SIEGFRIED ADALBERT UNRUH v. HANS-JOERG SEEBERGER AND ANOTHER

HCA 6641/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6641 OF 2000

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JUDGMENT

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Background:

1. This is an action by the Plaintiff, (Mr Unruh), for payment of a Special Bonus. The claim for the Special Bonus arises pursuant to a Memorandum of Agreement, (the MoA), made on 19 September 1992, between Mr Unruh and the 1st Defendant, (Mr Seeberger). The MoA was made as part of the documentation entered into during the course of the sale by Mr Unruh to, ultimately, the 2nd Defendant, Eganagoldpfeil (Holdings) Limited, (Egana) of the entire issued share capital in Eco Swiss China Time Limited (ESCT), a company owned by Mr Unruh.

2. At the time the MoA was signed by Mr Unruh and Mr Seeberger, ESCT was engaged in an arbitration proceeding in the Netherlands between ESCT and Bulova International Watch Company Inc, (Bulova), as plaintiffs, and Benetton International NV, (Benetton) as defendant. The arbitration proceedings were known as NAI 1325.

3. In simple terms, the MoA makes provision for the payment to Mr Unruh of a "Special Bonus", to be calculated pursuant to a formula set out in the MoA, that formula being dependant upon there being an award of compensation in the arbitration proceedings, exceeding US$10 million. The Special Bonus was to be paid in return for assistance given by Mr Unruh to ESCT and Egana in the conduct of the arbitration proceedings, and any other litigation in which ESCT was involved.

4. Before NAI 1325 was finally concluded, a second arbitration proceeding, known as NAI 1616 was commenced, this time with Benetton as plaintiff and ESCT as defendant, although ESCT was to file a substantial counterclaim. It is common ground that Mr Unruh gave assistance on both arbitrations. Both arbitrations were eventually settled for a sum in excess of US$42 million.

Mr. Unruh's claims against Mr Seeberger:

5. It is Mr Unruh's primary contention that Mr Seeberger is personally liable under the provisions of the MoA, specifically cl. 5 of the MoA, which contains a provision imposing a personal obligation on Mr Seeberger to pay the Special Bonus in default of payment by Egana.

6. In the alternative, Mr Unruh contends that in May or June 1995 he reached an oral agreement with Mr Seeberger, acting for himself, and on behalf of Egana, in which it was agreed Mr Unruh would continue to assist in the conduct of NAI 1325, and would give assistance in relation to NAI 161. His argument is that on that basis, Mr Seeberger agreed, both on behalf of himself and Egana, to pay the Special bonus.

7. In the alternative, Mr Unruh makes a claim against Egana. Should his claim against Egana fail, it is Mr Unruh's contention that Mr Seeberger is liable to him in damages for failing, pursuant to cl. 7 of the MoA, to procure Egana to enter into appropriate documentation to pay the Special Bonus to Mr Unruh.

Mr Unruh's claims against Egana:

8. There is no doubt that Egana did not, pursuant to the terms of the MoA, enter into the formal documentation contemplated by cl. 5 of the MoA to pay the Special Bonus.

9. Mr Unruh's claim against Egana, is made pursuant to the terms of a Deed of Acknowledgement, (the DoA), dated 5 January 1995, made between Mr Unruh, ESCT, (by then a wholly owned subsidiary of Egana), and Egana. The contention in this respect is that the DoA contains provisions which, on Mr Unruh's case, constitute an acknowledgement on the part of Egana that it would pay the Special Bonus to Mr Unruh. Mr Unruh contends that that acknowledgement gives rise to an estoppel by convention, thereby preventing Egana from contending it is not liable to pay the Special Bonus.

10. Alternatively, Mr Unruh repeats the contention that in about May or June 1995, he reached an oral confirmatory agreement with Mr Seeberger, acting on behalf of Egana, in which it was agreed Egana would pay the Special Bonus.

The primary documents:

11. There are accordingly two primary documents, both contracts between parties to this litigation, which require construction, namely the MoA and the DoA. A third primary document will also require construction. That is a Final Settlement Agreement (the FSA), made on 31 March 2000 between ESCT, and Benetton, whereby those two companies compromised all arbitration proceedings between them, resulting in a payment by Benetton to ESCT of US$42,086,470.69 and NLG2,902,881.55. It is this sum, amounting to some HK$338 million, upon which, Mr Unruh says that the Special Bonus should be calculated. Applying the formula in the MoA, Mr Unruh says that the Special Bonus is in the order of HK$26 million.

Mr Seeberger's defences to the claim for the Special Bonus:

12. Mr Seeberger raises four alternative defences to the claim under cl. 5 of the MoA.

13. First, he says that on a proper construction of the MoA, with Egana not having entered into documentation to pay the Special Bonus, there can be no liability on him personally. Second, he says that by virtue of Mr Unruh's failure to use his best endeavours to assist ESCT in connection with the arbitration, contrary to cl. 4 of the MoA, no liability arises to pay the Special Bonus in any event. Third, it is argued that the effect of the FSA is such that, in any event no liability to pay any monetary sum arises under the MoA. Fourth, he contends that the MoA is a champertous agreement, and accordingly unenforceable. As to the alternative claim, based on an oral confirmatory agreement, it is argued that there was no such agreement.

14. As to any obligation Mr Seeberger may have had pursuant to cl. 7 of the MoA to procure Egana to enter into documentation to pay the Special Bonus, he contends that the payment of the Special Bonus was dependent upon it appearing to Egana that it was both lawful and prudent for Egana as a company listed on the Stock Exchange to make payment of the Special Bonus. His pleaded case is that on two occasions Egana made a determination that it would be neither lawful nor prudent to pay the Special Bonus. In this context it is further contended by Mr Seeberger that to procure Egana to pay the Special Bonus would have been a breach of his own fiduciary duty to Egana. Finally, it is contended that even if there was a breach of cl. 7, that breach has caused Mr Unruh no loss.

Egana's defences to the claim for the Special Bonus:

15. The primary position of Egana is that it has never entered into any documentation nor agreement to effect any payment of a Special Bonus to Mr Unruh. They did not do so, it is argued, because the Board of Directors of Egana twice considered that it was not in the interests of Egana to enter into documentation to pay the Special Bonus, and further that they did not receive professional advice that it was lawful and prudent to enter into such documentation. It is argued that they received professional advice to the contrary. Accordingly, it is argued for Egana that they have no libility to pay the Special Bonus.

16. As to the DoA, Egana contends that it does not set up an estoppel by convention, and that in any event, an estoppel may be used only as a shield, and not as a sword upon which a claim may be found. Further, it is the case for Egana that the set-off provision in the DoA is conditional upon Egana being liable to pay the Special Bonus to Mr Unruh.

17. As to the oral agreement, Egana, like Mr Seeberger, says that there was no such agreement. Should it be held that there was an oral agreement to pay the Special Bonus, or that Egana is estopped from denying that it had assumed the liability by virtue of the DoA, it is contended that there was no consideration to support the MoA or that any consideration which there was, was past. Egana joins Mr Seeberger in relying on the failure to use best endeavours argument and take the primary lead in the contention that the MoA is a contract of champerty, and accordingly void and unenforceable.

Mr Seeberger's defence of set-off:

18. As part of his defence Mr Seeberger contends that he was obliged to make a payment of US$280,000 to a Mr Loeffler, and that Mr Unruh is obliged to refund that sum to Mr Seeberger. If liability is found against him, Mr Seeberger seeks to set that sum off against any liability, conversely, if Mr Seeberger has no liability under the MoA, he seeks judgment for the sum of US$280,000.

Mr Seeberger's Counterclaim:

19. Further, by way of counterclaim, Mr Seeberger sues Mr Unruh, arguing that by virtue of Mr Unruh's breach of his obligation under cl. 4 of the MoA to use his best endeavours to assist in the arbitrations, the value of Mr Seeberger's shares in Egana has been reduced.

20. The particular assertion pleaded is that Egana was obliged, by reason of pressure from Benetton arising from the discovery that Mr Unruh had convictions in both Germany and Italy, and in relation to the German conviction, Mr Unruh had been imprisoned, to accede to a settlement of the arbitrations in a sum that was significantly less than a proper settlement. The contention is that Mr Unruh's failure to disclose those matters constituted a breach of his obligation to use best endeavours. Consequently it is argued that Mr Unruh is liable to Mr Seeberger for that reduction in share value.

Egana's defence of set-off and counter-claim:

21. Egana too has a claim of set-off and counterclaim. By the DoA Mr Unruh acknowledged liability to ESCT for a total sum of HK$1,691,544.20. Egana seeks to set that sum off against any liability which may be found against it. Alternatively, if no liability is found against Egana, Egana seeks judgment against Mr Unruh for that sum.

Mr Unruh's defence to the set-off and counterclaims:

22. Mr Unruh defends both the set-off and the counter claims. As to Mr Seeberger's claim based upon his payment to Mr Loeffler, Mr Unruh says first, that any payment that may have been made was not in respect of the liability he agreed to refund. Second, Mr Unruh says that there is simply no evidence at all that Mr Seeberger made the payment he contends, in the circumstances he contends, or for the purpose he contends.

23. As to Mr Seeberger's claim for diminution in share value, Mr Unruh asserts that there is simply no evidence either that Egana settled with Benetton as a result of any pressure, or that Egana recovered less compensation than they might have, but for the admitted convictions.

24. The reply to Egana's set-off and counterclaim is a plea of res judicata. Mr Unruh says that the very same claims were raised by ESCT in the High Court of Hong Kong in Action 258 of 2003, and that claim was struck out on the grounds that it was statute barred. It is common ground that there was no appeal by ESCT from that decision. It is argued that Egana can have no greater rights than ESCT. The case for Mr Unruh is further that the DoA contains an acknowledgement of liability only to ESCT, which may have a right of action pursuant to the DoA, but no liability to Egana is acknowledged. Although the issue does not arise directly in the proceedings, the corollary to Mr Unruh's argument is that the principle of res judicata must apply against ESCT, even in respect of the DoA.

A split trial for Mr Seeberger's counterclaim on share value diminution:

25. At the commencement of the trial Mr Seeberger made application under O. 33 r.4(2), for an order for a split trial. He argued that the trial in respect of any damages arising in respect of his counterclaim for diminution of share value should be heard separately and after the present trial, which he argued should be confined to liability only on the counterclaim. Mr Unruh opposed that application.

26. Leave to file the amended counterclaim, which introduced Mr Seeberger's claim against Mr Unruh for diminution of share value for the first time, was given only on 20 February 2004. The trial was then due to start a mere five weeks later on 15 March 2004. A direction sought by Mr Unruh on the summons to amend the counterclaim, proposed that evidence in relation to the value allegedly lost in the shareholding should be filed by 10 March 2004. Mr Seeberger opposed that direction, but as there was no split trial summons before the court at that time, the direction was given, with liberty to apply, on the issue of a split trial. Subsequent inquiry has established that to properly put the expert evidence required before the court would take up to four months and would be a very expensive exercise.

27. Under O.33 r. 4(2), the court has a discretion to order separate trials of liability and damages, and the general rule, that while the normal procedure should still be that liability and damages should be tried together, may be departed from, whenever it is "just and convenient" to do so: see Tin Shui Wai Development Ltd v Attorney General [1989] 2 HKC 492, and Performance Properties Ltd & Anor v Yip Kim Po [2004] 1 HKC 338. Mr Chan relied upon the decision of Findlay J in Wincheer Investments Ltd v Lobely Co Ltd (unreported HCA 8145/92, HKP 2004 33/4/11), where the learned judge held that:

" 'Just' meant fair to both sides, without one side or the other gaining an undue advantage by a separation, and 'convenient' meant convenient to both sides and advantageous from the point of view of costs."

28. I accept that the introduction of this counterclaim was made very late in the day, but leave has been given to introduce it, and that decision must be accepted at this stage. Having regard to the extent of the evidence that would be required, and the cost of that evidence, to both sides, I was satisfied that it would be neither just nor convenient to require Mr Seeberger to go to trial on the damages aspect of his counterclaim so soon after that claim had commenced. In reaching that conclusion I bore in mind that should Mr Seeberger fail on liability on that part of the trial, a great deal of time and expense would be saved, as it would then not be necessary to embark upon an examination of damages.

29. For those reasons I made an order at the commencement of the trial that the issue of damages on Mr Seeberger's counterclaim alleging a diminution in the value of his shareholding in Egana should be tried separately.

The law as to the construction of contracts:

30. Mr Chan cited a number of well known, and oft cited, passages in Chitty on Contracts 29th Ed. I have re-read those passages in the course of preparing this judgment and have regard to them. A court must approach the construction of contracts between the parties having regard to the surrounding circumstances, or factual matrix, in which those documents were made. The proper approach to the evidence that may be used in the construction of a contract is set out in the judgment of Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, HL, at 912-3. I have regard also, in deciding this matter, to the dictum of Lord Hoffmann in Jumbo King Ltd. v Faithful Properties Ltd & Ors. [1999] 2 HKCFAR 279 at 296 D-I.

31. Mr Pun adopted Mr Chan's case in this respect. Mr Burns did not take exception to any of the principles cited. They are the principles that I apply in the construction of the documents in this action.

32. In order to understand fully the factual matrix in which the claim arises it is necessary for me to recite, unfortunately somewhat comprehensively, the factual background. Broadly, the facts were not in dispute, although there are discrete areas where the parties are diametrically opposed. The facts as I now set them out are the facts that I find. Where there is a dispute between the parties has to facts I shall indicate that dispute, and the manner in which I have resolved the dispute.

Prior to 1991 and "Benetton by Bulova":

33. Mr Unruh established ESCT in about 1981. In 1991 he held all of the shares in the company. The company was engaged in the manufacture and sale of watches and electronic components for watches. ESCT was based in Hong Kong and carried out its manufacturing primarily in China, and had UK, Swiss and Italian subsidiaries, carrying on the distribution aspects of the business in Europe.

34. One of the most successful items produced by ESCT was a fashion watch bearing the name "Benetton by Bulova". This was a watch designed and manufactured by ESCT under a Licence Agreement made between ESCT, Benetton, and the Bulova Watch Company Inc., (Bulova). Under the Licence Agreement ESCT manufactured and sold the watches, and paid royalties to both Benetton and Bulova. The term of the Licence Agreement was 8 years. The agreement provided that, not later than one year prior to the expiry of the term, the parties would negotiate, in good faith, to extend the term of the Licence Agreement. The effective date of the Licence Agreement was 1 July 1986, and accordingly it was due to expire on 30 June 1994. The obligation to negotiate in good faith for the extension term would accordingly arise on 30 June 1993.

Benetton terminates the licence, and ESCT commences arbitration:

35. On 24 June 1991, Benetton served on ESCT a notice terminating the Licence Agreement, the determination purporting to be effective from 22 September 1991. It is Mr Unruh's case that effectively, by that notice, Benetton indicated they would not enter into negotiations for the extension of the term. On 28 June 1991, ESCT and Bulova commenced arbitration proceedings in the Netherlands Arbitration Institute, that arbitration being referred to in proceedings as NAI 1325.

36. NAI 1325 began with ESCT and Bulova sending to The Netherlands Arbitration Institute a formal Letter of Request for Arbitration on 28 June 1991. ESCT filed its statement of claim in NAI 1325 on 2 March 1992. There is no suggestion that this was an inappropriate delay and no point arises from this fact. Benetton filed its statement of defence and a counterclaim on 20 April 1992. That was a year after Mr Seeberger became involved with ESCT.

37. The terms of the relief sought by ESCT in its Statement of Claim are important. The importance of the terms of the relief is such that it is appropriate to set out the relevant passages in full:

IV. Relief sought

For all the foregoing reasons, (ESCT) respectfully requests the Tribunal (primair) to:

1. declare that the Agreement continues in full force and effect between (ESCT), Benetton, and Bulova in accordance with its terms;

2. order Benetton to continue performing its obligations under the Agreement for the full term thereof including the commencement of negotiations with (ESCT) and Bulova no later 1 July 1993 and the conduct of those negotiations in good faith, under a penalty of $500,000 for every day Benetton fails such performance;

3. order Benetton to compensate (ESCT for the damages resulting from Benetton's repudiation of the Agreement and related misconduct in an amount to be proven in a second phase proceedings;

(5, 6, and 7, sought usual cost orders etc).

Alternatively, as a formality to preserve its rights under Dutch procedural law, (ESCT) respectfully requests (if the Tribunal declines the preceding relief) the Tribunal (subsidiair) to:

1. declare the Agreement terminated as of the date of its final award;

2. order Benetton to compensate (ESCT) for the damages resulting from Benetton's repudiation of the Agreement and related misconduct, including the last future profits covering both the initial term and the foreseen extension of the Agreement, in an amount to be proven in a second phase proceedings;

(3, 4, and 5 sought usual cost orders etc.)

Mr Seeberger seeks to acquire ESCT:

38. In around April 1991, two months prior to the termination of the Licence Agreement by Benetton, and before the commencement of NAI 1325, discussions had commenced between Mr Unruh and Mr Seeberger for the proposed acquisition by Mr Seeberger of Mr Unruh's shares in ESCT. The discussions had begun following meetings between Mr Unruh and Mr Seeberger at the Basel Watch Fair, which is held around Easter each year. In the usual way in a company acquisition, Mr Seeberger undertook due diligence in relation to ESCT. It is accepted by Mr Seeberger that in course of this exercise he was provided by Mr Unruh with a copy of the Licence Agreement, Benetton's notice of termination and all relevant documents in relation to NAI 1325. The intention of all concerned was that NAI 1325 would continue for the benefit, nominally of ESCT, although in reality, ultimately, for the intended public company, yet to be listed in Hong Kong, Egana.

39. The acquisition by Mr Seeberger of ESCT was to be undertaken in two stages. First, in August 1991, Mr Unruh entered into an agreement with a company owned by Mr Seeberger, Haru Pacific Limited, (Haru Pacific), whereby 49% of Mr Unruh's shares in ESCT were sold to Haru Pacific. It was then, and had for some time, been Mr Seeberger's intention to publicly list another of his companies, on the Hong Kong stock exchange. Mr Seeberger became a director of ESCT, and chairman of directors, and he appointed two of the six directors. Mr Unruh remained a director of ESCT, and he too appointed two directors.

40. The second stage took place a year later, when on 19 September 1992, Haru Pacific, acquired Mr Unruh's remaining shares in ESCT. On 19 September 1992, Mr Unruh was appointed an executive director of Egana pursuant to a Service Agreement which was due to expire on 31 August 1995. Mr Unruh held shares in Egana, and had options to acquire further shares. In September 1992, Egana was not yet a publicly listed company. The precise corporate commercial steps are not relevant, but ultimately ESCT became a wholly owned subsidiary of Egana, prior to it becoming a public listed company in Hong Kong.

41. One of the documents signed in the course of the commercial transaction on 19 September 1992, was a Deed made between Mr Unruh and Mr Seeberger on the one part, and Egana on the other. This document has been referred to as the Deed of Indemnity, (DoI). Included in that Deed was a covenant in which Mr Unruh and Mr Seeberger jointly and severally covenanted to indemnify the Egana Group, upon demand, in relation to the depletion or diminution or reduction in the value of any of the assets of any member of the Egana Group or any increase in the net liabilities of any member of the Group. This covenant was restricted to liabilities arising prior to 24 December 1992. The document is relevant to Egana's case on its counterclaim and set-off against Mr Unruh.

42. On 31 May 1993, Mr Unruh and Mr Seeberger entered into a further deed, this time with ESCT. As I understand the evidence it was the view of all parties at that time, that the obligations to be recorded in that deed were obligations which arose out of the DoI. That deed has been called the "Howard Lau Deed", and by it, both Mr Unruh and Mr Seeberger agreed to keep ESCT indemnified in respect of any liabilities in relation to Eco Swiss SpA and Contempo SpA, both Italian subsidiaries of ESCT.

