SIEGFRIED ADALBERT UNRUH v. HANS-JOERG SEEBERGER AND ANOTHER

cacv 297/2004 & CACV 298/2004
cacv 297/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 297 of 2004

(on appeal from HCA NO. 6641 of 2000)

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____________________

cacv 298/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 298 of 2004

(on appeal from HCA NO. 6641 of 2000)

____________________

____________________

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from a judgment of Deputy High Court Judge Saunders given on 3 September 2004.  The judge held in favour of the plaintiff against both defendants.  He awarded the plaintiff the sum of HK$25,027,447.13 and NLG290,288.15 against the 1^st defendant but with primary liability for the sum of HK$23,335,902.23 and NLG290,288.15 against the 2^nd defendant; he stayed execution of the claim against the 1^st defendant for 28 days ordering that the liability of the 1^st defendant was to come into effect if the 2^nd defendant should not pay the amount awarded against it within that time.  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.  The judge set out the background to the case in considerable detail.  It suffices to say that, save in relation to one aspect which is dealt with below, no challenge has been made as to the facts so found.  The plaintiff was the owner of all the shares in Eco Swiss China Time Limited (“ESCT”).  ESCT manufactured and sold watches and electronic components.  It had a licence which enabled it to produce watches marked “Benetton by Bulova”.  That licence ran from 1 July 1986 for eight years and was, therefore, due to expire on 30 June 1994.  Under the licence agreement there was an obligation on the parties to commence negotiations, in good faith, for the extension of the term one year before the expiry.  In about April 1991, the plaintiff commenced discussions with the 1^st defendant, who proposed to acquire ESCT from the plaintiff. 

3.  On 24 June 1991 Benetton International N.V. (“Benetton”) served a notice terminating the licence agreement on ESCT.  The termination date was 22 September 1991.  The grounds put forward in the notice of termination were that ESCT had granted a sublicence to Ascot Quartz Uhren AG for the production and sale of alarm clocks which had not been duly notified to Benetton and royalties had not been paid thereon.  It was also said that there were inaccurate books of account kept by ESCT and finally that a receiver had been appointed in Milan over a substantial part of ESCT’s assets namely a subsidiary Eco Swiss SpA (“Eco Swiss”), which was the holding company for a number of subsidiary companies.

4.  It is probable that the notice of termination had been anticipated because four days after the date of the notice, on 28 June 1991, ESCT and Bulova Corporation (“Bulova”) commenced arbitration proceedings against Benetton in the Netherlands in accordance with the terms of the licence agreement.  Those arbitration proceedings were given the number NAI 1325.  The relief sought in those proceedings was, first of all, a declaration that the licence agreement continued in full force and, secondly, an order that Benetton should continue to perform the obligations under the licence agreement including conducting negotiations for an extension commencing no later than 1 July 1993; compensation was also sought.  There was alternative relief claimed specifically that the agreement had been terminated as of the date of the final award and that Benetton should compensate ESCT for damages resulting from Benetton’s repudiation of the licence agreement including loss of future profits both in respect of the initial term and in respect of the possible extension of the licence agreement.  It will be noted that it was envisaged that there might have to be a second part of the arbitration depending on the result of the first part; the second prayer of the alternative order sought in the statement of claim read:

“order Benetton to compensate Eco Swiss for the damages resulting from Benetton’s repudiation of the Agreement and related misconduct, including lost future profits covering both the initial term and the foreseen extension of the Agreement, in an amount to be proven in a second phase of the proceedings”

5.  When the notice of arbitration was served, the 1^st defendant was still conducting due diligence investigations in respect of ESCT.  Notwithstanding being informed of the termination of the licence agreement, the 1^st defendant still wished to proceed with the purchase of the ESCT shares.  The arrangement was that the shares would be bought through Haru Pacific Limited, a company owned by the 1^st defendant, with the ultimate intention that ESCT would become a subsidiary of a company, which ultimately transpired to be the 2^nd defendant, which would be listed on the Hong Kong Stock Exchange.  The sale of the ESCT shares took place in two tranches.  The first in August 1991 and the second on 19 September 1992. 

6.  On that latter date two agreements were executed.  The first was termed the Memorandum of Agreement (MoA).  The second was termed the Deed of Indemnity (DoI).  The parties to the MoA were the plaintiff and the 1^st defendant.  Amongst other provisions of the MoA, the plaintiff undertook to assist ESCT in connection with not only the arbitration but also the other litigation in which ESCT was involved.  This was, quite obviously, highly important since the business connected with the Benetton by Bulova watches was a crucial part of ESCT’s business at the time and it would be likely that the plaintiff would be the person who had the most detailed knowledge that could assist in the arbitration and litigation.  The terms of the MoA which are relevant to this are as follows:

“	4.	LITIGATION
		(A)	[The plaintiff] hereby undertakes to and agrees with [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...
		…
	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 [the 2nd defendant] (subject to his fiduciary duties in that regard) or otherwise, to ensure that all necessary documentation (which shall be prepared by [the 2nd defendant’s] legal advisers) shall be entered into by all relevant parties to effect the payment of a special bonus by [the 2nd defendant] to [the plaintiff] in the following circumstances, provided that it appears (on the basis of professional advice received by [the 2nd defendant]) to be lawful and prudent for [the 2nd defendant] 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, there shall be no such special bonus payable to [the plaintiff]; and
		(b)	where the amount of any such monetary compensation received by ESCT is in excess of US$10,000,000 then the special bonus payable to [the plaintiff] shall amount to 10 per cent. of the amount of such compensation less US$10,000,000.
		Provided that, in the event that, in accordance with the provisions of this Clause, [the 2nd defendant] does not pay the amount of any special bonus which would otherwise be due to [the plaintiff] pursuant to paragraph (b) of this Clause, then [the 1st defendant] shall pay the amount of any such special bonus in cash to [the plaintiff].  For the avoidance of doubt any special bonus payable by either [the 2nd defendant] or [the 1st defendant] 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 expenses or the deduction of any taxation relating thereto.
		…
	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.”

7.  The meaning to be ascribed to clause 5 relating to the special bonus is one of the crucial parts of this case.

8.  The DoI signed on 19 September 1992 was made by the plaintiff, the 1^st defendant and the 2^nd defendant.  Significantly, the plaintiff and the 1^st defendant jointly and severally covenanted to indemnify the 2^nd defendant and its subsidiary companies against any depletion or diminution or reduction in value of any of the assets or any increase in the net liabilities of any of the companies as a result of any claims made against or obligations or liabilities of ESCT in respect of anything which had occurred up to and including the date of completion and any claims made against or obligations or liabilities of Eco Swiss or its subsidiary Contempo SpA (“Contempo”) whether before or after the date of the agreement and up to and including the date of completion. 

9.  The DoI was replaced by a further Deed of Indemnity dated 31 May 1993.  The parties were the same and the liability was the same save that it was extended to cover any liability which arose at any time provided that the covenantors were notified of any claim within two years from the date of the Deed.  Thus the liability under this deed, which was referred to as the “Howard Lau deed”, would only operate provided that there had been notification of a demand by ESCT no later than 30 May 1995.  It is also noted that under clause 5 of Schedule 2 to the Howard Lau deed, the aggregate liability of the plaintiff and the 1^stdefendant was not to exceed HK$35 million.  Thus, presumably, the maximum liability of each was HK$17.5 million (or, roughly, US$2.25 million).

