SIEGFRIED ADALBERT UNRUH v. HANS-JOERG SEEBERGER AND ANOTHER

HCA6641/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.6641 OF 2000

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D E C I S I O N

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Disputes

1. The 1st defendant has at all material times been a director and the chairman of the 2nd defendant. In 1992, the plaintiff sold his shares in Eco Swiss China Time Limited ("ESCT") to the 2nd defendant whereupon ESCT became a wholly owned subsidiary of the 2nd defendant and the plaintiff became a director of the 2nd defendant. The terms of the sale were set out in, inter alia, a Memorandum of Agreement dated 19 September 1992 made between the plaintiff and the 1st defendant ("the Agreement").

2. At the material time, ESCT had a licence agreement with Benetton. Before the sale of the plaintiff's shares in ESCT, Benetton sought to back out from the licence agreement. ESCT then commenced arbitration proceedings against Benetton. It was envisaged that ESCT might obtain monetary compensation from Benetton in respect of the arbitration proceedings. The Agreement thus made the following provisions :

"4. LITIGATION

(A) [The plaintiff] hereby undertakes to and agrees with [the 1st defendant] to use his best endeavours to assist ESCT in connection with the Arbitration...

...

(D) All payments made under the covenants contained in this Memorandum of Agreement shall be made gross, free of any rights of counterclaim or set-off and without any deductions or withholdings of any nature whatsoever...

5. SPECIAL BONUS

Each party hereby agrees that he shall exercise all rights and powers that he may have, in his capacity as a director of [the 2nd defendant] (subject to his fiduciary duties in that regard) or otherwise, to ensure that all necessary documentation (which shall be prepared by [the 2nd defendant's] legal advisers) shall be entered into by all relevant parties to effect the payment of a special bonus by [the 2nd defendant] to [the plaintiff] in the following circumstances, provided that it appears (on the basis of professional advice received by [the 2nd defendant]) to be lawful and prudent for [the 2nd defendant] to do so as a company listed on the Stock Exchange, such special bonus to be calculated on the following basis:-

(a) in the event that any monetary compensation is received by ESCT in respect of the Arbitration, where the amount of such compensation is less than US$10,000,000, there shall be no such special bonus payable to [the plaintiff]; and

(b) where the amount of any such monetary compensation received by ESCT is in excess of US$10,000,000 then the special bonus payable to [the plaintiff] shall amount to 10 per cent. of the amount of such compensation less US$10,000,000.

Provided that, in the event that, in accordance with the provisions of this Clause, [the 2nd defendant] dose not pay the amount of any special bonus which would otherwise due to [the plaintiff] pursuant to paragraph (b) of this Clause, then [the plaintiff] shall pay the amount of any such special bonus in case to [the plaintiff]. For the avoidance of doubt any special bonus payable by either [the 2nd defendant] or [the 1st defendant] shall be paid within 28 days of the date upon which ESCT shall receive the compensation giving rise to the obligations to pay such special bonus...

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."

3. In short, the plaintiff would use his best endeavours to assist ESCT in connection with the arbitrations proceedings involving Benetton. The 1st defendant and the plaintiff, in their capacity as directors of the 2nd defendant, would, subject to their fiduciary duties to the contrary, procure the 2nd defendant to pay a special bonus to the plaintiff in accordance with the formula and conditions specified in Clause 5. If the 2nd defendant did not pay the special bonus to the plaintiff, the 1st defendant would become personally to do so. When the special bonus was to be paid was specified. Payments of the special bonus were not subject to any counterclaim or set-off.

4. The plaintiff, ESCT and the 2nd defendant executed a deed of acknowledgment of debt on 5 January 1995 ("the Deed"). Clause 2 of the Deed reads :

"Pursuant to Clause 5 of [the Agreement], [the plaintiff] is to receive a special bonus of ten (10) percent in respect of monetary compensation less United States Dollars Ten Million (US$10,000,000) where such compensation to ESCT is in excess of United States Dollars Ten Million (US$10,000,000) from any successful outcome regarding the Benetton Arbitration ('Special Bonus'). Notwithstanding with (sic) any contrary provisions as provided in [the Agreement], [the plaintiff] hereby agrees and confirms that [the 2nd defendant] 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 [the 2nd defendant]. Indebtedness meant the plaintiff's various sums due to ESCT as described in the preamble of the Deed."