43. The Howard Lau Deed specifically provided that no liabilities shall be incurred by Mr Unruh or Mr Seeberger unless a demand in respect thereof was notified to each of them by ESCT within two years of the date of the Howard Lau Deed. Liability consequently had to be notified to them, by demand by ESCT, no later than 30 May 1995.

The MoA is signed:

44. In August 1991, when Mr Seeberger began his formal involvement in ESCT, by the acquisition of 49% of the shares in ESCT, ESCT was involved not only in the arbitration, but in a number of other matters of litigation. It was apparent to Mr Seeberger that Mr Unruh's assistance to ESCT, in relation to not only the arbitration, but all the litigation in which ESCT was engaged, would be important. As far as NAI 1325 was concerned Mr Unruh's assistance would be of vital importance by reason of Mr Unruh's familiarity with the licence arrangements and his exclusive dealings with both Benetton and Bulova in relation to the licence. Legal advice in relation to the arbitration was being given by Mr Shawn Conway of the Dutch firm of lawyers, Trinité van Doorne. Up until September 1992, Mr Unruh was still a shareholder in ESCT, and with the completion of the sale to Mr Seeberger still due, it was clearly in Mr Unruh's interests to ensure the satisfactory completion of the arbitration and any other litigation. With the final disposition of his shares in ESCT to Mr Seeberger in September 1992, the impetus on Mr Unruh to remain deeply involved, and to give assistance, would reduce, albeit that he would continue to be interested in the matter through his directorship and shareholding in Egana.

45. In order to ensure that, notwithstanding the sale of his shares, Mr Unruh would still be motivated to give that assistance, it was agreed between Mr Unruh and Mr Seeberger that Mr Unruh would be entitled to a Special Bonus calculated by reference to any monies recovered from Benetton in NAI 1325. Consequently, on 19 September 1992, at the same time as Mr Seeberger acquired the balance of Mr Unruh's shares in ESCT, and Mr Unruh was appointed an executive director of Egana pursuant to a Service Agreement, Mr Unruh and Mr Seeberger entered into the MoA, which, amongst other matters, dealt with the Special Bonus.

46. It is abundantly clear that in the middle of 1992 all parties were aware of the potential consequences of any agreements made by Egana or its subsidiary companies on the intended public listing of Egana. In particular, such agreements may need to be disclosed as part of the listing process. Standard Chartered Asia Limited, (Standard Chartered), were the merchant bank advising Mr Seeberger and Egana on the public listing. The matter of the Special Bonus was raised with Standard Chartered. At that time the discussions were that the Special Bonus would amount to 25% of the arbitration award. By a letter dated 7 July 1992, Standard Chartered advised that it would be difficult to justify to the investing public that a significant part of the compensation for the loss of a valuable asset of ESCT should be transferred or paid to Mr Unruh.

47. Thus, at the end of the day, after Mr Seeberger and Egana considered that advice, the MoA provided for a Special Bonus only in the event that the arbitration award should exceed US$10 million, and that it should amount to 10% of the arbitration award less US$10 million. The MoA further provides for payment of the Special Bonus by Mr Seeberger in the event that Egana does not pay.

48. There are four provisions of the MoA which are relevant to these proceedings. First, the document contains an interpretation section. Included in that section is the following definition:

(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" brand name;

Cl. 4 provides:

4 "LITIGATION

(A) Mr Unruh hereby undertakes to and agrees with Mr Seeberger 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."

Next, cl. 5 provides:

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 is 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 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 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.

Provided that, in the event that, in accordance with the provisions of this Clause, Egana does not pay the 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 on 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.

Also relevant is Clause 7 (A):

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."

The Partial Final Award in NAI 1325:

49. On 4 February 1993 the Arbitration Tribunal in NAI 1325 made an award, which it referred to as "the Partial Final Award" (the PFA), in which the Tribunal decided that the Licence Agreement still subsisted and would continue in full force and effect according to its terms. Benetton were ordered to continue performing their obligations under the Licence Agreement for the full term thereof. That order necessarily included the obligation to negotiate in good faith an extension of the Licence agreement, with those negotiations to commence no later than 1 July 1993. Benetton were ordered to compensate ESCT and Bulova for the damages resulting from the repudiation. The Tribunal directed that the amounts involved by way 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. All relief, declarations and orders sought by Benetton in their counterclaim were refused.

50. Advance notice of the PFA was given to the parties Dutch lawyers in December 1992. The immediate reaction of ESCT's Dutch lawyers was to congratulate Mr Unruh in effusive terms. Their letter to him read:

"There really is now no reason whatsoever not to stay at the Hotel "Vreugd en Rust" whenever you come to Holland in the future. 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."

It is difficult to imagine a more comprehensive expression of satisfaction at work done.

The Italian bankruptcy charges:

51. A subsidiary of ESCT, acquired by Egana through its acquisition of ESCT, was an Italian company, Eco Swiss SpA. Prior to 1991 that company had been the subject of an abortive sale to a Mr Frommherz. As a result, the relationship between Mr Frommherz and Mr Unruh had been bad. They became involved against each other in litigation in Hong Kong in 1991.

52. For reasons that are irrelevant to these proceedings, Eco Swiss SpA was adjudicated bankrupt by the Civil Court of Milan on 11 June 1991. Mr Seeberger had become a director of ESCT in August 1991. Mr Seeberger was aware of the fact of the bankruptcy of Eco Swiss SpA, through the due diligence that had been undertaken on his behalf, in the lead up to the first stage of the acquisition of ESCT, in August 1991. I am satisfied that subsequently Mr Unruh recommended to Mr Seeberger that it would be sensible for Egana to attempt to purchase the inventory from Eco Swiss SpA's receiver at public auction. Egana instructed an Italian lawyer, Mr Montanari, to undertake the purchase through a subsidiary of Egana called Egana SA-Bienne. The bid was successful, and the inventory was purchased at approximately 25% of the Receiver's valuation. A cash deposit was paid, and the balance of the purchase price were secured by Egana SA-Bienne by bank guarantee on 9 March 1992.

53. At first sight this appears to have been a sensible and successful transaction. That was however, not to be the case. The Receiver was not informed of the identity of the purchaser and was not aware of the fact that the purchaser was a company owned and controlled by Mr Seeberger, who was a director of ESCT, the parent of Eco Swiss SpA. These circumstances, when he learned of them, and other matters in the background of Eco Swiss SpA's bankruptcy, ultimately led the Receiver of Eco Swiss SpA, to give consideration to, and then to lay, criminal bankruptcy charges against the directors and auditors of Eco Swiss SpA, including Mr Unruh.

54. Mr Unruh was informed of the fact that a formal criminal complaint had been made by letter dated 30 March 1992 from his own lawyers, the Studio Legale F. de Luca. Mr de Luca sent with the letter of advice instructions to Mr Unruh as to the terms of letter to be written to Mr de Luca, appointing him as his counsel for the proceedings. Mr de Luca did not supply any details as to the charges, merely stating the fact that they had been laid.

55. In the normal course of events, it is reasonable to expect that Mr Unruh would have instructed Mr de Luca, who had acted for him in the past, as was anticipated by Mr de Luca's letter. Instead Mr Unruh instructed Mr Montanari's firm, Dondina & Montanari. I am satisfied that he did so on Mr Seeberger's recommendation, they being the lawyers to Egana SA-Bienne. On 12 April 1992 Mr Unruh wrote a letter to Messrs Dondina & Montanari appointing them to act in relation to the criminal bankruptcy charges. The letter records, and I find accordingly, that a copy was sent to Mr Seeberger.

56. There was, at that time, no reason at all for Mr Unruh to conceal the fact that charges were being considered. There was no reason why Mr Unruh should then falsely state on the letter that it was to be copied to Mr Seeberger. There is no suggestion that the letter is not entirely genuine. No issue had yet arisen in respect of the German conviction and Mr Unruh had no reason to think that any issue might arise in that respect. That Mr Unruh should both instruct Mr Montanari, and copy his letter to Mr Montanari to Mr Seeberger is, in the circumstances, entirely sensible and believable. That Mr Seeberger, a self described "big picture man", who left details to others, should pay little attention to, and not remember receiving that letter, leading him to deny receiving it, is equally understandable.

57. While Mr Unruh was obliged to concede in cross-examination, contrary to earlier evidence, that he had known Mr Montanari prior to April 1992, there was no evidence that Mr Montanari had previously acted personally for Mr Unruh. Prior to that time Mr Unruh had his own Italian lawyer, Mr de Luca. Mr Montanari was known to Mr Unruh, as may be seen from two letters from ESCT to Mr Montanari. Those letters, written on 31 January 1992 and 20 February 1992, were written after Mr Seeberger's involvement in ESCT, and at a time when Mr Montanari was acting for Egana SA-Bienne. Having regard to the new involvement of Mr Seeberger in ESCT, and Mr Montanari's involvement with Egana SA-Bienne and Eco Swiss SpA, it is not surprising that Mr Unruh had come to know of Mr Montanari. That concession does not lead me to reject the plain evidence of the letter of 12 April 1992, being copied to Mr Seeberger.

58. It was argued for Mr Seeberger that Mr Unruh could not have told him about the situation in April 1992, because in cross-examination Mr Unruh admitted that he first knew of the detail of the charges from Mr Montanari in September 1992. It is right that Mr Unruh did not learn of the detail of the charges until after they became a matter of public record in Italy on 15 September 1992. But I am satisfied that Mr Unruh told Mr Seeberger of the fact that a formal criminal complaint had been made after receiving that advice from Mr de Luca by letter of 30 March 1992. There is no other reason why Mr Unruh would then instruct Mr Montanari, who had not previously acted for him personally as against Mr. De Luca, who expected to be instructed.

59. The evidence establishes Mr Unruh did not discuss with Mr Conway the Italian charges prior to a hearing in October 1992 in the course of NAI 1325. Mr Conway however, was not unaware of the potential for difficulties in relation to Eco Swiss SpA arising from the bankruptcy. At his request, on 2 June 1992, Mr Montanari had sent to Mr Conway a statement in relation to the circumstances surrounding the bankruptcy. The statement adverts to the potential of criminal offences which might be prosecuted, even with penal consequences. It was argued by Mr Chan SC, that by reason of Mr Unruh's concealment of the position in Italy, Mr Conway ran a "positive case" in relation to Eco Swiss SpA, and did not have the choice of downplaying the relevance of the bankruptcy. Mr Conway was not called to give evidence. He plainly knew of the bankruptcy and the problems it might pose. In the absence of any evidence from him, the only inference that can be drawn is that Mr Conway had to hand all the information he needed to run the case in the way he considered most appropriate. If he thought there was a risk in the way in which he dealt with the bankruptcy it was open to him to make further inquiries of both Mr Montanari and Mr Unruh.

60. It is not correct to say, as was submitted by Mr Chan, that "Mr Unruh was tried and convicted by the Italian court". The true nature of the disposal of the charges may be seen from an affidavit by an Italian lawyer, Mr Rossini, filed on behalf of Benetton in proceedings to set aside the arbitration award in NAI 1325. The Italian bankruptcy charges were ultimately resolved on 26 October 1994 when Mr Unruh entered into a compromise with the Trustee in Bankruptcy, which resulted in a payment, and the formal entry of a conviction with a suspended sentence.

Mr Unruh's German conviction becomes public:

61. In 1976, Mr Unruh had been convicted on a charge of fraud sentenced to a term of imprisonment. He served a term of imprisonment consequent upon that conviction between 1977 and 1979. Both parties filed expert evidence on German Law. I am satisfied from that evidence that the law in Germany is that, in relation to sentences exceeding one year, once a period of 15 years has past, following the date of judgment, which I take to be the date of conviction, so long as the person commits no other offence, the conviction is "erased" from all official records. Once a conviction is "erased", it is deleted from all official records and the individual is, pursuant to German law, entitled to regard himself as not having a criminal record. Further, German law prohibits and penalises any disclosure or public statement concerning the "erased" conviction. The "erasure" legislation explains why a Public Record Certificate (Ex H2 118), in relation to Mr Unruh, received from the General Federal Attorney in Germany, records: "No Entry".

62. The only evidence as to the date of Mr Unruh's conviction is that it was in 1976. In the absence of any better evidence I am obliged to assume against him that it was in December 1976. Consequently, according to German law, fifteen years later, by December 1991, Mr Unruh was entitled to regard himself as not having a criminal record. After that date, it would have been in offence in Germany for anyone to disclose Mr Unruh's record. The expert evidence does not establish whether it would have been in offence to disclose that record in the Netherlands. I am satisfied that it would not be an offence in Hong Kong to disclose that conviction in Hong Kong. Further, it is clear that, the sentence of imprisonment having been imposed in Germany exceeding three months, even setting aside the fact that conviction was not in Hong Kong, the Rehabilitation of Offenders Ordinance, Cap 297, would not apply, and if required Mr Unruh would be obliged to disclose the conviction in Hong Kong.

63. Egana was listed on the Hong Kong Stock Exchange on 25 June 1993. It is common ground that a person who is to be a director of a public company must complete a Declaration and Undertaking, commonly known as "Form B". That form requires a declaration by signatory that the person concerned has no previous criminal convictions. The requirement is not limited to criminal convictions in Hong Kong. Mr Unruh had not completed Form B at the time Egana was listed. He was at that time outside Hong Kong, and the form was apparently sent to him. He did not complete and return the form. The failure to complete and file that form at the time of the listing constituted a technical breach of the listing rules.

64. The fact of the German conviction became known to Egana in July 1993. In July 1993 Hong Kong solicitors, Messers Boase & Cohen were acting for Mr Frommherz. It will be remembered that Mr Unruh and Mr Frommherz had had a bad relationship following their involvement together in Eco Swiss SpA. They were engaged in litigation in Hong Kong. The precise circumstances in which the matter was raised have not been disclosed in the evidence, but on 23 July 1993, Boase & Cohen, wrote to Egana's solicitors, Simmons & Simmons, informing them that they had received written confirmation from the Munich State Prosecutor's Office in Germany of Mr Unruh's conviction and imprisonment. They enclosed a draft letter to the Listing Committee of the Stock Exchange, and gave Simmons & Simmons 24 hours to respond to the allegation.

65. The potential for embarrassment from this matter, on the part of Egana, newly listed on the Stock Exchange in Hong Kong, was substantial. In the light of the conviction it was plain that Mr Unruh would not be able to remain as a director of the public company. It was clear to all that immediate steps needed to be taken. There were apparently intense discussions and negotiations with the Stock Exchange.

66. The evidence does not demonstrate any great deal of adverse publicity at the time, although there was evidence of one report in a Chinese newspaper in Hong Kong. It was necessary for Egana, upon Mr Unruh's subsequent resignation as a director, to publish a statement to that effect. The statement was carefully drawn and did not specifically refer to the conviction. Most importantly, it had been necessary to disclose the fact of the conviction to the Listing Committee of the Stock Exchange, and that in itself was a substantial embarrassment to Egana. It could well have been regarded as a "black mark" on Egana's record with the Stock Exchange, which may affect later dealings with the Exchange. Although Egana was at the same time aware of the circumstances in Italy, apparently because there was no conviction that stage, it was not thought necessary to inform the Stock Exchange of that matter at that time.

67. Immediate steps were taken to terminate Mr Unruh's appointment as a director of Egana. His Service Agreement was terminated and in its place a Consultancy Agreement was negotiated.

The Service Agreement is replaced with a Consultancy Agreement:

68. The negotiation of the termination of the Service Agreement and the replacement of that with the Consultancy Agreement was undertaken for Mr Unruh by his solicitors, Haldanes, and for Egana by their solicitors, Simmons & Simmons. The Consultancy Agreement, entered into on 29 September 1993, specifically referred to the Special Bonus provided for in the MoA. As might be expected in such a compromise arrangement, in which one form of agreement was terminated and another substituted, a "No Claims" clause was included in which the parties to the agreement, Mr Unruh, Mr Seeberger, and Egana each acknowledged that they had no claims of any kind whatsoever against each other. The "No Claims" clause of the Consultancy Agreement contains the following sentence:

"For the avoidance of doubt, this sub-clause shall not be taken to relate to the rights of (Mr Unruh) under Clause 5 of the Memorandum of Agreement (" the Memorandum of Agreement") dated 19 September 1992 and entered into between (Mr Unruh) and (Mr Seeberger)."

Further, in a letter dated 17 September 1993, between solicitors, in the course of the drafting negotiations, Simmons & Simmons, acting for Mr Seeberger and Egana, made the following statement in reference to the "No Claims" clause:

"You will see that we have provided for the "special bonus" provisions of the Memorandum of Agreement dated 19 September 1992 between Messers Seeberger and Unruh to be expressly excluded from this provision (to the extent that it could be applicable - there was no intention on the part of the Egana Group or Mr Seeberger to cancel the obligations contained in the Memorandum of Agreement in this regard.)"

69. The Consultancy Agreement was for a term of two years and was to expire on 30 September 1995. With the completion of the Consultancy Agreement Mr Unruh continued giving assistance in respect of the arbitration.

Egana's knowledge of the Italian charges and German conviction in 1993:

70. It is clear from the documents, and acknowledged by both Mr Seeberger and Egana in their pleadings, that by the end of July 1993 both Mr Seeberger and Egana were fully aware of the existence of the Italian charges. On 8 July 1993, Simmons & Simmons Italian office, sent to Simmons & Simmons Hong Kong, office a translation of the terms of the Italian charges laid against Mr Unruh. Simmons & Simmons Hong Kong were then acting for Mr Seeberger and Egana.

71. In fact, as is apparent from a Simmons & Simmons memorandum dated 3 August 1993, there was, in July 1993, a "general awareness" on the part of Egana of the Italian proceedings, which when questioned, Mr Unruh had said were being used as a "bargaining chip" by Italian liquidators, "as a matter of course". A specific decision was made by Egana, and those advising it in the public listing exercise, that at least as at 13 July 1993, there was no need to disclose those charges to the Hong Kong Stock Exchange at that stage.

72. Both Mr Seeberger and Egana were equally fully aware of the German conviction, following the Boase & Cohen letter and the circumstances described above. The latest possible date of Egana and Mr Seeberger's knowledge of the Italian charges and the German conviction, July 1993, is relevant for it was not to be until July 1995, two years later that Benetton was to rely on those facts in its attempts to set aside the arbitration awards that ESCT had by then secured.

Did Mr Unruh disclose the German conviction before July 1993:

73. Mr Unruh's evidence was that he had told Mr Seeberger about the German conviction and his imprisonment on an occasion between April and August 1991, when Mr Unruh was staying at Mr Seeberger's home in Switzerland. Mr Seeberger denied that that was so.

74. It is undeniable that in the past Mr Unruh had lied about his conviction and imprisonment. On 10 July 1991 in an affidavit filed in Action 4881 of 1991, in the High Court of Hong Kong, in which ESCT and another company in which in which Mr Unruh was involved, were plaintiffs, Mr Unruh swore an affidavit that contained the following paragraph:

"12. I categorically deny that I had been convicted of any offence of dishonesty or any offence at all. I have never served a prison sentence."

Having regard to the terms of the German legislation, and the erasure provisions, and if the conviction had been prior to July 1976, it may have been open to Mr Unruh to say "I do not have any criminal convictions", but that was not said. In the terms in which the statement in the affidavit was made, it was a lie.

75. It was plain to me from seeing Mr Unruh give evidence that he is in complete denial in respect of his German conviction. He described it as his "accident". Notwithstanding that in other respects I found him to be a straightforward and honest witness, I do not believe him in his evidence that he had told Mr Seeberger of the conviction prior to July 1993. It is entirely inconsistent that a man, so in denial of the event, would disclose it, especially in circumstances when there was no particular need to make disclosure.

76. I accordingly conclude that prior to July 1993 Mr Unruh had not disclosed his German conviction and imprisonment to either Mr Seeberger or to Egana.

