The doctrine of consideration and the concept of duress are two fundamental pillars of contract law. Both determine whether agreements between parties can be enforced and under what circumstances they may be invalidated. A landmark decision that clarified these principles is Pao On v Lau Yiu Long [1979] UKPC 17, decided by the Judicial Committee of the Privy Council on appeal from Hong Kong.
This case addressed two central questions: when past consideration can be treated as valid consideration and whether commercial pressure amounts to duress. The judgement remains highly influential in English contract law, often cited for its authoritative articulation of the exceptions to the rule on past consideration and the proper scope of economic duress.
Facts of Pao On v Lau Yiu Long Case
The dispute arose out of a complex commercial transaction involving two companies and their shareholders. Fu Chip Investment Co. Ltd., a newly incorporated public company controlled by the defendants, Lau Yiu Long and his younger brother Benjamin, intended to purchase a 21-storey building known as the Wing On building. The building was owned by Tsuen Wan Shing On Estate Co. Ltd., whose majority shareholders were Pao On and his family, the claimants in this case.
Rather than arranging a straightforward cash sale, the parties structured the deal through a share swap. Fu Chip would purchase all of the shares in Shing On, thereby acquiring ownership of the building. In return, Pao On received 4.2 million shares in Fu Chip, valued at $2.50 each. To stabilise the market price of Fu Chip’s shares, the parties entered into an additional arrangement whereby Pao On agreed not to sell 60 per cent of the shares for one year. Simultaneously, the Laus agreed to repurchase those shares at the guaranteed price of $2.50 if the value dropped within the year.
However, a difficulty soon emerged. Pao On realised that under this arrangement, if the share price rose above $2.50, he would be deprived of potential gains, while Lau would benefit from certainty. To address this imbalance, Pao On demanded a fresh arrangement, insisting that unless he was indemnified against any fall in share price, he would not complete the main agreement. Consequently, a guarantee agreement was signed on 4 May 1973. Under this, Lau agreed to indemnify Pao On should the price fall below $2.50, while leaving Pao free to enjoy any rise in value.
Unfortunately for Pao On, the share price slumped. He sought to enforce the indemnity agreement, but Lau resisted. The defendants argued that the indemnity lacked valid consideration because it relied on a past act and a pre-existing contractual duty. They further claimed that the agreement had been procured under economic duress.
Issues
The case raised two key legal questions:
- Consideration – Did the indemnity agreement lack valid consideration, either because it was based on past consideration or because it consisted of a pre-existing duty?
- Duress – Was the guarantee agreement unenforceable because it was obtained through duress, in the form of commercial pressure exerted by Pao On?
Decision of the Privy Council in Pao On v Lau Yiu Long
The Privy Council, in a judgement delivered by Lord Scarman, held in favour of the claimants. The guarantee agreement was valid and enforceable. The ruling clarified important principles regarding both consideration and duress.
Consideration
Ordinarily, the doctrine of consideration dictates that past consideration is no consideration. A promise given in return for something already performed is not enforceable. However, Pao On v Lau Yiu Long recognised an important exception to this principle, drawing on the earlier case of Lampleigh v Braithwaite (1615). Lord Scarman held that past consideration may be valid if three conditions are satisfied:
- The act must have been done at the request of the promisor.
- It must have been understood by both parties that the act would be remunerated or compensated in some way.
- The promise, if made in advance, would have been legally enforceable.
Applying these conditions, the Privy Council reasoned that Pao On’s promise not to sell shares was given at Lau’s request and was understood to form part of the overall bargain. The indemnity was not independent but rather reflected the true intention of the parties at the time of the main contract. The guarantee agreement therefore had valid consideration.
Importantly, the case also confirmed that performing a pre-existing contractual obligation owed to a third party can constitute good consideration. Thus, even though Pao On’s obligation not to sell shares was already binding in relation to the main agreement, promising to perform this duty provided valid consideration for Lau’s indemnity.
Duress
On the question of duress, Lord Scarman was equally clear. The defence of duress requires more than the presence of commercial pressure. It requires coercion of the will that vitiates consent. Drawing from the earlier case of Barton v Armstrong [1976] AC 104, the Privy Council outlined several factors to determine whether duress exists:
- Whether the person allegedly coerced protested at the time.
- Whether there was an alternative course of action available, including legal remedies.
- Whether the party had access to independent advice.
- Whether the party took steps to avoid the contract after signing it.
In Pao On v Lau Yiu Long, although Lau faced significant commercial pressure when negotiating with Pao, this did not amount to duress in law. The defendants were engaged in a commercial transaction at arm’s length, and their decision to agree to the indemnity was voluntary. The Privy Council held that while pressure existed, it did not amount to coercion of the will. The agreement was therefore enforceable.
Ratio Decidendi
The ratio of Pao On v Lau Yiu Long lies in two main findings:
- Past consideration can be good consideration if it was performed at the promisor’s request, with the mutual understanding of remuneration, and would have been enforceable if promised beforehand.
- Economic duress requires more than commercial pressure. It requires coercion of will sufficient to vitiate consent, and must be established by examining factors such as protest, alternatives, advice, and subsequent conduct.
Obiter Dicta
Lord Scarman also made observations regarding the fairness of commercial negotiations. He noted that businessmen negotiating at arm’s length do not require courts to intervene lightly, as commercial pressure is a natural feature of bargaining. Only in cases of illegitimate or unlawful pressure should the law intervene.
Conclusion
Pao On v Lau Yiu Long is a cornerstone of English contract law, addressing both the doctrine of consideration and the scope of duress. It established that past consideration can, under specific circumstances, be valid, and it carefully defined the requirements of economic duress. The Privy Council’s ruling ensures that commercial certainty is preserved while also offering guidance on when agreements may be invalidated.
By clarifying these principles, the case continues to guide courts, lawyers, and students alike. Its enduring significance lies in its pragmatic balance: upholding bargains honestly made, while resisting attempts to misuse legal doctrines to evade contractual responsibility. In doing so, Pao On v Lau Yiu Long remains one of the most important authorities in the development of modern contract law.
