Pao On v Lau Yiu Long [1979]

Pao On v Lau Yiu Long [1979] UKPC 17 is a contract law appeal case concerning consideration and duress. The case was appealed from the Court of Appeal of Hong Kong to the Judicial Committee of the Privy Council, which served as the court of final appeal for the colony at that time, so it is relevant for English contract law.

The case involves a contract dispute between Fu Chip Investment Co Ltd (majority owned by Lau Yiu Long and his brother Benjamin) and Tsuen Wan Shing On Estate Co Ltd (majority owned by Pao On and family). The parties engaged in a complex deal involving the exchange of shares in their respective companies rather than a straightforward cash transaction. As part of the agreement, Pao On agreed not to sell a significant portion of the acquired shares for at least a year. Additionally, in the event of a share price drop, Lau Yiu Long agreed to repurchase a portion of the shares at a fixed price. However, Pao On sought to amend this arrangement to an indemnity if the share price fell below a certain level.

The central legal issues revolved around the validity of the amended agreement. Lau Yiu Long contested its validity on two grounds: (1) lack of consideration, as the amendment appeared to be based on a pre-existing duty; and (2) allegations of duress, claiming that the contract was procured under coercion.

Lord Scarman, delivering the Privy Council's advice, dismissed the lack of consideration argument. He clarified that a promise to perform a pre-existing contractual obligation to a third party could be valid consideration. The court rejected the notion that consideration could be invalidated based on threats to repudiate a pre-existing obligation or an unfair use of a dominating bargaining position, particularly in commercial transactions conducted at arm's length.

On the issue of duress, Lord Scarman outlined the criteria for coercion of will that would vitiate consent. Factors included whether the allegedly coerced party protested, had alternative courses of action, received independent advice, and took steps to avoid the contract. In this case, the court concluded that the economic pressure applied was not sufficient to constitute duress. The pressure was deemed to be commercial in nature, driven by a desire to avoid adverse publicity.

The case is significant in clarifying the principles of consideration and duress in the context of commercial contracts. It emphasises the enforceability of agreements, even if modifications involve pre-existing duties, as long as the parties negotiate at arm's length. Additionally, it establishes the criteria for evaluating duress in commercial contexts, requiring a showing that the victim's consent was not voluntary and amounted to a coercion of will.