The steps to extend the Benetton by Bulova Licence Agreement:

77. The PFA, in favour of ESCT, had declared that the Licence Agreement continued in full force and effect. Benetton were ordered to continue to perform its obligations, including the commencement of negotiations with ESCT for the renewal of the Licence Agreement, no later than 1 July 1993, and conduct those negotiations in good faith. Negotiations duly commenced. The difficulties raised by Benetton in the course of those negotiations may be seen from the allegations in the Statement of Counterclaim and Defence filed in NAI 1616 by ESCT. In the course of negotiating in "good faith" Benetton had contrived to attend only one meeting. ESCT, for its part had offered significant improvements to the Licence Agreement should it be extended, including a 70% increase in the royalty rate. Notwithstanding all ESCT's efforts, the negotiations came to nothing and were terminated by Benetton in November 1993.

78. On 31 January 1994, Benetton made a formal Request for Arbitration to the Netherlands Arbitration Institute in relation to the renewal of the licence. This second arbitration proceeding was known as NAI 1616. In the request Benetton alleged that ESCT's position was one in which Benetton were simply obliged to extend the Licence Agreement, rather than negotiate, and, effectively, that ESCT itself did not negotiate in good faith. Benetton accordingly asserted that it had been justified in terminating the negotiations. A declaration that Benetton had rightfully ended the negotiations was sought, together with compensation.

79. On 21 March 1994, ESCT filed a Short Answer to the Request for Arbitration in NAI 1616. The Short Answer asserted that ESCT would establish that Benetton's conduct in relation to the contemplated extension violated Dutch law and the terms of the agreement. It indicated that severe damages had been suffered by ESCT and put the loss of profits ESCT would have realised over the 8 year extension period at US$51.8 million.

80. The formal Statement of Claim by Benetton in NAI 1616, was filed on 29 April 1996. That Statement of Claim raised the issue of the bankruptcy of Eco Swiss SpA, and Mr Unruh's conviction in the Italian bankruptcy Court. On 14 June 1996, ESCT filed a Statement of Defence and Counterclaim in response. The damages claimed as resulting from Benetton's failure to extend the agreement were now put at US$158 million. That and other compensation and costs were sought.

The Deed of Acknowledgement of Debt (DoA):

81. On 31 May 1993, Mr Unruh, Mr Seeberger and ESCT had entered into the Howard Lau Deed, in which Mr Unruh and Mr Seeberger agreed to keep ESCT indemnified against certain claims, obligations or liabilities on the part of ESCT, and in respect of certain claims obligations or liabilities found against ESCT's subsidiary, Eco Swiss SpA, and certain other liabilities of other ESCT subsidiaries. In the absence of demand by ESCT, the liability of both Mr Unruh and Mr Seeberger under the Howard Lau Deed was to expire on 31 May 1995. The expiry of this document, at a time when Mr Unruh owed money to ESCT, but no demand had been made, was to lead to the DoA.

82. In April 1994, ESCT sent a memorandum to Mr Unruh pointing out that the liabilities that he was due to meet, (presumably pursuant to the Howard Lau Deed, although the memorandum is silent as to that), then amounted to HK$1,130,377.49. As payment pursuant to the Consultancy Agreement of HK$1 million was then due to Mr Unruh from Egana, it was suggested to him that he should send ESCT a cheque for the balance, of HK$130,377.49, setting off the amount due under the Consultancy Agreement to meet the difference. Mr Unruh responded by insisting that there should be no set-off, that he should be paid the sum due under the Consultancy Agreement, and that he should delay reimbursing ESCT, until December 1995 as to 50%, and until June 1996 for the remaining 50%.

83. The evidence of Mr Chik, who was the Group Treasurer of Egana, was that this proposition was unacceptable to the boards of both Egana and ESCT, and as well to the Group auditors, who were concerned at the size of the liability and the risk of recoverability of such debts from Mr Unruh. The auditors were concerned that if the expenses had to be charged to ESCT's profit they would ultimately be reflected in the Group Accounts and would affect the true and fair view of Egana's financial position for the financial year 1994 and subsequent financial years.

84. In order to resolve this matter, agreement was reached that Mr Unruh would be paid the sum due under the Consultancy Agreement and that he would enter into a Deed of Agreement acknowledging his debt to ESCT, and making a provision for a set-off of that debt against the Special Bonus to be paid by Egana.

85. The DoA is a document made between three parties, Mr Unruh, ESCT and Egana. It is a deed made on 5 January 1995. The recitals record first, the circumstances in which Mr Unruh's debt to ESCT has arisen. The circumstances include the following statement:

"Pursuant to Clause 4(C) of the (MoA) dated 19 September 1992 between Mr Unruh and (Mr Seeberger), Mr Unruh is to bear one-half of any liability in connection with claims and otherwise in which ESCT is a party in any way whatsoever."

Clause 1 Provides:

"Mr Unruh acknowledges that he is indebted to ESCT in the total sum of HK$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 indemnity ESCT all Mr Seeberger to the extent of 50% of the total liabilities to be incurred in accordance with the Memorandum."

Clause 2 provides:

"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) where such compensation to ESCT is an excessive United States Dollars Ten Million (US$10,000,000) from any successful outcome regarding the Benetton Arbitration (" Special Bonus"). Notwithstanding any contrary provisions as provided in the Memorandum, Mr Unruh hereby agrees and confirms that (Egana) shall be entitled to set off the Indebtedness and any further liabilities as above stated against the amount of Special Bonus to be payable by (Egana)...." (I have omitted the balance which is irrelevant).

The precise reason why the extent of the indebtedness recorded in the DoA is less than that sought in the April 1994 memorandum has not been made clear, but at the end of the day nothing turns on the difference.

86. The DoA was prepared by Mr Wong, and another director of Egana, Mr Lee, and Mr Chik. They did not seek legal advice in respect the document. The DoA, duly completed, was undoubtedly shown to the Group auditors, and the only inference that can be drawn is that they were satisfied that the amount due by Mr Unruh to ESCT would be recovered from the Special Bonus when that sum was paid by Egana to Mr Unruh.

87. In evidence in chief, both Mr Wong and Mr Chik had asserted that the auditors concern as to recoverability was a factor in the execution of the DoA. When faced with the inference that the DoA was thereby a direct statement to the auditors that Egana would pay the Special Bonus from which recoverability of the debt would be assured, both Mr Wong and Mr Chik retreated from their position on recoverability. They then asserted that there was no issue as to recoverability because of Mr Unruh's personal wealth and financial position. The proposition simply does not stand scrutiny. In the first place it ignores the clear evidence in chief. Secondly there was simply no proper evidence of Mr Unruh's personal financial position. Third, in the absence of a "recoverability" issue there was simply no need to insert a set-off provision. Conversely, in the absence of a set-off provision there is nothing in the DoA to satisfy the concerns of the auditors on recoverability.

88. Subsequently, in the High Court of Hong Kong, in A 258 of 2003 ESCT, in reliance on the DoA, sued Mr Unruh seeking payment of the sum now claimed by way of set-off and counterclaim. That action was dismissed by the Master on the grounds that it was statute barred. ESCT did not appeal against that decision.

Further publicity in Hong Kong over Mr Unruh's conviction:

89. On 18 May 1995, nearly 2 years after the German conviction had first been revealed, the South China Morning Post published a general article in its Business Section, describing events under a headline "HK listings fiasco widens". The fact of Mr Unruh's resignation, two years earlier, was one of several incidents referred to in the article. Mr Wong sent a copy of the article to Mr Conway.

90. Mr Conway responded immediately, (Ex H2-74). He cautioned that if there was sufficient publicity and the matter came to the attention of Benetton, Benetton would try to use it as an after-the-fact justification for its refusal to extend the Licence Agreement, or even try to use it to have the PFA set aside. He went on to say:

"Obviously if this matter gets sufficient publicity that it comes to the attention of Benetton, Benetton will try to use it as an after-the-fact justification for its refusal to extend the Licence Agreement. Benetton might even try to use it to have the termination award set aside or even resist execution of the award. 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."

That was to prove an accurate prediction of the steps Benetton were to take. Mr. Conway had positioned ESCT to meet the coming challenge.

91. The flurry of publicity did not end there. On 5 June 1995, an anonymous letter, claiming to be from a minority shareholder in Egana, and referring to both the Italian issues and the German conviction was sent to the Listing Department of the Stock Exchange and to Egana. The matter received apparently widespread publicity, particularly in the Chinese press in Hong Kong. A great deal of work was necessary on the part of Egana to calm the Listing Department of the Stock Exchange and to prevent the matter from escalating in the press in Hong Kong, and that press escalation extending overseas.

92. It is beyond question that the matter was an embarrassment to Egana and would have been expensive in terms of time and resources to deal with. Fortunately, Mr Conway had positioned ESCT in the arbitration to resist Benetton's arguments.

Attempts to renew the consultancy agreement, the draft side letter, and the Oral Agreement:

93. Following the revelation of Mr Unruh's German conviction it was clear that, notwithstanding the conviction having been expunged in Germany, it had to be disclosed in Hong Kong, and prevented him remaining as a director of Egana. The Service Agreement under which he was employed as a director had been terminated and replaced with the Consultancy Agreement. The Consultancy Agreement with due to come to an end in September 1995. By May 1995, it was apparent to all that the assistance Mr Unruh was giving in relation to the arbitration would be required beyond September 1995.

94. It is Mr Unruh's case that in late May, or early June, 1995, he reached an oral agreement with Mr Seeberger, acting for himself and on behalf of Egana, in which it was agreed that notwithstanding the fact that the Consultancy Agreement would come to an end in September 1995, Mr Unruh would continue to assist in the conduct of both NAI 1352 and NAI 1616, and that both Egana and Mr Seeberger personally would undertake to pay the Special Bonus calculated by reference to monetary compensation that might be received not only in respect of NAI 1325, but also NAI 1616.

95. In anticipation of the expiry of the Consultancy Agreement, on about 31 May 1995, Mr Terry, Mr Unruh's solicitor, prepared a draft Extension Agreement contemplating the extension of the Consultancy Agreement. It is plain from the document drawn that Mr Terry contemplated that the Consultancy Agreement would be extended. When the Consultancy Agreement had been made, the only arbitration proceedings on foot were NAI 1325. By May 1995, however, NAI 1616 had begun. The draft Extension Agreement did not specifically refer to NAI 1616, but used the following expression:

"the Arbitration, whether in relation to stage one, stage two or any subsequent stages including any appeals in relation thereto".

96. On 27 May 1995, Mr Peter Lee, a director of Egana, in dealing with the publicity that had been arisen over the German conviction, had informed the Listing Division of the Stock Exchange that the tenure of the Consultancy Agreement was to 30 September 1995, and that it was unlikely that the term would be extended after its expiration. It is apparent however that Mr Terry had not been informed of that decision. Realistically, Mr Unruh may well have seen that a renewal of the Consultancy Agreement was unlikely in the light of the continued adverse publicity. However, there is no evidence that he was specifically told of the decision the board of Egana had apparently taken in relation to the Consultancy Agreement.

97. The draft Extension Agreement was sent to Mr Unruh with a fax cover sheet seeking input from Mr Conway on the definition of the "termination date". A handwritten note on a fax copy of that document tends to indicate that it was sent on my fax by Mr Unruh to Mr Conway. However in cross-examination Mr Unruh accepted that he did not send it by fax to Mr Conway.

98. It is plain however that there was discussion with Mr Conway about the matter, that discussion probably having between Mr Conway and Mr Terry. On 6 June 1995, Mr Conway forwarded to Mr Terry a document entitled "Draft Side-letter", under cover of a fax which stated as follows:

"Dear Stephen,

I am sorry I was not able to get the attached draft out to you before the weekend. I attach it now to give you an idea of what I had in mind. I look forward to receiving your proposed draft. Sincerely,

"Shawn"

S.C . Conway."

Solicitors do not correspond in such terms if they do not know each other on a personal level, and if they have not had personal discussions on the subject at issue.

99. Mr Unruh's evidence was that at about this time, in personal discussions with Mr Seeberger, the oral agreement described in paragraph 94 had been reached. Mr Seeberger denies that there was any such discussion. The terms of the "Draft Side-letter", prepared by Mr Conway, are entirely consistent with Mr Unruh's assertions as to the terms of the discussion with Mr Seeberger. However, on 7 June 1995, Mr Terry sent a fax to Mr Unruh, copied to Mr Conway, with a revised draft of the "side letter", which save for very minor amendments, was substantially the same as that prepared by Mr Conway. It is not clear whether both the cover sheet and the draft were sent to Mr Conway, but it seems likely that both were. The cover sheet, advising Mr Unruh about the matter, drew his attention to the fact that it was a letter from Mr Seeberger, and would not have the actual signatures of ESCT and Egana, and stated that it "might put a bit more pressure on Seeberger".

100. On 8 June 1995, Mr Conway sent that draft to Mr Seeberger and to Mr Rainer Greeven, an attorney in New York, USA, with a firm called Greeven & Ercklentz, who acted for ESCT in New York. Mr Conway said in the fax:

"I attach a draft side-letter that I have received from Sigi Unruh's lawyer clarifying that even if the Consultancy Agreement expires before the end of Arbitration No.1616, that his share in any award in Arbitration No.1616 will not be affected. I do not think I am in the best position to handle this matter between Unruh and the Company. Perhaps Rainer (Greeven) can handle this with Mr Terry."

There is no evidence of any response by either Mr Greeven or Mr Seeberger to that fax.

101. By letter dated 16 June 1995, Mr Terry sent the draft side letter to Mr Seeberger, asking "whether you are agreeable" to sending such a letter to Mr Unruh. There was no reply to that letter, or to a subsequent letter of reminder sent to Mr Seeberger on 26 June 1995. On 19 July 1995 Mr Terry wrote to Simmons & Simmons, copied also to Mr Greeven, referring to his letters to Mr Seeberger, seeking to further pursue the matter. The letter carries an endorsement that it was received by Simmons & Simmons on 27 July 1995. There was no reply to that letter. Neither party pursued the issue further. There the matter lay until these proceedings began.

102. Mr Terry's fax to Mr Unruh, apparently copied to Mr Conway, referring to "putting pressure on Seeberger" is entirely inconsistent with an agreement having been reached between Mr Unruh and Mr Seeberger. Mr Terry's letter asking Mr Seeberger if he was "agreeable to send such a letter" to Mr Unruh is entirely inconsistent with an agreement having already been made between Mr Unruh and Mr Seeberger. Had Mr Unruh instructed Mr Terry that an oral agreement in the terms of the draft side letter had been reached I am confident that Mr Terry would have couched his correspondence to Mr Seeberger in quite different terms, making it plain agreement had been reached, and the draft side letter was intended merely to confirm that agreement.

103. In all the circumstances I cannot say on the balance of probabilities that the oral agreement alleged by Mr Unruh was in fact reached. I am satisfied that there may well have been general discussions about the issue between Mr Unruh and Mr Seeberger, with Mr Unruh expressing a desire to agree in the terms of the draft side letter. Such discussions have, in all likelihood, led Mr Unruh to recall them in terms of an agreement. But, I am not satisfied that an agreement was reached.

104. It is accordingly, not necessary for me to consider the issue as to whether, in relation to the draft side letter, Mr Conway was acting for Mr Unruh or Mr Seeberger.

The Final Arbitral Award in NAI 1325:

105. While all these matters were proceeding, in the Hague, ESCT, Bulova and Benetton had been undertaking the second phase of NAI 1325, as contemplated by the PFA that had been delivered on 4 February 1993. The Final Arbitral Award (FAA), was delivered on 23 June 1995. The result was a success for ESCT. Benetton were ordered to pay ESCT US$23,750,000.00 together with interests and costs. Bulova too succeeded, with an award of US$2,800,000.00, also with interests and costs.

Steps taken by Benetton to attack the awards:

106. It will be remembered that in November 1993, Benetton had terminated negotiations for the extension of the Licence Agreement, and on 31 January 1994 had commenced the second arbitration, NAI 1616, essentially seeking to avoid the extension of the Licence Agreement. Benetton now, with the delivery of the FAA in NAI 1325, commenced a plethora of court proceedings in an effort to set aside the awards.

(i) On 10 July 1995, Benetton issued a Summons in the Court of Appeal in The Hague seeking to revoke both the PFA and the FAA, (the revocation action) ;

(ii) On 14 July 1995, Benetton issued the Summons in the District Court of The Hague seeking to set aside both the PFA and the FAA, (the setting-aside action);

(iii) On 17 July 1995, ESCT and Bulova countered these proceedings by seeking and obtaining from the District Court in The Hague leave to enforce the FAA;

(iv) On 21 July 1995, Benetton issued a Summons in the Amsterdam District Court, to stay the execution of both the PFA and the FAA;

(v) On 24 July 1995, Benetton filed a Motion in the District Court of The Hague to suspend enforcement of the PFA and FAA, pending the final decision in both the revocation action and the setting-aside action, (Motion I);

(vi) Also on 24 July 1995, Benetton filed a Motion in the Court of Appeal of The Hague, which motion also sought to suspend enforcement of the Arbitration Awards pending the final decisions in both the revocation action and the setting-aside action, (Motion II).

107. In the revocation action, Benetton relied, in part, on the facts surrounding the Italian bankruptcy of Eco Swiss SpA, and Mr Unruh's conviction in those proceedings. Although the Summons in the revocation action did not raise the German conviction, it appears that it was later raised in the course of argument, for ultimately the Court of Appeal was to mention both convictions. The setting-aside action did not raise the convictions, but was centred on an argument surrounding Article 85(1) of the European Community Treaty, (the EC Treaty). The various stay or suspension of enforcement proceedings relied upon steps taken in the revocation action and the setting aside action.

108. The first of these proceedings to be resolved was ESCT's summons for leave to enforce the FAA. In August 1995, ESCT and Bulova agreed to halt steps to execute the FAA pending resolution of Benetton's motions to suspend enforcement of the FAA. Motion I was first dealt with on 19 September 1995, when the District Court dismissed the application to suspend enforcement of the FAA, and ordered ESCT, prior to enforcing the FAA, to furnish security in the form of a bank guarantee. Bulova was a party to those proceedings, Benetton was ordered to pay their costs. Benetton appealed that decision to the Court of Appeal.

109. Motion II was resolved on 22 January 1996 when the Court of Appeal rejected Benetton's application to suspend enforcement. As to the relevance of the Italian bankruptcy proceedings, and Mr Unruh's conviction in Italy, a translation of the decision shows that the Court of Appeal had this to say:

"as regards the bankruptcy of Eco Swiss SpA: there is no prima facie evidence to substantiate that any fraud in Mr Unruh's statement and/or Eco Swiss's statement on the significance of the bankruptcy, if such fraud were established at all, would lead to the setting aside of the Arbitral Awards, because (the financial condition of) Eco Swiss SpA was of no actual relevance to the proper performance of the licence agreement."

Notwithstanding that clear statement from the Court of Appeal, when Benetton filed its Statement Claim in NAI 1616 on 29 April 1996, only four months later, the Italian circumstances were still relied upon. A perusal of ESCT's Statement of Counterclaim and Defence shows that Mr Conway did not even bother to engage Benetton on the issue of the Italian circumstances.

110. On 28 March 1996, judgment was delivered by the Court of Appeal in relation to Motion I. The judgment of the District Court was overturned, a stay was refused in relation to the PFA, but granted in respect of the FAA, and an order was made that execution of the FAA be suspended. On 2 October 1996 the District Court dismissed Benetton's claims and refused to set aside either the PFA or the FAA.

111. On 21 March 1997 the Supreme Court, on appeal from the judgment of the Court of Appeal in relation to Motion I, referred a number of questions, particularly that of Article 85(1) of the EC Treaty to the European Court of Justice for preliminary rulings, and thereupon postponed any further decisions pending those rulings.

112. It may be fairly said that in March 1997, the efforts of ESCT to recover compensation form Benetton for what had been established as a wrongful termination of the Licence Agreement, had become well and truly mired in the Netherlands courts.

