Pau On v Lau Yiu [1980]

Plaintiffs sold shares in company A to company B in
return for issue to them of shares in company B.
Subsidiary agreement with defendants, majority
shareholders in company B, that plaintiffs would not sell 60% of newly issued
shares for one year, and defendants would purchase at end of period at certain
stipulated price.
Plaintiffs then realised that whilst this protected
them from fall in value of shares, they would be deprived of any increase in
Hence plaintiffs refused to complete main agreement
unless defendants in substitution for subsidiary agreement agreed to indemnify them against any reduction in value of shares below certain
price during deferment period.
Defendants agreed – consideration for indemnity agreement
expressed to be plaintiffs agreement to sell shares in company A. Shares later
fell in value and defendants claimed indemnity.
Defendants refused on grounds, inter alia, that consideration
for indemnity agreement was past consideration.
Privy Council held:
1.  Past act
could be valid consideration where:
(i)  Act done at
promisor’s request.
(ii)  Parties
understood that act was to be remunerated, either by payment or other benefit.
(iii)  Remuneration
would have been legally enforceable had it been promised in advance.
And that these criteria were here satisfied.
2.  Promise to
perform contractual obligation for benefit of a third party was good consideration.