5. The plaintiff complained that no special bonus had been paid to him despite the fact that Benetton had paid a sum exceeding US$10,000,000 as monetary compensation in respect of the arbitration proceedings. In July 2000, he commenced the present action against the 1st defendant. In November 2001, the 2nd defendant was joined. Trial is due to take place in January 2004.

6. The plaintiff's pleaded case in its Re-Re-Amended Statement of Claim against the 2nd defendant can be summarised as follows. By virtue of the Deed, the 2nd defendant acknowledged that it was liable to pay the plaintiff the special bonus arising from the arbitrations 1325 and 1616 as defined in the pleading: paragraphs 10(1) and (2). (The said arbitrations all involved Benetton.) The 1st defendant acknowledged that the 2nd defendant was liable to pay the plaintiff the special bonus and promised and represented that the 2nd defendant or in default, the 1st defendant personally would pay the said bonus to the plaintiff in the event of receipt by ESCT and of the 2nd defendant monetary compensation amounting to a sum in excess of US$10 million in respect of Arbitration 1325 and/or Arbitration 1616 : paragraph 11. Benetton had made a payment of monetary compensation in respect of the above arbitrations in the excess of US$10 million to ESCT or for its benefit: paragraph 15. In the premises, pursuant to the Deed and by virtue of the matters pleaded in paragraphs 11 and 15, the 2nd defendant became liable to pay the plaintiff the special bonus : paragraph 16. The plaintiff is also entitled to claim interest against the 2nd defendant : paragraph 18. Trial is due to take place in January 2004.

Applications

7. By a summons dated 31 May 2003, the 2nd defendant applied for an order :

(1) that under Order 18, rule 19 of the Rules of the High Court paragraphs 10(1), 10(2), 16 (first sentence) and 18 (reference to it) of the Re-Re-Amended Statement of Claim be struck out; or alternatively; and

(2) that under Order 14A of the Rules of the High Court the question whether on a proper construction of the Deed had acknowledged that it was liable to pay the plaintiff a special bonus as alleged in paragraph 10(1) of the Re-Re-Amended Statement of Claim be determined and if that question is answered in the negative, that the action against the 2nd defendant be dismissed.

I will first deal with the striking out application.

Striking out application

8. It can be readily seen from the Re-Re-Amended Statement of Claim that the plaintiff is relying on firstly, the Deed and secondly, the matters pleaded to in paragraph 11 to mount his claims against the 2nd defendant.

9. The first plea relates to the proper interpretation of Clause 2 of the Deed. Mr Chan, SC, for the 2nd defendant, submitted that the clause does not possibly support any reasonable cause of action against the 2nd defendant. In summary, his submissions are as follows. It is self-evident from Clause 5 of the Agreement that it was anticipated that the 2nd defendant might pay the special bonus subject to professional advice that it would be lawful and prudent to do so. However, the obligation to pay the special bonus rests primarily with the 1st defendant. The only conceivable cause of action against the 2nd defendant is an alleged acknowledgment by the 2nd defendant that it was liable to pay the special bonus pursuant to the Deed. But the Deed shows that it was an acknowledgement by the plaintiff of his debts owed to ESCT. The 2nd defendant was made a party to the Deed because the Agreement did not allow any set-off against the special bonus if it were to be paid. By virtue of Clause 2 of the Deed, the 2nd defendant would then be entitled to set off the plaintiff's indebtedness due to ESCT. Clause 2 does not amount to any admission of liability on the part of the 2nd defendant to pay the special bonus to the plaintiff.

