Fu Chip Investment Co Ltd.(Fu Chip), a public company majority owned by Lau Yiu Long, wished to buy a building owned by Tsuen Wan Shing On Estate Co. Ltd.(Shing On), whose majority shareholder was Pao On. Instead of simply selling the building for cash, Lau and Pao did a swap deal for the shares in their companies;
1) Main Agreement
Shing On would get 4.2m $1 shares in Fu Chip, and Fu Chip bought all the shares of Shing On.
2) Subsidiary Agreement
To ensure the share price of Fu Chip suffered no shock, Pao agreed to not sell 60% of the Fu Chip shares for at least one year. Also, in case the share price dropped in that year, Lau agreed to buy 60% of the Fu Chip shares back from Pao at $2.50.
2a) Pao's problem and resulting economic pressure.
Pao then realised, if the Fu Chip share price rose over $2.50 in the year, the price would stay fixed and he would not get the gains on buying back, so he instead demanded 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.
3) Facts leading to court
Subsequently the shares did fall in value and Pao tried to enforce the guarantee agreement. Lau argued the guarantee agreement was not valid because;
(1) there was no consideration, only in the past and under a pre-existing duty, and
(2) it was a contract procured by duress.
- Was there past consideration, i.e. insufficient consideration?
- Was there economic duress on the part of Pao?
Finding for the plaintiff (Pao On); guarantee agreement upheld.
Lord Scarman 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, citing Lampleigh v Brathwait. The consideration for the guarantee was the promise to perform according to the other contractual agreement signed by the parties.
On the subject of duress, the Privy Council held that this was simply commercial pressure as per the nature of the market. For 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.
- Duress is something beyond commercial pressure, such that there must be a coercion of will vitiating consent.
- The "coercion of will" principle to show that any seeming agreement was given involuntarily and there was an absence of choice on the victim's part.
- Conditions for deciding whether economic duress was established:
- Did the party claiming to be coerced protest at the time?
- Was there an alternative option available to the party?
- Was the party independently advised?
- After having entered the contract did the party take steps to avoid it?