Chief Justice Andrew Li
I agree with the judgment of Justice Ribeiro PJ.
Justice Bokhary PJ
I agree with the judgment of Justice Ribeiro PJ.
Justice Chan PJ
I have read the judgment of Justice Ribeiro PJ in draft. I agree entirely with his comprehensive analysis and conclusions. I too would dispose of these appeals as proposed by him in the concluding paragraph of his judgment.
Justice Ribeiro PJ
A. The parties and the issues
On 19 September 1992, the plaintiff (“Mr Unruh”) entered into a Memorandum of Agreement (“the MoA”) with the 1st defendant (“Mr Seeberger”). The MoA provides that under certain circumstances, Mr Unruh is to become entitled to payment of a “Special Bonus”. Mr Unruh contends that such entitlement has arisen and, not having been paid, brought proceedings to recover the same from Mr Seeberger and from the 2nd defendant (“Egana”, formerly called Haru International (Holdings) Limited). Prior to its flotation, Egana was owned by Mr Seeberger. He remains a substantial shareholder.
Mr Unruh’s claim is resisted by Mr Seeberger on the basis that, properly construed, no entitlement to a Special Bonus (or to an unapportioned Special Bonus) arises under the MoA. He also alleges that Mr Unruh failed to comply with a “best endeavours” obligation in the MoA said to operate as a condition precedent to any entitlement. He furthermore adopts the argument, advanced on Egana’s behalf, that the MoA is a champertous agreement and therefore void and unenforceable.
In a careful and comprehensive judgment, Deputy High Court Judge Saunders (as he then was) rejected all of those arguments and held Mr Seeberger personally liable to pay the Special Bonus. He gave judgment against him in the sums of HK$25,027,447.13 and NLG290,288.15 with interest and costs. His judgment in this respect was unanimously upheld in the Court of Appeal.
As against Egana, which is not a party to the MoA, Mr Unruh relied at the trial on an oral contract allegedly made in late May or early June 1995 between himself and Mr Seeberger, with the latter acting on his own behalf and on behalf of Egana, whereby Egana took on the liability to pay Mr Unruh the Special Bonus, with Mr Seeberger remaining liable to pay if Egana were to default. The Judge rejected this part of Mr Unruh’s case and it was not pursued in the Court of Appeal.
Mr Unruh also contended at the trial that the doctrine of estoppel by convention applies so as to prevent Egana from denying its liability to pay him the Special Bonus, thereby entitling him to judgment against Egana. The Judge accepted that submission and adjudged Egana liable to pay Mr Unruh HK$23,335,902.23 and NLG290,288.15 with interest and costs. The amount of the judgment was less than that awarded against Mr Seeberger because the Judge accepted that Egana could set-off certain debts owed by Mr Unruh, which set-off was unavailable to Mr Seeberger.
By a majority, the Court of Appeal upheld the Judge’s decision in respect of Egana. Stone J dissented, taking the view that liability on Egana’s part could not be made out. Leave to appeal to this Court was granted by Rogers VP pursuant to s 25 of the Hong Kong Court of Final Appeal Ordinance, Cap 484.
The primary issue concerning Egana on appeal is whether an estoppel by convention arises on the facts, and if so, whether it enables Mr Unruh to establish Egana’s liability to pay the Special Bonus. Secondly, Egana raises the issue of champerty. This is somewhat odd since the argument was directed at the enforceability or otherwise of the MoA, a question obviously relevant to Mr Seeberger’s case but not self-evidently relevant to Egana, which is not a party to that agreement and is not being sued on it. However, public policy may exclude the raising of an estoppel and Egana’s argument appears to be that Mr Unruh’s case on estoppel asserts a convention which effectively deems Egana to be a party to the MoA or to an equivalent agreement so that, by reason of the public policy against champertous agreements, such a conventional estoppel cannot arise.
The champerty argument will in any event have to be examined in relation to Mr Seeberger who relies on that ground in addition to contending that the decisions below should be overturned on grounds relating to the construction of, and the best endeavours obligation in, the MoA.
The Court is indebted to counsel for their assistance. Mr Unruh is represented by Mr Ashley Burns, appearing with Mr Alexander Stock. Mr Ambrose Ho SC appears with Ms Linda Wong for Mr Seeberger, and Mr Denis Chang SC appears with Mr Hectar Pun and Mr Newman Lam for Egana.