10.  It is also necessary to mention the criminal charges which were brought against the plaintiff in Italy in connection with the bankruptcy of Eco Swiss.  It appears that the receiver (or Trustee in Bankruptcy) had discovered that there were a number of entries in the books of Eco Swiss which referred to what might be regarded as items of personal expenditure of the plaintiff in the form of the provision of vehicles and staff for his personal use which had been charged to Eco Swiss.  Although that might not be considered particularly heinous and, indeed, might even be justified in respect of senior executives of a company, there were other alleged items expenditure, which would have been rather more difficult to explain, which had, apparently, found their way into the Eco Swiss books.  The charges which were ultimately brought against the plaintiff also included accounting irregularities going back to 1986. 

11.  The plaintiff was first notified in March 1992 that criminal charges might be brought.  The judge found as a fact that the plaintiff had, at least indirectly, notified the 1^st defendant of the possibility of the charges.  He had done so by copying letters to the Italian lawyer Mr Montanari of Dondina & Montanari whom he appointed to act on his behalf.  That firm acted on behalf of the 2^nd defendant and the judge was satisfied that the plaintiff had instructed Mr Montanari on the 1^st defendant’s recommendation.  In June 1992 the Italian lawyer, Mr Montanari, informed Mr Conway, the lawyer who was dealing with the arbitration proceedings in the Netherlands, of the circumstances surrounding the potential criminal offences.  It was not, however, until 15 September 1992 that the criminal charges became a matter of public record.  Again, the judge was satisfied that that was when the plaintiff knew the details of the charges.  The matter appears to have lingered on until 26 October 1994 when there was what appears to have been some kind of out-of-court settlement between the plaintiff and the Trustee in Bankruptcy which resulted in a suspended prison sentence.  It only remains to be said that there were, perhaps, extenuating circumstances in respect of the conviction.  The judge dealt with that indicating that there was more than a suspicion that they had been instigated by a Mr Frommherz who had an axe to grind, whether justifiably or not, against the plaintiff.

12.  On 4 February 1993 there was an award in the arbitration proceedings, which was referred to as the Partial Final Award (“the PFA”).  As the PFA recorded, the Tribunal had requested the parties to restrict the number of witnesses so that hearing could be shortened, leaving open the option for a second hearing.  In response to that request the parties agreed that damages would not be assessed at the initial stage.  In the PFA, the Tribunal held that the licence agreement still subsisted and should continue in full force and effect according to its terms.  Benetton was ordered to continue performing its obligations under the licence agreement.  That order necessarily included the obligation to negotiate, in good faith, an extension of the term of the licence agreement; those negotiations had to commence no later than 1 July 1993.  Benetton was ordered to compensate ESCT and Bulova for damages resulting from the repudiation.  In accordance with the agreement reached at the Tribunal’s instigation, the amount of damages and costs were to be determined by the Tribunal in a second phase of the proceedings should ESCT and Bulova request such awards within 9 months of the PFA.  Benetton’s counterclaim was rejected.

13.  ESCT’s Dutch lawyers had apparently come to know of the decision in advance because they expressed their appreciation to Mr Unruh by letter dated December 1992, in what the judge aptly described as effusive terms saying that it was difficult to imagine a more comprehensive expression of satisfaction for what the plaintiff had done.  Amongst other things their letter said:

“You really deserve a Prince’s treatment now that you have so clearly proven to Luciano Benetton who was right and who was wrong. Many, many congratulations! Shawn - who is suffering from a slight hangover after too much champagne last night - and I, and all the rest of our ‘team’ are overjoyed that the arbitrators have decided to give you the Christmas present that you were entitled to.”

14.  The 2^nd defendant was “floated” on the Hong Kong Stock Exchange in June 1993.  As part of the formalities the directors were required to file Form B declarations as to their fitness to act as directors.  This entailed their declaring any previous convictions.  There is no dispute that the plaintiff delayed filing his Form B.  The reason for that became apparent to the defendants at the latest by July 1993 when solicitors acting for Mr Frommherz wrote to the 2^nd defendant’s solicitors informing them of the plaintiff’s conviction and imprisonment in Germany in the 1970’s, threatening to disclose the matter to the Stock Exchange.  The upshot was that the plaintiff had to be removed from being a director of the 2^nd defendant and his service agreement with the 2^nd defendant was terminated.  It might be noted that the need to disclose the Italian criminal conviction had not arisen by July 1993, as, of course, no conviction had occurred by then.

15.  The service agreement was replaced by a Consultancy Agreement dated 29 September 1993; the term of that agreement was 2 years and it was, therefore, due to expire on 30 September 1995.  Under the Consultancy Agreement the plaintiff was required to provide a variety of services to ECST including designing and developing products and removing the name of ECST from the “Arab Blacklist”.  In addition to providing his services in relation to “such other matters” as ESCT “may reasonably require”, the plaintiff was also required to assist the arbitration proceedings.  The total remuneration over the 2 years of the consultancy was to be HK$5 million, which, it might be noted, was a net reduction on his remuneration of $230,000 per month under the previous service agreement.  

16.  Interestingly the Consultancy Agreement referred to clause 5 of the MoA.  Clause 13 of the Consultancy Agreement recited the fact that the plaintiff for his part had no claims against either of the defendants whether arising out of the termination of the service agreement or for any other reason and both the defendants for their part recited that they had no claims outstanding against the plaintiff.  That clause continued:

“For the avoidance of doubt, this sub-clause shall not be taken to relate to the rights of the Consultant (i.e the plaintiff) under Clause 5 of the Memorandum of Agreement (‘the Memorandum of Agreement’) dated 19th September, 1992 and entered into between the Consultant (i.e. the plaintiff) and HJS (i.e. the 1st defendant).”

17.  The intention which was thus expressed to maintain any rights which arose under the MoA was also alluded to in a letter from the 2^nd defendant’s solicitors in the course of the negotiations leading up to the Consultancy Agreement.

18.  Despite the PFA it proved impossible to negotiate a renewal of the licence agreement with Benetton.  Benetton took the initiative and made a formal Request for Arbitration to the same body in the Netherlands.  The second arbitration was given the number NAI 1616.  Benetton sought a declaration that it had rightfully ended the negotiations for the extension of the term of the licence agreement and sought compensation.  That request was made on 31 January 1994 and on 21 March 1994 ESCT filed a short answer indicating that it was Benetton’s conduct which prevented the conclusion of an extension.  ESCT eventually claimed US$158 million as a result.

19.  In July 1994 the Arbitration Tribunal ruled that the claims by ESCT and Bulova in respect of the non-extension of the term of the licence agreement and the failure of Benetton to comply, in that respect, with the PFA should be dealt with in the NAI 1616.  The final hearings of NAI 1325 were heard in November 1994 but it was not until June 1995 that the Final Arbitral Award was made in which ESCT was awarded US$23.75 million with interest and costs.

20.  In the meantime it appears that those who were conducting the affairs of the 2^nd defendant were becoming concerned about the non-payment of expenses which the plaintiff had agreed to indemnify ESCT in respect of the liquidation of Eco Swiss and Contempo.  In April 1994, the suggestion was made to the plaintiff that an amount in excess of HK$1 million would be deducted from the payments under the Consultancy Agreement.  This met with a sharp rebuff from the plaintiff who suggested that the reimbursement should be delayed until December 1995 and June 1996.

21.  However, the auditors of the 2^nd defendant and ESCT were concerned at the size of the liability which the plaintiff had incurred and about the risk of recoverability of the debts from the plaintiff.  The auditors were concerned about having to include provision for the loss in the accounts and as to how that would affect the true and fair view of the 2^nd defendant’s financial position.  The matter was resolved by the plaintiff, ESCT and the 2^nd defendant entering the Deed of Acknowledgement of Debt (“DoA”) dated 5 January 1995.  The recital clause refers first of all to the plaintiff and the 1^st defendant having agreed in clause 4(c) of the MoA to bear one half of any liability in connection with claims in which ESCT was a party in any way whatsoever.  The recitals then go on to state that the 1^st defendant had paid his half share of what were identified as the Liquidation Acquisition costs in respect of the offer to the receiver in Italy to purchase the assets of Eco Swiss and Contempo. 