A Partial Final Award in NAI 1616 and further challenges by Benetton:

113. Again, in the background to all other matters going on, NAI 1616 was proceeding through preliminary hearings. A Partial Final Award in NAI 1616 was delivered on 27 June 1997 (PFA 1616). This Award was limited to two threshold issues. These were, first, the question as to which substantive law the Tribunal should apply, and second, the question whether the Licence Agreement was invalid due to the fact that one or more clauses in the Licence Agreement were null and void pursuant to Article 85 of the EC Treaty. The Tribunal concluded first, supporting ESCT's argument, that it must apply Dutch substantive law.

114. As to the Article 85 argument, the Tribunal held a particular clause in the Licence Agreement prohibiting Bulova from selling timepieces in certain countries must be held null and void as being against Article 85. Holding that the restriction did not affect Benetton, the Tribunal went on to hold that that breach did not render the whole Licence Agreement invalid, and found that all other clauses of the Licence Agreement, including particularly Article 16, as to the negotiation of the extension, was valid and enforceable.

115. Although the declarations requested by ESCT in its statement of counterclaim and defence were refused at that stage, the result was essentially a success for ESCT for it meant that Benetton was still held to the requirement to negotiate the extension of the Licence Agreement in good faith. If it did not so negotiate then ESCT could renew its claim for damages.

116. In accordance with its past practice of challenging awards against it in courts, Benetton again mounted Court challenges. This strategy was correctly described by Mr Conway, in the Statement of Counterclaim and Defence in NAI 1616, as a strategy of "the best defensive approach is an aggressive offensive attack". The following proceedings were instituted:

(i) on 25 August 1997, a Summons was filed by Benetton in the District Court of The Hague seeking to nullify PFA 1616;

(ii) on 26 August 1997, Benetton filed a second Summons in the District Court of The Hague to suspend enforcement of PFA 1616, until the final decision in the Summons for nullification.

117. On 8 January 1998, the District Court of The Hague ruled upon the Summons for nullification, holding that there was no ground for nullification. However on 19 March 1998, the District Court of The Hague stayed execution of PFA 1616, but denied any further claims by Benetton.

The European Court of Justice:

118. The Article 85 argument had been pursued by Benetton for some time. Contemporaneously with the other proceedings, steps were being taken in the European Court system. In March 1997, the Dutch Supreme Court, in upholding the FAA in NAI 1325, had ruled that the Article 85 defence was time-barred under Dutch law, but certified the procedural issues to the European Court of Justice, (ECJ). A hearing before the ECJ took place in July 1998. Four of the governments that elected to express an opinion, and the European Commission, unanimously reinforced the contention that Benetton was barred from raising the Article 85 defence. The procedure then required the Advocate-General of the ECJ to write up the conclusion to the Court for decision. The Advocate-General agreed with the decision. The Board of Directors of Egana duly reported this to shareholders in the annual report for 1988, asserting that "ESCT will prevail in the ECJ".

119. In the meantime Benetton's various Court challenges continued. On 17 December 1998, on an appeal by ESCT and Bulova, the decision of the District Court to stay PFA 1616 was overturned. This was a success for ESCT. On 1 June 1999 the ECJ delivered a judgment holding effectively that Benetton was barred from raising the Article 85 defence. The question of costs was reserved back to the Dutch national courts. ESCT had, as expected, prevailed in the ECJ.

The final disposal of Benetton's court challenges:

120. The final step in the ultimate disposal of all the Benetton's Court challenges came on 16 September 1999 when the Court of Appeal of The Hague dismissed the revocation action. In the course of so doing specific reference was made to both the Italian conviction and the German conviction. The Court said as follows:

"iii) Criminal proceedings leading to Unruh's conviction.

8.1 The criminal offence of which Unruh was convicted in connection with the bankruptcy of Eco Swiss SpA and the circumstance that Unruh had been convicted (many years) earlier in Germany and given a prison sentence for embezzlement, did not constitute grounds for determination of the agreement by Benetton, which was submitted for arbitration. In the first place, Unruh's conviction by the criminal court of Milan took place as late as October 26, 1994, and hence subsequent to the PFA (the stay request, Exhibit K, Exhibit 6) and it would go too far to expect (ESCT) and/or Bulova to have mentioned an ongoing investigation (procedure).

8.2 Moreover the Court of Appeal is of the opinion that the circumstance of Unruh having been convicted by the Italian judge with a suspended sentence and a fine, and having been previously convicted in Germany was not significant in the context of the arbitration decision on the dispute. The ground for giving notice to terminate the agreement, which concerned the bankruptcy of Eco Swiss SpA, relates to the appointment of a "receiver of a substantial part of" the ESCT assets (being Eco Swiss SpA, a wholly-owned subsidiary of ESCT and itself a parent company of five other companies) and does not concern the question of why or thanks to whom the bankruptcy was caused and also not concern the question as to whether or not the director/major shareholder of ESCT was sufficiently reliable. The PFA (page 33, section IV, 1, b) shows that the arbitration proceedings were conducted on the issue of whether or not the termination notice, issued by Benetton, was lawful and, in assessing this, the arbitrators stuck closely to the grounds given by Benetton in the termination notice. The failure of ESCT to disclose the aforementioned criminal convictions of Unruh, and failure to submit documents connected therewith, could thus not have any influence on the arbitration award made and did not therefore constitute fraud in the sense of Article 1068 of the Code of Civil Procedure." (sic)

In similarly dismissive terms the Court of Appeal disposed of assertions that the Eco Swiss SpA bankruptcy was symptomatic of the poor financial position of ESCT, and that documents had been withheld in connection with the Eco Swiss SpA bankruptcy.

A decision is made by the Egana group to settle with Benetton:

121. Thus, by the beginning of October 1999, all challenges to the Partial and Final arbitral awards that had been made in both NAI 1325 and 1616 in the Dutch courts, and the ECJ had been dealt with, and all ultimately in favour of ESCT. Further, on two occasions, a body as august as the Dutch Court of Appeal, had pronounced Mr Unruh's German conviction and Italian conviction to be utterly irrelevant to the issues being arbitrated. ESCT were now in a strong position and could approach forthcoming hearings with more confidence. Their positions, albeit having been under attack, were being steadily upheld.

122. The final hearing for determination of damages in NAI 1616 was due to take place on 18 and 19 October 1999. Mr Wong was present at The Hague for the hearing. His evidence was that the ESCT team were approached by legal counsel from Benetton and a settlement proposal was made. On the evening of 19 October 1999 a board meeting of Egana was held. The meeting was held in the Netherlands, with Mr Wong and Mr Michael Poix, another Egana director, both personally present, and Mr Seeberger attending by telephone. No contemporaneous note of the meeting was kept. Mr Wong said that the next day, in the course of a flight from the Netherlands to Hong Kong, he made a handwritten note recording the circumstances of the meeting. The note was subsequently signed by Mr Poix.

123. The following passages from the note are significant.

"The legal counsel of Benetton indicated that Benetton would not admit any liability to the Final Award for NAI 1325 issued in June 1995, and that Benetton would be prepared to indefinitely pursue all the court and further legal proceedings against ESCT.

The legal counsel of Benetton, in the presence of Benetton's representative had approached Messers Michael Poix and David Wong, the Egana Group's representatives at the hearing, as well as the Dutch legal counsel to consider a global settlement on the premises that the Final Award 1325 be negated and both parties not admitting any liability of the claims against each other".

The note went on to record that the board discussed the matter and took into account that:

"it was of common view (of the Board) that Benetton's termination and nonrenewal action upon a core asset of ESCT had caused irreparable loss of (Egana's) shareholder value in ESCT and reputation as well as goodwill in the industry, that given Benetton's past and ongoing legal (and non-legal such as the influence through the press) actions, further substantial cost and management resources would be expended trying to enforce and collect the Final Award under NAI 1325, and that significant time and cost would have to be incurred for establishing the NAI 1616 arbitration."

The note recorded that it was resolved:

"that (Egana) should instruct its Dutch legal counsel to pursue the global settlement possibility initiated by Benetton in lieu of incurring further time and cost in litigating and defending various court proceedings and the arbitration, and with a higher certainty of receiving a lump sum compensation earlier which could then be used for acquiring certain target or other distribution company as (Egana's) subsidiary for enhancing the distribution network of the Group. Such settlement talks would proceed only on the basis that any settlement sum is agreed with Benetton are to the account of (Egana)."

The memorandum proceeded to outline a financial discussion which Mr Wong said was the basis upon which an acceptable "bottom-line" of US$43 million was arrived. That sum was not specifically mentioned in the resolution formally instructing the Dutch legal counsel to negotiate settlement. There was no mention whatsoever in the memorandum of any current issue concerning Mr Unruh's convictions, whether in Italy or Germany, or even that those convictions were discussed.

124. There is no evidence whatsoever before the court as to the conduct of the negotiations. Mr Conway, who conducted the negotiations on behalf of ESCT and Egana, was not called to give evidence. No documents in relation to the negotiations were produced. Mr Wong, who was Mr Seeberger's right-hand man, and Mr Conway's point of contact in ESCT and Egana, was unable to say much other than that from time to time between 19 October 1999, and 31 March 2000, Mr Conway reported to him on progress of the negotiations. He could not remember anything of significance from those progress reports. Eventually on 31 March 2000 the FSA was signed.

125. The FSA, a document made between ESCT and Benetton, dated 31 March 2000, contains the following relevant provisions. The first recital records that parties had been:

"engaged in lengthy disputes under and in connection with a licensing agreement for the manufacture and sale of timepieces entered into by them in 1986, (the 1986 Agreement), including arbitral proceedings known as NAI 1325 and NAI 1616, and various judicial proceedings arising therefrom in which ESCT claims to seek compensation for the benefit of its parent company for alleged loss to ESCT's company value and goodwill".

That was not true, for in fact no such claim at all "for ESCT's parent company" (Egana), had been made throughout the course of the arbitrations. In fact no claim at all had been made by ESCT for either loss of company value or goodwill. All of ESCT's claims were directed simply to compensation to ESCT as a result of the repudiation of the Licensee Agreement and Benetton's refusal to negotiate the extension thereof. Clause 3 of the FSA recorded:

"(ESCT) and (Benetton) each acknowledge that this Settlement Agreement negates the NAI 1325 awards and does not constitute any admission by either party that any Claim made against it is true or meritorious, or that it has any liability to the other party in monetary damages or otherwise. Each party adheres to its positions taken in the various arbitral and judicial proceedings and enters into this Settlement Agreement as a compromise to avoid substantial additional costs, burdens, and inconveniences of further proceedings."

The FSA further recorded the settlement sum as being US$42,086,470.69 and NLG 22,902,881.55.

126. There is simply no evidence at all as to how those very precise sums were arrived at or why the settlement sum should be divided between US dollars and Netherlands guilders. It may well be that one represented the compensation payable to ESCT, and the other was for a sum of costs or expenses, but in the absence of any evidence, it is impossible, on the face of the FSA alone, to determine the issue.

Mr Unruh seeks payment of the Special Bonus:

127. Mr Unruh was not informed by Egana or Mr Seeberger of the fact that the disputes between ESCT and Benetton had been finally resolved. He became aware of the settlement however, and on 11 May 2000, by fax, wrote personally to Mr Seeberger seeking advice as to whether any monetary compensation, as contemplated by cl. 5 of the MoA had been received by ESCT. He asked to know the precise amount, the date on which it was received, and any other information relevant to his entitlement to the Special Bonus.

128. On 16 May 2000 the Chairman's statement in the Egana Annual Report reported that Egana had received approximately HK$338 million from Benetton in the settlement of the dispute. Mr Seeberger had not replied to Mr Unruh's fax, and on 22 May 2000 Mr Unruh's solicitors wrote to Mr Seeberger enclosing a copy of the Mr Unruh's fax of 11 May 2000, and sought a response. Again Mr Seeberger did not reply. On 13 June 2000, Mr Unruh's solicitors wrote again to Mr Seeberger. The letter was addressed to Mr Seeberger at the Egana office, at his home, and at an Egana address in Germany. It was sent by registered post and fax. On 20 June 2000 Mr Seeberger's Secretary responded to Mr Unruh's solicitors. She said that Mr Seeberger was overseas and as the letter had been marked "Private and Confidential", she was unable to pass it on to him and would draw it to his attention to it when he returned to Hong Kong the following week. Mr Unruh's solicitors wrote again to the same three addresses on 22 June 2000, this time ensuring that the correspondence was on a completely open basis, and requesting a reply.

129. A reply was finally received on 29 June 2000, from Simmons & Simmons, solicitors for Mr Seeberger and Egana. The reply asserted that Mr Unruh's claim for the Special Bonus was misconceived, as Mr Unruh had failed to use his best endeavours to assist ESCT in connection with the arbitration, as defined in the MoA, and that the terms of the settlement were such that the US$10 million threshold in cl 5 of the MoA had not been met. Consequently no payment was due.

130. A specific assertion in relation to the failure to use "best endeavours" was made. It was argued that Benetton had used Mr Unruh's prosecution in Italy in support of the early termination of licence, and that Mr Unruh's failure to disclose material information had enabled Benetton to take ESCT by surprise and gain an advantage in the litigation. An argument was next raised that there was no apportionment of the global settlement sum between NAI 1325 and NAI 1616, and that the Special Bonus was only payable in respect of the proceeds of NAI 1325. It was asserted that it could not be demonstrated by Mr Unruh to a court in Hong Kong that of the global sum received, more than US$10 million was attributable to NAI 1325.

131. The letter went on to assert that Mr Unruh owed Mr Seeberger in excess of US$750,000.00, and ESCT approximately HK$2.2 million. It was said that neither Mr Seeberger nor ESCT were currently minded to assert these matters, but if a claim was pursued there would be a counterclaim. The letter proceeded to suggest that litigation would result in personal embarrassment to Mr Unruh. These propositions were promptly rejected by Mr Unruh's solicitors, and the writ was issued. When the counterclaims were eventually filed, Mr Seeberger's counterclaim was reduced to US$280,000, and Egana's to HK$1.6 million.

132. All of the foregoing matters comprise the matrix of facts, at relevant points in time, against which the primary documents must be construed. They also comprise the factual circumstances relevant to the subsequent conduct of the parties, which in turn is relevant to their credibility as witnesses and the basis upon which various decisions are to be made.

The relationship between ESCT and Egana and the discovery of documents:

133. During the course of trial it was necessary for me to examine the relationship between ESCT and Egana. On 18 May 2004, I made a ruling that ESCT, a wholly owned subsidiary of Egana, was the alter ego of Egana, and in the unfettered control of Egana. I have listened carefully to the evidence of both Mr Seeberger and Mr Wong, in which they have both asserted that the board of directors of ESCT is completely independent of that of the parent company Egana, and that that board acts solely in the best interests of ESCT and not in the interests of Egana. I have also had regard to the evidence of Mr Chik, the Egana Group treasurer.

134. Nothing that they have said persuades me that I should review the decision I made during the course of the trial. For the reasons given in that ruling, which I do not propose to repeat here, together with the evidence given by Mr Seeberger and Mr Wong I remain completely satisfied that ESCT is the alter ego of Egana, and in the unfettered control of Egana. In fact the evidence of Mr Seeberger and Mr Wong, particularly that of Mr Wong, serves only to reinforce the conclusion that I made in my earlier ruling.

135. First, they have both failed completely to offer to me any sensible commercial justification for the resignation of 3 of the 4 directors of ESCT on 12 September 2001, just 30 days before Mr Seeberger's solicitors were formally advised by Mr Unruh's solicitors that they proposed to join Egana as a defendant in the proceedings. The fourth director resigned on 22 October 2001, 11 days after that notification. All of the directors of ESCT who resigned were at that time directors of Egana. They were replaced with Egana/ESCT employees.

136. As I recorded in paragraph 24 of my earlier ruling the ESCT documents relevant to the terms of the FSA were, at the request of Egana, forwarded to Egana by Mr Conway. Mr Wong, on receiving the documents gave instructions to Hong Kong solicitors, Baker & McKenzie, to give advice on the documents. He purported to do so on behalf of ESCT. Obtaining the advice apparently took a period of three months between July 2003 and September 2003.

137. Mr Wong was neither an employee nor an officer of ESCT. He had received the documents as a director of Egana, consequent upon an instruction from Egana to Mr Conway, and the documents remained in his control throughout that three-month period. That he should purport to give instructions to Baker & McKenzie, "for ESCT", is, having regard to the circumstances in which he received the documents, merely a demonstration of an attempt by Mr Seeberger and Mr Wong to perpetuate the device that ESCT was arm's length from Egana. There might have been a basis to argue the device if ESCT had requested the documents, and a director or employee of ESCT had given the instructions to Baker & McKenzie. But the reality of the situation was plainly demonstrated by the steps taken, with the documents remaining throughout in the control or possession of a director of Egana.

138. Mr Wong, in his evidence, attempted to suggest that if he required any ESCT documents he would have to consult Mr Chik, who would locate the required document, and then pass it to Mr Wong. Mr Wong apparently took the view that in those circumstances the documents remained in possession of ESCT. Cross-examination demonstrated however, that the whole ten boxes of documents were simply given to Mr Wong who was free to roam through them as he wished, choosing which documents would be made available to the Court in support of the position of Mr Seeberger and Egana. The documents surrounding the settlement of the arbitrations have remained concealed from the Court.

139. Further demonstrations of the reality of the situation may be seen in an affidavit by the solicitor, Mr Collins, in proceedings brought by ESCT against Mr Unruh under HCA 258/2003. There, Mr Collins stated he was authorised on behalf of ESCT to make the affidavit and says:

"Where I refer to matters on information and belief they are made on information from David Wong the Director of Egana, (ESCT's) holding company who informs me that he has checked the records of (ESCT) and other companies to which this claim relates."

It is not explained how Mr Wong, neither an officer nor employee of ESCT, is able to supply such information, other than through his position as a Director of Egana. Mr Wong, in another affidavit in the same proceedings, for his part describes himself as "a Director of Egana, the Plaintiff's holding company." He says:

"I am authorised on behalf of (ESCT) to make this affirmation on its behalf. I make this information from matters within my own knowledge and belief or upon information gleaned from company records and other documents of (ESCT) and other companies to which this claim relates as referred to hereafter."

It is quite inconsistent with the concept of a totally independent company, as Mr Seeberger and Egana would have ESCT to be, that ESCT's litigation is dealt with, not by ESCT officers, but by Egana officers, who blandly describe Egana as the "holding company" of ESCT. The mere use of that expression is sufficient to put the lie to the case attempted to be made.

140. Both Mr Seeberger and Egana have consistently refused to produce to the court any documents of ESCT, as to the circumstances of the FSA with Benetton. They have taken this position because they say the documents are the documents of ESCT, and that company has not authorised the production of them. Yet many other ESCT documents, all apparently to the advantage of both Mr Seeberger and Egana, have been produced. No director of ESCT has been called to explain why some documents are produced and some are not. No resolution of the board of ESCT has been produced to show that a decision has been taken by ESCT to keep documents confidential.

141. Mr Pun argued that notwithstanding my ruling in respect of the relationship with ESCT, which included a ruling that documents in the possession of ESCT are documents that were in the power of Egana, Egana was not in breach of any obligation of discovery. That simply cannot be right. Once that ruling had been made it must have been apparent to Egana that they had in fact been in breach of the obligations of discovery and production when both Mr Seeberger and Mr Wong filed their affidavits asserting that they had no relevant documents. The obligation immediately arose upon them to put the matter right and to disclose the documents. They failed to do so. I am satisfied that it has been open to both Mr Seeberger and Egana, throughout the course of this litigation, to obtain any documents they wish from ESCT, and that they have done so selectively and only where they consider it to their advantage.

The champerty defence:

142. It is convenient to deal with this defence immediately, for if successful it will provide a complete answer to both Mr Seeberger and Egana.

