SIEGFRIED ADALBERT UNRUH v. HANS-JOERG SEEBERGER AND ANOTHER

CACV 277/2003 &
CACV 314/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 277 AND 314 OF 2003

(ON APPEAL FROM HCA NO. 6641/2000)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. I agree with the judgment of Reyes J.

Hon Le Pichon JA:

2. I agree with the judgment of Reyes J.

Hon Reyes J:-

Background

3. By Summons dated 30 May 2003 in HCA No. 6641 of 2000 the 2nd Defendant ("Egana") sought the following Orders:-

(1)	That the following passages ("the Passages") be struck out from the Re-Re-Amended Statement of Claim ("RRAMSOC"): §10(1), §10(2), the 1st sentence of §16, and the reference to Egana in §18.
(2)	Alternatively, that the following question ("the Question") be determined under Order 14A: Whether on a proper construction of a Deed of Acknowledgment ("the Deed") dated 5 January 1995, Egana had acknowledged that it was liable to pay the Plaintiff a special bonus as alleged in RRAMSOC §10(1).
(3)	If Egana succeeded on its strike-out application or if the answer to the Question was in the negative, that the Plaintiff's claim against Egana be dismissed.

4. By Order ("the 1st Order") dated 22 July 2003 Deputy Judge Poon refused to strike-out the Passages or order the Question to be determined. Instead the judge directed the Plaintiff to take out a Summons to amend RRAMSOC. The Plaintiff did so on 25 July 2003, but included an application in his Summons to amend his Reply and Defence to Egana's Defence and Counterclaim.

5. By Amended Order ("the 2nd Order") dated 17 September 2003 Judge Poon allowed the proposed Re-Re-Re-Amended Statement of Claim ("RRRAMSOC") and Amended Reply and Defence ("ARD"). He also gave directions for the filing of pleadings in response. Finally, he awarded the costs of and occasioned by RRRAMSOC (save for the costs of the hearing before him of the application to amend) to the Defendants and the costs of the strike-out application to the Plaintiff.

6. By Notices of Appeal dated 13 September 2003 ("the 1st Notice") and 14 October 2003 ("the 2nd Notice") Egana appealed against the 1st and 2nd Order. On 31 October 2003 the Court of Appeal dismissed both appeals. This judgment sets out reasons for the dismissal.

Discussion

7. The principal documents in this case are the Deed and a Memorandum of Agreement ("the MA") dated 19 September 1992 between the Plaintiff and the 1st Defendant.

8. The MA is in the form of a deed signed by both parties. It provides (among other terms) as follows:-

"	(1)	(Clause 1)
	INTERPRETATION
	...
	(d)	'ESCT' means Eco Swiss China Time Limited, a company incorporated in Hong Kong;
	...
	(h)	'the Arbitration' means the arbitration proceedings commenced by ESCT in 1991 in The Netherlands under the terms of the licence agreement dated 1st July, 1986 entered into between Bulova Watch Company, Inc (1) Benetton NV (2) and ESCT (3) in relation to the 'Benetton by Bulova' brandname;...
	(2)	(Clause 4)
		LITIGATION
		(A)	Mr Unruh [the Plaintiff] hereby undertakes to and agrees with Mr Seeberger [the 1st Defendant] to use his best endeavours to assist ESCT in connection with the Arbitration and otherwise in respect of all outstanding proceedings, claims and otherwise to which ESCT is a party in any way whatsoever.
	...
		(D)	All payments made under the covenants contained in this Memorandum of Agreement shall be made gross, free of any rights of counterclaim or set-off and without any deductions or withholdings of any nature whatsoever. In the event that any deductions or withholdings whatsoever are required by law, then the party due to pay the same shall be liable to pay to the other party by virtue of this Clause such further sums as will ensure the aggregate of the sums paid or payable under this Clause shall, after deducting therefrom all deductions or withholdings from such sums, leave the other party with the same amount as he would have been entitled to receive under this Clause in the absence of any such deductions or withholdings.
		...
	(3)	(Clause 5)
		SPECIAL BONUS
			Each party hereby agrees that he shall exercise all rights and powers that he may have, in his capacity as a director of Egana (subject to his fiduciary duties in that regard) or otherwise, to ensure that all necessary documentation (which shall be prepared by Egana's legal advisers) shall be entered into by all relevant parties to effect the payment of a special bonus by Egana to Mr Unruh in the following circumstances, provided that it appears (on the basis of professional advice received by Egana) to be lawful and prudent for Egana to do so as a company listed on the Stock Exchange, such special bonus to be calculated on the following basis:-
			(a) in the event that any monetary compensation is received by ESCT in respect of the Arbitration, where the amount of such compensation is less than US$10,000,000.00, there shall be no such special bonus payable to Mr Unruh; and
			(b) where the amount of any such monetary compensation received by ESCT is in excess of US$10,000,000.00 then the special bonus payable to Mr Unruh shall amount to 10 per cent of the amount of such compensation less US$10,000,000.00.
		Provided that, in the event that, in accordance with the provisions of this Clause, Egana does not pay he amount of any special bonus which would otherwise be due to Mr Unruh pursuant to paragraph (b) of this Clause, then Mr Seeberger shall pay the amount of any such special bonus in cash to Mr Unruh. For the avoidance of doubt any agreed bonus payable by either Egana or Mr Seeberger pursuant to the provisions of this Clause shall be paid within 28 days of the date upon which ESCT shall receive the compensation giving rise to the obligations to pay such special bonus. For the avoidance of doubt, in calculating the special bonus the amount of any monetary compensation which forms the basis for such calculation shall be the gross amount of such monetary compensation before the deduction of any expense or the deduction of any taxation relating thereto.
	(4)	(Clause 7)
		MISCELLANEOUS
		(A)	The parties hereto shall in good faith and as soon as reasonably practicable after the execution of this Memorandum of Agreement sign or execute all such documents and do all such things as may be necessary or desirable to give effect to the provisions of this Memorandum of Agreement.
		..."