22.  In the recital clause it was said: “The parties hereto have agreed to execute this Deed to evidence the Indebtedness and provide for the terms governing repayment thereof.”  Clause 1 of the DoA recites that the plaintiff acknowledged that he was indebted to ESCT in the total sum of HK$752,406.50 and that there was a continuing obligation to indemnify ESCT or the 1^st defendant to the extent of 50% of the total liabilities to be incurred in accordance with the MoA.  It is the second clause of the DoA which is of particular relevance in this case.  That read:

“ Pursuant to Clause 5 of the Memorandum, (the plaintiff) 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) where such compensation to ESCT is in excess of United States Dollars Ten Million (US$10,000,000) from any successful outcome regarding the Benetton Arbitration (‘Special Bonus’). Notwithstanding with any contrary provisions as provided in the Memorandum, (the plaintiff) hereby agrees and confirms that (the 2nd defendant) shall be entitled to set off the Indebtedness and any further liabilities as abovestated against the amount of Special Bonus to be payable by (the 2nd defendant). (The plaintiff) covenants with (the 2nd defendant)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 …”

23.  The DoA was drafted by two of the directors of the 2^nd defendant without legal advice.  One of them, Mr Chik, gave evidence.  The other Mr Lee did not.  However Mr David Wong, who was also a director of the 2^nd defendant and an accountant of some considerable experience, not only in accounting matters but in taxation and corporate matters as well, also gave evidence.  In paragraph 87 of the judgment the judge refers to how Mr Wong and Mr Chik had said in their evidence in chief that the auditors’ concern was as to recoverability.  This is not at all surprising because when the DoA was sent to the plaintiff for signature the covering note signed by Mr Lee and Mr Chik included the following sentence:

“In order not to have any adverse effect on the financial position and to ensure that your indebtedness will be duly reimbursed to ESCT, we suggest a Deed of Acknowledgement of Debts be entered into by you in favour of ESCT and (the 2nd defendant).”

They had sought to retreat from that position when faced with the proposition that the DoA was thus a direct statement to the auditors that the 2^nd defendant would pay the special bonus under the MoA and consequently the recoverability of the debt would be assured.  The judge did not accept their change of evidence.  Having been directed to the relevant parts of the transcript, I consider that the judge was amply justified in coming to the conclusion that the DoA came into existence because of the auditors’ concern as to the recoverability of the amounts due from the plaintiff and that their concern was, at least in part, allayed by the fact that the amount due from the plaintiff could be deducted from the special bonus.

24.  In May and June 1995 there was further publicity given to the plaintiff’s convictions in Germany and Italy as well as his removal from being a director of the 2^nd defendant.  This caused some concern amongst the defendants’ camp because it was anticipated that Benetton might use this as an excuse for an “after-the-fact” justification for its refusal to extend the licence agreement and it might even try to use that as a basis to have the PFA set aside.  However Mr Conway, who was conducting the arbitration proceedings in the Netherlands, said in a fax that he considered that, because the plaintiff had been removed immediately from the 2^nd defendant’s board and was no longer a member of the management during the period when negotiations for the extension of the licence agreement took place, the defendants had positioned themselves to resist any such arguments from Benetton.

25.  On 23 June 1995 the Arbitration Tribunal issued the Final Arbitral Award under which Benetton was ordered to pay ESCT US$23,750,000 together with interest and costs.  Bulova was awarded the sum of US$2,800,000 together with interest and costs.

26.  The issue of the Final Arbitral Award then became the focus of a series of applications and court proceedings directed to setting it aside.  Those were based, in part upon allegations stemming from the existence of the plaintiff’s convictions in Germany and Italy.  The proceedings were based on other grounds as well and were even taken to the European Court of Justice.  In September 1999 the Court of Appeal of The Netherlands dismissed the revocation action and in the course of doing so held that the plaintiff’s convictions in Germany and in Italy were irrelevant in the context of the arbitration decisions.  Serious negotiations for a settlement apparently commenced at the hearing, which took place in October 1999, for the determination for the damages in NAI 1616.  The final settlement agreement between ESCT and Benetton was concluded in March 2000 whereby Benetton agreed to pay ESCT US$42,086,470.69 and NLG22,902,881.55.

27.  It was on those sums that the plaintiff claimed under Clause 5 of the MoA.  His initial letters to the 1^st defendant were not replied to.  Eventually solicitors on behalf of the defendants wrote denying any liability to the plaintiff on the part of the defendants, asserting that the settlement had not been in respect of NAI 1325 since it was a global settlement and it was impossible to separate the amount which was attributable to that arbitration.  It was also asserted that the plaintiff had not used his best endeavours to assist the arbitration because of the concealment of the convictions which had laid ESCT open to the attacks from Benetton in respect of the arbitration awards.  It was also said that the 1^st plaintiff and ESCT had claims against the plaintiff which they were minded not to proceed with unless the plaintiff pursued his claims.  Then there was also a threat that any proceedings would be an embarrassment to the plaintiff.

The judgment below

28.  The judge had no difficulty in reaching the conclusion that ESCT was the alter ego of the 2^nd defendant.  He did so in the context of observing that he considered that although the 2^nd defendant had been in a position to obtain whatever documents were required from ESCT, the judge considered that the 2^nd defendant had been highly selective, to put it euphemistically, in the documents which were produced particularly with regard to the final settlement with Benetton.

29.  The judge gave judgment against both the 1^st and 2^nd defendants.  He held that, on the wording of the MoA, the 1^st defendant was liable to pay the amount claimed irrespective of whether the 2^nd defendant was also liable.  In doing so he rejected the allegation that the MoA constituted a champertous agreement.  He also held that the final settlement with Benetton constituted monetary compensation received by ESCT in respect of the arbitration, as the expression was used in the MoA.  Although the matter related primarily to the claim against the 2^nd defendant, the judge also held that the 2^nd defendant had not made any decision either in 1993 or 1995 that it was unlawful or not prudent to pay the plaintiff the special bonus.  The judge then went on to hold that the plaintiff had used his best endeavours to assist ESCT in the arbitration and that any defence on the part of the defendants based on a failure to use best endeavours failed.

30.  In respect of the 2^nd defendant, the judge held that by mutual assent, contained in the DoA, it was acknowledged that the 2^nd defendant would pay the special bonus and that although the 2^nd defendant was not a party to the MoA and was, therefore, not bound by it, in entering the DoA, it had effectively agreed to pay the special bonus.  The judge went on to hold that it would be inequitable to allow the 2^nd defendant to deny such a commitment.  Not only would it be unfair to the plaintiff who had altered his position as a result of entering the DoA but the 2^nd defendant would also have, effectively, deceived the auditors.  The judge went on to hold that even if the rule that an estoppel could not be used as a sword were to apply to the facts of this case, the facts indicated that Mr Wong and Mr Lee had agreed on behalf of the 2^nd defendant with the plaintiff to pay the special bonus.

This appeal

31.  Both defendants appealed to this court.  On behalf of the 1^st defendant four main points were taken.  In the first place it was said that the wording of clause 5 of the MoA did not give rise to a discrete liability on the part of the 1^st defendant should the 2^nd defendant not be liable under the MoA.  It was said that the 1^st defendant had done everything that he was required to do under the MoA.  He was confined in what he could do by the fact that his obligation to procure the 2^nd defendant to execute an agreement was subject to his fiduciary duties as a director.  The point was also taken that the amount received in the settlement from Benetton did not constitute monetary compensation from the arbitration.  It was said that the arbitration should be narrowly construed to mean damages awarded in the NAI 1325 arbitration and that the settlement sum was not such a sum.

