PaO On v Lau Yiu [1980] AC 614

• Plaintiffs had a company which they agreed to sell to Defendant’s company, in return for shares in Defendant's company rather than money.

• To protect Defendants’ share price, a subsidiary agreement was made that Plaintiffs would keep 60% of their shares until after April 30, 1974, and to protect Plaintiffs against a possible drop in share price, Defendants agreed to buy 60 per cent of the allotted shares on or before April 30, 1974, at $2.50 a share.

• Defendants later (when Plaintiffs refused to move forward with the deal since they wanted a more lucrative agreement for themselves) agreed to provide a guarantee of indemnity (i.e. that they would only pay $2.50 per share if the shares fell below that price, but would pay the asking price otherwise). This was due to Defendants’ fear of costs of litigation + falling confidence in Defendants’ company if the deal was delayed.

• Plaintiffs’ shares collapsed in price and Defendants refused to honour the subsidiary agreement since they said it was non-existant, while the indemnity agreement was invalid due to duress and past (i.e. invalid) - consideration.  

HL

• Held that:

  1. There was no duress, merely commercial pressure, and the coercion of the weaker bargaining party by the stronger one was not duress;

  2. The promise not to sell shares by Plaintiffs WAS valid consideration, despite being given before the indemnity arrangement, since it was made at Defendants’ request with the understanding that Ss would be rewarded in some way for this conduct (even though the specific reward was only established later) i.e. resurrection of the Lampleigh rules.

• This understanding “survived through” the cancellation of the subsidiary agreement in favour of the indemnity one. 

Lord Scarman

• For past-consideration to be valid:

  1. It had to have been performed at the other party’s request;

  2. The parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit (why is this test subjective when normally the objective test is used for explaining the content of a contract?);

  3. The payment/benefit would have to have been legally enforceable if it had been given in advance of the consideration.

• These are present here.  The promise not to sell the shares before a certain date was consideration for the subsequent guarantee i.e. an act/promise made before the actual agreement could suffice as consideration for the later promise. 

RELATED CASES

• Barton v Armstrong

• Lampleigh v Braithwaite