PAO ON AND OTHERS V LAU YIU AND ANOTHER PRIVY COUNCIL. [1980] AC 614, [1979] 3 All ER 65 HEARING-DATES: 15 JANUARY, 9 APRIL APRIL 1979

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1 CATCHWORDS: PAO ON AND OTHERS V LAU YIU AND ANOTHER PRIVY COUNCIL [1980] AC 614, [1979] 3 All ER 65 HEARING-DATES: 15 JANUARY, 9 APRIL APRIL 1979 Contract - Consideration - Performance of existing contractual duty - Performance to be remunerated by conferment of benefit - Plaintiffs purchasing shares in company of which defendants majority shareholders - Plaintiffs promising not to sell shares for a year - Restriction on sale to be compensated for by defendants guaranteeing price of shares - Subsequent promise by defendants to indemnify plaintiffs against fall in value of shares during year sale restricted - Whether antecedent promise not to sell shares sufficient consideration for subsequent promise of indemnity - Whether consideration for subsequent promise of indemnity invalidated on ground of public policy if promise of indemnity secured by threat to repudiate existing contract or by abuse of dominant bargaining power. Contract - Duress - Economic duress - What constitutes duress in commercial contract - Whether economic duress recognised by English law. HEADNOTE: The plaintiffs owned the issued share capital of a private company ('Shing On') incorporated in Hong Kong. The defendants were the majority shareholders in a public investment company ('Fu Chip') in Hong Kong. Shing On's principal asset was a building. The plaintiffs wished to realise the value of the building by selling the shares of Shing On and the defendants wished to extend the property holding of Fu Chip by acquiring Shing On's shares. Accordingly, on 27th February 1973 two written agreements were entered into. The first ('the main agreement') was a contract for the sale by the plaintiffs of Shing On's shares to Fu Chip. The parties to that agreement were the plaintiffs as vendors, Fu Chip as the purchasers, and Shing On. The price for the Shing On shares was to be satisfied by the allotment to the plaintiffs of 4.2 million ordinary shares of $1 each in Fu Chip. It was provided, for the purpose of the main agreement, that the market value of each Fu Chip share was to be deemed to be $2.50. The plaintiffs gave an undertaking in the main agreement that they would not, before the end of April 1974, sell or transfer 2.5 million of the 4.2 million shares to be allotted to them. That restriction was of great importance to the defendants for heavy selling by the plaintiffs of Fu Chip shares could depress the market and devalue the defendants' shareholding in Fu Chip. The plaintiffs realised that by giving an undertaking to postpone sale of the Fu Chip shares they exposed themselves to the risk that the price of the shares might fall below $2.50 a share during the period of postponement. They therefore sought from the defendants a guarantee against a fall in the price of the shares. Accordingly, by a subsidiary agreement dated 27th February the defendants agreed to buy back from the plaintiffs, on or before 30th April 1974, 2.5 million of the allotted Fu Chip shares at the price of $2.50 a share. Under the two agreements the defendants obtained the better bargain because if, as was generally expected, Fu Chip shares rose in value beyond $2.50 a share, the plaintiffs still remained bound by the subsidiary agreement to sell back 2.5 million of the allotted Fu Chip shares to the defendants at $2.50 a share. The plaintiffs, appreciating they had made a bad bargain, indicated to the defendants that they would not complete the main agreement with Fu Chip unless the subsidiary agreement was cancelled and replaced by a true guarantee by way of indemnity, guaranteeing the price of 2.5 million of the allotted shares at $2.50 a share. The defendants knew that Fu Chip could claim specific performance of the main agreement without cancelling and replacing the subsidiary agreement, but were anxious to complete the transaction for otherwise public confidence in Fu Chip (which had only recently gone public) might be impaired. Thus, having considered the matter, the defendants chose to avoid litigation and to accede to the cancellation of the subsidiary agreement and its replacement by a guarantee by way of indemnity. The subsidiary agreement was therefore cancelled and, on 4th May 1973, the defendants signed a guarantee that the price of the 2.5 million of the allotted shares would not be less than $2.50 a share on the marketing day immediately following 30th April 1974 and that they would indemnify the plaintiffs if the shares fell below that price. The guarantee referred to the terms of the main agreement (which had not yet been performed) and stated that the main agreement had been entered into at the defendants' request. The guarantee, by referring to the terms of the main agreement, thereby incorporated as part of the