32.  The point was also taken on behalf of the 1^st defendant that the judge was wrong to have dismissed the 1^st defendant’s case that the plaintiff had not used his best endeavours in respect of the arbitration.  In this respect it was said that the plaintiff had failed to inform those conducting the arbitration of his convictions, let alone the full facts relating thereto, and that, as a result, the appropriate defensive measures had not been taken in respect thereof.  Finally the 1^st defendant allied himself to the case of the 2^nd defendant in respect of champerty.

33.  The appeal by the 2^nd defendant relied on two aspects.  In respect of estoppel it was said that the reliance on estoppel constituted using the estoppel as a sword and not a shield and was therefore illegitimate.  It was also said that the judge was wrong in coming to the conclusion that there was a common assumption that the 2^nd defendant would pay the special bonus and, also, that it could be inferred in the circumstances that there had been an oral agreement.  In respect of champerty it was said that the agreement constituted a champertous agreement: the MoA had been made in Hong Kong and was governed by Hong Kong law and that it was unenforceable as a matter of public policy because it fell within the rubric that it had a tendency to affect the proper administration of justice.  In this respect an attempt was made to show that champerty could exist where maintenance did not.  It was also argued that the judge was wrong in holding that there was no reason why a genuine commercial interest which would justify what would otherwise be maintenance should not also justify what would otherwise be champerty.

The construction of clause 5

34.  In my view the interpretation of clause 5 of the MoA relating to the special bonus clearly imposes a liability on the 1^st defendant to pay the special bonus should the 2^nd defendant not pay it.  The purpose of clause 5 of the MoA was to entitle the plaintiff to the special bonus.  Although it was envisaged that the 2^nd defendant would pay the special bonus, the 2^nd defendant was not a party to the MoA.  In those circumstances it was not known whether the 2^nd defendant would, as a public company, be in a position where it would be right to pay such a bonus.  In July of the year that the MoA was executed Standard Chartered Asia Limited, who were advising the 2^nd defendant, wrote to the 2^nd defendant, care of Mr David Wong, and expressed strong views that the previous proposal that the plaintiff should receive 25% of the arbitration award would be difficult to justify to the investing public.  In that same letter, concerns had been expressed about the fiduciary duties of directors of a company.  It is thus understandable that the first part of clause 5 should be couched in terms that the parties to the MoA should not breach their fiduciary duties and that before committing itself to pay the special bonus, the 2^nd defendant should be advised that it was lawful and prudent to pay the special bonus. 

35.  The proviso seems to me to provide that in circumstances where the 2^nd defendant was not to pay the special bonus the 1^st defendant would be required to pay it.  It is not insignificant, for example, that the liability to pay the special bonus was a liability to pay within 28 days of the date when ESCT would receive the compensation.  One might observe that if, contrary to the above construction, it were the position that the 1^st defendant would only be liable to pay the special bonus in circumstances where the 2^nd defendant had assumed a liability to pay, following legal and other advice, but did not pay, it would be difficult to understand how the 1^st defendant could be required to pay the special bonus within 28 days of the receipt monetary compensation by ESCT, if his responsibility to pay was consequent upon the 2^nd defendant’s failure to pay the special bonus and that itself would only be known 28 days after receipt of the monetary compensation.

36.  In the course of argument the proviso in the final paragraph of clause 5 was analysed and dissected phrase by phrase and even word by word.  It has to be observed that the phrase “in accordance with the provisions of this Clause” is contained in commas.  It seems to me to be quite clear that the first sentence of the proviso of clause 5 refers to the fact that the 2^nd defendant would only be liable to pay the special bonus provided that the documentation referred to in the first part of clause 5 were duly executed.  In my view the plaintiff is correct that clause 5 is there to provide that the 1^st defendant should pay the special bonus in the event that (a) the monetary compensation received by ESCT was in excess of US$10 million and (b) the 2^nd defendant did not pay for any reason whatsoever.  I see no ground for disturbing the judge’s conclusion in this respect.

Whether the amount received in the final settlement agreement was monetary compensation in respect of the arbitration?

37.  The judge came to the clear conclusion that the expression “the Arbitration” as used in the MoA meant the arbitration known as NAI 1325 and all proceedings flowing from it, including NAI 1616.  In my view he was amply justified in so doing.  The interpretation clause of the MoA referred to the arbitration as meaning the arbitration proceedings commenced by ESCT in 1991 in the Netherlands under the terms of the licence agreement dated 1 July 1986.  As already referred to in paragraph 4 above, the orders sought by ESCT in NAI 1325 were far ranging and included all matters of compensation resulting from Benetton’s repudiation of the licence agreement and covered the damages which flowed from the breach covering both the initial term and any foreseen extension of the agreement.  Furthermore the orders sought in the statement of claim in NAI 1325 envisaged that the amount would “be proven in a second phase of the proceedings”.  As already indicated, the Arbitration Tribunal itself indicated to the parties that the question of damages and costs should be determined in a second phase of the proceedings; the Tribunal clearly considered that any damages resulting from the breach of the licence agreement in so far as it impinged upon the requirement to negotiate an extension would, as a procedural matter, have to be deferred.

38.  It was the defendants’ case that the monetary compensation received as a result of the settlement with Benetton was not attributable to NAI 1325 and, alternatively, in so far as it was so attributable, only a small amount could be so attributed.  In my view the monetary compensation that was received from Benetton resulted from the arbitration proceedings which were all part and parcel of one claim which was made by ESCT as a result of Benetton’s repudiation of the agreement.

The plaintiff’s failure to use best endeavours

39.  Mr Ho SC, who appeared on behalf of the 1^st defendant, sought to make out a case that the plaintiff was in breach of clause 4(A) of the MoA on the basis that he had not used his best endeavours to assist the arbitration proceedings on behalf of ESCT.  In view of the letter from the lawyers conducting the arbitration proceedings referred to in paragraph 13 above it would, seemingly, have been rather difficult to mount a case that the plaintiff had not assisted the lawyers conducting the proceedings to his full extent as regards the issues that were relevant in the arbitration proceedings. 

40.  What was said, however, was that the plaintiff failed to disclose to the lawyers full details of his German conviction and the charges brought against him in Italy and subsequently the convictions there.  Mr Ho sought to argue that had the plaintiff so informed the lawyers conducting the arbitration proceedings they would have put themselves and ESCT in a position whereby they could avoid any difficulties that might arise as a result of it.  That argument, on its own, lacked any substance.  When this court asked Mr Ho as to what steps might have been taken which would have changed the position, Mr Ho was unable to give any explanation other than the fact that lawyers generally are ingenious.  Obviously the defendants’ case in this regard was made even more difficult by the fact that Mr Conway, who appears to have been the person in charge of the conduct of the arbitration proceedings, did not give evidence in this case.  It was, therefore, almost impossible, it seems to me, for the defendants to mount any serious charge in this respect.  The one matter which appears to be relevant in this respect coming from Mr Conway is the statement in the fax which he sent to Mr David Wong on 18 May 1995 where he said that “given that Mr Unruh was removed immediately and was no longer a member of management during the period of the ‘negotiations’, we have positioned ourselves to resist Benetton’s arguments.”

