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Pao On v Lau Yiu Long

[1979] 3 WLR 435; [1979] UKPC

Overview

Pao On agreed to sell shares in a company in shares to Fu Chip (controlled by Long) in consideration for certain shares. To protect the share value, Pao On and Fu Chip agreed that Pao On would retain 60% of the acquired shares until April 1974. However, in April 1973, Pao On refused to proceed with the contract unless Long agreed to indemnify him against the value of the retained shares falling below a set level. Long agreed, but only to ensure public confidence in the company. The sale proceeded an Pao On sought to enforce the indemnity.

The Privy Council (in a judgment delivered by Lord Scarman) stated the issues as follows:

Two issues are fundamental. Was there consideration for the contract of guarantee? If there was, was the consent of the defendants vitiated by duress?

All four judges (trial judge and judges in the Court of Appeal) held that the consideration in the written contract (guarantee/indemnity) was past consideration. By itself it could not constitute good consideration. Three of the four (but not Justice McMullin) considered that extrinsic oral evidence was admissible to support the claim of additional consideration and that the claimed additional consideration was not inconsistent with the terms of the written guarantee. Two judges thought it would be contrary to public policy to recognise consideration revealed by extrinsic evidence as good consideration. All four judges dismissed the allegations of duress.

The Privy Council held that there was good consideration stipulated in the document, noting that 'past' consideration can in some circumstances constitute good consideration. Even if that was not the case extrinsic evidence showing additional consideration was admissible in this case. There was no duress.

Facts

Pao On agreed to sell shares in Tseun Wan Shing On Estate Company Ltd to Fu Chip Investment Company Ltd (controlled by the defendant) in consideration for certain shares in Fu Chip. To protect the share value, Pao On and Fu Chip agreed that Pao On would retain 60% of the acquired shares until April 1974. However, in April 1973, Pao On refused to proceed with the contract unless Long agreed to indemnify him against the value of the retained shares falling below a set level. Long agreed, but only to ensure public confidence in the company. 

The sale proceeded, but share prices slumped and Pao On sought to enforce the indemnity.

 

Issues

The Privy Council (in a judgment delivered by Lord Scarman) stated the issues as follows:

Two issues are fundamental. Was there consideration for the contract of guarantee? If there was, was the consent of the defendants vitiated by duress?

All judges at all levels dismissed the duress claim - the following considers only the issue of consideration.

 

Held (trial)

The trial judge held that the consideration in the contractual document was 'past consideration', but held that extrinsic oral evidence was admissible to show additional (non-contradictory) consideration sufficient to constitute 'good consideration'.

 

Held (HK Court of appeal) (appeal allowed by majority)

The Court of Appeal (in three separate judgments) allowed the appeal by majority.

Two judges held that extrinsic evidence was admissible, but only one of them recognised that as constituting good consideration (Chief Justice Briggs). The other (Justice Leonard) thought it would be contrary to public policy to recognise the consideration revealed by extrinsic evidence as 'good consideration'. The third judge (Justice McMullin) held that extrinsic evidence was inadmissible to prove the existence of additional consideration.

 

Held (Privy Council)

The Board first asked whether, on a true construction of there guarantee, there was 'good consideration'. The Board held that it did, observing that past consideration can sometimes be good consideration. In particular, an 'act done before the giving of a promise ... can sometimes be consideration for the promise'. For this to be the case the following criteria must be satisfied:

  • the act done was done at the promisor’s request
  • the parties understood that the act would be remunerated in some way and
  • if the promise had been given in advance of the act it would be legally enforceable. 

In this case all three elements were present.  In particular, the defendant had requested that Pao On retain 60% of shares and the parties understood at that time that that act would be compensated by the provision of a guarantee.

The second question related to admissibility of extrinsic evidence to prove real consideration. The Board stated:

There is no doubt—and it was not challenged—that extrinsic evidence is admissible to prove the real consideration where:

(a) no consideration, or a nominal consideration, is expressed in the instrument, or

(b) the expressed consideration is in general terms or ambiguously stated, or

(c) a substantial consideration is stated, but an additional consideration exists.

However, any additional consideration must not be inconsistent with the terms of the written agreement. Here there was extrinsic evidence showing that there was additional consideration and that was consistent with the consideration stated in the document. It was sufficient to establish valid consideration.

The Board briefly considered the duress claim and noted that all four judges in earlier courts had concluded there was no duress and they were not prepared to substitute their opinion for the judges below on this question of fact (regardless, they did not consider there was 'coercion' amounting to duress - only commercial pressure)

Appeal allowed.