143. Maintenance has been described as an officious intermeddling with the disputes of others in which the defendant has no interest whatever, and where the assistance he renders the one or the other party is without justification or excuse: per Fletcher Moulton LJ in British Cash and Parcel Conveyers Ltd v Lamson Store Service Co Ltd [1908] 1 KB 1006, 1014. Champerty is a particular type of maintenance, where there is a bargain between a plaintiff or defendant in a suit, and a third person, to divide between them the land or other matters sued for in the event of the litigant being successful in the suit. Maintenance was a crime and punishable at common law, and also by statute since 1377. Champerty was illegal at common law and also by statute since as long ago as the Statute of Westminster I 1275, c 25.

144. Mr Burns, and Mr Pun, whose argument was adopted by Mr Chan, agreed that both maintenance and champerty ceased to be criminal offences in the United Kingdom by virtue of the Criminal Law Act 1967. Notwithstanding that both ceased to be criminal offences, both maintenance and champerty remained contrary to public policy in the United Kingdom, and contracts that savour of maintenance or champerty will not be enforced by the courts. In United Kingdom in recent years there have been substantial inroads into the extent of maintenance particularly. Lawyers are now permitted to undertake litigation on a "no-win, no fee" basis. Previously such an arrangement would have been considered bad as constituting maintenance.

145. In the present proceedings nothing turns on the fact that both maintenance and champerty remain, technically, criminal offences in Hong Kong. Both are also contrary to public policy in Hong Kong and a contract that is champertous will not be enforced by the courts of Hong Kong.

146. The most recent statement by the Court of Appeal, by whose decisions I am bound, on maintenance and champerty is that in Low Chun Song v Kah Wah Bank Ltd [1991] 1 HKC 241. I adopt the following passage from the judgment of Kempster JA, at p. 246, as correctly stating the present law in Hong Kong.

"We have been taken through the relevant authorities in some detail, particularly Martell v Consett Iron Co Ltd [1955] Ch 363 and Trendtex Trading Corp v Credit Suisse [1980] 629; [1982] AC 670. Perhaps I may be forgiven if, gratefully, I adopt the summary of the latter decision appearing in the judgment of Lloyd LJ in Brownton Ltd v Edward Moore Inbucon [1985] 3 All ER 499, 509.

(i) Maintenance is justified, inter alia, if the maintainer has a genuine commercial interest in the result of the transaction.

(ii) There is no difference between the interest required to justify maintenance of action and the interest required to justify the taking of a share in the proceeds, or the interest required to support an out-and-out assignment.

(iii) A bare right to litigate, the assignment of which is still prohibited, is a cause of action, whether in tort or a contract, in the outcome of which the assignee has no genuine commercial interest.

(iv) In judging whether the assignee has a genuine commercial interest for the purpose of (i) to (iii) above, you must look at the transaction as a whole.

(v) If the assignee has a genuine commercial interest enforcing the cause of action, it is not fatal that the assignee may make a profit after the assignment.

(vi) It is open to question whether, if the assignee does make such a profit, he is answerable to the assignor for the differences."

Item (iii) is a description of champerty.

147. The only reported case in Hong Kong on the question of champerty, since 1991, is Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 1 HKC 179. There, Kaplan J, who was apparently not referred to Low Chun Song, but who had the advantage of the decision of the Court of Appeal in England in Giles v Thomson [1993] 3 All ER 321, and particularly the judgment of Steyn LJ, as he then was, held that in practice, the doctrine of champerty nowadays manifested in two forms: as a rule of professional conduct which forbids a solicitor from accepting a conditional fee, and as the ground to deny recognition to the assignment of a bare right of action. I understand the reference to a "bare right of action", as a reference to a right of action in which the assignee has no genuine commercial interest.

148. That a genuine commercial interest will remove the transaction to safety, otherwise being caught by the law of champerty, is reinforced in subsequent decisions since Low Chun Song. In Bevan Ashford v Geoff Yeandle (Contractors) Ltd [1999] Ch 239 at 249 Sir Richard Scott VC said, when dealing with the question as to whether champerty applied to arbitration proceedings:

"If it is contrary to traffic in causes of action without a sufficient interest to sustain the transaction, what does it matter if the cause of action is to be prosecuted in court or an arbitration?" (The emphasis is mine).

In R (Factortame Ltd) v Transport Secretary (No. 8) [2003] QB 381 CA, at 399 Lord Phillips of Worth Matravers MR, delivering the judgment of the court adopted the decision of Lord Mustill in Trendtex Trading Corp v Credit Suisse [1982] AC 670. A review of the relevant passages from Trendtex make it abundantly plain that a sufficient interest in the litigation will mean that the recipient of a share of the proceeds will not be found to have acted in a champertous manner.

149. As I understood Mr Pun's argument, it was that no matter what interest a person may have in the litigation, if he is to take a share of the proceeds, the arrangement is champertous and will not be enforced. I reject that submission. It is abundantly plain from all the authorities that the modern law of champerty allows a person, who is a non-party to litigation to share in the proceeds of that litigation, if that person has a genuine commercial interest in the result of the transaction. That that is so is clearly indicated by the decision in Trendtex, where a bank was held to have a genuine and substantial interest in the success of a customers litigation, and assignment of the right of litigation to the bank was upheld. However, a further assignment by the bank, to a third party who had no interest in the litigation at all, other than to make a profit, was struck down as manifestly savouring of champerty. The former transaction was upheld in the Court of Appeal, and that decision was not appealed to the House of Lords. The latter transaction was struck down by both Court of Appeal and the House of Lords. It was, in circumstances, correctly described as "trafficking in litigation".

150. Mr Pun, did not challenge the concept that a sufficient commercial interest would justify what would otherwise be maintenance. In the face of plain authority he could not adopt that position. I accept Mr Burns' submission that in principle there is no reason why a genuine commercial interest, which would justify what would otherwise be maintenance, should not also justify what would otherwise be champerty.

151. There can be no doubt that the MoA is an agreement in which a person who is not the party to the litigation is to share in the proceeds of that litigation. The formula to determine the Special Bonus is based upon a percentage of the monetary compensation received in respect of the arbitration. There can be no plainer way to describe the sharing of the fruits of litigation. The essential question is therefore whether or not Mr Unruh has a sufficient commercial interest in the arbitration so that the MoA is taken out of the realms of champerty.

152. I accept Mr Pun's submission that the time at which that genuine commercial interest must be determined is the time at which the MoA was made. Mr Burns relied upon the following matters:

(a) At the time the parties entered into the MoA, Mr Unruh held 50% of the shares in ESCT. It was only subsequent to the execution of the MoA, albeit on the same day, that Mr Unruh executed the Deed disposing of that 50% interest in ESCT, to Egana.

(b) Mr Unruh had a continuing association with Egana, the parent company of ESCT, in his capacity as an executive director of Egana pursuant to his Service Agreement which agreement was to run until 31 August 1995, with an extension to 31 August 1996, and potentially further extensions.

(c) Mr Unruh had a shareholding in Egana and held options in respect of further shares in Egana.

(d) By reason of certain indemnity provisions in clause 6 in the DoI, Mr Unruh remained liable to indemnify Egana in respect of potential liabilities of ESCT arising in the future.

(e) As founder of ESCT, and having regard to his prior personal involvement in the Licence Agreement with Benetton and Bulova, Mr Unruh had a familiarity and direct personal involvement in all of the issues arising out of the disputes concerning the Benetton Licence Agreement.

(f) The whole of Mr Unruh's background, both in the watch manufacturing industry, and his involvement by way of his former ownership of ESCT rendered it only natural after the sale of his shares, that in addition to his normal duties as an executive director of Egana, he should have given specific assistance in the conduct of the arbitration proceedings.

Weighing all of these matters I am satisfied that Mr Unruh had a sufficient genuine commercial interest in the outcome of the arbitration proceedings that the arrangement that he should be paid for his assistance in the arbitration by way of a share in the monetary compensation, should any be received, does not amount to a contract of champerty.

153. Mr Pun's argument appeared to be that, even if I found that the contract did not amount to a contract of champerty, the court should refuse to enforce the contract, agreement if it presented a tendency to pervert the course of justice. The public policy grounds that provide the rationale for the law of champerty are obvious. The risk that such a contract, when in the hands of one who has no genuine commercial interest in proceedings, may lead to perjury, the suborning of perjury, and to a perversion of justice is plain. But those risks do not provide any separate, overriding, discretion in the court to strike down the bargain of a person who has a genuine commercial interest in proceedings, and has agreed to assist in those proceedings in return for a share of the proceeds.

154. Having concluded that the MoA is not champertous it is not necessary for me to attempt to resolve the difference between Kaplan J in Cannonway and Steyn LJ in Giles v Thompson, on the one hand, and Sir Richard Scott in Bevan Ashford, on the other, as to whether or not the law of champerty applies in an arbitration. For myself, with respect to Lord Steyn and Kaplan J, I find the argument of Sir Richard Scott, that in reality there is no difference between a cause of action prosecuted in a court and an arbitration, to be compelling. That is particularly so when one has regard to the public policy rationale for champerty.

155. If I am wrong in my conclusion that the MoA is not a champertous arrangement, then the consequence of the fact that the contract was to be performed in relation to arbitration proceedings in the Netherlands becomes relevant. It is common ground between parties that the doctrine of champerty is quite unknown in Dutch law. In Giles v Thompson Steyn LJ said at p 332:

"The doctrine is further limited in application to the extent that it only applies to agreements governing English litigation: see Re Trepca Mines Ltd [1962] 3 All ER 351 at 345-355, [1963] Ch 199 at 218. An agreement of a champertous nature made in England is valid if it relates to litigation in a country where champerty is lawful. This illustrates that one is not dealing with an overriding public policy, which applies wherever the agreement is made or to be performed, such as an agreement to pay a bribe abroad. It is designed to protect the integrity of the English judicial system."

In Giles v Thompson, in the House of Lords, no exception was taken to that proposition. There is no authority to suggest that a different rule ought to apply in Hong Kong, and I see no reason why Hong Kong should presume to protect the integrity of the Dutch judicial system.

156. Consequently, even if the MoA were otherwise champertous, the fact that the litigation involved was being conducted solely in the Netherlands, within the Netherlands arbitral and judicial systems, means that the MoA is valid and enforceable in Hong Kong.

157. I reject the argument based on champerty.

Is Mr Seeberger liable on the MoA:

158. Mr Chan argued that on a true interpretation of cl. 5 of the MoA, the only circumstance in which Mr Seeberger would be liable to pay the Special Bonus would be when Egana, having determined that it was lawful and prudent to do so, had entered into documentation obliging it to pay the Special Bonus, but that it had failed to pay. In simple terms, Mr Seeberger was offering a guarantee, only in the event that Egana failed to pay, after agreeing to pay. The basis for the argument was the use, in the proviso to cl. 5, which provided for Mr Seeberger's guarantee, of the words "in accordance with the provisions of this Clause".

159. It is necessary to have regard to the factual matrix in which the MoA was made. Mr Unruh had sold ESCT to Mr Seeberger, and Mr Seeberger recognised that Mr Unruh's assistance in the pending arbitration proceedings was vital. He needed to secure that assistance, and proposed to do so by offering the Special Bonus. All of the parties knew that the requirements imposed upon a company to be publicly listed may result in the concept of the payment of the Special Bonus being unlawful. At the least, if Egana was a party to the MoA, because Mr Unruh was a director of Egana, the arrangement would have to be disclosed in the listing process. That may well have generated critical comment, and created adverse publicity at the time, not something encouraged in an initial public offering.

160. In the terms in which the MoA was drawn, Egana was not a party to it, and had not agreed to any liability. By drawing the MoA in those terms there was no immediate obligation on Egana which would require disclosure in the course of the listing procedure. Realistically though, all involved knew that the funds to pay the Special Bonus would ultimately come from Egana, via ESCT. However, they could not afford the risk of adverse publicity that would arise from disclosure of the arrangement at that time. But at same time Mr Seeberger needed to assure Mr Unruh that if he gave the assistance required the Special Bonus would be paid.

161. It simply makes no commercial sense at all for Mr Seeberger's guarantee to be confined in the manner suggested by Mr Chan. I accept Mr Chan's submission that from time to time even a public company may be required to offer the personal guarantee of its most substantial shareholder. But having regard to the circumstances in which the MoA was negotiated there is no sensible reason why Mr Unruh would require a personal guarantee of an obligation by a public company, once that public company had itself entered into a commitment to pay. On the other hand, with no present commitment to pay from Egana, and with the future prospect that Egana may not, for legal or commercial reasons, be able itself to make a commitment to pay the Special Bonus, there is every reason why Mr Unruh should require the personal guarantee of Mr Seeberger. Equally, with his need for Mr Unruh's assistance, there is every reason why Mr Seeberger should offer a personal guarantee, in the event that, for legal or commercial reasons, Egana could not make the payment.

162. Mr Burns argued that the words "in accordance with the provisions of this Clause", when read with the words "which would otherwise be due to Mr Unruh pursuant to paragraph (b)", were simply a reference to the formula contained in cl. 5(b), and in particular the happening of the event referred to there, i.e., the receipt of monetary compensation in excess of US$10 million. He argued that the words were not capable of referring to any legal obligation on the part of Egana to make the payment. He said that was clearly so, as neither cl. 5, read as a whole, nor paragraph (b), of cl. 5, imposed any legal obligation on Egana to pay the Special Bonus. Egana, he correctly said, was not a party to the MoA. The Special Bonus would not be "otherwise due" by Egana pursuant to paragraph (b), and non payment by Egana would not be capable of being "in accordance with the provisions" of cl. 5. Mr Chan argued that for the proviso to the clause to have the meaning contended for by Mr Burns, the words "for any reason" would need to be inserted.

163. I am satisfied that Mr Burns' interpretation of cl. 5 is correct. I reject the proposition that Mr Burns' construction of the clause renders the reference to the expression "in accordance with the provisions of this Clause" entirely superfluous. That expression merely refers to the prospect that, for one of a number of possible reasons in cl. 5 of the MoA, Egana may not enter into the necessary documentation which would give a right in Mr Unruh to demand payment from Egana. The interpretation sought by Mr Chan requires the substitution for the words "in accordance with the provisions of this clause" with the words "having entered into documentation to pay the Special Bonus and in breach of the provisions of such documentation,". I accept Mr Burns' argument that that is, quite simply, not what the words say and not what the words mean. Mr Burns' interpretation does not require the addition of any words to the clause for it to make the sense for which he argues.

164. Having regard to the matrix of facts in which the MoA was negotiated, I am satisfied that the parties intended that if, for any reason pursuant to cl. 5 of the MoA, Egana did not pay the Special Bonus, it would be paid by Mr Seeberger. I accordingly hold that, subject to my consideration of the other defences raised by Mr Seeberger, in the event that Egana does not pay the Special Bonus, Mr Seeberger is liable to Mr Unruh on the MoA, and must pay the Special Bonus.

Estoppel by Convention: Is Egana liable to pay the Special Bonus:

165. There are three parties to the DoA. They are Mr Unruh, ESCT, and Egana. The evidence was that the document was prepared, without consultation with lawyers, by Mr Wong and Mr Lee, both directors of Egana, after discussions by them, in their capacity as directors of Egana, with Mr Unruh.

166. The DoA began by referring to a situation in relation to expenses that had been incurred, and were to be incurred, by ESCT in relation to Eco Swiss SpA and Contempo. These were expenses for which Mr Unruh and Mr Seeberger had agreed to reimburse ESCT equally. The expenses to date were defined as "the Indebtedness". It is convenient to use that term here. There is no reference to the MoA in the recitals in the DoA, however recital (D) provides as follows, (In each case the emphasis is mine):

"The parties hereto have agreed to execute this Deed to evidence the Indebtedness and provide for the terms governing repayment thereof."

There are two significant sentences in clause 2 of the DoA. They are first:

"Pursuant to Clause 5 of the (MoA), 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) 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")."

And:

"Notwithstanding any contrary provisions as provided in the (MoA), Mr Unruh hereby agrees and confirms that (Egana) shall be entitled to set off the amount of the Indebtedness and any further liabilities as above stated against the amount of Special Bonus to be payable by (Egana)."

The DoA then proceeds to make provision for payment of the balance of the indebtedness, should the Special Bonus not be sufficient to cover the full amount due by Mr Unruh.

167. The case for Mr Unruh is that these provisions in the DoA, allowing Egana to set off the Indebtedness, and any further liabilities which Mr Unruh might have in respect of such expenses as might in the future be incurred in relation to the acquisition of both Eco Swiss SpA and Contempo SpA, against the amount of Special Bonus, amounted to an acknowledgement on the part of Egana that it had agreed to pay Mr Unruh the Special Bonus. The argument is that such an acknowledgement could only have arisen from, and had been based on, the common assumption that Egana had entered into a commitment to pay Mr Unruh his Special Bonus. Consequently, it was argued, such an assumption gave rise to an estoppel by convention preventing Egana from denying its liability to Mr Unruh in respect of the Special Bonus.

168. For Egana, Mr Pun argued that the circumstances were such that the prerequisite conditions for an estoppel by convention to apply, did not exist. He argued further that like other forms of estoppel, estoppel by convention may only be used as a shield, and not a sword, and that the principle of estoppel did not create a new cause of action where none existed before.

169. The origin of the modern doctrine of estoppel by convention lies in that of estoppel by deed, for which sealing and delivery were essential, and of which the foundation lay, not in the agreement itself, or any reliance thereon, but in the formal solemnity of the deed, reflecting the concern of ancient jurisprudence with form as opposed to substance: see Spencer Bower, Estoppel by Representation 4th Ed. para VIII.1.1. Spencer Bower, para VIII.1.2, records that the evolution of estoppel by deed into something quite different is no new or sudden development. In Carpenter v Buller (1841) 10 LJ Ex 393, 8 M & W 209, Parke B. said:

"If a distinct statement of a particular fact is made in the recital of a bond, or other instrument under seal, and a contract is made with reference to that recital, it is unquestionably true that, as between the parties to that instrument, and in an action upon it, it is not competent for the party bound to deny the recital, notwithstanding what Lord Coke says on the matter of recital in Coke on Littleton 352b; and a recital in instruments not under seal may be such as to be conclusive to the same extent."

It is then said that the process of development has continued, and that the modern doctrine is not simply an application of the doctrine of estoppel by deed to instruments that are not under seal.

170. I take as a definition of estoppel by convention the following statement, developed from Spencer Bower para VIII 2.1. An estoppel by convention is an estoppel by representation of fact in which the relevant proposition, that is, that which a party is to be estopped from denying, is established, not by representation or promise by one party to another, but by mutual, express or implicit, assent. This form of estoppel is founded on an agreed statement of facts, the truth of which has been assumed, by convention of the parties, as the basis of their relationship. When the parties have so acted in their relationship upon the agreed assumption that the given state of facts is to be accepted between them as true, that it would be unfair on one for the other to resile from the agreed assumption, then he will be entitled to relief against the other.

171. The critical factor that Mr Unruh must establish is that both relevant parties to the DoA, himself and Egana, have acted on an assumed state of facts. The assumption in this case is that Egana has agreed with Mr Unruh to pay the Special Bonus. Mr Unruh's primary position was that he should not then, at the time the DoA was made, make payment of the Indebtedness. Egana's primary position was that they must be assured that the payment would be made. Each, in order to ensure that the payment would be made, have assumed that the Special Bonus would be paid by Egana, thereby enabling the Indebtedness to be deducted. If the Special Bonus was not to be paid, or was still contingent upon some future decision by Egana, then deduction of the Indebtedness was not assured, and there was no purpose in entering into the set off provision.

172. The case for Mr Unruh is that by mutual assent, contained in the DoA, it was acknowledged by Egana that it would pay the Special Bonus, from which Mr Unruh acknowledged that Egana could deduct the Indebtedness. It is a critical element of an estoppel by convention that the assumption of the relevant fact or proposition as to the parties' rights must be expressly or impliedly communicated between them. Here, in the DoA, Egana has effectively said; "We have agreed to pay you the Special Bonus, and from that we will deduct the Indebtedness, but if the Indebtedness exceeds the Special Bonus, you must pay the balance to us." Mr Unruh, by entering into the DoA, has effectively said; "I have agreed that the Indebtedness may be deducted from the Special Bonus that you have agreed to pay me, and if the Special Bonus is not enough to cover the Indebtedness, I will pay you the balance within 10 days."