41.  Even on the basis that there had been a failure to disclose the German conviction and the Italian charges and later conviction, the result of the various proceedings which took place between 1995 and 2000 when Benetton tried to set aside the awards and instituted various actions including actions which went as far as the European Court of Justice and the Court of Appeal demonstrates the fallacy of the point.  The ultimate result was that the unanimous decision of the courts was that those convictions and criminal charges were irrelevant as regards the issues in the arbitration proceedings.  Hence Benetton, in relying upon those matters, was relying on matters which were irrelevant.  Even on that basis one can only come to the conclusion that the plaintiff cannot be faulted for failing to use his best endeavours in failing to disclose matters and enable the parties to deal with matters which were wholly irrelevant and there was nothing demonstrable that they could have done about it even if it had been relevant.

Champerty

42.  Both defendants relied upon the argument that the provisions in the MoA relating to the special bonus constituted the MoA a champertous agreement.  Mr Ho was, however, content to leave the argument in this regard to Mr Chang SC, who appeared on behalf of the 2^nd defendant.  The judge came to the conclusion that the plaintiff had a sufficient genuine commercial interest in the outcome of the arbitration proceedings such that the arrangement that he should be paid for his assistance in the arbitration did not amount to a champertous contract.  In my view he was quite correct.

43.  Before considering the defendants’ argument it is necessary to consider what constitutes champerty.  The general principles of the law of maintenance and champerty are stated in Halsbury’s Laws of Hong Kong, Vol. 7 (2001), para. 115.212 in a passage taken from Halsbury’s Laws of England, 4^th Ed., Vol. 9 (1974), page 272, para. 400:

“Maintenance may be defined as the giving of assistance or encouragement to one of the parties to litigation by a person who has neither an interest in the litigation nor any other motive recognised by the law as justifying his interference.  Champerty is a particular kind of maintenance, namely maintenance of an action in consideration of a promise to give the maintainer a share in the proceeds or subject matter of the action.”

44.  That passage has been cited with approval in a number of cases: see, for example, the speech of Lord Wilberforce in Trendtex Trading Corporation and another v Credit Suisse [1982] AC 679 at 694H (the 2^nd sentence) and the judgment of Lightman J in Grovewood Holdings Plc. v James Capel & Co. Ltd [1995] Ch 80.

45.  Turning specifically to maintenance, in the Trendtex case Lord Roskill referred to “… the classic judgment of Danckwerts J., affirmed by the Court of Appeal, in Martell v. Consett Iron Co. Ltd [1955] Ch. 363.”  In that judgment, after referring to the jurisprudential history of maintenance, Danckwerts J said at page 376:

“Blackstone (Commentaries IV, 134) defines maintenance as ‘an officious intermeddling in a suit that no way belongs to one, by maintaining or assisting either party with money or otherwise, to prosecute or defend it.’  Lord Abinger in Findon v. Parker (1843) 11 M.&W. 675 said at page 682: ‘The law of maintenance, as I understand it upon the modern constructions, is confined to cases where a man improperly, and for the purpose of stirring up litigation and strife, encourages others either to bring actions, or to make defences which they have no right to make.’  Lord Haldane in Neville v. London “Express” Newspaper Ld. [1919] AC 368 said at page 390: ‘... the broad rule remains unrepealed by any statute that it is unlawful for a stranger to render officious assistance by money or otherwise to another person in a suit in which that third person has himself no legal interest, for its prosecution or defence.’  I observe that each of these definitions qualifies the interference which gives rise to the wrong with the words ‘officious’ or ‘improperly.’  It may be that the argument for the defendant company in the present case was not intended to avoid this qualification, when it was contended that all maintenance was unlawful unless it fell within one of the recognized and (as it was claimed) strictly limited cases of justified interference or ‘excuses’.  These exceptions from the general rule were said to be (1) near relationship between the maintainer and the person maintained; (2) charity; and (3) where the maintainer and the person maintained have a common interest in the subject-matter of the suit, which, it is said, must be such an interest as is recognized by the law and not merely a sentimental interest.  Sir Andrew Clark referred me to a number of authorities in support of his propositions, which I will proceed to examine.”

46.  Lord Mustill’s speech in Giles v Thompson [1994] 1 AC 142 at page 161B cited from Fletcher Moulton LJ’s judgment in British Cash and Parcel Conveyors Ltd v Lamson Store Service Co. Ltd [1908] 1 KB 1006 at page 1014 which contained similar expressions referring to:

“… wanton and officious intermeddling with the disputes of others in which the [maintainer] has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse.”

47.  Mr Chang sought to draw a distinction between maintenance on the one hand and champerty on the other and relied upon the statement of Millett LJ in the case of Thai Trading Co. v Taylor [1998] QB 781 at 786C where he said:

“… there can still be champerty even if the maintenance is not unlawful.  The public policy which informs the two doctrines is different and allows for different exceptions”

48.  As with all propositions of law derived from authorities, what the judge was saying must be considered carefully in context of the case.  In this instance, the first thing that must be mentioned is that the citation from Millett LJ’s judgment, at paragraph 55 of Mr Chang’s skeleton argument, is only part of a sentence.  That sentence commences:

“There can be no champerty if there is no maintenance; but there can still be champerty even if the maintenance is not unlawful. …”

49.  It is important therefore to consider what was referred to as being “maintenance” and what was referred to as being “unlawful” or its corollary “lawful” maintenance.  Millett LJ went on to refer to cases which had been referred to in the earlier authorities where maintenance was acknowledged to be permissible when the maintainer had a legitimate reason for assisting in a suit.  As Danckwerts J had said in Martell, that was not confined to cases where he had a financial or commercial interest in the result.  It extended to other cases where social, family or other ties justified the maintainer in supporting the litigation.  Millett LJ continued at page 787A:

“In Neville v. London “Express” Newspaper Ltd. [1919] A.C. 368, 389 Lord Haldane said: ‘Such an interest is held to be possessed when in litigation a master assists his servant, or a servant his master, or help is given to an heir, or a near relative, or to a poor man out of charity, to maintain a right which he might otherwise lose.’ In Bradlaugh v. Newdegate (1883) 11 Q.B.D. 1, 11 Lord Coleridge C.J. spoke of ‘the interest which consanguinity or affinity to the suitor give to the man who aids him, or the interest arising from the connection of the parties, e.g., as master and servant …’  In Condliffe v. Hislop [1996] 1 W.L.R. 753 this court held that it was not unlawful for a mother to provide limited funds to finance her bankrupt son’s action for defamation.”

50.  It is clear on a number of authorities, therefore, that there can be maintenance which can be justified or tolerated and that is what is referred to as “lawful” maintenance.  In contrast, however, assistance given in relation to litigation may not constitute maintenance at all.  If what the party assisting the litigation has done does not constitute officious intermeddling into something in which the party concerned has no interest whatever, then what he has done does not constitute maintenance.

51.  In this case, it appears me to be impossible to say that the plaintiff was officiously intermeddling into litigation in respect of which he had no interest whatever.  On the contrary, he was intimately involved in the whole subject matter of the litigation.  He had previously been the owner of ESCT at the time when the licence agreement was entered into.  He had been in full control of ESCT at the time when the licence agreement was in force, when the alleged breaches of the licence agreement had occurred, when the licence agreement was terminated and when the arbitration was commenced.  He was so intimately involved in the issues that arose in the arbitration that it would, seemingly, be almost impossible to have conducted the arbitration without his active assistance.  This is quite apart from the fact that at the time the MoA was entered into, the plaintiff was a director of both ESCT and the 2^nd defendant and had a substantial financial interest in those companies.