2 stated consideration for the guarantee the plaintiffs' promise to Fu Chip in the main agreement not to sell 2.5 million of the allotted shares before 30th April Between 4th May and 30th April 1974 share prices slumped and by 30th April Fu Chip shares had fallen to 36 cents a share. The defendants failed to fulfil their promise of indemnity under the guarantee of 4th May The plaintiffs brought an action against them claiming $5,392,800 due under the guarantee, or alternatively specific performance of the guarantee. By their defence the defendants asserted (i) that no valid consideration for the defendants' promise of indemnity was expressed in the guarantee, (ii) that extrinsic evidence to prove additional consideration was inadmissible and (iii) that the guarantee was void on the ground that it was induced by economic duress on the plaintiffs' part. The judge in the Supreme Court of Hong Kong gave judgment for the plaintiffs. On the defendant's appeal the judge's decision was reversed and the appeal allowed. The plaintiffs appealed to the Judicial Committee of the Privy Council. All four judges below were agreed that the consideration expressed in the guarantee was past consideration and therefore incapable of supporting the defendants' promise of indemnity but held (by a majority) that extrinsic evidence was admissible to prove additional consideration. All four judges were also agreed that the facts negatived the defendants' contention that there was economic duress which made the guarantee void. The extrinsic evidence showed that the primary consideration for the defendants' promise of indemnity was the plaintiffs' promise to the defendants to perform their existing contract with Fu Chip under the main agreement. Before the Board the plaintiffs contended that the consideration expressed in the guarantee was sufficient to support the defendants' promise of indemnity. The defendants contended that the expressed consideration was past consideration, and that the primary consideration established by the extrinsic evidence, although otherwise valid, was invalidated as being against public policy, even if economic duress could not be established, because the promise of indemnity was secured by the plaintiffs' threat of repudiation of their pre-existing contract with Fu Chip and by abuse of a dominant bargaining position. held - The appeal would be allowed for the following reasons -- (1) An act done before the giving of a promise to make a payment or to confer some other benefit could be consideration for the promise where (i) the act was done at the promisor's request, (ii) the parties understood that the act was to be remunerated either by payment or the conferment of a benefit, and (iii) the payment or conferment of benefit was legally enforceable. Since the consideration expressed in the guarantee included, by incorporation, the plaintiffs' promise in the main agreement not to sell the shares for a year, the defendants' promise of indemnity could not be treated as independent of the plaintiffs' antecedent promise not to sell, because the parties understood at the time of the main agreement that the restriction on sale was to be compensated for by the benefit of a guarantee conferred by the defendants against a drop in the price of the shares. On that basis, the plaintiffs' promise to Fu Chip in the main agreement not to sell part of the allotted shares for a year was made at the defendants' request, the promise of indemnity was given to fulfil that intention, and it was legally enforceable. It followed that, although the plaintiffs' promise was antecedent to the guarantee, it was good consideration for the defendants' promise of indemnity (see p 74 b to d and p 75 b to d, post); Lampleigh v Brathwait (1615) Hob 105 and dictum of Bowen LJ in Re Casey's Patents, Stewart v Casey [1892] 1 Ch at applied. (2) Where the consideration for a promise was an existing contractual duty to a third party which was otherwise valid consideration, it was not invalidated as being against public policy (in the absence of proof of duress) merely because the promise had been secured by a threat to repudiate the existing contract or by unfair use of a dominant bargaining position. Where businessmen were negotiating at arm's length it was unnecessary for the achievement of justice to invoke that principle, for what justice required was that a businessman be held to his bargain unless his consent to it could be shown to have been vitiated by fraud, mistake or duress. Accordingly the primary consideration for the promise of indemnity, established by the extrinsic evidence, was not invalidated on the ground of public policy (see p 77 d and h to p 78 a, post); Harris v Watson [ ] All ER Rep 493 and Stilk v Myrick (1809) 2 Camp 317 explained and distinguished. (3) Nor was the guarantee voidable because of duress on the part of the plaintiffs. To constitute duress of any kind there had to be coercion of will so as to vitiate consent, and in relation to a contract commercial pressure alone did not constitute duress. Whether there had been coercion of will vitiating consent depended on whether the person alleged to have been coerced did or did not protest, whether he had an alternative course open to him (such as an adequate legal remedy) at the time of the alleged coercion, whether he was independently advised and whether after entering into the contract he had taken steps to avoid it. On the facts, the Board would not disturb the unanimous finding below that there had not been coercion of the defendants' will to sign the guarantee (see p 78 f to j, post); dicta of Lord Wilberforce and Lord Simon of Glaisdale in Barton v. Armstrong [1975] 2 All ER at 476, 477 applied; dictum of Kerr J in The Siboen and The Sibotre [1976] 1 Lloyd's Rep at 336 approved.

