PAO ON v YIU LONG (1980) PAST CONSIDERATION IS NOT GOOD CONSIDERATION

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Exception - a past act/ promise may be good consideration if three conditions are satisfied:
1) The act must have been done at (express) request of the promisor
2) Payment understood to be due (parties understood the act to be rewarded) may be implied
3) Contract enforceable apart from this issue: ICLR issues or offer & acceptance issues

The claimants owned shares in a private company, Shing On, the principal asset of which was a building under construction. The defendants were the majority shareholders in the Fu Chip Investment Company, which wished to acquire the building. In February 1973, the claimants agreed with the Fu Chip Company to sell their shares in Shing On to Fu Chip in return for shares in Fu Chip.

To avoid depressing the market for shares in Fu Chip, the defendants requested that the claimants retain 60 per cent of their shares until after 30 April 1974, and it was agreed that the defendants would protect the claimants against any loss from a fall in the value of those shares during that period. A subsidiary agreement was entered into under which the defendants agreed to buy, and the claimants agreed to sell, 60 per cent of the shares on or before 30 April 1974 at $2.50 a share.

The claimants realized, however, that such an agreement meant that they would lose the benefit of any possible rise in the market price of that 60 per cent holding, and they refused to complete the sale of the shares in Shing On to Fu Chip unless the defendants agreed to replace the subsidiary agreement with an indemnity. The defendants signed an indemnity in consideration of the claimants having agreed to sell their (p. 138) shares in Shing On. The claimants later sought to rely on the indemnity and one issue before the court was whether the claimants had provided any consideration for the indemnity. The Privy Council applied Re Casey's Patents [1892] 1 Ch 104.

Held: The consideration was the claimants' promise not to sell 60 per cent of their Fu Chip shares for one year. Although this promise had been made before the indemnity was given, it had been made at the request of the defendants and on the understanding that the claimants were to be protected against the risk that the value of their shareholding might fall in this period.

LORD SCARMAN: The first question is whether upon its true construction the written guarantee of May 4, 1973, states a consideration sufficient in law to support the defendants' promise of indemnity against a fall in value of the Fu Chip shares ... [C]ounsel for the plaintiffs before their Lordships' Board ... contends that the consideration stated in the agreement is not in reality a past one. It is to be noted that the consideration was not on May 4, 1973, a matter of history only. The instrument by its reference to the main agreement with Fu Chip incorporates as part of the stated consideration the

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