The liability of the 2^nd defendant

52.  The judge dealt with this aspect of the case on the basis of estoppel by convention based on the DoA.  In the alternative the judge found that there must have been an agreement arrived at between the plaintiff and Mr Lee and Mr Chik prior to the execution of the DoA.  The route by which the judge arrived at that is that by mutual assent, contained in the DoA, it was acknowledged by the 2^nd defendant that it would pay the special bonus, from which the plaintiff acknowledged that the 2^nd defendant could deduct the indebtedness to ESCT which was provided for in the MoA and the Howard Lau deed.  The judge then went on to hold that, in relying on the statements made in the DoA, the plaintiff’s position could be described as “worse off”.  For example, he might have pressed the 2^nd defendant to execute the documents envisaged in the MoA or he might have refused to provide any further assistance in the arbitration.  Furthermore, it has already been noted that under the Howard Lau deed not only was the liability limited in time but in extent.  It can also be mentioned again in this context, that the only signatories to the MoA were the plaintiff and the 1^st defendant.  Neither ESCT nor the 2^nd defendant were parties to the MoA. 

53.  In coming to his conclusion the judge had reference not only to clause 2 of the DoA but also the recital which together made it clear that the DoA was intended to provide for the terms governing repayment against the amount of special bonus to be payable by the 2^nd defendant.  In doing so the judge was very conscious of the fact that the auditors had not been called to give evidence.  In the written submissions, Mr Chang called attention to the evidence of Mr Chik and Mr Wong in relation to the intention behind the DoA.  Reference has already been made to that in paragraph 23 above.  A reading of that evidence certainly does not give the impression that those witnesses were giving honest or frank evidence.  Moreover the purpose of the DoA was to induce the auditor to believe that the indebtedness was not an appreciable risk, hence the importance of it being recovered out of the special bonus.  Although the covering note referred to in paragraph 23 above would not necessarily have been shown to the auditors, it is difficult to envisage how the expression “… to ensure that your indebtedness will be duly reimbursed …” could have been used otherwise than in the context of the special bonus being payable by the 2^nd defendant.  Similarly, both the second and the last sentences in clause 2 of the DoA would have been inoperative if the 2^nd defendant were not under an obligation to pay the special bonus.

54.  Mr Chang’s answer to this in the closing stages of his reply speech on this appeal was that the purpose of the DoA was first of all to give the plaintiff time to pay the indebtedness and at the same time to give comfort to ESCT because the Howard Lau deed would expire and that with the DoA the 2^nd defendant and ESCT would have no need to worry about the two-year expiry date.  As regards the 2^nd defendant, it was said that the DoA did not alter the conditions required by the MoA, namely that documentation should be prepared by the 2^nd defendant’s legal advisers and that the payment should appear to be lawful and prudent for the 2^nd defendant as a company listed on the Stock Exchange.  On the other hand it was said that the effect of the DoA was to “acknowledge the Indebtedness and to entitle the 2^nd defendant to set off the same against the amount of the special bonus.”   

55.  In my view such an argument ignores the finding of fact by the judge that the directors of the 2^nd defendant, in particular Mr Lee and Mr Chik, were concerned to satisfy the auditors that the indebtedness would be repaid and in particular that there was a source of funds from which that would come.  If Mr Chang’s argument were correct, it would mean that the operative part of the DoA was clause 1 and that clause 2 was, in effect, highly deceptive verbiage designed to obfuscate the true position from the auditors in order that they should not require the accounts to be presented in a manner which they considered was necessary to give a true and fair view of the financial state of the 2^nd defendant.  In consequence, if Mr Chang’s argument were correct, clause 2 of the DoA was designed to fool the auditors, deceive the public as to the true and fair view of the financial state of the 2^nd defendant and cheat the plaintiff into extending his liability in a number of respects.

56.  In argument, Mr Chang said that the 2^nd defendant’s case had always been that the 2^nd defendant would pay the special bonus if the conditions in the MoA were fulfilled.  However, when the 1^st defendant was asked why the plaintiff was permitted to carry on assisting ESCT with the arbitrations if, all along, it had been decided that the plaintiff was not going to be paid the special bonus, his response was that “we” meaning presumably, the 2^nd defendant and he himself, considered that ESCT should receive between $80 and $150 million and that in those circumstances

“maybe we would have considered, but at this time it was a disaster to have him on board. So time are changing the situation, wouldn’t you agree?”

(See Transcript at pp 766U-767A.)

57.  That answer seems to me to point quite clearly to the fact that the 2^nd defendant, no doubt controlled by the 1^st defendant, changed its mind as to the payment of the special bonus when it did not receive compensation in the amount referred to.  It is highly significant that the 1^st defendant’s response was not along the lines of the submissions made in court, namely that the 2^nd defendant had not been advised that the payment could be made.  Nor was it said that the requisite documentation had not been executed.

58.  It was also said that in coming to his conclusion that there had been an acknowledgement that the 2^nd defendant would pay the special bonus and, further, that there must have been an agreement to that effect, the judge overlooked the fact that the plaintiff had not initially relied upon the DoA and indeed only joined the 2^nd defendant into the action at a comparatively late stage.  It was said, in this vein, that the judge had rejected the positive case put forward by the plaintiff that subsequent to the DoA there had been an agreement between the plaintiff and the 1^st defendant acting on behalf of the 2^nd defendant that the special bonus would be paid.  For my part, I cannot see that the judge would have overlooked that finding of fact which he had made in such a careful judgment.  Nor can I see that there is any special merit in the point that the plaintiff chose to pursue the 1^st defendant initially and joined the 2^nd defendant later.

59.  It was said that the Consultancy Agreement provided handsome remuneration for the plaintiff in return for, amongst other things, his assistance with the arbitrations.  In my view, those other things and duties which the plaintiff was required to perform under the Consultancy Agreement were very substantial and it cannot be said that the insertion of a duty to assist in the arbitration proceedings removed the need to pay the special bonus.  Comment has already been made that the remuneration under the Consultancy Agreement was less than under the service agreement.  If the need to pay the special bonus was not removed in the Consultancy Agreement, then the suggestion that the DoA should be read in the context that the plaintiff would not be entitled to anything further necessarily falls.

60.  It was said that there had been no waiver of the requirement in the MoA of advice as to the appropriateness of paying the special bonus.  The position was that the 2^nd defendant does not seem to have sought any such advice.  It does not seem to me that in the circumstances it can rely on its failure to seek any such advice as a ground for asserting that it could not have committed itself to paying the special bonus.

61.  In my view the judge was entitled to take the view which he did of the circumstances leading up to the execution of the DoA.  Once he had reached the conclusion that there was an acknowledgement and an understanding that the 2^nd defendant would pay the special bonus, I consider that he was amply justified in holding that the plaintiff had altered his position in entering into and relying upon the DoA.

Conclusion

62.  In the circumstances I consider that these appeals fall to be dismissed and I would make an order nisi that the costs of these appeals should be to the plaintiff.

Hon Le Pichon JA:

63.  I have had the advantage of reading in draft the judgments of the Vice President and Stone J.  I agree that both appeals should be dismissed for the reasons given by the Vice President.  I should, however, like to add a few observations on the issue of the liability of the 2^nd defendant.

64.  At paragraph 187 of his judgment, the judge concluded that “there must therefore have been an agreement by Mr Wong and Mr Lee, on behalf of [the 2^nd defendant], with [the plaintiff], to pay the Special Bonus.”  I agree with the analysis and reasoning of the Vice President as to why the judge was entitled to take the view that he did of the circumstances leading up to the execution of the Deed of Acknowledgement.

65.  I would add this.  The agreement found by the judge was an agreement to pay the special bonus under clause 5 of the Memorandum of Agreement.  In other words, by so doing, the 2^nd defendant was effectively waiving the need for the conditions contained in clause 5 (concerning documentation and receipt of professional advice) to be satisfied before it would come under any obligation to pay the special bonus.  There is nothing to suggest that the basis for computing the special bonus was to be altered.  Thus, under clause 5, unless the amount of the award were to exceed US$10 million, the special bonus would be zero. 

