In Pao On v Lau Yiu Long, the plaintiffs owned shares in a private company which had one principal asset (a building under construction) which the defendants wished to acquire. The proposed method of acquisition was that a public company in which the defendants were the majority shareholder should buy from the plaintiffs their shares in the private company, the price to be paid by the issue of shares by the plaintiffs to the public company. In order not to depress the market for shares in the public company, the plaintiffs agreed, at the defendants’ request, to retain 60% of the shares until after April 1974. A subsidiary agreement was made between the plaintiffs and the defendants whereby the plaintiffs were protected against a fall in value of the shares pending the handover date in April, but this also had the effect of denying the plaintiffs any advantage should the price of those shares rise during the same period. As a result, the plaintiffs refused to complete the main agreement, unless the defendants agreed to cancel the subsidiary agreement and replace it with a guarantee by way of indemnity should the value of the shares fall. The defendants, fearing the delays of litigation and the possible adverse effects on the public company, agreed to issue the guarantee, but only after having taken legal advice. Subsequently, the value of the shares in the private company did fall and the plaintiffs sought to enforce the guarantee. The Privy Council held that although the defendants had been subject to commercial pressure, they had not been coerced into giving the guarantee with the result that the contract was not voidable on the ground of duress: Pao On v Lau Yiu Long [1980] AC 614, p 635

doi:10.4324/9781843141518-68

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In Pao On v Lau Yiu Long, the plaintiffs owned shares in a private company which had one principal asset (a building under construction) which the defendants wished to acquire. The proposed method of acquisition was that a public company in which the defendants were the majority shareholder should buy from the plaintiffs their shares in the private company, the price to be paid by the issue of shares by the plaintiffs to the public company. In order not to depress the market for shares in the public company, the plaintiffs agreed, at the defendants’ request, to retain 60% of the shares until after April 1974. A subsidiary agreement was made between the plaintiffs and the defendants whereby the plaintiffs were protected against a fall in value of the shares pending the handover date in April, but this also had the effect of denying the plaintiffs any advantage should the price of those shares rise during the same period. As a result, the plaintiffs refused to complete the main agreement, unless the defendants agreed to cancel the subsidiary agreement and replace it with a guarantee by way of indemnity should the value of the shares fall. The defendants, fearing the delays of litigation and the possible adverse effects on the public company, agreed to issue the guarantee, but only after having taken legal advice. Subsequently, the value of the shares in the private company did fall and the plaintiffs sought to enforce the guarantee. The Privy Council held that although the defendants had been subject to commercial pressure, they had not been coerced into giving the guarantee with the result that the contract was not voidable on the ground of duress: Pao On v Lau Yiu Long [1980] AC 614, p 635

ABSTRACT

In Pao On v Lau Yiu Long,63 the plaintiffs owned shares in a private company which had one principal asset (a building under construction) which the defendants wished to acquire. The proposed method of acquisition was that a public company in which the defendants were the majority shareholder should buy from the plaintiffs their shares in the private company, the price to be paid by the issue of shares by the plaintiffs to the public company. In order not to depress the market for shares in the public company, the plaintiffs agreed, at the defendants’ request, to retain 60% of the shares until after April 1974. A subsidiary agreement was made between the plaintiffs and the defendants whereby the plaintiffs were protected against a fall in value of the shares pending the handover date in April, but this also had the effect of denying the plaintiffs any advantage should the price of those shares rise during the same period. As a result, the plaintiffs refused to complete the main agreement, unless the defendants agreed to cancel the subsidiary agreement and replace it with a guarantee by way of indemnity should the value of the shares fall. The defendants, fearing the delays of litigation and the possible adverse effects on the public company, agreed to issue the guarantee, but only after having taken legal advice. Subsequently, the value of the shares in the private company did fall and the plaintiffs sought to enforce the guarantee. The Privy Council held that although the defendants had been subject to commercial pressure, they had not been coerced into giving the guarantee with the result that the contract was not voidable on the ground of duress:

Pao On v Lau Yiu Long [1980] AC 614, p 635 Lord Scarman: Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. Their Lordships agree with the observation of Kerr J in Occidental Worldwide Investment Corpn v Skibs A/S Avanti [1976] 1 Lloyd’s Rep 293, p 336 that in a contractual situation commercial pressure is not enough. There must be present some factor ‘which could in law be regarded as a coercion of his will so as to vitiate his consent’. This conception is in line with what was said in this Board’s decision in Barton v Armstrong [1976] AC 104, p 121 by Lord Wilberforce and Lord Simon of Glaisdale – observations with which the majority judgment appears to be in agreement. In determining whether there was a coercion of will such that there was no true consent, it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it. All these matters are, as was recognised in Maskell v Horner [1915] 3 KB 106, relevant in determining whether he acted voluntarily or not.