3 Per Curiam. There is nothing contrary to principle in recognising economic duress as a factor which may render a contract voidable, provided the basis of such recognition is that the duress must amount to a coercion of will, which vitiates consent. It must be shown that the payment made or the contract entered into was not a voluntary act (see p 79 d e, post). INTRODUCTION: Appeal. This was an appeal by the plaintiffs, Pao On, Ho Lei Chun and Pao Lap Chung, against the judgment of the Court of Appeal of Hong Kong (Leonard and McMullin JJ, Briggs CJ dissenting) dated 5th November 1976 allowing an appeal by the defendants, Lau Yiu Long and Benjamin Lau Kam Ching, from the judgment of the Supreme Court of Hong Kong (Li J) dated 17th February 1976 ordering the defendants to pay the plaintiffs the sum of $ HK 5,392,800 with interest which the judge found to be due to the plaintiffs under a written agreement dated 4th May The facts are set out in the judgment of the Board. COUNSEL: F P Neill QC, Marion Simmons and Andrew Li (of the Hong Kong Bar) for the plaintiffs. Andrew Leggatt QC and Christopher Swift for the defendants. PANEL: LORD WILBERFORCE, VISCOUNT DILHORNE, LORD SIMON OF GLAISDALE, LORD SALMON AND LORD SCARMAN JUDGMENT-1: LORD SCARMAN read the following judgment of the board. [ ] The first question is whether on its true construction the written guarantee of 4th May 1973 states consideration sufficient in law to support the Laus' promise of indemnity against a fall in value of the Fu Chip shares. The instrument is, so far as relevant, in these terms: 'Re: Tsuen Wan Shing On Estate Company Limited 'IN CONSIDERATION of your having at our request agreed to sell all of your shares of and in the above mentioned Company whose registered office is situate at 274 Sha Tsui Road Ground Floor Tsuen Wan New Teritories in the Colony of Hong Kong for the consideration of $10,500,000:00 by the allotment of 4,200,000 ordinary shares of $1.00 each in Fu Chip Investment Company Limited whose registered office is situate at No. 33 Wing Lok Street Victoria in the said Colony of Hong Kong and that the market value for the said ordinary shares of the said Fu Chip Investment Company Limited shall be deemed as $2.50 for each of $1.00 share under an Agreement for sale and purchase made between the parties thereto and dated the 27th day of February 1973, we lau yiu lon/ ( ) of No. 152 Tin Hau Temple Road, Flat C1, Summit Court, 14th floor in the Colony of Hong Kon Merchant and BENJAMIN LAU KAM CHIN ( ) of No. 31 Ming Yuen Street West, Basement in the said Colony of Hon Kong Merchant the directors of the said Fu Chip Investment Company Limited HEREBY AGREE AND GUARANTEE the closing market value for 2,520,000 shares (being 60% of the said 4,200,000 ordinary shares) of the said Fu Chip Investment Company Limited shal be at $2.50 per share and that the total value of 2,520,000 shares shall be of the sum of HK $6,300,000:00 on the following marketing date immediately after 30th day of April, 1974 AND WE FURTHER AGREE to indemnify and keep you indemnified against any damages, losses and other expenses which you may incur or sustain in the event of the closing market price for the shares of Fu Chip Investment Company Limited according to The Far East Exchange Limited shall fall short of the sum $2.50 during the said following marketing date iimmediately after the 30th day of April, 1974 PROVIDED AL- WAYS that if we were caled iupon to indemnify you for the discrepancy between the market value and the said total value of HK $6,300,000:00 we shall have the option of buying from you the said 2,520,000 shares of Fu Chip Investment Company Limited at the price of HK$6,300,000:00...' Counsel for the plaintiffs before their Lordships' Board but not below contends that the consideration stated in the agreement is not in reality a past one. It is to be noted that the consideration was not on 4th May 1973 a matter of history only. The instrument by its reference to the main agreement with Fu Chip incorporates as part of the stated consideration the Paos' three promises to Fu Chip: to complete the sale of Shing On, to accept shares as the price for the sale,

4 and not to sell 60% of the shares so accepted before 30th April Thus, on 4th May 1973 the performance of the main agreement still lay in the future. Performance of these promises was of great importance to the laus, and it is undeniable that, as the instrument decares, the promises were made to Fu Chip at the request of the Laus. It is equally clear that the instrument also includes a promise by the Paos to the Laus to fulfill their earlier promises given to Fu Chip. The Board agrees with the submission of counsel for the plaintiffs that the consideration expressly stated in the written guarantee is sufficient in law to support the laus' promise of indemnity. An act done before the giving of a promise to make a payment or to confer some other benefit can somtimes be consideration for the promise. The act must have been done at the promisor's request, the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit, and payment, or the conferment of a benefit, must ihave been legally enforceable had it been promised in advance. All three features are present in this case. The promise given to Fu Chip under the main agreement not to sell the hares for a year was at Lau's request. The parties understood at the time of the main agreement that the restriction on selling must be