173. There is nothing equivocal in the statements by Egana in the DoA. Had there been no agreement to pay the Special Bonus, it would have been open to Egana to preface the references to the Special Bonus with expressions such as "in the event that Egana is liable to pay to Mr Unruh the Special Bonus". The parties could even have adopted the words in the MoA by saying, "in the event that Egana, having determined it to be lawful and prudent as a company listed on the Stock Exchange, has entered into all necessary documentation to pay to Mr Unruh the Special Bonus". But the references to the Special Bonus were not qualified in any way at all. Indeed, had they been so qualified, it is unlikely that the DoA would have satisfied Egana's auditors on the issue of recoverability of the Indebtedness, the purpose for which the DoA was primarily made. Had the payment of the Special Bonus still been contingent, the auditor would not have been assured that the Indebtedness would have been recoverable. For Egana to argue otherwise than that it had agreed to pay the Special Bonus, involves a necessary conclusion that, in so presenting the DoA to Egana's auditor, Mr Wong and Mr Lee were deceiving the auditor as to Mr Unruh's true right to the receipt of the Special Bonus, and consequently, the ability of Egana to recover the Indebtedness.

174. A second critical factor is the requirement of unfairness. Spencer Bower, in para VIII.5.3, puts the matter in the following way. Whether unfairness would result, depends on whether the party seeking to raise the estoppel by convention has been induced, by the conventional understanding, so to act, that he will be worse off if the other party is allowed to resile from the convention than he, (the estoppel raiser), would be if he had not been induced to act by the convention.

175. Whether Mr Unruh has been induced to act by the convention may be tested against the primary purpose of the DoA. That primary purpose was to assure the auditor that Egana would be able to recover the Indebtedness. In assessing this matter it is important to remember that at this time ESCT had received the PFA, and no challenges to it had yet been mounted by Benetton. There was every reason for all to believe that in due course monetary compensation would be forthcoming. That belief was duly proved correct, only 6 months later, with the delivery of the FAA on 23 June 1995, awarding ESCT US$23,750,000.00.

176. The auditor was not called, and in the absence of evidence from him, having regard to the whole of the circumstances, the only inference that is open is that the auditor, having read the DoA, and being assured that there was a sum of money from which the Indebtedness could be recovered, namely the Special Bonus, permitted the matter of the Indebtedness to be dealt with in the accounts as Egana had sought. In simple terms, the auditor was induced, by the DoA, to believe that the Indebtedness would be repaid from the Special Bonus. Equally, Mr Unruh, from the discussions prior to the DoA, and confirmed by the DoA, knew that there was a source of funds from which he would be able to meet the Indebtedness. That source of funds was the Special Bonus which, in terms of the DoA was to be payable by Egana.

177. As a corollary to that knowledge, Mr Unruh knew that if he continued to provide the assistance in the arbitration required by the MoA, in due course, he would receive his Special Bonus. Had he known, in January 1995, that Egana may not enter into the necessary documentation to secure his right to the Special Bonus, it would have been open to Mr Unruh to press Mr Seeberger to secure that documentation in terms of Mr Seeberger's obligation under cl. 7 of the MoA. It would have been open to Mr Unruh to negotiate with Egana for formal documentation himself. It would have been open to him simply to cease providing assistance, perhaps arguing a failure of consideration. Having been induced to continue to provide assistance, and relying on the facts assumed, and recorded in the DoA, that he would receive the Special Bonus, Mr Unruh has been deprived of these opportunities. I am satisfied that in relying on the statements made in the DoA, Mr Unruh's position is one which may be described as "worse off".

178. Consequently, it would be manifestly unfair to now say to Mr Unruh that, notwithstanding the assertions made in the DoA by Egana as to payment of the Special Bonus, upon which he relied for a source of funds to repay the Indebtedness, and as an inducement to continue to provide assistance in the arbitrations, Egana should not now be liable to pay the Special Bonus. Egana has had the benefit of the continued assistance Mr Unruh in the arbitration which has resulted in a very substantial sum being paid. There is no suggestion at all that without that assistance Egana would have achieved the same result.

179. Mr Pun relied primarily on the notion, well-known to all lawyers who have braved an encounter with the concept of estoppel, that an estoppel may only be used as a shield, and not as a sword to support a cause of action. While this is true in most cases, it has been said that the metaphor is apt to mislead: see e.g. Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274, where, in the context of a discussion of proprietary estoppel, Judge LJ referred to the "misleading aphorism that estoppel is a shield, not a sword." While that maybe right as to proprietary estoppel, or other forms of equitable estoppel, it may not be so in estoppel by convention.

180. The leading authority is Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84. In that case the common assumption of the parties was that they had entered into a contract of guarantee under which the guarantor had promised to guarantee loans made by a subsidiary of a bank to a subsidiary of the guarantor. In fact, the wording of the guarantee covered loans made by the bank, but not loans made by the banks' subsidiary. When the guarantor went into liquidation the bank applied money which they owed to the guarantor in discharge of the guarantors alleged liability under the guarantee. The guarantor sought a declaration that the bank was not entitled to apply the guarantor's money in such a way because the guarantee was not effective to cover the loans made by the bank's subsidiary. But the court held that the parties had entered into the guarantee under the shared assumption that the guarantee did cover such loans and the effect of the estoppel was to prevent the guarantor from denying the efficacy of the guarantee.

181. It is clear that in the context of the particular proceedings, an application by the guarantor for a declaration that it was not liable for the sums deducted, the bank was able to use the estoppel as a shield to the guarantors claim for a declaration. But what was the position if the bank did not have funds to set-off the liability and had sued the guarantor on the guarantee? The majority (Lord Denning and Brandon LJ,) held that the bank could have sued on the guarantee to recover the sums which they alleged were due.

182. Brandon LJ, (as he then was), dealt specifically with the shield-sword concept. At p.131 the learned Judge demonstrated how the defendant bank could have sued, pleading the contract of loan incorporating the guarantee, and averred that on a true construction of the guarantee, the guarantor was liable for the debt. By its defence, the guarantor would have pleaded that on the true construction of the guarantee it was not liable for the debt. That defence would have been met with the reply by the bank that, by reason of an estoppel arising, the guarantor was precluded from questioning the interpretation of the guarantee which both parties had, for the purpose of the transactions between them, assumed to be true. The Judge went on to say:

"In this way the bank, while still in form using the estoppel as a shield, would in substance be founding a cause of action on it. This illustrates what I would regard as the true proposition of law, that, while a party cannot found a cause of action on an estoppel, he may, as a result of being able to rely on an estoppel, succeed on a cause of action on which, without being able to rely on that estoppel, he would unnecessarily have failed. That, in my view, is, in substance, the situation of the bank in the present case."

183. The argument as developed by Lord Brandon may be applied to the present case. The essence of Mr Unruh's action against Egana is an assertion that there was an agreement between himself and Egana that Egana would pay the Special Bonus. By their defence Egana argues that there is no such agreement. By reply, Mr Unruh says that by reason of an estoppel, Egana are precluded from questioning the existence of the agreement, which had, for the purpose of the DoA transaction between them, been assumed to exist.

184. If it may be thought that it is an answer to that scenario that there was in fact no agreement between Mr Unruh and Egana, that in my view is wrong. In Amalgamated Property, in its terms, the guarantee did not include the debt claimed by the bank. By reason of the estoppel, the guarantor was precluded from asserting the actual terms of the guarantee, which had, for the purposes of the transactions between them, been assumed to include the debt. Equally, Egana are precluded from asserting that there was no agreement on their part, which had been assumed to exist for the purposes of the DoA. A further example of an argument to support an estoppel by convention founding a cause of action may be seen in Thornton Springer v NEM Insurance [2000] 2 All ER 489.

185. In Norwegian American Cruises v Paul Mundy Ltd (The Vistafjord) [1988] 2 Lloyd's LR 343, CA the defendant had received payment of charter fees from which it had deducted a commission. The defendant successfully resisted a claim by the plaintiff for the sum retained by relying on an estoppel by convention that it would be entitled to the commission. The question of shield-sword did not arise directly and was not considered by the court. It would seem illogical however, to say that if the defendant retains a commission, and is held to be entitled to it by an estoppel by convention, he should not equally have been able to sue for it, relying upon the same estoppel by convention. Just as it would be illogical and manifestly unfair to the bank in Amalgamated Property, to deny them the right to recover from the guarantor merely because it was the plaintiff, in a Vistafjord situation it would seem equally illogical and manifestly unfair to deny the right to the commission merely through a coincidence as to how the proceedings began.

186. The matter is not free from doubt. While recognising the extent of authority to the contrary, Chitty expresses the matter in this way at para 3-113:

"It is indeed, possible for estoppel by convention (as it is for promissory estoppel and estoppel by representation) to deprive the defendant of a defence, and so enable the claimant to win an action which otherwise he would have lost, but even in such cases the estoppel does not create a cause of action, for the facts giving rise to the cause of action exist independently of the estoppel. No other authority squarely supports the view that estoppel by convention can, of itself, create a new cause of action; and present position seems to be that it cannot, any more than promissory estoppel or estoppel by representation, produce this effect."

187. If that be right, and contrary to the view that I have taken, aligning myself with Lord Brandon, estoppel by convention does not, of itself, create a new cause of action, I am still of the view Egana is liable to Mr Unruh. The evidence did not traverse in detail the precise nature of the negotiations between Mr Unruh, on the one hand, and Mr Wong and Mr Lee, on the other. However, it is an unassailable fact that, in the course of those negotiations they agreed that the Indebtedness would be deducted from the Special Bonus to be paid by Egana. The DoA says so in terms. With Egana not having previously entered into the appropriate documentation to pay the Special Bonus, and accordingly not being liable to pay the Special Bonus, such an agreement could not be reached, unless in the course of the negotiations Mr Wong and Mr Lee, agreed with Mr Unruh that Egana would pay the Special Bonus. There must therefore, have been an agreement by Mr Wong and Mr Lee, on behalf of Egana, with Mr Unruh, to pay the Special Bonus. There is no requirement of law or otherwise that such an agreement must be in writing. Consequently, the facts giving rise to the cause of action, namely an agreement to pay the Special Bonus, existed independently of the estoppel. The effect of the estoppel is to deny Egana the defence of contending that there was no such agreement.

188. For the foregoing reasons I am satisfied that Egana is liable to pay the Special Bonus to Mr Unruh.

189. In reaching the conclusions I have reached in relation to estoppel by convention, I have not disregarded the decision of Cheung J (as he then was), in Yuen Ching Yuen v Union Insurance Society of Hong Kong Ltd [1998] 2 HKC 294. The concept of estoppel by convention was not argued by counsel who proceeded on an agreed understanding as to what constituted estoppel by convention. There, counsel were apparently agreed as to five conditions that must exist for an estoppel by convention. The Judge appears to have been told that the statement of those conditions came from The Vistafjord. An examination of that case shows however that, as a definition of estoppel by convention, Bingham LJ actually adopted a definition from a judgment by Peter Gibson J in Hamel-Smith v Pycroft & Jetsave Ltd (unreported, 5 February 1987). The definition in both Hamel-Smith and The Vistafjord is quite different from that cited by Cheung J. It appears therefore that, as a result of the agreement of counsel as to the constituent elements for an estoppel by convention being quite wrong, the learned Judge was unfortunately misled as to the constituent requirements.

190. An essential element of the requirements for an estoppel by convention, as set out in Yuen Ching Yuen, was that there must be a common mistaken assumption by both parties as to the existence of a state of affairs. Certainly, an essential element of proprietary estoppel is a common mistaken assumption by both parties as to the existence of a state of affairs. However, an estoppel by convention, as may be seen from the definition I have set out, and from that adopted by Bingham LJ in The Vistafjord, does not require any mistake, but rather an agreed statement of facts, the truth of which has been assumed. The consequence of an estoppel by convention is that where both parties agree on certain facts, and the other appropriate criteria are present, then those facts may not later be denied. In the present case the facts agreed on were that Egan would pay the Special Bonus.

191. For the sake of completeness, I record that it would be no answer for Egana to contend that it had not made any determination as to whether or not payment of the Special Bonus was lawful or prudent. The pre-condition upon Egana entering into documentation to pay the Special Bonus, that payment must be both lawful and prudent, were conditions inserted solely for the benefit of Egana. They are conditions which may be waived by Egana. Consequently, that no such decision was made is simply irrelevant.

The meaning of the expression "the Arbitration" in the MoA:

192. The importance of the interpretation of the expression "the Arbitration" lies in the role that expression plays in the formula by which the Special Bonus is to be calculated. The formula is based upon the sum of "monetary compensation received by ESCT in respect of the Arbitration". The case for both Mr Seeberger and Egana was that that meant the arbitration in NAI 1325.

193. Mr Chan submitted that the expression "the Arbitration" was specifically defined in the MoA as Arbitration 1325. Strictly that is not right, for the reference "1325" does not appear in the definition. The basis of the argument was the reference to the definition of the expression in the MoA, which referred to "the arbitration proceedings commenced by ESCT in 1991 in the Netherlands". Consequently, the argument went, the parties could only have had NAI 1325 in mind, and it could not be said that there was any intention that Mr Unruh was to share in the monetary compensation received from any other litigation, including another arbitration. It is of course right that there may have been a satisfactory conclusion to NAI 1325, without there being any monetary compensation. In that case, just as with a failure in the arbitration, no Special Bonus would be payable.

194. It is also quite right that at that time in September 1992, NAI 1325 was the only arbitration proceeding on foot, and that NAI 1616 was not commenced until January 1994. But it is necessary to remember the scope of NAI 1325, as set out in the relief sought by ESCT in its Statement of Claim in that proceeding. ESCT sought first a declaration that the Licence Agreement was to continue in full force and effect, and second an order that Benetton continue to perform its obligations, including particularly, the extension negotiations obligation. Damages were sought by way of compensation, not only for the repudiation of the Licence Agreement, but also for "related misconduct", which necessarily included any breach of the extension negotiations obligation. In the alternative, damages were sought to compensate ESCT for the repudiation, which damages were specifically expressed to include future profits covering both the remainder of the initial term, and the term of the extension of the Licence Agreement. Thus in NAI 1325, ESCT was already looking to monetary compensation for the non-extension of the Licence Agreement.

195. Modern litigation is a complex animal. It is not at all unusual for a single dispute between two parties to spawn a plethora of proceedings. By the terms of the relief sought in NAI 1325, ESCT correctly anticipated that there may be further stages, or phases, of the proceedings. Whether those "stages" or "phases", the expressions used in the Statement of Claim, were to be an actual part of NAI 1325, or in quite separate proceedings matters not. Those further proceedings were contemplated at the commencement of NAI 1325, and were an integral part of NAI 1325, arising from NAI 1325. I have not the slightest doubt that if an informed, independent and objective observer had said to the parties at the time the MoA was signed: "What if it is necessary to resolve the question of monetary compensation in separate proceedings?", those present would testily have said: "Then of course, that sum will determine the amount of the Special Bonus."

196. I am satisfied that the expression "the Arbitration", as used in the MoA, means the arbitration known as NAI 1325, and all proceedings flowing from it, including NAI 1616. Consequently, in the event that monetary compensation to ESCT is determined in other proceedings flowing from NAI 1325, and not directly in NAI 1325, the Special Bonus is to be determined on the basis of the compensation arising from those other proceedings.

197. In reaching this conclusion, I do not need to imply any particular terms into the MoA. I am satisfied that on an interpretation of the definition in the MoA, of the expression "the Arbitration", having regard to the matrix of facts at the time, the parties contemplated that the monetary compensation referred to in cl. 5 of the MoA would be whatever monetary compensation was paid in the final resolution of the proceedings involving Benetton, irrespective of precisely in which set of proceedings that compensation was ordered.

198. In reaching this conclusion I have had regard to the apparent confidence expressed by Egana in the Prospectus for Listing, that the Licence Agreement would be renewed. Mr Seeberger said in evidence that his view throughout was that the Licence Agreement would in fact be renewed. The prospectus for the public listing of Egana contained statements such as:

"The Directors are confident that agreement can be reached with Benetton International NV for the renewal of this licence",

and

"The Directors have recently held initial discussions with the licensor and the Directors believe that the relationship has improved since the arbitration ruling in favour of the Group was made. The Directors believe that they will be able to successfully conclude a renewal of this licence and that it will make a significant contribution to the growth of the Group's future operations."

199. Having regard to the whole of the circumstances of the dispute between ESCT and Benetton, and the evidence before me, I find those statements to be at best, disingenuous, and perhaps, potentially misleading. That is certainly so in the light of the allegations made by ESCT, in the Statement of Claim in NAI 1616, as to the attitude being displayed by Benetton in June 1993.

200. The true reality of the situation, at the time Egana was listed, in June 1993, and known to the directors, including Mr Unruh, was that Benetton had terminated the licence, and had then fought their way through the first stage of an expensive and complex arbitration. The likelihood that they would thereafter negotiate "in good faith" to extend a licence that they did not want was in my view remote. That was being demonstrated to ESCT, in June 1993, by the attitude of Luciano Benetton personally, and those representing Benetton. That is clear from ESCT's Statement of Counterclaim in NAI 1616. The terms of the Statement of Claim filed by ESCT in NAI 1325 made it clear that it was not anticipated that Benetton would seek to renew or extend the Licence Agreement. For that very reason the Statement of Claim sought as part of the relief damages for the failure to extend, those damages to be based upon the value of the extension.

Did Egana make a decision in September 1993, that it was not lawful or prudent to pay the special Bonus:

201. It was contended by both Mr Seeberger and Egana that, in September 1993, when Mr Unruh's Service Agreement was terminated and he resigned as a director of Egana, the board of Egana determined on the basis of professional advice received, that it would not be lawful or prudent for Egana to enter into documentation to enable it to effect payment of the Special Bonus. The evidence in chief in the form of witness statements filed pursuant to the usual orders, of both Mr Seeberger and Mr Wong formed the evidential basis for this assertion.

202. However by the time they both came to give oral evidence, their position appeared to have retreated to a state described by them both as a "wait and see" position on the part of the Board of Egana. Notwithstanding close cross-examination it did not become apparent whether they contended that the Board had made a decision that it was neither lawful nor prudent to pay the Special Bonus, but that it would "wait and see" what happened, with a view to a future decision which may permit payment of the Special Bonuses; or whether they contended that the Board had made a decision that it was lawful and prudent to pay the Special Bonus, but in the light of events would "wait and see" what happened, with a view to a future decision which may resolve that it was no longer lawful and prudent, and the Special Bonus should not be paid.

203. Whichever it was, there was not a single contemporary document to support the assertion that any decision at all had been made by the Board. There was no agenda of a meeting of directors in which the subject of the Special Bonus featured as an item. There was no resolution of the directors recording a decision. It is right that Egana was not at that time the party to the MoA, but the decision was an important one. It was a decision that required the Board to take professional advice. It was certainly a decision that would have at least made the level of an agenda item in the administration of a public company. That Egana was not a party to the MoA, is however not a sufficient reason for there to be no proper record of what was said to be a specific decision taken by the Board of a public company, allegedly after the receipt of professional advice.

204. The absence of a resolution in relation to such an important matter stood in marked contrast to the detailed minute recorded by Mr Wong following the approach by Benetton to settle. That minute described not only the precise terms of the resolutions passed, but also the discussion that had taken place on 19 October 1999, when the settlement of the arbitrations was considered by the Board.

