In Pao On v Lau Yiu Long, the plaintiffs agreed to sell a partly constructed building to the defendants. The arrangement involved a transfer of shares in a subsidiary company which owned the building. It was subsequently realised by the plaintiffs that, by agreeing to sell the shares at a fixed price, the defendants might make a considerable profit if the shares were to rise in value. The plaintiffs threatened to pull out of the deal unless the defendants were prepared to abandon the original contract and replace it with a contract of indemnity which would protect the plaintiffs from a fall in value of the shares, but would allow them to benefit from any rise in value prior to the date of the final transfer of ownership of the building. The defendants feared adverse publicity which might affect public confidence in the company if the contract were not performed. Under pressure, they complied with the plaintiffs’ demands. Subsequently, the shares fell in value, and the plaintiffs sought to recover their loss under the indemnity contract. It was held that there was no duress, as the defendants had carefully considered their position and, after advice, chose to avoid litigation for commercial reasons. In determining whether a threat constitutes duress, it is necessary to consider whether the victim protested; whether there was any alternative course of action open to the victim such as the pursuit of an adequate legal remedy; whether the victim was independently advised, and whether, after making the contract, the victim took sufficient steps to avoid it: Pao On v Lau Yiu Long [1980] AC 614, p 634

doi:10.4324/9781843141518-165

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In Pao On v Lau Yiu Long, the plaintiffs agreed to sell a partly constructed building to the defendants. The arrangement involved a transfer of shares in a subsidiary company which owned the building. It was subsequently realised by the plaintiffs that, by agreeing to sell the shares at a fixed price, the defendants might make a considerable profit if the shares were to rise in value. The plaintiffs threatened to pull out of the deal unless the defendants were prepared to abandon the original contract and replace it with a contract of indemnity which would protect the plaintiffs from a fall in value of the shares, but would allow them to benefit from any rise in value prior to the date of the final transfer of ownership of the building. The defendants feared adverse publicity which might affect public confidence in the company if the contract were not performed. Under pressure, they complied with the plaintiffs’ demands. Subsequently, the shares fell in value, and the plaintiffs sought to recover their loss under the indemnity contract. It was held that there was no duress, as the defendants had carefully considered their position and, after advice, chose to avoid litigation for commercial reasons. In determining whether a threat constitutes duress, it is necessary to consider whether the victim protested; whether there was any alternative course of action open to the victim such as the pursuit of an adequate legal remedy; whether the victim was independently advised, and whether, after making the contract, the victim took sufficient steps to avoid it: Pao On v Lau Yiu Long [1980] AC 614, p 634

ABSTRACT

Their Lordships’ knowledge of this developing branch of American law is necessarily limited. In their judgment it would be carrying audacity to the point of foolhardiness for them to attempt to extract from the American case law a principle to provide an answer to the question now under consideration. That question, their Lordships repeat is whether, in a case where duress is not established, public policy may nevertheless invalidate the consideration if there has been a threat to repudiate a pre-existing contractual obligation or an unfair use of a dominating bargaining position. Their Lordships’ conclusion is that, where businessmen are negotiating at arm’s length, it is unnecessary for the achievement of justice and unhelpful in the development of the law, to invoke such a rule of public policy. It would also create unacceptable anomaly.

It is unnecessary because justice requires that men, who have negotiated at arm’s length, be held to their bargains, unless it can be shown that their consent was vitiated by fraud, mistake or duress. If a promise is induced by coercion of a man’s will, the doctrine of duress suffices to do justice. The party coerced, if he chooses and acts in time, can avoid the contract. If there is no coercion, there can be no reason for avoiding the contract where there is shown to be a real consideration which is otherwise legal.