Pao On v Lau Yiu Long
Encyclopedia
Pao On v Lau Yiu Long [1979] UKPC 2 is an contract law appeal case from the Court of Appeal of Hong Kong decided by the Privy Council
, concerning duress
.
majority owned by Yiu-Long Lau and his younger brother Benjamin (the defendants), wished to buy a building called 'Wing On', owned by Tsuen Wan Shing On Estate Co. Ltd., whose majority shareholder was On Pao and family (the claimants). Instead of simply selling the building for cash, Lau and Pao did a swap deal for the shares in their companies. Tseun Wan would get 4.2m $1 shares in Fu Chip, and Fu Chip bought all the shares of Tsuen Wan. To ensure the share price of Fu Chip suffered no shock, Pao agreed to not sell 60% of the shares for at least one year. Also, in case the share price dropped in that year, Lau agreed to buy 60% of the shares back from Pao at $2.50. But then Pao realised, if the share price rose over $2.50 in the year, the price would stay fixed and he would not get the gains. So he demanded that instead of that, Lau would merely indemnify Pao if the share price fell below $2.50. Pao made clear that unless he got this "guarantee agreement", he would not complete the main contract. It was signed on 4 May 1973. But as it turned out the shares did slump in value. Pao tried to enforce the guarantee agreement. Lau argued the guarantee agreement was not valid (1) because there was no consideration, only in the past and under a pre-existing duty, and (2) because it was a contract procured by duress.
’s advice first disposed of the question about past consideration, because a promise to perform a pre-existing contractual obligation to a third party can be good consideration. The question of whether consideration can be invalidated ‘if there has been a threat to repudiate a pre-existing contractual obligation or an unfair use of a dominating bargaining position’ was rejected because ‘where businessmen are negotiating at arm’s length it is unnecessary for the achievement of justice’.
On the point of duress, Lord Scarman held the following.
This was commercial pressure and no more, since the company really just wanted to avoid adverse publicity. For a general doctrine of economic duress, it must be shown ‘the victim’s consent to the contract was not a voluntary act on his part… provided always that the basis of such recognition is that it must amount to a coercion of will, which vitiates consent.’
Privy council
A privy council is a body that advises the head of state of a nation, typically, but not always, in the context of a monarchic government. The word "privy" means "private" or "secret"; thus, a privy council was originally a committee of the monarch's closest advisors to give confidential advice on...
, concerning duress
Duress
In jurisprudence, duress or coercion refers to a situation whereby a person performs an act as a result of violence, threat or other pressure against the person. Black's Law Dictionary defines duress as "any unlawful threat or coercion used... to induce another to act [or not act] in a manner...
.
Facts
Fu Chip Investment Co Ltd, a newly public companyPublic company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
majority owned by Yiu-Long Lau and his younger brother Benjamin (the defendants), wished to buy a building called 'Wing On', owned by Tsuen Wan Shing On Estate Co. Ltd., whose majority shareholder was On Pao and family (the claimants). Instead of simply selling the building for cash, Lau and Pao did a swap deal for the shares in their companies. Tseun Wan would get 4.2m $1 shares in Fu Chip, and Fu Chip bought all the shares of Tsuen Wan. To ensure the share price of Fu Chip suffered no shock, Pao agreed to not sell 60% of the shares for at least one year. Also, in case the share price dropped in that year, Lau agreed to buy 60% of the shares back from Pao at $2.50. But then Pao realised, if the share price rose over $2.50 in the year, the price would stay fixed and he would not get the gains. So he demanded that instead of that, Lau would merely indemnify Pao if the share price fell below $2.50. Pao made clear that unless he got this "guarantee agreement", he would not complete the main contract. It was signed on 4 May 1973. But as it turned out the shares did slump in value. Pao tried to enforce the guarantee agreement. Lau argued the guarantee agreement was not valid (1) because there was no consideration, only in the past and under a pre-existing duty, and (2) because it was a contract procured by duress.
Advice
Lord Scarman, giving the Privy CouncilPrivy council
A privy council is a body that advises the head of state of a nation, typically, but not always, in the context of a monarchic government. The word "privy" means "private" or "secret"; thus, a privy council was originally a committee of the monarch's closest advisors to give confidential advice on...
’s advice first disposed of the question about past consideration, because a promise to perform a pre-existing contractual obligation to a third party can be good consideration. The question of whether consideration can be invalidated ‘if there has been a threat to repudiate a pre-existing contractual obligation or an unfair use of a dominating bargaining position’ was rejected because ‘where businessmen are negotiating at arm’s length it is unnecessary for the achievement of justice’.
On the point of duress, Lord Scarman held the following.
This was commercial pressure and no more, since the company really just wanted to avoid adverse publicity. For a general doctrine of economic duress, it must be shown ‘the victim’s consent to the contract was not a voluntary act on his part… provided always that the basis of such recognition is that it must amount to a coercion of will, which vitiates consent.’
See also
- Iniquitous pressure in English lawIniquitous pressure in English lawUnconscionability in English law is a field of contract law and the law of trusts, which precludes the enforcement of consent based obligations. "Inequality of bargaining power" is another term used to express essentially the same idea for the same area of law, which can in turn be further broken...
- Lynch v DPP for Northern Ireland [1975] 1 All ER 913, 926, Lord Wilberforce said duress means there is coactus volui.
- Hennessy v Craigmyle & Co [1986] ICR 461, if it is reasonable to take legal proceedings and resist a threat, there will have been no duress.
- Universe Tankships Inc of Monrovia v International Transport Workers’ Federation [1982] 2 All ER 67