Contract; formation; consideration; past and executed consideration; promise to a third party as consideration; avoiding contract; duress.
Facts: Pao On agreed to sell his private company to the Fu Chip Company, a public company in which Lau Yiu Long was majority shareholder. In return, Pao On was to receive 4.2 million shares in the Fu Chip Company at a price of $2.50 per share. Lau Yiu Long was concerned that if the Fu Chip shares sold to Pao On were immediately placed on the market, this would depress the share price. To meet this concern, Pao On agreed not to sell 60% of his Fu Chip shares for a year. By promising to keep the shares for a year, Pao On ran the risk of a loss if the market price fell below $2.50 per share.
To avoid this risk Pao On and Lau Yiu Long entered a second agreement whereby Lau Yiu Long agreed to re-purchase Pao On's shares, after a year, for $2.50 each. Having entered this second agreement, Pao On realised that, while it protected him from loss, it also meant he would not make a profit if the price of the shares rose during the year. He therefore refused to proceed with the main agreement (the sale of his company to Fu Chip) unless the contract to resell the shares to Lau Yiu Long after a year at a fixed price of $2.50 was replaced with an agreement whereby Lau Yiu Long would simply compensate Pao On for any fall in the share price below $2.50 (an indemnity agreement).
Lau Yiu Long was reluctant to provide this indemnity but, fearing that a dispute would damage public confidence in the Fu Chip Company, he agreed to give it. The consideration given by Pao On in exchange for the indemnity was said to consist of Pao On's original agreement to sell his company to the Fu Chip Company and not resell the Fu Chip shares for a year. A year later the share price of the Fu Chip Company had fallen to a price of 36 cents but Lau Yiu Long refused to honor the indemnity, arguing it was not supported by consideration. Pao On sued Lau Yiu Long to enforce the indemnity.
Issue (1): Was there sufficient consideration to make the indemnity legally enforceable?
Decision: Although the main agreement had been entered into before the indemnity agreement, the promises referred to as consideration for the indemnity agreement were not 'past' consideration.
Reason: Something done before a promise is finally given can be valid consideration for that later promise if:
(1) the initial thing was done at the promisor's request; and
(2) both parties had understood that the thing done would be paid for; and
(3) what is later promised is a benefit that would have been legally enforceable if it had been promised before the thing was done.
These requirements were satisfied in relation to Lau Yiu Long's promise of indemnity.
Issue (2): Could the promise that Pao On made to Lau Yiu Long that he (Pao On) would perform his agreement with the Fu Chip Company constitute consideration for Lau Yiu Long's promise to indemnify Pao On against loss?
Decision: A new promise to perform obligations already owed to a third party can be valid consideration.
Reason: Pao On's promise gave Lau Yiu Long himself the benefit of a legally enforceable right against Pao On if Pao On failed to perform the obligations owed to Fu Chip.
Issue (3): Did the commercial pressure which Pao On exerted on Lau Yiu Long amount to duress so that the indemnity agreement should be set aside as void?
Decision: The circumstances did not amount to duress and the contract remained valid.
Reason: In the circumstances, neither the commercial pressure exerted, nor Pao On's threat to repudiate an existing contractual obligation, amounted to coercion of Lau Yiu Long's will sufficient to vitiate his consent. Lau Yiu Long had realistic alternative choices open to him and acted voluntarily in consenting to the indemnity agreement.
Compare North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705.