Published: Wed, 07 Mar 2018
Pao On v Lau Yiu Long  AC 614
When past consideration is good consideration.
The plaintiffs (P) owned the shares of a private company which owned a building that the defendants (D) wanted to buy. The defendants were majority shareholders in a public company. P agreed to sell their shares in the private company to D so that D could acquire the building. In return P would get shares in the public company. Fearing a drop in share value of the public company would result, P and D made another agreement that P would not sell their shares for a while. However, P realized that D might profit from this agreement and demanded that this second agreement be replaced with one in which P was indemnified for any fall in share value but might also benefit from any rise in share value. Fearing that not agreeing to this would delay the main contract, D agreed. The share value did drop, and P sought to rely on the indemnity contract. D refused to comply with this, and the case reached the Privy Council.
The defendants claimed that the consideration for the indemnity agreement was past consideration and had only been agreed to under duress.
The court found for the plaintiffs. Applying the exception to the doctrine of past consideration in Lampleigh v Braithwaite (1615) Hob 105 Lord Scarman said that an act done before a promise was made was good consideration for that promise if it was done at the promisor’s request and the parties understood the act was to be paid for at a later date, and the payment or benefit would have been enforceable had it been promised in advance.
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