66.  On that analysis, there is indeed a possibility that no sum would be payable as special bonus.  It might therefore be said that the judge’s reasoning does not hold given that it could not be said (even assuming waiver and the words “notwithstanding … any contrary provisions as provided in the Memorandum” do support a waiver) that there was bound to be a sum that would be due from the 2^nd defendant.  In that eventuality, there would be nothing against which the set off could operate.

67.  On this last point, I would invite attention to the fact that by the date of the Deed of Acknowledgment in early January 1995, ESCT had already obtained an award in its favour in NAI 1325 when Benetton was ordered to perform its obligations under the licence agreement.  On 3 November 1993 ESCT embarked on phase 2 of the arbitration seeking damages in excess of US$44 million for Benetton’s repudiation of the licence agreement as well as unliquidated damages resulting from Benetton’s violation of the Final Partial Award rendered by the tribunal on 4 February 1993.  As at January 1995, the award as to damages was pending, having regard to the fact that the final hearing in that arbitration had taken place in November 1994.  It would be fair to say that by that date, the award was likely to be rendered in the following months.  In fact, it was duly rendered approximately six months later, on 23 June 1995, when the plaintiff was awarded damages totalling US$23.75 million.  Whilst it is true that as at early January 1995 the amount of the award was not yet known, it is certainly likely that the plaintiff and the 2^nd defendant would have had some inkling as to whether or not it was expected to exceed US$10 million.  Although the 2^nd defendant was not a party to the arbitration, it would have obtained the relevant knowledge through the 1^st defendant.  The language used in the Deed of Acknowledgement suggests that the authors believed and acted on the basis that, indeed, a special bonus would undoubtedly be payable under the Deed of Memorandum.  In other words, the expectation was that the award would exceed US$10 million thereby giving rise to the payment of the special bonus.

68.  Moreover, clause 2 of the Deed of Acknowledgement contained a covenant by the plaintiff to pay “any balance of the Indebtedness which are not set-off by the Special Bonus”.  At a minimum, that covenant would have afforded the auditors some additional comfort.  Regrettably, the 2^nd defendant chose not to call the auditors whose evidence would have been material.  The 2^nd defendant must therefore bear the consequences and cannot complain if adverse inferences are drawn against it.

69.  For these reasons, I am of the view that this basis of liability is sustainable.  I do not therefore consider it necessary to consider the correctness of the alternative ground of estoppel by convention as supporting liability on the part of the 2^nd defendant.

Hon Stone J:

70.  I have had the advantage of reading in draft the judgments of the Vice President and of Le Pichon JA in this appeal.

71.  I agree that the appeal of the 1^st defendant should be dismissed for the reasons given by the Vice President. 

72.  Of the four main points taken in this appeal by Mr Ho SC, leading on behalf of the 1^st defendant, only one, namely that of the construction of clause 5 of the Memorandum of Agreement, has caused me concern.

73.  Initially I was attracted to the argument that upon the plain wording of this clause that the obligation upon the 1^st defendant to make payment thereunder was conditional only, so that if and in so far as Egana’s obligation to pay the special bonus “in accordance with the provisions of this Clause” did not ‘bite’ (whether due to failure to execute necessary documentation or as the consequence of professional advice), then the guarantee of payment by Mr Seeburger likewise did not crystallise.

74.  Upon reflection, however, I am satisfied that the approach to the construction issue adopted by the learned judge below is correct, and that having regard to the factual matrix, wherein clearly it was vital that Mr Seeburger obtain Mr Unruh’s assistance in the arbitration proceedings, it would fly in the face of commercial reality to construe clause 5 in the manner contended for on behalf of the 1^st defendant.

75.  As the Vice President has pointed out, the words permit the construction that if for any reason Egana did not pay the special bonus, then such would be paid by Mr Seeburger, provided always that the monetary compensation received by ESCT exceeded the threshold figure of US$10 million.  In other words, subject to this ‘financial threshold’ condition, the obligation upon Mr Seeburger was absolute in the factual event of non-payment by Egana.

76.  Where, however, I have the misfortune of taking a different view to that of the Vice President, and to that of Le Pichon JA, is in terms of the merits of the appeal of the 2^nd defendant, Egana.

77.  The plaintiff’s case against Egana had been put on two bases in the court below : first, that the Deed of Acknowledgment contained provisions that constituted an acknowledgment on the part of Egana that it would pay the special bonus to Mr Unruh, and that such gave rise to an estoppel by convention, thereby precluding Egana from the contention that it was not liable to pay the special bonus; and second, that in or about May or June 1995 Mr Unruh and Mr Seeburger, acting on behalf of Egana, had reached an oral agreement whereby it was agreed that Egana would pay the special bonus to Mr Unruh.

78.  The learned judge (at paragraph 103 of his judgment) specifically rejected the contention as to the alleged oral agreement, holding that whilst he was satisfied that “there may well have been general discussions about the issue” between Mr Unruh and Mr Seeburger, he was unable to say on the balance of probabilities that an agreement had been reached.  The plaintiff has not sought to appeal against this conclusion.

79.  However, although he thus dismissed the claim in contract against Egana – which entity, of course, was not privy to the original Memorandum of Agreement – the judge held in favour of the plaintiff against Egana upon the basis of estoppel by convention (at paragraphs 171-186).

80.  Furthermore, the judge found (at paragraph 187) that if estoppel by convention did not suffice to get the plaintiff home, nevertheless he was “still of the view” that Egana was liable to Mr Unruh because in the negotiations leading up to the Deed of Acknowledgment that clearly it had been agreed that Mr Unruh’s pre-existing debt should be set-off against the special bonus payable by Egana, and accordingly that such an agreement could not have been reached unless it had been agreed between Mr Unruh and the directors, Messrs Wong and Lee, that Egana in fact would pay such bonus.  Thus, it was concluded, “there must have been” such an agreement to pay the special bonus.

81.  With respect to the learned judge, whom, if I may say so, has written a meticulous and carefully considered judgment, in the circumstances of this case I find it difficult to accept this latter conclusion, which appears to depend solely upon inference from primary fact, and which represents a finding upon a separate, and hitherto unidentified, cause of action. 

82.  Given his dismissal of Mr Unruh’s express contractual claim that there was an oral agreement formed in May/June 1995 between himself and Mr Seeburger on behalf of Egana, it is a little surprising that the judge should have been so prepared to discern the existence of an entirely separate oral agreement prior to the execution of the Deed of Acknowledgment of 5 January 1995, and notwithstanding that such a separate contractual cause of action neither was pleaded nor advanced by the plaintiff.

83.  I find it difficult to see how the anticipated set-off of Mr Unruh’s indebtedness against the special bonus to be paid by Egana, as rehearsed in the Deed of Acknowledgment, can be premised upon an oral agreement between the parties negotiating the Deed of Acknowledgment that, in effect, such bonus was to be paid in any event and irrespective of those conditions as earlier set out within the Memorandum of Agreement – conditions which clearly were required to be satisfied prior to payment by Egana of that bonus, and conditions which, it is common ground, never were met.  Moreover, if indeed there was such an agreement, why, one wonders, was such not specifically pleaded and advanced by the plaintiff at trial?

84.  It is common ground that the Deed of Acknowledgment was drawn absent legal advice and on the basis that the ‘Howard Lau’ deed was soon to expire.  As such it is tolerably clear that the purpose of this Deed was to afford a measure of comfort to ESCT and to Egana as to the proposed repayment mechanism, and whilst it is not difficult to accept that this is a document which also may have been drawn with a view to finding favour with third party auditors upon the issue of ‘recoverability’, this fact of itself does not have the effect of altering the clear and pre-existing conditions, as set out in the Memorandum, governing the circumstances in which Egana was to be responsible for payment of the special bonus. 

