Facts
- The case concerned a commercial agreement involving Pao On, who agreed to retain shares for a specified lock-up period as part of an acquisition deal with Lau Yiu Long.
- This arrangement involved mutual assurances and was tied to the broader context of the acquisition transaction.
- After the agreement, a dispute arose regarding whether there was valid consideration for certain promises made, and whether economic duress invalidated the guarantee agreement.
- The parties raised questions about whether Pao On’s actions, performed before the formal promise, could constitute good consideration, and whether the agreement was entered into voluntarily or under impermissible pressure.
Issues
- Whether past consideration—an act completed before a promise—is sufficient to support a subsequent promise in contract law under certain conditions.
- What is the correct test to distinguish between mere commercial pressure and economic duress sufficient to vitiate a contract?
- Whether in the circumstances of this case, Pao On’s prior actions qualified as valid consideration and if the contract was the product of economic duress.
Decision
- The Privy Council held that past consideration can be valid if the act was performed at the promisor's request, with an understanding of future remuneration, and where the promised reward would have been enforceable had it been agreed in advance.
- In this instance, Pao On’s promise to retain shares satisfied these requirements and constituted good consideration.
- The court found that the defendants experienced commercial pressure, but it did not amount to economic duress, as their will was not overborne.
- The consent to the guarantee agreement was deemed valid and enforceable, as the defendants had alternatives and the opportunity for independent advice.
Legal Principles
- The general rule excludes past consideration but provides an exception where (i) the act was at the promisor’s request; (ii) there was an understanding, express or implied, of reward; and (iii) the reward, had it been promised in advance, would have been legally enforceable.
- The distinction between commercial pressure and economic duress hinges on whether illegitimate pressure overcame the contracting party’s free will, rendering the agreement involuntary.
- For economic duress, the court considers whether the coerced party protested, had legal alternatives, received independent advice, and promptly sought to avoid the contract after formation.
Conclusion
Pao On v Lau Yiu Long established a significant exception to the doctrine of past consideration and defined the criteria distinguishing commercial pressure from economic duress, ensuring that contract law accommodates the realities of commercial negotiations while upholding fairness and voluntariness in contractual arrangements.