205. Mr Seeberger had the greatest difficulty in describing precisely what professional advice had been received. On 4 August 1993, Simmons & Simmons had written to Mr Seeberger, with a copy to Mr Wong, in relation to Mr Unruh's German conviction which had come to light the previous month. The letter attached a schedule of matters to be considered in preparation for a forthcoming meeting with Mr Unruh. These included:

"- consider Mr Unruh's 'special bonus' in the event of obtaining significant damages from Benetton in respect of the arbitration result, rather than renewal of the licence."

Nothing further is said concerning the Special Bonus. Whilst the letter accompanying the schedule invited Mr Seeberger to discuss the matter further with the solicitors after he had considered the schedule there was no evidence that there was any further discussion.

206. It is plain from both the letter, and the accompanying schedule, that at no stage do the solicitors give advice either, that the payment of the Special Bonus would be unlawful, or that it would not be prudent to make such a payment. The best that can be said is that Mr Seeberger was invited to consider the issue. That is a long way from the receipt of professional advice on the issue. I have had due regard to the opinion of Mr Geoffrey Ma QC, as he then was, given on 20 July 1993, advising Egana whether they can terminate Mr Unruh's Service Agreement as an executive director of Egana. That opinion is confined to the issue of the termination of the Service Agreement, and expresses no view at all on any obligation in relation to the Special Bonus under the MoA. There is not even any suggestion that counsel was aware of the terms of the MoA.

207. Mr Wong gave evidence that he, as a Chartered Accountant in Hong Kong, gave professional advice that it would not be lawful or prudent to make payment. However he did not say precisely how he considered payment to be unlawful, nor did he say why it would not be prudent, other than to refer to the Standard Chartered advice that had been given on 7 July 1992. That advice of course had been given in relation to a suggested bonus of 25% of the arbitration award. Unusually for a professional man, who may later be held liable for wrong advice, he made no record at all of that advice.

208. There was a complete lack of documentation by Egana as to any professional advice or discussion or decision that they may have received or made on the issue. That circumstance stood in stark contrast to the Simmons & Simmons letter of 17 September 1993, (see para. 68). There, in the course of the negotiation of the terms of the Consultancy Agreement, Mr Unruh and his solicitors had been assured, in terms, that there was no intention of the part of the Egana Group or Mr Seeberger to cancel the obligations in the MoA. Mr Chan and Mr Pun sought to escape the consequences of the plain expression in that letter by pointing to the words "to the extent that it could be applicable", which prefaced the "no intention to cancel the obligations", statement. The word "it" in that phrase they argued, referred to cl. 5 of the MoA. That plainly was not the case. I am quite satisfied that the phrase referred to the applicability of the "No Claims" clause in the Consultancy Agreement. The writer of the letter was simply making it plain that, even without the special provision in the Consultancy Agreement preserving the rights to the Special Bonus in the MoA, it was not intended that the MoA should be caught by the "No Claims" clause.

209. There was a crystal clear dichotomy between Mr Seeberger's and Egana's position in their pleadings, and in their solicitors' letter. On the one hand it was pleaded that Egana had made a decision not to pay the Special Bonus. On the other hand, the effect of the "no intention to cancel" paragraph in the solicitors letter was plain. Mr Unruh's rights to the Special Bonus remained. When faced with this dichotomy in cross-examination, Mr Seeberger said that he could not see the difference. That the chairman of a public company should not to be able to see the difference was quite extraordinary. His answer was both evasive and unbelievable.

210. Had the position been as contended in the pleadings, or even on the lesser "wait and see" position adopted in the oral evidence, the assertion in the solicitors letter, that Mr Seeberger and Egana had no intention to cancel the obligations in the MoA, was a plain deceit by Mr Seeberger, Mr Wong, and Egana, on Mr Unruh.

211. It is relevant here to consider the findings that I have made in respect of the argument on Estoppel by Convention. The assertion that the decision had been made in 1993, either not to pay the Special Bonus or to "wait and see" whether or not to pay the Special Bonus would have been a deception upon the auditor of the Egana Group. The presentation of the DoA to the auditor had assured him as to the recoverability of the money due by Mr Unruh, by demonstrating that it would in future be set-off against the payment of the Special Bonus. That such a set-off was available is completely inconsistent with a decision that the Special Bonus would not be paid, or even that it may not be paid.

212. Having regard to the terms of the solicitors letter, and the complete absence of contemporary documentation, either giving the relevant advice, or recording any consideration or decision of the matter by the Board of Egana, I find that in September 1993 no decision at all was made by Egana in relation to their then or future position on the Special Bonus.

Did Egana make a decision in August 1995 that it was not lawful or prudent to pay the Special Bonus:

213. The contention that the Board of Egana had made a decision that it was not lawful or prudent to pay the Special Bonus was reasserted. It was pleaded that such a decision was made again in August 1995. There was no explanation as to why it might have been necessary to make a second such decision.

214. Again, the evidence in chief in the witness statements had asserted such a decision, as had the pleadings. Again, in oral evidence, both Mr Seeberger and Mr Wong retreated to the "wait and see" position. Again the precise nature of that position was not made clear. Again, both Mr Seeberger and Mr Wong were obliged to acknowledge that there was not a single contemporary document demonstrating the matter had gone before the Board of Egana, either by way of an agenda, or by way of the resolution of directors making the decision.

215. Again, Mr Seeberger had the greatest difficulty in describing precisely what legal or professional advice had been received. He relied primarily on a note entitled "Outstanding Issues for the Egana Group in relation to Mr Siegfried Unruh" prepared on 22 August 1995, by Simmons & Simmons. That note referred to three principal outstanding issues, the status of the Consultancy Agreement, the implications of the Italian situation, and the treatment of the Special Bonus.

216. As far as the Consultancy Agreement was concerned, after considering the terms of the agreement, advice was given in relation to attempting to terminate the agreement early, and an option of a "global settlement" of Mr Unruh's position with Egana was suggested. As to the Italian proceedings, clear advice was given in relation to a matter of liability between Mr Unruh and Mr Seeberger, and how that liability should be borne. Equally clear advice was given in relation to a matter of set-off or counterclaim in relation to an aspect of the MoA, not relevant to these proceedings. Formal advice as to the effect of the Howard Lau Deed was given.

217. The writer of the note then turned to the issue of the Special Bonus. The writer took a different view from the conclusion reached by me as to the scope of the expression "the Arbitration" in the MoA. It recorded, correctly, that Mr Unruh, having ceased to be a director, no longer had any effective rights that would enable him to ensure that Egana entered into documentation to pay the Special Bonus.

218. The note then recorded that:

"Mr Seeberger must take a view as to whether it was consistent with his fiduciary duties as a director of Egana to attempt to procure the payment of the special bonus to Mr Unruh."

The note expressed the view that that payment could be viewed in an unfavourable light but gave no advice as to whether procurement of the payment would or would not be consistent with Mr Seeberger's fiduciary duty. The note repeated the argument made as to the true interpretation of cl. 5 of the MoA, which interpretation I have rejected.

219. Under a heading "COMMENT", the writer reviewed various matters. It was pointed out that if Mr Unruh was no longer a director of any member of the Egana Group the payment by Egana of a Special Bonus would not constitute a "connected transaction" for the purposes of the Hong Kong Stock Exchange Listing Rules, with all of the onerous disclosure obligations that would normally entail. In my view that was advice that the payment of the Special Bonus by Egana would, to that extent, be lawful.

220. The note then referred to the requirement on Egana to keep the Hong Kong Stock Exchange, and Egana's shareholders informed of any information relating to the Egana Group which is necessary to enable them to appraise the position of the Group and which might reasonably be expected to materially affect market activity in, and the price of securities. Without expressing a firm view, the writer was "minded to consider" that the Special Bonus arrangements would probably not fall within those provisions. Even with the limited term "minded to consider", the opinion expressed constituted advice which did not place any restriction on Egana in relation to the payment of the Special Bonus.

221. The final paragraph, before the consideration of the series of alternative means by which the Special Bonus could be paid, was directed at Mr Seeberger's personal position and began with the following statement:

"If, for whatever reason, Egana decided that the payment of a "special bonus" to Mr Unruh would not be appropriate (whether on the grounds of unlawfulness, prudence, Egana's position as a Hong Kong listed company or otherwise), then even if Mr Seeberger were to exercise all his rights as a director of Egana and (indirectly) as a shareholder of Egana, Mr Seeberger would not be able to procure that payment. Mr Seeberger could be out-voted at a board meeting and he would not be able to arrange (through his indirect shareholding) for the composition of the board to be changed to cause the payment of a "special bonus" to be made. In those circumstances, Mr Seeberger would appear to have discharged his obligations under the (MoA.) "

222. The crucial word is of course, the word "appear" in the last sentence. The advice being given, to Mr Seeberger, not Egana, is to the effect that notwithstanding any liability that may arise on Mr Seeberger, consequent upon Egana deciding not to pay the Special Bonus, by the device of ensuring that he was out-voted at the Board meeting, Mr Seeberger would be able to avoid liability. In no circumstances could such advice be considered professional advice to Egana.

223. The second matter that arises from this paragraph is that in no circumstances could it be considered advice to the Board of Egana, either as to the lawfulness of payment of the Special Bonus, nor as to whether payment would be a prudent act by a public company.

224. After having suggested a device whereby Mr Seeberger could avoid his liability, the note went on to consider four different alternatives to provide a means to pay the Special Bonus, "if it is considered appropriate for Mr Unruh to receive" the Special Bonus. Two of these methods were arrangements whereby Egana would lawfully pass funds through Mr Seeberger to enable him to make payment. One involved extending the Consultancy Agreement, enabling that document to make payment directly from Egana. Advice was given that an extension of the Consultancy Agreement would not be a "connected transaction" as far as the Stock Exchange was concerned. The final method payment involved a declaration of dividends by ESCT and Egana, as a means of funnelling enough funds to Mr Seeberger to allow him to make payment of the Special Bonus. The note concluded with commercial advice as to the procedure and tactics that might be adopted.

225. I have given very careful consideration to this document. I have concluded that it does not, and cannot, constitute professional advice to Egana that is either unlawful or not prudent to pay the Special Bonus. Mr Chan asked me to look at the document with reality in mind, considering that it is hardly unusual for lawyers to couch their advice in terms leaving the ultimate decision to clients. That is undoubtedly correct. But where an action, proposed to be taken by a public company is potentially illegal, I have no doubt that any potential illegality will be expressed in terms, in order that the client may make a decision. There is no such expression of advice in the note.

226. Equally, I am confident that if competent commercial lawyers in Hong Kong considered a proposed course of action by a public company, relating to a decision the company must make in the context of the obligations on that public company, both at law and pursuant to the Hong Kong Stock Exchange Listing Rules, not to be prudent, the solicitors would say so in terms. There is no such expression of advice in the note. To the contrary, the note suggests alternative scenarios in relation to either legality or the prudent nature of the payment of the Special Bonus. There is no suggestion that for either legal or commercial reasons it would not be prudent for Egana to make the payment of the Special Bonus.

227. Mr Wong asserted that he gave advice to the Board of Egana. He did not say quite what that advice was, other than to point to the Simmons & Simmons note. Again, he made no documentary record of the advice he gave.

228. Finally, other than the argument on champerty, no submission was made at all, by either Mr Chan, or Mr Pun as to any basis at law in which payment of the Special Bonus might have been illegal. Neither made any submission at all as to any basis on which payment of the Special Bonus might have been considered not to be prudent on behalf of Egana.

229. Neither Mr Seeberger nor Mr Wong were able to say that anyone ever told Mr Unruh, either in 1993, or in August 1995, that a decision had been made by the Board that the Special Bonus would not be paid. Their position was that Mr Unruh ought to have known from all circumstances. That was disingenuous in the extreme. If, as they both contended in the pleadings, they had decided not to pay the Special Bonus, by keeping the matter quiet and to themselves, and continuing to use Mr Unruh's services and the assistance he was obliged to give under the MoA, they were effectively deceiving him. The deceit involved allowing Mr Unruh to continue to work, he believing that he would in due course receive a Special Bonus, when in fact a decision had been made that no Special Bonus would be paid. Their position is not improved by the "wait and see" assertion. That equally would constitute a deceit on Mr Unruh.

230. Having regard to the complete absence of documentary evidence that the Board of Egana, either considered the issue in August 1995, or passed any resolution on it, I find that no decision was then or ever made in which Egana concluded that it was the either unlawful or not prudent to pay Mr Unruh the Special Bonus.

Did Mr Unruh use his "best endeavours" to assist ESCT:

231. The pleadings make it clear, and it was not argued otherwise, that the only matters relied upon in the "absence of best endeavours" assertion, was the failure of Mr Unruh to earlier disclose his German conviction and the Italian proceedings. It became abundantly clear through the course of Mr Seeberger's evidence that there were other general matters in which he had great concern as to Mr Unruh's conduct. Plainly none of those matters related to the efforts Mr Unruh was required to contribute to the arbitration. They were quite irrelevant to the arbitration proceedings, but perhaps explain why this matter has resulted in a lengthy and very hard fought trial.

232. A number of matters are relevant to the determination of the issue as to whether or not Mr Unruh did use his best endeavours to assist. First, it is clear that by June 1992, Mr Conway was aware of the potential difficulties in relation to the Italian situation. He had received from Mr Montanari a formal statement of the circumstances, and he could, at any time he thought necessary, obtain further information from Mr Montanari. Mr Conway could have, but apparently did not, make any enquiry he wished of Mr Unruh as to the Italian situation. All concerned knew of the German conviction by July 1993. In 1995, when referring to the German conviction and the Italian conviction, then recently revived in the Hong Kong press, Mr Conway assured Mr Seeberger in writing, that:

"we have positioned ourselves to resist Benetton's arguments."

That statement was made in the full knowledge of both the Italian and German situations.

233. It was not until July 1995, that Benetton relied upon the Italian proceedings to make a challenge to the PFA. At that time Mr Conway had known of those proceedings for three years, and the German conviction for two years, and in his own words, had positioned ESCT appropriately. To suggest in the circumstances, as was pleaded, that had the charges been disclosed earlier the legal team would have been able to prepare for the challenges and/or minimised them is plainly without any foundation at all. The legal team had positioned themselves and were ready.

234. Next, on two occasions, in January 1996, and in September 1999, the Netherlands Court of Appeal made clear statements that both the Italian and German circumstances were quite irrelevant to the arbitration proceedings. If the court took the view that they were irrelevant, it is difficult to see how Mr Unruh could have thought there was any greater obligation on him in relation to those matters. Mr Conway knew of the Italian position, and there could be no obligation on Mr Unruh, in the context of the arbitration proceedings, to disclose an ancient, spent, German conviction.

235. It is right that the German conviction ought to have been disclosed by Mr Unruh in the course of the listing procedures of Egana, but that is a matter quite unrelated to the exercise of Mr Unruh's best endeavours obligation in the MoA. Mr Unruh duly paid the price for his failure to disclose the German conviction by the determination of his Service Agreement, and his resignation as a director of Egana.

236. I have already referred to the testimonial letter received by Mr Unruh from Trinitévan Doorne. It is right that at the time that letter was written neither the German conviction nor the Italian proceedings had reared their heads at the instigation of Benetton. But there was not a single contemporary document, at any stage of the proceedings, from the testimonial letter in December 1992, right through until the FSA, at the end of March 2000, a period of over 7 years, in which any contrary view was expressed.

237. Most significantly, there was no evidence from Mr Conway. Mr Conway had the control of the arbitration right from the very beginning when instructed by Mr Unruh following Benetton's repudiation of the Licence Agreement on 24 June 1991, to the final settlement document on 31 March 2000. Throughout the whole of the time Mr Conway worked closely with Mr Unruh. The principles relating to a party's failure to tender witnesses at trial was set out by Lord Diplock in Herrington v British Railways Board [1972] AC 877 at 930:

"The appellants, who are a public corporation, elected to call no witnesses, thus depriving the court of any positive evidence as to whether the condition of the fence and the adjacent terrain had been noticed by any particular servant of theirs or as to what he or any other of their servants either thought or did about it. This is a legitimate tactical move under our adversarial system of litigation. But a defendant who adopts it cannot complain if the court draws from the facts which have been disclosed all reasonable inferences as to what are the facts which the defendant has chosen to withhold."

238. The only expression as to the efforts applied by Mr Unruh in the exercise of his obligations under the MoA is a strong testimonial in his favour. In the absence of any suggestion to the contrary from Mr Conway, the person closest to the conduct of the arbitrations, there is simply no evidence at all upon which any inference could be drawn that Mr Unruh did not do other than use his best endeavours in the assistance he gave. I am satisfied that in giving assistance, as he was required pursuant to the MoA, Mr Unruh did use his best endeavours.

Is consideration required for Egana to be liable:

239. I have held that by virtue of the doctrine of Estoppel by Convention, Egana are prevented from denying that they had entered into an agreement with Mr Unruh to pay the Special Bonus. Mr Pun contends that there could be no such agreement for there was no consideration for such an agreement.

240. In my view this argument must fail for two reasons. First, the application of the doctrine prevents a denial of the agreement, and accordingly a denial of the examination of the circumstances of the agreement. Second, plainly, there was good consideration. Egana had bought ESCT. In January 1995, ESCT's arbitration was still underway and Mr Unruh's services were still required. Any service to ESCT was a service to its parent, Egana. The plain consideration for such an agreement is Mr Unruh's promise to give assistance, in return for Egana's promise to pay the Special Bonus.

Mr Seeberger's obligation to procure Egana to enter into documentation to pay the Special bonus:

241. This argument was based upon cl. 7 of the MoA. It must be right, that with the termination of Mr Unruh's position as a director of Egana, he no longer had any ability at all to procure Egana to enter into documentation to pay the Special Bonus. The suggestion that because Mr Unruh himself did not take steps to procure Egana to enter into documentation, he is barred in some way from pursuing Mr Seeberger on his obligation, must be without foundation.

242. Having found that Mr Seeberger is liable to pay the Special Bonus in the absence of Egana entering into documentation to pay the Special Bonus it becomes unnecessary to consider this part of the claim.

No monetary compensation from the Arbitration:

243. It was contended, somewhat faintly, that the terms of the FSA, in which each side "adheres to its various litigation positions and denies any liability to the other" (recital 2# and cl. 3), and that the FSA "negates the NAI 1325 award", (cl. 3), somehow meant that the sum received by ESCT did not constitute "monetary compensation received by ESCT in respect of the Arbitration" as that expression is used in the MoA.

244. I simply do not understand the argument. Neither the adherence to prior litigation positions, the denial of liability, nor the negation of the NAI 1325 award, in any way detract from the fact that were it not for the engagement of the parties in arbitration there is no reason whatsoever for Benetton to pay any money at all to ESCT. No suggestion was made that there was any other reason for payment. Whether the monetary compensation came as a result of a formal award by Arbitrators, or by way of the settlement of litigation between parties, it is simply beyond argument that the monetary compensation was received in respect of the arbitration. The argument was artificial and without foundation in reality. I reject the argument.

The apportionment of the sum received under the FSA:

245. A considerable amount of time was spent in submission on the issue of the apportionment of the sum paid under the FSA in settlement of the Arbitration. Those submissions were predicated on the basis that if Mr Unruh was entitled to any Special Bonus, it should be calculated only on the amount of monetary compensation received in relation to NAI 1325. The argument then went that there could be no portion of the sum received which could be attributable to NAI 1352.

246. The conclusion that I have reached on the interpretation of the expression "the Arbitration", renders a conclusion on the issue of apportionment entirely unnecessary. I am satisfied that the expression "the Arbitration" refers to both NAI 1325 and NAI 1616.

247. For the sake of completeness, and in case I am wrong on that conclusion, I shall briefly express my view on the apportionment issue. It is here that the position of both Mr Seeberger and Egana as to the ESCT documents first becomes relevant. The primary position taken by both Mr Seeberger and Egana was that Mr Unruh was not able to prove on the balance of probabilities that any of the monetary compensation received under the FSA was attributable to NAI 1325.