B. The main course of events
B.1. ESCT and the Licence Agreement
Eco Swiss China Time Limited (“ESCT”) is a Hong Kong company founded by Mr Unruh and at the material time was wholly-owned by him. Its business involved the production and distribution of watches and other time pieces.
On 1 July 1986, ESCT entered into a Licence Agreement (“the Licence Agreement”) with Benetton International NV (“Benetton”) and Bulova Watch Company Inc (“Bulova”). This permitted ESCT, on payment of royalties, to manufacture and service what were referred to as “fashion watches” using the name “Benetton by Bulova”. The Licence Agreement was for a term of eight years with the parties agreeing to enter into negotiations in good faith with a view to extending its term not later than one year before its expiration. It also contained an arbitration clause in favour of the Netherlands Arbitration Institute in The Hague (“the Tribunal”), applying the laws of the Netherlands.
It appears that exploitation of the Licence Agreement proved very lucrative. According to Mr Unruh, “Benetton by Bulova” became the second biggest selling watch brand in the world, achieving sales of over 5 million watches per year.
B.2 Acquisition of ESCT and commencement of NAI 1325
Mr Unruh and Mr Seeberger had known each other from previous dealings. In April 1991, Mr Seeberger was contemplating the flotation of Egana on the Hong Kong stock market. He began discussions with Mr Unruh for the acquisition of ESCT with a view to its being injected into Egana for the purposes of the flotation.
However, as these discussions were progressing, Benetton served a notice dated 24 June 1991 purporting to terminate the Licence Agreement. It alleged various wrongful acts on the part of ESCT, including the granting of an unauthorized sub-licence concerning alarm clocks; a failure to pay royalties; providing inaccurate books; understating sales figures to avoid paying royalties; and so forth. It also relied on the fact that, on 10 April 1991, a receiver had been appointed by a Milan court over an Italian subsidiary of ESCT called Eco Swiss SpA (“Eco Swiss”) which was alleged to constitute a substantial part of ESCT’s assets. The eight-year term of the Licence Agreement was due to run until 30 June 1994, so Benetton was purporting to cut it short by about three years.
ESCT rejected these allegations and, on 28 June 1991, commenced an arbitration against Benetton (which became known as Arbitration “NAI 1325”) before the Tribunal. In its Statement of Claim delivered on 2 March 1992, it specified as part of the relief sought in NAI 1325, a declaration that the Licence Agreement continued in full force; an order for Benetton to continue rendering performance, including the commencement of good faith negotiations for its extension; compensation for damages flowing from Benetton’s alleged repudiation “and related misconduct”. Alternatively, if the Licence Agreement were held not to continue in force, ESCT sought damages resulting from the alleged “repudiation and related misconduct, including lost future profits covering both the initial term and the foreseen extension of the Agreement, in an amount to be proven in a second phase of the proceedings.”
Mr Seeberger was not deterred by Benetton’s termination of the Licence Agreement from proceeding with ESCT’s acquisition. The parties entered into a series of agreements between August 1991 and September 1992 setting the terms upon which Mr Unruh was to part with his shares in ESCT, such terms evolving with each new agreement.
The net effect of these agreements (including the MoA, whose precise effect receives more detailed consideration below) as at 19 September 1992 may be summarised as follows:
Mr Unruh disposed of all his shares in ESCT in two tranches (sale of the second tranche being conditional). The first tranche consisted of 12,996 shares (representing 49.98% of ESCT’s issued capital), sold to Haru Pacific Limited (“Haru Pacific”, a company wholly owned by Mr Seeberger). Such shares were subsequently on-sold to Egana. The second tranche, comprising 13,004 shares, was sold to Egana with completion made conditional upon, among other things, a ruling in the arbitration which was satisfactory to Egana.
The consideration for each tranche of shares was the nominal sum of HK$1.00. However, as part of the package, Mr Seeberger granted Mr Unruh an option to purchase 2% of the issued shares of Egana for HK$13 million, which sum was to be provided by Egana to Mr Seeberger for Mr Unruh’s account. In addition, Mr Unruh received HK$1 million in cash and was given a further option to purchase an additional 2.5% of Egana’s share capital at the date of listing at the offer price. The first option was exercised, but not the second.