compensated for by the benefit of a guarantee against a drop in price: and such a guarantee would be legally enforceable. The agreed cancellation of the subsidiary agreement left, as the parties knew, the Paos unprotected in a respect in which at the time of the main agreement all were agreed they should be protected. Counsel's submission for the plaintiffs is based on Lampleigh v Brathwait. In that case the judges said : 'First... a meer voluntary curtesie will not have a consideration to uphold an assumpsit. But if that curtesie were moved by a suit or request of the party that gives the assumpsit, it will bind, for the promise, though it follows, yet it is not naked, but couples it self with the suit before, and the merits of the party procured by that suit, which is the difference.' The modern statement of the law is in the judgment of Bowen LJ in Re Casey's Patents, Stewart v Casey. Bowen LJ said: 'Even if it were true, some scientific students of law believe, that a past service cannot support a future promise, you must look at the document and see if the promise cannot receive a proper effect in some other way. Now, the fact of a past service raises an implication that at the time it was rendered it was to be paid for, and, if it was a service which was to be paid for, when you get in the subsequent document oa promise to pay, that promise may be treated either as an admission which evidence or as a positive bargain which fixed the amount of the reasonable remuneration on the faith iof which the service was originally rendered. So that here for past services there is ample justification for the promise to give the third share.' Conferring a benefit is, of course, an equivalent to payment: see Chitty on Contracts. Counsel for the defendants does not dispute the existence of the rule but challenges its application to the facts of this case. He submits that it is not a necessary inference or implication from the terms of the written guarantee that any benefit or protection was to be given to the Paos for their acceptance of the restriction on selling their shares. Their Lordships agree that the mere existence or recital of a prior request is not sufficient in itself to convert what is prima facie past consideration into sufficient iconsideration in law to support a promise: as they have indicated, it is only the first of three necessary preconditions. As for the secondof those preconditions, where the act done at the request of the promisor raises an implication of promised remuneration or other return is simply one of the construction of the words of the contract in the circumstances of its making. Once it is recognised, as the Board considers it inevitably must be, that the expressed consideration includes a reference to the Paos' promise not to sell the shares before 30th April 1974, a promise to be performed in the future, though given in the past, it is not possible to treat the Laus' promise of indemnity as independent of the Paos' antecedent promise, given at Lau's request, not to sell. The promise of indemnity was given because at the time of the main agreement the parties intended that Lau should confer on the Paos the benefit of his protection against a fall in price. When the subsidiary agreement was concelled, all were well aware that the Paos were still to have the benefit of his protection as consideration for the restriction on selling. It matters not whether the indemnity thus given be regarded as the best evidence of the benefit intended to be conferred in return for the promise not to sell, or as the positive bargain which fixes the benefit on the faith of which the promise was given, though where, as here, the subject is a written contract, the better analysis is probably that of the 'positive bargain'. Their Lordships, therefore, accept the submission that the contract itself states a valid consideration for the promise of indemnity. This being their Lordships' conclusion, it is unnecessary to consider the further submission of counsel for the plaintiffs (also raised for the first time before the Board) that the option given the Laus, ifcalled on to fulfil their indemnity,

5 to buy back the shares at $2.50 a share was itself a sufficient consideration for the promise of indemnity. But their Lordships ssee great force in the contention. The Laus promised to indemnify the plaintiffs if the market price of Fu Chip shares fell below However, in the event of the Laus being called on to implement this promise they were given an option to take up the shares themselves at $2.50.This on the face of it imposes on the plaintiffs in the circumstances envisaged, an obligation to transfer the shares to the Laus at the price of $2.50 if called on to do so. The concomitant benefit to the Laus could be a real one, for example, if they thought that the market, after a temporary set-back, would recover to a price above $2.50. The fact that the option is stated in the form of a proviso does not precludit being a contractual term or one under which consideration moves. [ ] For these reasons their Lordships will humbly advise Her Majesty that the appeal be allowed and that the judgment of the trial judge be restored with interest up to the date of Her Majesty's Order in Council disposing of this appeal. The defendants must pay the plaintiffs' costs here and below. DISPOSITION: Appeal allowed. SOLICITORS: Stephenson, Harwood (for the plaintiffs); Bower, Cotton & Bower (for the defendants).