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Pao On v Lau Yiu Long [1980] AC 614

When past consideration is good consideration.


Facts:
The plaintiffs (P) owned the shares of a private company which owned a building that
the defendants (D) wanted to buy. The defendants were majority shareholders in a
public company. P agreed to sell their shares in the private company to D so that D
could acquire the building. In return P would get shares in the public company.
Fearing a drop in share value of the public company would result, P and D made
another agreement that P would not sell their shares for a while. However, P realized
that D might profit from this agreement and demanded that this second agreement be
replaced with one in which P was indemnified for any fall in share value but might
also benefit from any rise in share value. Fearing that not agreeing to this would delay
the main contract, D agreed. The share value did drop, and P sought to rely on the
indemnity contract. D refused to comply with this, and the case reached the Privy
Council.
Issues:
The defendants claimed that the consideration for the indemnity agreement was past
consideration and had only been agreed to under duress.
Held:
The court found for the plaintiffs. Applying the exception to the doctrine of past
consideration in Lampleigh v Braithwaite (1615) Hob 105 Lord Scarman said that an
act done before a promise was made was good consideration for that promise if it was
done at the promisor’s request and the parties understood the act was to be paid for at
a later date, and the payment or benefit would have been enforceable had it been
promised in advance.

Pao on v Lau Yiu Long [1979] 3 All ER 65 Privy Council


The claimant had threatened not to complete the main contract for the purchase of
shares unless subsidiary agreements were met including a guarantee and an indemnity.
The defendant was anxious to complete the main contract as there had been a public
announcement of the aquisition of shares and did not want to undermine public
confidence in the company and the consequent affect on share prices. The defendant
could have sued for specific performance of the agreement but this would have
delayed matters and damaged the company's reputation. The defendant had taken
legal advice on all these matters before agreeing to the guarantee and indemnity. The
claimant then sought to enforce the guarantee and the defendant sought to have the
agreement set aside for economic duress.
Held: There was no economic duress. The Privy Council identified 4 factors to
consider in assessing whether economic duress was present:
Did the person claiming to be coerced protest?
Did that person have any other available course of action?
Were they independently advised?
After entering into the contract, did they take steps to avoid it?

In the present case the defendant did not protest at the time. He also could have
enforced the contract of sale through specific performance and thus had another
avenue of redress available to him. He had taken legal advice and took no steps to
avoid the agreement prior to the claimant seeking to enforce the guarantee. Therefore
no economic duress could be established. It was simply commercial pressure far short
of duress.

Re McArdle (1951) Ch 669 Court of Appeal


Majorie McArdle carried out certain improvements and repairs on a bungalow. The
bungalow formed part of the estate of her husband's father who had died leaving the
property to his wife for life and then on trust for Majorie's husband and his four
siblings. After the work had been carried out the brothers and sisters signed a
document stating in consideration of you carrying out the repairs we agree that the
executors pay you £480 from the proceeds of sale. However, the payment was never
made.
Held:
The promise to make payment came after the consideration had been performed
therefore the promise to make payment was not binding. Past consideration is not
valid.

Roscorla v Thomas (1842): consideration must not be past.


The fact of the case: The claimant bought a horse from the defendant. After the sale
finished the defendant told the claimant that it was a sound horse and did not have any
vice such as bad temper. The truth however was quite different from what the
claimant had been told. The horse had very bad temper and was ferocious. The
claimant sued the defendant.

The court decided that the claimant could not sue because the statement about the
horse had taken place after the sale was completed. Had the defendant made the same
promise before the sale then the defendant would have a claim. Because the promise
was made after the sale, the claimant was not able to provide any consideration for it;
and hence he was not able to make a claim on it.

In another words, for a contract to exist and any terms of the contract to be valid, a
consideration must be provided. The deal had already taken place in which the
defendant offered the sale of the horse and the claimant provided the consideration by
paying for it. If the claim (about the horse) which came after the sale was a promise
then the claimant had not provided any consideration for it.