Mr Seeberger became a director and chairman of ESCT. Mr Unruh was made a director of Egana.
Under a Service Agreement between himself and Mr Seeberger, Mr Unruh was to receive a salary of $230,000 per month plus fringe benefits for a term of three years on his agreeing to devote his energies as executive director to the development of the Egana Group’s business.
He was also obliged under the MoA 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.”
Also under the MoA, Mr Seeberger was to pay Mr Unruh a Special Bonus involving a share in monetary compensation received by ESCT in respect of the Arbitration should such compensation exceed US$10 million, subject to conditions considered more closely below.
Mr Unruh and Mr Seeberger became jointly and severally obliged to indemnify Egana against any reduction in value of the assets of any member of the Egana Group (which would include ESCT upon completion of the second tranche’s acquisition) resulting from any claims against ESCT, Eco Swiss and/or Contempo SPA (another Italian subsidiary of ESCT).
As between themselves, Mr Unruh and Mr Seeberger agreed to discharge the obligations to indemnify Egana in equal shares.
The second tranche acquisition became unconditional on 24 December 1992. That was two days after the Tribunal notified the parties of its initial decision in NAI 1325 in summary form. That decision was to the effect that Benetton’s termination was invalid, that the Licence Agreement remained in full force with Benetton having to continue performance, and that Benetton would have to pay damages for repudiation of the agreement with such damages to be assessed, if not agreed, in a second phase of the Arbitration. The Tribunal, however, declined to deal with ESCT’s requests for specific orders and penalties relating to Benetton’s continued performance. The ruling was evidently satisfactory to Egana and a Confirmatory Memorandum dated 21 January 1993 was executed stating that the conditions in the deed of acquisition were satisfied as at 24 December 1992. The formal award, referred to as the Partial Final Award (“PFA” – “partial” because damages had not been assessed), was published on 4 February 1993.
B.3 The position of the parties as at 19 September 1992
It is worth pausing at this point to consider the position of the parties and the commercial considerations which were evidently of importance to them as at 19 September 1992, the date of the MoA.
In acquiring ESCT’s shares Egana was acquiring a company whose principal asset was unrealized since it consisted of ESCT’s arbitration claim against Benetton which would have to be pursued to a successful conclusion before it could be translated into an enforceable award or a valuable settlement. It was also an asset of uncertain monetary value since it was not known whether the Tribunal would hold Benetton’s termination of the Licence Agreement to be unjustified and if so, what relief it would grant. It was not known whether it might result in an award of damages or in Benetton agreeing to reinstate and extend the Licence Agreement and if so, on what terms.
The fact that the asset acquired was of an unrealized and uncertain value had two important implications for Mr Unruh’s position. In the first place, the consideration he received for the sale of his shares in ESCT naturally reflected that uncertainty. Thus, only a nominal consideration of HK$1.00 was agreed for each tranche of shares. The financial benefits which he immediately received were restricted to a cash payment of HK$1 million and a right to 2% of Egana’s issued shares valued at HK$13 million. He was, however, to receive a potential financial benefit which depended on the value of the asset if and when it was realized and quantified. If the “monetary compensation” received by ESCT “in respect of the Arbitration” should exceed US$10 million, he was to receive a 10% shares of the excess.
The second implication for Mr Unruh and plainly recognized by Mr Seeberger and Egana was that he had an important role to play in realizing the value of that asset. As indicated above, the parties had requested the Tribunal to deal with any assessment of damages during a second phase of the arbitration. The parties therefore clearly recognized that even if they succeeded in the first phase of NAI 1325, this did not necessarily mean an end to the arbitration as a second phase might well be required. Furthermore, they appear also to have recognized that litigation concerning the claim might not be confined to NAI 1325. Given Mr Unruh’s involvement in ESCT’s affairs he was uniquely placed to assist in any Phase 2 or related proceedings and Egana and Mr Seeberger were obviously concerned to ensure that he would continue to render such assistance. He was accordingly required to undertake 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.” Structuring the consideration for his ESCT shares to include a potential share in the arbitration proceeds was no doubt also designed to provide an incentive for Mr Unruh to work towards a successful result in the process.
