Introduction
The doctrine of consideration constitutes a fundamental tenet of contract law, requiring that a promise be supported by something of value in order to be legally binding. Generally, past consideration, meaning an act performed before a promise is made, is not deemed valid consideration. This principle finds its expression in cases such as Eastwood v Kenyon. However, this is not without exception. The case of Pao On v Lau Yiu Long, a decision by the Privy Council, establishes a crucial exception to this general rule, holding that past actions can constitute valid consideration under specific circumstances. In addition, this case elucidates the concept of economic duress, differentiating it from mere commercial pressure. The judgment provides detailed criteria for determining when commercial pressure might vitiate consent, thereby rendering a contract voidable.
Past Consideration and the Exception in Pao On v Lau Yiu Long
The general principle that past consideration is not good consideration is well-established. For example, in Eastwood v Kenyon, a promise to repay loans taken out to raise a child was held to be unenforceable because the consideration, the act of taking the loans, was performed before the promise of repayment. This also occurred in Re McArdle, where decorating work completed before a promise of payment was deemed past consideration, making the promise non-binding. These cases illustrate that a promise must be supported by fresh consideration, not actions that have already occurred. However, the judgment in Pao On v Lau Yiu Long carves out a significant exception to this doctrine, building upon principles established in Lampleigh v Brathwait. Lampleigh v Brathwait held that a prior act can be good consideration if it was done at the promisor's request and with an understanding of future remuneration.
In Pao On v Lau Yiu Long, Lord Scarman articulated three requirements for when past consideration will be considered valid. First, the act must have been done at the promisor's request. Second, there must have been an understanding between the parties that the act was to be compensated, whether through payment or other benefits. Third, the payment or benefit must have been legally enforceable had it been promised in advance. These conditions create a test that allows for the validation of actions that predate a promise, under the proper framework of an implicit or explicit expectation of reward. The court held that Pao On's promise to retain shares for a lock-up period, made in the context of an acquisition deal, was good consideration because it was understood this was a part of a larger transaction involving mutual benefits and assurances, and it met the specific criteria established by this test.
Commercial Pressure vs. Economic Duress
Beyond the exception to past consideration, Pao On v Lau Yiu Long also provided a critical analysis of the concept of duress in contract law. The case distinguishes between mere commercial pressure and economic duress, a distinction which greatly influences the validity of contracts. The Court of Queen’s Bench had initially held in Eastwood v Kenyon that there needed to be fresh consideration in order to enforce a promise for repayment. Pao On v Lau Yiu Long clarified that simply being in a commercially difficult situation does not give a party a right to avoid a contract for duress. Rather, there must be a coercion of the will which vitiates consent. Economic duress occurs when one party applies illegitimate pressure that overbears the other party's free will, leading to a contract not truly entered into voluntarily. This contrasts with commercial pressure, which is simply the rough-and-tumble of business dealings. Lord Scarman stated that the court must assess whether there was a "coercion of the will which vitiates consent".
The judgment established a four-part test to determine whether economic duress exists: Whether the allegedly coerced party protested; whether the party had an alternative legal remedy available to them; whether they received independent advice; and whether they attempted to avoid the contract after its formation. In Pao On v Lau Yiu Long, the court found that the defendants, while experiencing significant commercial pressure, had not been subject to the level of coercion that would constitute economic duress. The defendants had time to consider the matter, sought legal advice, and believed the risk of the guarantee was low, which indicated that their will had not been overborne. Therefore, their consent to the guarantee agreement was valid, and they were bound by it. Cases like The Sibeon and The Sibotre also address the issue of economic duress, holding that a coerced party must not have had their free will overborne and must have protested where appropriate.
Application of the Pao On v Lau Yiu Long Principles
The principles from Pao On v Lau Yiu Long have been applied in many subsequent cases to determine the validity of consideration and claims of economic duress. For example, the ruling clarified and extended the exception from Lampleigh v Brathwait to situations where a prior act had been performed with the clear intention that a reward would follow, and that the act would be legally enforceable had the reward been agreed to at the outset. The ruling provided a necessary framework for ensuring that commercial relationships could function fairly.
In another case, Williams v Roffey, the court further analyzed the concepts of consideration and duress in the context of a building contract. The court in Williams v Roffey held that practical benefits can constitute sufficient consideration when a party agrees to pay an extra bonus to ensure the other party performs their obligations under the existing contract. This practical benefit approach, while seemingly departing from traditional ideas, has been influenced by the reasoning in Pao On v Lau Yiu Long in focusing on the commercial realities of agreements. The courts have adopted a more flexible interpretation of consideration, recognizing that in complex commercial transactions, the mere performance of a pre-existing duty can provide a real benefit to the promisor, which can then constitute adequate consideration for a further promise.
Contrasting Case Law: Eastwood v Kenyon and Re McArdle
The significance of Pao On v Lau Yiu Long becomes more apparent when contrasted with cases like Eastwood v Kenyon and Re McArdle, which adhere strictly to the traditional view that past consideration is not valid. In Eastwood v Kenyon, the guardian's actions of borrowing money to raise a child were deemed past consideration to a subsequent promise to repay this debt from the child’s husband. Similarly, in Re McArdle, decorating work completed prior to a promise to pay for it was deemed past consideration and, therefore, not good consideration. These cases show that an act, done before a promise, is generally seen as insufficient for establishing a legally enforceable contract.
These contrasting cases demonstrate the importance of the Pao On v Lau Yiu Long exception. Had the court applied the traditional rule, the guarantee agreement in Pao On would not have been enforceable. However, the court recognized that the circumstances of the case were unique. Pao On’s original agreement to maintain the shares was part of a complex commercial negotiation, where both parties understood that their actions would ultimately be of mutual benefit and an implied reward was expected. This highlights that the exceptions established in Pao On v Lau Yiu Long do not undermine the basic principles of consideration but rather provides essential flexibility to accommodate the complexities of commercial relationships.
Conclusion
Pao On v Lau Yiu Long stands as a significant judgment in contract law, refining the doctrine of consideration and clarifying the concept of economic duress. The case provides a crucial exception to the general rule that past consideration is not good consideration, establishing clear criteria for when a prior act can be deemed valid consideration. This exception is based on actions requested by the promisor with an understanding of compensation, thereby reflecting the practicalities of many commercial agreements. Moreover, this case draws a clear distinction between mere commercial pressure and the coercion of will, defining economic duress as pressure that is illegitimate and vitiates consent. This differentiation helps ensure contracts are entered into freely, and allows for the fair operation of the law. The judgment has had a considerable effect on contract law and continues to influence the way courts assess consideration and duress cases. The principles from Pao On v Lau Yiu Long, built upon cases such as Lampleigh v Braithwait, ensure that contract law is both robust and responsive to the complex nature of commercial activity. By establishing these tests for both valid consideration and economic duress, the judgment continues to be essential in upholding fairness in contract formation and enforcement. The judgment has not diminished the fundamental principle of consideration but has made necessary allowances for the complexities of commercial agreements, providing a necessary and nuanced approach.