248. If there was any apportionment between NAI 1325 and NAI 1616, it would have undoubtedly been revealed in an examination of the documents that must have been generated between October 1999, when the issue of settlement was first raised, and March 2000, when the FSA was finally concluded. What both Mr Seeberger and Egana were in effect saying was: "We have the documents in our possession or power that may resolve this issue, we decline to give them to you, and the court must decide the issue in our favour." It is not necessary to resort to the maxim Omnia Praesumutur Contra Spolitorem to reject that proposition. It would be quite unjust to allow a defendant, who was obliged to give proper discovery, and has failed to give that discovery, to rely upon the absence of evidence as the basis for a finding in his favour.

249. The existence of the maxim reinforces the conclusion that in the whole of the circumstances justice would require, that should an apportionment be required, the whole of the sum received by way of monetary compensation should, as a consequence of the defendant's attitude to the documents, be attributed to NAI 1325.

250. A further argument to the same end, pleaded by both Mr Seeberger and Egana, was to the effect that the sum paid under the FSA was not monetary compensation to ESCT, but a payment to, and for the benefit of, Egana in respect of the "decreased value in its shareholding in ESCT". Sensibly this argument was not pursued in submissions. No explanation at all was given by Mr Wong as to why the Board of Egana should have discussed the matter in those terms when settlement was being considered in October 1999. It was certainly not a matter that appeared to have had any consideration by anyone prior to October 1999. It was not a matter that had featured at all in the pleadings in either NAI 1352 or NAI 1616. There may well have been taxation advantages in couching the matter in that way, but none was suggested to me. An inference arises that the matter was expressed in that way in the Board minute as part of a device to ensure that Mr Unruh would not be entitled to the Special Bonus. It is not necessary for me to make any decision on the point.

Mr Seeberger's counterclaim for US$280,000:

251. In 1982, Mr Loeffler had become a shareholder and director of ESCT. In October 1987, Mr Loeffler had transferred his shares in ESCT to Mr Unruh. In 1988, Mr Loeffler ceased to be a director of ESCT. Notwithstanding that Mr Loeffler had ceased formal involvement in ESCT he remained associated with Mr Unruh. He appears from time to time to have been a source of either cash advances to Mr Unruh, or a guarantor in respect of bank advances made to either Mr Unruh or ESCT. As part of the first stage of the acquisition by Mr Seeberger of ESCT, Mr Seeberger had acquired 51% of the shares in ESCT, and Mr Seeberger and Mr Unruh had each appointed three directors to the Board of ESCT. Mr Loeffler was named as an arbitrator in the event that any dispute arose between directors. There was no evidence that he had been called upon in that capacity.

252. On 7 April 1991, prior to the formal involvement of Mr Seeberger in ESCT, Mr Unruh and Mr Loeffler both signed a document, in the German language, entitled "Debt Acknowledgement". The document referred to three previous documents, and appears to have replaced those. In the first clause, Mr Unruh acknowledged cash loans from Mr Loeffler in the sum of CHF400,000, which were to bear interest at 1% per month until repayment was completed. Clause 2 made provision for the assumption by Mr Loeffler of a guarantee of an ESCT bank facility with Swiss Bank Corporation, in the sum of US$1,400,000.00. In Clause 3, Mr Unruh acknowledged a debt to Mr Loeffler for repayment obligations not carried out, in the sum of CHF60,000.

253. Mr Seeberger's pleaded case was first, that Mr Loeffler requested Mr Unruh to repay the facility to Swiss Bank Corporation so as to release the personal guarantee, and second that Mr Loeffler requested Mr Unruh to repay the sum of US$500,000 which Mr Unruh owed Mr Loeffler. The pleading then alleged that Mr Unruh failed to repay Mr Loeffler, and that Mr Unruh requested Mr Seeberger to settle Mr Unruh's personal indebtedness to Mr Loeffler, to repay the facility to the bank so as to release the personal guarantee of Mr Loeffler. Finally it was alleged that in the middle of 1994, Mr Seeberger paid to Mr Loeffler US$280,000 on behalf of Mr Unruh. On the basis of these pleadings, Mr Seeberger says that Mr Unruh should pay him US$280,000.00.

254. In the light of the terms of the Debt Acknowledgement document, this was a somewhat confused pleading. In the light of the evidence the matter simply became more confusing.

255. The liability secured by the bank guarantee was a liability of ESCT. On the face it, if anything had to be paid to release the bank guarantee, payment would have to be made to the bank. Mr Loeffler acknowledged in evidence that he had not had to pay anything to the bank pursuant to his guarantee, so no liability in that respect could have arisen in Mr Unruh. In any event, were there any liability to reimburse Mr Loeffler, any such liability would be a liability of ESCT. There was nothing in the Debt Acknowledgment document that made the liability in respect of the bank guarantee a liability of Mr Unruh personally. It was plain from Mr Loeffler's evidence that he was quite unable to distinguish between ESCT, and Mr Unruh personally, and he did not in his own mind treat the two as separate entities.

256. As I understand the case, notwithstanding the confused nature of the pleadings and the evidence, it is now said that the sum of US$500,000.00, which it is alleged Mr Loeffler asked Mr Unruh to pay, represents the debt of CHF400,000.00 plus interest. If that is right, then I cannot understand why it was considered necessary to plead the matters relating to the bank guarantee. Mr Seeberger says that Mr Unruh failed to repay Mr Loeffler as requested. Mr Seeberger said that he then paid US$280,000.00 to Mr Loeffler in "around the middle of 1994". Mr Seeberger counterclaims, seeking that sum from Mr Unruh.

257. Both Mr Seeberger and Mr Loeffler had a great deal of difficulty in relating the sum of US$280,000.00 to the debt of CHF400,000.00. The agreed evidence was that in the middle of 1994, the exchange rate between the US dollar and the Swiss franc ranged between US$1.00 = CHF1.26 to CHF1.57. The original advance of CHF400,000.00 carried interest at 1% per month, or 12% per annum, a sum of CHF48,000 a year. The advance was acknowledged in April 1991, and the payment relied upon made sometime after June 1994, a total in excess of three years, at least CHF150,000 in interest. Consequently by the middle of 1994, the total amount outstanding stood at some CHF550,000.00. On the range of exchange rates that amounted to US$350,300 to US$436,500.

258. Neither Mr Seeberger nor Mr Loeffler were able to explain how a debt of CHF550,000, should have been satisfied by a payment of US$280,000.00. On the basis of the range of exchange rates, the sum of US$280,000.00 represented a range of CHF352,800.00 to CHF439,600.00, well short of the amount due.

259. Mr Seeberger presented no evidence at all of the fact of the payment that he had made, other than his own assertion and that he called Mr Loeffler to give evidence. It is right that Mr Loeffler said that he received a payment from Mr Seeberger sometime in 1994. At that time it was Mr Loeffler's practice to take an extended annual summer cruise on his yacht in the Mediterranean. The evidence was that he would depart for that cruise in June, returning home in about October. His evidence was that he recalled that when he returned home in about October 1994, he found that there had been a substantial payment made into his bank account, in US dollars. He was very pleased. But he had no recollection as to how much the sum was, where it had come from, or precisely who had paid it.

260. Mr Loeffler was not able to say who made the payment to him, Mr Seeberger, or ESCT, nor when it was made, nor was he able to say just what debt was repaid. While I am satisfied that a payment was made to him, I cannot be satisfied from his evidence, either as to the amount paid, or who made the payment, or why the payment was made. Of course if the payment was made by ESCT, that would give no right of action to Mr Seeberger against Mr Unruh.

261. This aspect of the counterclaim has been in Mr Seeberger's mind from the very first day in which Mr Unruh made demand for the Special Bonus. It may be that this is the sum described in Mr Seeberger's solicitors letter of 29 June 2000, as "a debt arising from a payment made to Mr Loeffler of a sum in excess of US$750,000.00." There was no explanation from Mr Seeberger as to why the sum should have reduced to only US$280,000 by the time the counterclaim was filed. Notwithstanding that the claim was made over four years ago, and was contained in a counterclaim filed in September 2000, that has been vigorously resisted by Mr Unruh throughout, Mr Seeberger produced no documents whatsoever to substantiate his assertion of a payment of US$280,000.00.

262. When first asked to explain the absence of any banking documents to substantiate his claim, and his failure to make inquiries of the bankers through whom he allegedly made payment to Mr Loeffler, Mr Seeberger said that the bank in question was the Union Bank of Switzerland (UBS), which was no longer in Hong Kong. I do not need evidence to know that UBS is a substantial bank. The proposition that the appropriate information could not be obtained, or that the bank would not be able to respond to an inquiry in relation to such a substantial payment in 1994, is simply not believable.

263. When Mr Seeberger was asked in cross-examination why he had not made such inquiries his response was: "Why should I?". The answer is simple. He should because he is the plaintiff in the counterclaim and as such carries the burden of proof that he has made the payment he alleges, to the person he alleges, for the purpose he alleges. Having regard to Mr Loeffler's evidence and in the absence of banking documents, I cannot be satisfied on the balance of probabilities that it was Mr Seeberger personally, and not ESCT, that made payment to Mr Loeffler. I cannot be satisfied on the balance of probabilities of the amount which was paid. I cannot be satisfied on the balance of probabilities of the purpose for which the payment was made.

264. There may well have been a liability on Mr Unruh to recompense Mr Seeberger in relation to a payment made to Mr Loeffler. But the evidence led before me falls well short of even the civil standard of proof in establishing any right to a judgment in favour of Mr Seeberger against Mr Unruh. Mr Seeberger's counterclaim for the sum of US$280,000.00 must fail.

Egana's counterclaim and set-off:

265. Under the DoA, Mr Unruh acknowledged a specific right, by way of set-off, to Egana in sum of HK$752,406.50. In addition, he acknowledges liability for a further set-off in relation to 50% of certain legal and professional expenses. I am satisfied from the evidence that Mr Unruh's share of those expenses amounts to HK$939,137.70. The total set-off to which Egana is entitled is HK$1,691,544.20.

266. I have concluded that Egana is liable to Mr Unruh for payment of the Special Bonus. It follows, and the contrary was not argued, that if Egana were to make payment of the Special Bonus in pursuant to the DoA, Egana are entitled to set-off against the amount they are liable to pay the sum of HK$1,691,544.20. The consequence of my judgment is that Egana has been liable to pay the Special Bonus since April 2000. Had they paid the sum then, they would then have been entitled to the set-off. The consequence of Egana's action in not paying the Special Bonus is that they have had the use of the funds, in the same way in which they would, had they paid the Special Bonus and made the set-off.. In those circumstances they are not entitled to interest on the amount of the set-off.

267. In the alternative, Egana sought the same sum of HK$1,691,544.20 by way of counterclaim. Strictly, this issue arises only should Egan not be liable to pay the Special Bonus.

268. Mr Pun appreciated the very great difficulties he had in that claim when I drew his attention to the fact that the DoA contained an acknowledgement of debt to ESCT, the right of set-off to Egana, but no direct acknowledgement of a debt to Egana. That being case Egana appeared to have no direct right of action against Mr Unruh for the sum, a direct right of action being an essential element of a counterclaim. Mr Pun was obliged to acknowledge that no demand had been made under the Howard Lau Deed, which had expired, but which otherwise may have given a direct right of action to Egana.

269. In those circumstances Mr Pun sought refuge in a very late amendment, which sought to base a direct right in Egana to claim against Mr Unruh pursuant to the terms of the DoI, made in September 1992. It is clear from the provisions of cl. 6 of that document however that the liability referred to there could only be arrived at following an assessment as to whether or not there had been a depletion or diminution or reduction in the value of any assets of the Egana Group arising from ESCT's Italian operations. Those events must have taken place within a particular time frame. The proposed amendment opened up areas which simply had not been traversed in evidence, and I decline to allow the amendment.

270. The DoA, upon which the counterclaim by Egana was based, creates no right of action in Egana. There must be judgment for Mr Unruh on the counterclaim by Egana. In these circumstances, it is not necessary for me to consider the argument based upon res judicata.

Mr Seeberger's claim for share value diminution:

271. This claim is based upon two allegations. First it is said that Mr Unruh was in breach of his obligation to use his best endeavours. The pleading is a repetition of the pleading made in opposition to the obligation to pay the Special Bonus, and centred solely upon the alleged failure to disclose the German conviction the Italian proceedings and conviction. Next it is said that by reason of that breach, ESCT and Egana were pressured into acceding to Benetton's settlement proposal thereby recovering significantly less compensation from either NAI 1325 or NAI 1616.

272. I have already dealt with the question of whether or not Mr Unruh used his best endeavours in assisting ESCT in the conduct of the arbitrations. For the reasons that I have already given I have concluded that in fact Mr Unruh did use his best endeavours, and that ESCT and Egana were aware of both convictions at least 2 years before they were used by Benetton.

273. There was not a single shred of evidence to substantiate the assertion that either ESCT or Egana were under any pressure to accept the settlement proposal by virtue of circumstances arising from Mr Unruh's German conviction or the Italian proceedings and conviction. Yet again, Mr Seeberger did not put before the court any of the ESCT documents surrounding the negotiations of the settlement. Again, he seeks to say that ESCT was under pressure, but that he will not disclose the documents which might establish that pressure or establish that there was no pressure. As I said in the ruling on the subpoena issue, the proposition only needs to be stated to show its injustice and its falsity. No evidence was called to establish that, either ESCT had refused to give him the documents, or that there was any good reason why they should not be disclosed.

274. The only contemporary document in relation to the circumstances in which the settlement was reached was the minutes of the meeting of directors on 19 October 1999. It is right that the directors recognised that a settlement would save further time and cost in litigating and defending various court proceedings and the arbitration, and had a higher certainty of receiving a lump sum compensation earlier. Those matters do not demonstrate any particular pressure, aside the normal exigencies and consequences of litigation.

275. There is nothing whatsoever in the Board minutes to indicate that Egana felt under any "pressure" by virtue of Mr Unruh's German conviction or the Italian proceedings and conviction. Those matters were simply not mentioned. Having regard to the judgments of the Netherlands Court of Appeal, firmly rejecting the relevance of those issues, and the state of the various court challenges, that is not surprising. At the time of the Board meeting the position was that ESCT had an award in its favour in NAI 1325 for a sum in excess of US$23 million, and had substantially successfully resisted all Benetton's attempts in the Dutch courts to overturn that decision. While it is right that, technically, further appeals were available to Benetton, ESCT had every reason to believe that Benetton would soon run out of steam, if not appeal opportunities.

276. On the eve of a hearing in NAI 1616 ESCT were in a strong position. They had the award in NAI 1325, and had demonstrated to Benetton that they could win in the courts as well. It was in those circumstances that an approach was made by Benetton to settle. That the approach was made by Benetton, speaks for itself. It was Benetton who were feeling the pressure, not ESCT. It was of course sensible, for the time and costs reasons properly taken into account by the Board of Egana, to give instructions to try and settle the matter. It is rarely that litigation is better taken to trial rather than to settled.

277. I gained no assistance on this aspect of the claim from Mr Wong's labourious explanation of the figures in the 19 October 1999 Board minute recording the decision to settle. At the end of the day Mr Wong accepted that there was nothing particularly scientific as to the approach made, and that essentially any decision on the settlement of complex litigation is an arbitrary matter.

278. Far from establishing that ESCT or Egana were under pressure, the evidence establishes quite the contrary. I have no hesitation at all in concluding, not only that Mr Unruh did use his best endeavours in giving his assistance in the arbitration, but that the settlement was not as a result of any pressure at all arising from either Mr Unruh's German conviction or the Italian proceedings and conviction. The fundamental basis upon which Mr Seeberger's counterclaim for diminution in share value relies fails. There must be judgment for Mr Unruh on that counterclaim.

The amount of the Special Bonus:

279. The sum paid in settlement by way of the FSA, the monetary compensation received in the Arbitration, was expressed in both United States dollars and Netherlands guilders. Mr Seeberger and Egana have elected not to disclose any documents from ESCT, and accordingly there is no evidence before me either as to the reasons why very precise sums were calculated in both United States dollars, and Netherlands guilders, to comprise the sum paid pursuant to the FSA. Whether or not some portion of the sum paid was attributable to costs is in any event irrelevant. The MoA provides in cl. 5:

"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."

It is plain therefore, that the amount of the Special Bonus must be calculated based upon the gross amount provided for in the FSA, whatever that amount may be.

280. Although the FSA was entered into in March 2000, the single European currency, the Euro, had commenced in January 1999. There was no explanation in the evidence as to why Netherlands guilders were used as the currency, rather than the Euro. In the absence of evidence I draw the inference that parties simply continued using currencies that had been previously used in the papers. There was no evidence as to appropriate exchange rates between the US dollar and Netherlands guilders, so the calculation of the Special Bonus must be undertaken in both those currencies. The sum received by way of monetary compensation was US$42,086,470.69 and NLG2,902,881.55. The sum of US$10,000,000 must first be deducted. Mr Unruh is entitled to 10% of the sum of US$32,086,470.69; that is US$3,208,647.02, or HK$25,027,447.13, and NLG290,288.15.

Judgment:

281. Mr Seeberger's obligation to pay the Special Bonus arose pursuant to the proviso to cl. 5 of the MoA, if Egana did not pay it within 28 days of the receipt of the monetary compensation in respect of the arbitration. As Egana failed to pay the Special Bonus within that time, Mr Unruh is entitled to judgment against Mr Seeberger.

282. There will be judgment for Mr Unruh against Mr Seeberger in the sum of HK$25,027,447.13, and NLG290,288.15. There will be a stay of execution upon that judgment for 28 days, to allow Egana to pay. Mr Seeberger personally, is not entitled to the set-off under the DoA, and if he is required to pay, he must pay the full sum of the Special Bonus. In the event that Egana does not pay within 28 days, Mr Unruh may execute the judgment against Mr Seeberger. There will be judgment for Mr Unruh against Mr Seeberger on both Mr Seeberger's counterclaims.

283. There will be judgment for Mr Unruh against Egana for the sum of HK$23,335,902.23 and NLG290,288.15, being the appropriate calculation of the Special Bonus, less the set-off. There will be judgment for Mr Unruh on Egana's counterclaim.

284. Mr Unruh has been entitled to these sums since 1 June 2000. I direct that the appropriate exchange rates be adopted will be the exchange rate as between the Euro and Netherlands guilders, and as between the Euro and the US dollar, as at 1 June 2000.

285. The statement of claim sought interest on a compound basis. No submissions were made in this respect and there is nothing in the MoA to justify an award of compound interest. The MoA is silent on interest, but required payment of the Special Bonus within 28 days of the date upon which ESCT received the compensation giving rise to the obligation to pay the Special Bonus. The FSA was signed on 31 March 2000, and by its terms required simultaneous payment of the compensation. Egana have had the use of the funds since 31 March 2000.

286. Neither Egana nor Mr Seeberger chose to tell Mr Unruh, as they should have, of the terms of the settlement. Mr Unruh sought payment of the Special Bonus immediately he learned of the settlement, in polite terms. He was ignored, and then met with a solicitor's letter which over-inflated a counterclaim subsequently made, and made what can only be described as gratuitous threats that any litigation would embarrass Mr Unruh. Exercising my discretion, I award interest to Mr Unruh on the amounts for which he has judgment, at judgment rate, from 1 June 2000, until the date of payment.

Costs:

287. Mr Unruh has succeeded on every argument he has made, with the exception of the contention for the oral agreement. Egana has succeeded in its argument for a set-off, but not its counterclaim based on the same amount. There will be an order nisi that Mr Unruh will have his costs, on a party and party basis, together with all costs reserved, on the claim and all counterclaims, against both defendants. That order will become absolute in 14 days.

288. This matter has been prolonged and complex, but I have been greatly assisted throughout by counsel on all sides. The reduction of the submissions to writing, the quality of those submissions, and the sensible confinement of oral submissions to the central points in issue, has made my task much easier. That has also allowed me to give judgment quickly following the completion of the trial. I express my gratitude for that assistance.