The parties furthermore recognized that the acquisition of ESCT carried with it actual and potential liabilities, especially in respect of legal costs in the proceedings concerning its Italian subsidiaries. Mr Unruh and Mr Seeberger accepted that such liabilities, which represented the cost of realizing the value of the asset injected into Egana, should not be borne by the Egana Group but by themselves in equal shares. Accordingly, indemnities in respect of such liabilities were given to Egana.
Finally, it was intended that Mr Unruh’s experience and expertise in the watch trade should be harnessed to the development of Egana’s business. Mr Unruh was engaged to perform duties to that end under a Service Agreement, for which he was remunerated by a salary and fringe benefits.
The indemnity arrangements referred to above were supplemented by a Deed dated 31 May 1993 (referred to by the parties as “the Howard Lau Deed”) whereby Mr Unruh and Mr Seeberger covenanted to indemnify ESCT for any claims against Eco Swiss and Contempo and for any charges or expenses arising out of any such claims. This indemnity was limited to HK$35 million and was to operate for a period of two years. On the same day, Mr Unruh and Mr Seeberger executed a deed agreeing between themselves to bear in equal shares, any liability to ESCT under the Howard Lau Deed.
B.4 Listing of Egana, Mr Unruh’s status and NAI 1616
In June 1993, Egana became listed on the Hong Kong Stock Exchange (“HKSE”). This was the culmination of a long process which had formed the backdrop for the abovementioned agreements.
The publicity associated with the listing, with Mr Unruh named as a director of Egana, had an unwelcome consequence. On 23 July 1993, Simmons and Simmons (“S&S”), Egana’s and Mr Seeberger’s solicitors, were informed that the HKSE’s Lisiting Division was about to be told that Mr Unruh had been convicted of a criminal offence in Germany, something which he had not previously disclosed in Hong Kong. Mr Unruh had indeed been convicted of fraud in Germany in 1976 and had spent time in prison between 1977 and 1979. However, the Judge found that under German law, if for 15 years after judgment no further offence is committed, a conviction is “erased” from all official records and the individual concerned is entitled to be regarded as having no criminal record, it being an offence for anyone thereafter to disclose the erased conviction. However, that constraint did not apply in Hong Kong and the disclosure (apparently at the behest of a former associate who had fallen out with Mr Unruh) was duly made to the HKSE.
One unrelated but similar matter concerned the bringing of criminal charges in Italy against Mr Unruh in connection with the bankruptcy of Eco Swiss. These charges had been laid in March 1992 and were being contested by lawyers instructed in Italy. The Judge found that Mr Unruh had earlier disclosed their existence to Mr Seeberger but that, on advice, it was not considered necessary to disclose them to the HKSE at that stage.
In any event, in the light of the German conviction, Egana terminated Mr Unruh’s Service Agreement and removed him from the board of Egana on 9 September 1993. On 18 September 1993, he also ceased to be a member of ESCT’s board.
Nevertheless, Mr Unruh’s continued assistance in pursuing the Benetton arbitration was plainly considered essential and the parties immediately went about drafting a Consultancy Agreement to regulate Mr Unruh’s continued association with Egana. That agreement was signed on 29 September 1993, the parties being ESCT, Mr Seeberger, Egana and Mr Unruh (“the Consultancy Agreement”).
It recited that ESCT wished to use Mr Unruh services in relation to the Benetton arbitration and the litigation in Italy regarding the liquidation of Eco Swiss, among other matters.
It was for a term of two years, expiring on 30 September 1995 and Mr Unruh was to receive a total sum of HK$5 million for his services, payable in specified instalments, plus expenses and fringe benefits.
It also contained a “No Claims” clause by which, Mr Unruh confirmed that he had no claims against the Egana Group or Mr Seeberger and vice-versa, but with the parties acknowledging that this did not relate to Mr Unruh’s rights under Clause 5 of the MoA.