10. Mr Burns, for the plaintiff, first submitted that the Deed must be construed in light of its full factual matrix, including the terms of the Agreement and/or by reason of the subsequent acknowledgment, promise or representation by the 1st defendant on behalf of the 2nd defendant and himself. In this connection, he relied on the matters pleaded in paragraph 11 of the Re-Re-Amended Statement of Claim. He further submitted that the purpose of the Deed could not have been solely to reflect the indebtedness of the plaintiff to ESCT. Had that been the case, there would have been no need for the 2nd defendant to do more than merely record the plaintiff's acknowledgment of his indebtedness to ESCT. It is apparent from Clause 2 of the Deed that an additional purpose was to acknowledge, on the one hand, the 2nd defendant's obligation to pay the special bonus to the plaintiff, the word "payable" being used to describe the obligation, and on the other hand, the ability of the 2nd defendant to set off the plaintiff's indebtedness to ESCT against the special bonus payable by the 2nd defendant. The set-off provision only makes sense if it is accepted that the 2nd defendant had or had assumed a liability to pay the special bonus to the plaintiff and that the 2nd defendant had promised to pay it. Although the pleaded case was not couched in such clear terms, Mr Burns made it clear in the course of his submissions that the plaintiff's claim in this respect is contractual.

11. I fully accept that Clause 2 of the Deed cannot be construed in vacuo. See Amalgamated Investment & Property Co. Ltd v. Texas Commerce International Bank Ltd [1982] QB 84. When one turns to the relevant factual matrix, one can identify the following matters as being pertinent. When the Agreement was made, arbitration proceedings with Benetton were already in place. Assistance from the plaintiff in respect of the arbitrations was required, which he promised under the Agreement to use his best endeavours to render. It would appear that he did render assistance in connection with those arbitration proceedings. It was envisaged that ESCT would receive monetary compensation from Benetton. Monetary compensation thus received by ESCT was arguably for the benefit of the 2nd defendant as ESCT had already become the subsidiary of the 2nd defendant. It was envisaged in the Agreement that the plaintiff was to be paid a special bonus by the 2nd defendant or in default by the 1st defendant for his assistance in the arbitrations. At the same time, the plaintiff owed various sums to ESCT. The Deed was made in this context to enable the 2nd defendant to set off those sums against the special bonus payable to the plaintiff.

12. In my view, it is arguable that upon a proper interpretation of Clause 2 of the Deed in light of all the relevant circumstances, the 2nd defendant had assumed a contractual obligation to pay the special bonus to the plaintiff in return for his assistance in respect of the arbitrations when they resulted in payments of monetary compensation by Benetton to ESCT, which was for the benefit of the 2nd defendant, subject to the conditions imposed in Clause 5 of the Agreement and the set-off in Clause 2.

13. The plaintiff's pleaded case in this respect obviously needs improvement. The deficiencies can however be cured by proper amendments. It is not a case for striking out.

14. I turn to the next plea, which relates to the matters pleaded in paragraph 11 of the Re-Re-Amended Statement of Claim. Mr Burns argued that the 1st defendant made the acknowledgement, promise and representation on behalf of the 1st defendant. It is unfortunate that this was not clearly borne out as the paragraph now stands. In the event, Mr Burns had to rely on paragraph 2 of the Re-Re-Amended Statement of Claim which alleged that the 1st defendant is and has at all material times been a director and chairman of the 2nd defendant. In my view, this indirect way of pleading is hardly desirable. But the defect is curable by a proper amendment. According to Mr Burns, the claim in paragraph 11 is based on contract or misrepresentation. Again that is not clearly pleaded. Amendments to cure the defects are therefore required. That being the position, it is not a case for striking out.

15. For these reasons, I will not accede to the striking out application.

16. Mr Burns in the course of his submissions alluded to a possible cause of action based on estoppel. In light of my ruling above, it is not necessary to deal with this aspect any further. It is a matter for the plaintiff to decide whether to amend the pleadings to include such a plea. I do not wish to express any view on it at this stage.

17. I now turn to the application under Order 14A.

Order 14A application

18. This application is successful only if the court can come to a definitive view of the interpretation of Clause 2 of the Deed in favour of the 2nd defendant. But as I have just demonstrated above, that is not the case. It follows that this application must fail as well.

Conclusion

19. For the above reasons, I will dismiss both the striking out application and that under Order 14A. I will direct the plaintiff to take out a summons to amend the Re-Re-Amended Statement of Claim to deal with the deficiencies identified above within 14 days returnable before me. I will hear the parties on the proposed amendments and the question of costs of the present summons.

Remarks: