normally good consideration, there are exceptions. In particular:
- Where the past act was requested by the other party, and the other party objectively gave the impression that it would be remunerated, that act can be consideration for a later promise.
- Obligations owed to a third-party may be relied on as consideration.
Lord Scarman noted, however, that this mainly relates to past contractual duties or acts. Where the existing duty is a public one, there are public policy reasons to hold that it is not good consideration.
Where the contract explicitly states what the consideration is, it is normally still possible to admit extrinsic evidence to demonstrate that another or alternative form of consideration has been provided.
This case explained that economic duress is a defence in contract law. However, Lord Scarman held that the party must show that the pressure constituted ‘coercion of the will’.
Modern cases on economic duress do not use strong language such as ‘coercion’ or complete vitiation of the will. Rather, they focus on whether the pressure was illegitimate and whether the party had any practical choice but to submit to the threat. See for example Universe Tankships Inc of Monrovia v International Transport Workers Federation  1 AC 366 and Dimskal Shipping Co SA v International Transport Workers Federation  2 AC 152.