85.  It therefore strikes me as difficult to regard the terms of the Deed of Acknowledgment as reflective of an underlying agreement that Egana was to pay the special bonus ‘come what may’, which is the substance of this additional oral agreement which the judge has inferred had come into being between the plaintiff and the Egana directors; nor, for that matter, have I been directed to, or been able to identify any evidence at trial which clearly warrants such a conclusion – were this to be correct might it also be suggested, for example, that this agreement further imported that Egana was obliged to pay the special bonus irrespective of whether the ‘threshold’ settlement figure of US$10 million had been achieved?

86.  In my judgment, therefore, the learned judge was in error in alternatively basing his decision upon a separate and unpleaded oral agreement consistent neither with the specific oral agreement relied upon by the plaintiff (and specifically rejected), nor with the plain terms of the Memorandum of Agreement. 

87.  It follows from this that the plaintiff’s claim against Egana must stand or fall upon the primary conclusion of the judge below that estoppel by convention is sufficient in itself to confer a cause of action upon the plaintiff.

88.  As to this element of the case, the judge found that there was a common assumption that the special bonus would be paid by Egana, thereby enabling the indebtedness to be deducted (paragraph 171), that this assumption had been communicated between Mr Unruh and Egana by means of the Deed of Acknowledgment (paragraph 172), that the plaintiff had been induced by such assumption to continue to provide assistance, and that it would be manifestly unfair for Egana now to be heard to say that it is not liable to pay the special bonus (paragraphs 177-178), and – and here follows the contentious part of the present analysis – that estoppel by convention itself can create a new cause of action, and thus that Egana is liable to Mr Unruh for the sum in question (paragraphs 179, 184, 187).

89.  For my part I struggle to accede to this view regarding the independent efficacy of the doctrine of estoppel by convention.

90.  As authority for the proposition the judge below prayed in aid the case of Amalgamated Investment & Property Co. Ltd v. Texas Commerce International Bank Ltd, [1982] QB 84, although, as Mr Chang SC, for the 2^nd defendant, pointed out, this authority in fact is to the contrary effect, namely that a party cannot in terms found a cause of action on estoppel by convention, although he may be able to succeed on a cause of action on which, absent such estoppel, he necessarily would fail.

91.  As the editors of Chitty, op cit, point out, in Amalgamated Investment it is Lord Denning alone who expressed the principle of estoppel by convention in such a way as to enable it to give rise to a cause of action; Eveleigh LJ clearly did not share that view – “I do not think that the bank could have succeeded on a claim on the guarantee itself”, whilst the view of Brandon LJ (with whose reasoning the judge below aligned himself) was that the bank’s cause of action rested upon an agreement that a guarantee would be provided, and that it was this agreement, and not the estoppel, which would have given rise to the bank’s cause of action if it had sued on the guarantee.

92.  If this understanding of Amalgamated Investment be correct, it becomes necessary to identify the cause of action invoked by the plaintiff upon which, absent such estoppel, he necessarily would fail.

93.  I am unable to discern such cause of action, given that the learned judge dismissed the express contractual case mounted by the plaintiff, and given that which I consider to be his erroneous view that there was an actionable agreement, albeit unpleaded, to be inferred between the plaintiff and the Egana directors which is said to have given rise to an unfettered payment obligation on the part of Egana.

94.  In Baird Textile Holdings Ltd v. Marks & Spencer Plc [2001] 1 All ER (Comm) 737, the English Court of Appeal affirmed the proposition that estoppel by convention was insufficient to create a cause of action, whilst Thornton Springer v. NEM Insurance [2000] 2 All ER 489 – which the learned judge cited (at paragraph 184) as a “further example” supporting estoppel by convention as founding a cause of action – in fact was decided upon the basis that there was a contract supported by consideration in the form of an implied promise not to take proceedings.  Nor, with respect, is it clear how the case of Norwegian American Cruises v. Paul Mundy Ltd (The Vistafjord) [1988] 2 Lloyd’s LR 343, which was also cited, assists in this context, given that the ability of estoppel by convention to found a cause of action was not considered by the court in that case.

95.  No doubt it was in recognition of the paucity of English case law underpinning the proposition embraced in the court below that Mr Burns, on behalf of the plaintiff, sought in his able address to place before this court a number of Australian authorities on the point; in this connection he invited the court to follow the more liberal approach of the High Court of Australia, which is to permit reliance on estoppel by convention irrespective of any pre-existing cause of action – see, for example, Walton Stores v. Maher [1987-1988] 164 CLR 387 and Commonwealth of Australia v. Verwayen [1990] 170 CLR 394.

96.  For my part I would decline to follow such wider approach, an approach which, as Deane J observed in Walton Stores, op cit, at 445, rejects “a constriction of the doctrine in a way which would preclude a plaintiff from relying upon the assumed or mistaken state of affairs (which a defendant is estopped from denying) as a factual foundation of a cause of action arising under ordinary principles of law”, with the consequence that such estoppel “provides the factual foundation for enforcement of that ‘contract’ notwithstanding that those facts demonstrate that no binding contract was actually made.”

97.  It seems to me, with due respect, that this is to stretch the doctrinal envelope too far.  On the facts of the present case, for example, I fail to see how the common assumption – upon which estoppel by convention is predicated – within the Deed of Acknowledgment as to the set-off of Mr Unruh’s pre-existing debt against the anticipated payment of the special bonus can serve to operate, without more, to confer upon the plaintiff an independent cause of action which otherwise does not exist in clear contractual terms.

98.  I would agree with the authors of Chitty on Contracts, 29^th Edition, at para 3-113, who consider the current position under English law, and observe that estoppel by convention “does not create a cause of action, for the facts giving rise to the cause of action exist independently of the estoppel” and that “the present position seems to be that it cannot, any more than promissory estoppel or estoppel by representation, produce this effect.”

99.  In his judgment (at paragraph 186) the learned judge quotes precisely this passage from Chitty, and recognises that it is directly contrary to the view that he has taken as to the efficacy of estoppel by convention in creating an independent cause of action.  Equally it is this fact which stimulates his further finding (at paragraph 187) that “there must have been an agreement” between Messrs Unruh, Wong and Lee to pay the special bonus, with the result that it is this inferred agreement, “existing independently of the estoppel”, which then is prayed in aid to reinforce the judgment that Egana remains liable to pay this bonus to Mr Unruh – notwithstanding that such an agreement apparently formed no part of the plaintiff’s case below.  I am driven to the view that the learned judge’s finding in this regard is illustrative of a tribunal ‘reaching’ toward a conclusion which otherwise it is difficult to sustain.

100.  It follows from the foregoing that in terms of the appeal of the 2^nd defendant I am unable to agree with the majority of the court, and respectfully consider that the learned judge below erred in holding that judgment should be entered for the plaintiff against Egana.

101.  Mr Chang SC has made it clear during his submission that he does not pursue the 2^nd defendant’s counterclaim.

102.  In my judgment, therefore, save and except for that part of the judgment relating to the counterclaim of the 2^nd defendant, and the costs associated therewith, the appeal of the 2^nd defendant should be allowed and the judgment against the 2^nd defendant set aside, the plaintiff’s claim against the 2^nd defendant should stand dismissed, and there should be an order nisi that the costs of the plaintiff’s action against the 2^nd defendant be to the 2^nd defendant, such costs to be taxed if not agreed.

Hon Rogers VP:

103.  The appeals will therefore be dismissed with an order nisi of costs in favour of the plaintiff.