9. The Deed (which was executed between the Plaintiff, ESCT and Egana) provides (among other terms) as follows:-

"	(1)	(Clause 1)
		Mr Unruh acknowledges that he is indebted to ESCT in the total sum of Hong Kong Dollars Seven Hundred Fifty Two Thousand Four Hundred and Six and Cents Fifty Only ($752,406.50) ('the Indebtedness'). Mr Unruh further acknowledges that further legal and professional expenses in connection with the Liquidation Acquisition may be incurred and agrees to continue to indemnify ESCT or Mr Seeberger to the extent of 50% of the total liabilities to be incurred in accordance with the Memorandum [the MA].
	(2)	(Clause 2)
		Pursuant to Clause 5 of the Memorandum, Mr Unruh is to receive a special bonus of ten (10) percent in respect of monetary compensation less United States Dollars Ten Million (US$10,000,000.00) where such compensation to ESCT is in excess of United States Dollars Ten Million (US$10,000,000.00) from any successful outcome regarding the Benetton Arbitration ('Special Bonus'). Notwithstanding with any contrary provisions as provided in the Memorandum, Mr Unruh hereby agrees and confirms that EIH [Egana] shall be entitled to set off the Indebtedness and any further liabilities as abovestated against the amount of Special Bonus to be payable by EIH. Mr Unruh covenants with EIH that he will pay any balance of the Indebtedness which are not set-off by the Special Bonus within ten (10) days from the date of the payment of the Special Bonus at a place to be mutually agreed upon by the parties, failing which a penalty default interest shall be charged at Hong Kong Dollar Prime rate as quoted by The Hong Kong and Shanghai Banking Corporation Limited and shall be accrued on a daily basis."

10. By RRAMSOC the Plaintiff claims payment of the special bonus mentioned in the MA and the Deed. The Plaintiff says that he used his best endeavours to assist ESCT in arbitration proceedings against Benetton. But (RRAMSOC alleges) Egana has not paid any special bonus to the Plaintiff, even though ESCT was awarded damages of US$23,750,000.00 and interest and costs in the Benetton arbitration in June 1995 and despite a final settlement having been reached between Benetton and ESCT by May 2000.

11. Egana denies liability to the Plaintiff on the ground (among others) that it was not party to the MA and hence not contractually bound by it. Egana further says that, by the terms of the Deed properly construed, it did not become liable to pay a special bonus to the Plaintiff.

12. On the Benetton arbitration, there is an issue between the parties whether, if the Defendants or one or other of them are liable under the MA or the Deed, the special bonus covers sums recovered under:-

(1)	both Arbitration 1325 commenced by ESCT and Bulova against Benetton in June 1991 and Arbitration 1616 commenced by Benetton against ESCT and Bulova in January 1994; or,
(2)	just Arbitration 1325.

