Decided 9 April 1979 | ||
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Full case name Pao On and others v Lau Yiu Long and another Citation(s) [1979] UKPC 17, [1980] AC 614, [1979] HKLR 225 Judge(s) sitting Lord Wilberforce
Viscount Dilhorne
Lord Simon of Glaisdale
Lord Salmon
Lord Scarman Court Privy Council of the United Kingdom Similar Stilk v Myrick, Williams v Roffey Bros & Nicholl, Chappell & Co Ltd v Nestle Co, Foakes v Beer, D & C Builders Ltd v Rees | ||
Pao On v Lau Yiu Long [1979] UKPC 17 is a contract law appeal case from the Court of Appeal of Hong Kong decided by the Privy Council, concerning duress. It is relevant for English contract law.
Contents
Facts
Fu Chip Investment Co Ltd, a newly formed public company, majority owned by Lau Yiu Long and his younger brother Benjamin (the defendants), wished to buy a building called "Wing On", owned by Tsuen Wan Shing On Estate Co. Ltd. ("Shing On"), whose majority shareholder was Pao On and family (the claimants). Instead of simply selling the building for cash, Lau and Pao did a swap deal for the shares in their companies. Shing On would get 4.2m $1 shares in Fu Chip, and Fu Chip bought all the shares of Shing On. Fu Chip bought all the shares in Shing On, and Pao received as payment 4.2m shares in Fu Chip (worth $2.50 for each $1 share). To ensure the share price of Fu Chip suffered no shock, Pao agreed to not sell 60% of the shares for at least one year. Also, in case the share price dropped in that year, Lau agreed to buy 60% of the shares back from Pao at $2.50. But then Pao realised, if the share price rose over $2.50 in the year, the price would stay fixed and he would not get the gains. So he demanded that instead of that, Lau would merely indemnify Pao if the share price fell below $2.50. Pao made clear that unless he got this "guarantee agreement", he would not complete the main contract. It was signed on 4 May 1973. But as it turned out the shares did slump in value. Pao tried to enforce the guarantee agreement. Lau argued the guarantee agreement was not valid (1) because there was no consideration, only in the past and under a pre-existing duty, and (2) because it was a contract procured by duress.
Judgment
Lord Scarman, giving the Privy Council’s advice first disposed of the question about past consideration, because a promise to perform a pre-existing contractual obligation to a third party can be good consideration. The question of whether consideration can be invalidated ‘if there has been a threat to repudiate a pre-existing contractual obligation or an unfair use of a dominating bargaining position’ was rejected because ‘where businessmen are negotiating at arm’s length it is unnecessary for the achievement of justice’. On the idea of past consideration, Lord Scarman said this:
On the point of duress, Lord Scarman held the following.
This was commercial pressure and no more, since the company really just wanted to avoid adverse publicity. For a general doctrine of economic duress, it must be shown ‘the victim’s consent to the contract was not a voluntary act on his part… provided always that the basis of such recognition is that it must amount to a coercion of will, which vitiates consent.’