Pao On v Lau Yiu Long
An act done at the promisor's request can be good consideration, a promise to perform a duty owed to a third party can be consideration, and commercial pressure is not duress unless illegitimate.
Facts
The Pao On family owned a private company, Shing On, whose main asset was a building under construction in Hong Kong. The Laus were the majority shareholders in Fu Chip Investment, a public company that wanted the building. The parties agreed that Fu Chip would buy Shing On's shares in exchange for 4.2 million Fu Chip shares, and the Paos promised not to sell 60 per cent of those shares for a year to protect Fu Chip's share price. A side agreement provided that the Laus would buy back the shares at $2.50 each, but the Paos realised this would deny them any rise in value. They threatened not to complete the main contract unless the side agreement was replaced by a guarantee from the Laus indemnifying them against a fall below $2.50. The Laus agreed, to avoid delay and loss of confidence in Fu Chip. The shares fell, and the Laus refused to honour the guarantee.
Legal principle
The Privy Council held that the guarantee was enforceable. The Paos' promise to Fu Chip not to sell the shares, made at the Laus' request, was good consideration for the guarantee even though it came before it, because the act was done at the promisor's request, the parties understood that it was to be rewarded, and the reward would have been legally enforceable if promised in advance. A promise to perform an existing contractual duty owed to a third party can also be good consideration. The Laus' claim of economic duress failed, because they had faced only commercial pressure: they had considered the matter, taken advice and decided that the guarantee was a reasonable commercial risk.
Related cases on consideration and promissory estoppel
- Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130
- Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87
- Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329, [2008] 1 WLR 643
- Combe v Combe [1951] 2 KB 215
- Currie v Misa (1875) LR 10 Ex 153
- D & C Builders Ltd v Rees [1966] 2 QB 617
- Foakes v Beer (1884) 9 App Cas 605
- Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270
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