13. The Plaintiff's case against Egana pleaded in RRAMSOC may be summarised as follows:-

(1)	Egana acknowledged liability to pay the special bonus by the Deed (§10(1)). The special bonus covers Arbitrations 1325 and 1616 (§10(2)).
(2)	In May or June 1995 the 1st Defendant on Egana's behalf asked the Plaintiff to continue to assist ESCT and Egana in Arbitrations 1325 and 1616. At that time the 1st Defendant acknowledged that, in consideration for such assistance, Egana was liable to (and would) pay the special bonus in respect of monies received in the 2 arbitrations. In reliance on the 1st Defendant's "acknowledgment, promise and representation" ("the Acknowledgement") the Plaintiff provided the help requested (§11).
(3)	Benetton having paid ESCT in respect of the arbitration proceedings (§15), Egana was bound (but has failed) to pay the special bonus within 28 days of receipt of money from Benetton (§16).
(4)	Egana is also liable for interest on any unpaid sums (§18).

14. RRRAMSOC adds the following to the Plaintiff's claim against Egana:-

(1)	An estoppel by convention is pleaded: "[B]oth Mr Unruh and Egana adopted and proceeded on the basis of the assumption that Egana had agreed and/or was liable and/or was assumed to be liable to pay the said Special Bonus to Mr Unruh." (§10(1A)(b))
(2)	It is now expressly pleaded that, when making the Acknowledgement, the 1st Defendant was "acting on his own behalf and/or on behalf of Egana" (§11(1)).
(3)	It is further alleged that in providing continued assistance to Egana after the Acknowledgement, the Plaintiff also acted on the assumption mentioned in RRRAMSOC §10(1A)(b).

15. ARD contains the following additional material:-

(1)	The plea of estoppel by convention is fleshed out in ARD §2A(3). The reference in the Deed to the special bonus being payable by Egana is said to amount to a representation which induced the Plaintiff to enter into the Deed and agree to the Indebtedness (as therein defined) to be set off against any special bonus due. Further, in reliance on that representation, the Plaintiff continued to help ESCT and Egana in the 2 arbitrations.
(2)	ARD §2B(1) pleads that "Egana was not a party to the [MA], and ... no liability was imposed upon Egana thereby: rather such liability was imposed upon Egana because of the matters pleaded in [RRAMSOC §§10, 11 and ARD §2A]". It follows from this, ARD §2B(2) reasons, "Egana's liability to pay the said special bonus was not conditional [on the matters stipulated in MA cl. 5] as alleged or at all".

1st Notice: Egana's strike-out and Order 14A applications

16. Mr Grossman SC (appearing for Egana) first submitted that, the condition in MA cl. 5 (that it would be thought lawful and prudent on the basis of professional advice for a listed company to make such payment) not having been fulfilled, on no account can Egana be liable for the special bonus at this time. This would be the case even if it were assumed that by Deed cl. 2 Egana acknowledged an obligation to pay the special bonus.

17. I do not accept that Mr Grossman's reading of the proviso to MA cl. 5 is the only possible construction of the words in question. The proviso appears to have been inserted into the MA for Egana's protection. An alternative reading is that, if Egana should receive professional advice that it is neither lawful nor prudent for Egana to pay the special bonus, then Egana may decline to pay the special bonus. But this does not mean that, having received monetary compensation in respect of the Benetton Arbitration, Egana may unreasonably delay taking advice. On this construction of MA cl. 5, receipt of professional advice for or against payment would not be a condition precedent to the crystallisation of any liability to pay, but merely an option which Egana could exercise or waive before payment. Nor can Egana postpone payment indefinitely by not taking professional advice. Of course, there might be many other plausible ways of construing the proviso. It is enough to defeat Mr Grossman's strike-out application if there is at least one way of reading the proviso in MA cl. 5 which is consistent with the Plaintiff's case.

18. In any case, Mr Grossman suggested that Deed cl. 2 contains an agreement by the Plaintiff to Egana exercising a right of set-off, but does not have an acknowledgment by Egana of a liability to pay the special bonus. In my judgment there is arguably ambiguity in the expression "the amount of Special Bonus to be payable by EIH" found in Deed cl. 2. It could mean "the amount of Special Bonus which EIH is obliged to pay" as the Plaintiff contends. But it could conceivably also mean "the amount of Special Bonus which EIH may pay even though it has no contractual obligation to do so" as Egana maintains.

19. I do think that the ambiguity of meaning can be resolved except by reference to the factual matrix in which the Deed was agreed. Chitty (28th ed.), I, §12-116 goes so far as to suggest that there is no need for words to be ambiguous before extrinsic evidence may be adduced to determine how the parties understood a contract:-

"The more modern view, however, is that the words [of an agreement] do not have to be vague, ambiguous or otherwise uncertain before extrinsic evidence will be admitted. Since the purpose of the inquiry is to ascertain the meaning which the words would convey to a reasonable man against the background of the transaction in question, the court is free (subject to certain exceptions) to look to all the relevant circumstances surrounding the transaction, not merely in order to choose between the possible meaning of words which are ambiguous but even to conclude that the parties must, for whatever reason, have used the wrong words or syntax. So the court is entitled (and, indeed, bound) to enquire beyond the language of the document and see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances which the person using them had in view. The court must place itself in the same 'factual matrix' as that in which the parties were."

Chitty's words are all the more apposite where, as here, there is arguably ambiguity.

20. More fundamentally, it seems to me that the dispute between the Plaintiff and Egana involves significant disputes of fact which need to be resolved in order to obtain a true picture of what all parties (including the 1st Defendant) envisaged as to Egana's liability for the special bonus.

21. For example, the following may have to be examined at trial:-

(1)	The circumstances in which the MA was entered into and, in particular, the initial non-inclusion of Egana as a party to the MA in view of Egana's imminent listing on the Stock Exchange.
(2)	The parties' conduct in the first half of 1995. Even ignoring the Deed, there is the allegation in RRAMSOC of the Acknowledgement orally given by the 1st Defendant, acting on Egana's behalf, that Egana would pay a special bonus to reward the Plaintiff's continued assistance in the Benetton proceedings.
(3)	If one takes into account the new pleading of estoppel by convention in RRRAMSOC and ARD, the existence or otherwise of any understanding among the parties as to Egana's liability.

22. The scope of the factual inquiry just sketched out means that this action cannot be disposed of in interlocutory proceedings without recourse to examination of witnesses. The action against Egana is simply not capable of being summarily dismissed by recourse to strike-out or to Order 14A proceedings on the Question.

23. Finally, I note that I do not see how (as Mr Grossman's Skeleton argued) Recital D to the Deed is conclusive, one way or another, of the construction to be given to cl. 2 and the issue of Egana's liability.

24. For the above reasons, I do not think that Judge Poon erred in dismissing Egana's strike-out application or refusing Egana's request for a determination under Order 14A.

2nd Notice: Egana's objections to RRRAMSOC and ARD

25. Mr Grossman submitted that the proposed amendments are "irreconcilable" with the Plaintiff's witness statements and discovery. He provided a chart comparing the new parts of RRRAMSOC with the Plaintiff's witness statements.

26. It is inappropriate in an interlocutory proceeding to comment on the evidence to be adduced at trial in any greater detail than necessary. After considering Mr Grossman's chart, I am not convinced that the Plaintiff's evidence is necessarily inconsistent with the pleadings and compels disallowing RRRAMSOC.

27. In his Skeleton, Mr Grossman remarked that Reply §9 contradicts RRAMSOC §10((1)(b). Reply §9 pleads: "In the premises, it is denied that Egana is entitled to any right of set off whether as alleged in paragraph 20 or at all." RRRAMSOC §10(1)(b) pleads that by the Deed the Plaintiff agreed that Egana would have a limited right to set off certain Indebtedness (but no other) against the special bonus. Assume that the words "at all" in Reply §9 are too wide. The point seems minor in the scale of things and of no import to Egana's appeal.

28. Finally, Mr Grossman submitted in his Skeleton that the Plaintiff's estoppel agreement was bad in law and fact. Nonetheless, he accepted in oral submission that, whether or not the Court was with him, the question of estoppel did not have to be considered in this appeal. It is therefore unnecessary to deal with estoppel at this stage.

29. For the above reasons, I concluded that Egana's 2nd Notice should also be dismissed. In my view, Judge Poon rightly allowed RRRAMSOC and ARD.

Conclusion

30. Egana having failed on its appeals, costs were awarded to the Plaintiff.