Egana was right to anticipate the need for continued assistance from Mr Unruh in the dispute with Benetton. Attempts to negotiate a settlement came to nothing and, on 3 November 1993, ESCT and Bulova initiated Phase 2 of NAI 1325, seeking an assessment of damages and other relief. On 31 January 1994, Benetton retaliated, commencing their own arbitration (known as “NAI 1616”), seeking a declaration that it had rightly ended the negotiations and advancing a counterclaim for compensation.
In the meantime, legal expenses associated with the Italian proceedings had been and were continuing to be incurred. However, Mr Unruh had not kept up with paying his half share of those expenses. On 26 April 1994, Egana’s board received advice from Mr Alan Ewins of S&S as to Egana’s right to demand payment by Mr Unruh under the indemnities he had provided. S&S advised that the result of the No Claims clause in the Consultancy Agreement was that Mr Unruh had been released from his obligation to indemnify Egana or ESCT in respect of liabilities incurred prior to the Consultancy Agreement’s date. Mr Ewins’s letter stated:
On the basis of the release contained in the Consultancy Agreement, in my view neither Mr Seeberger nor any member of the Egana Group can require Mr Unruh to account in any way for expenses or liabilities of ESCT or any other member of the Egana Group which relate to the period up to and including 29th September 1993.
It also advised that Egana had no right of set-off against the Consultancy Agreement fees.
The ability of Egana to recover Mr Unruh’s contribution to the expenses already incurred for the Italian proceedings was therefore put in doubt. Additionally, the indemnity obligation contained in the Howard Lau Deed was due to expire on 30 May 1995, after which Egana might lack a legal basis for claiming an indemnity for expenses and liabilities incurred.
The final instalment of HK$1 million was due to be paid to Mr Unruh pursuant to the Consultancy Agreement on 31 December 1994. By then, his share of legal and professional expenses which would have been payable under the indemnities, plus certain personal expenses paid on his behalf, stood at about HK$750,000. He refused ESCT’s request that this sum should be set-off against his last instalment but acceded to their request to enter into a deed acknowledging such liability as a basis for his receiving payment of the HK$1 million instalment in full.
It was against this background that Egana, ESCT and Mr Unruh executed the Deed of Acknowledgment dated 5 January 1995 (“the DoA”). In it, Mr Unruh acknowledges liability for his share of the expenses which had been incurred and for half of all future liabilities to be incurred in connection with “claims and otherwise in which ESCT is a party in any way whatsoever” as provided for in the MoA. The DoA also provides that Egana is entitled to set off Mr Unruh’s existing indebtedness and any future liabilities “against the amount of Special Bonus to be payable by” Egana. This clause is at the heart of Mr Unruh’s case on estoppel and will require closer examination.
B.5 The alleged oral agreement and eventual settlement with Benetton
On 2 May 1995, the Tribunal gave a preliminary indication of its ruling in Phase 2, confirming this by its Final Arbitral Award dated 23 June 1995 (“the FAA”). In circumstances explained in the FAA, the Tribunal confined themselves to an assessment of damages for repudiation of the Licence Agreement. In the result, Benetton was ordered to pay to ESCT such damages in the sum of US$23.75 million plus interest and costs. Bulova was awarded damages of US$2.8 million plus interest and costs.
As previously indicated, it was part of Mr Unruh’s original case – rejected by the Judge and not subsequently pursued – that in May or early June 1995, after the Tribunal’s preliminary indication of its award had been received, he entered into an oral agreement with Mr Seeberger regarding Egana’s liability to pay him the Special Bonus.
It is unsurprising that the oral agreement was rejected as highly unlikely given that the controversy concerning Mr Unruh’s past history had been resurrected in the press on 18 May 1995 and in an anonymous complaint made to the HKSE shortly thereafter. Apart from the German conviction in the 1970’s, Mr Unruh now also had an Italian conviction. On 26 October 1994, he had agreed terms with the Italian authorities so that, upon his making certain payments, a conviction was entered and a suspended sentence ordered.
Egana was obviously embarrassed and concerned as to the effect Mr Unruh’s history might have on the Benetton award. It sought advice from Mr Shawn Conway (“Mr Conway”), a lawyer with Messrs Trenité van Doorne, the Dutch lawyers acting for ESCT in the arbitrations. In his fax dated 18 May 1995, Mr Conway opined that if Benetton were to hear of Mr Unruh’s history it might “try to use it as an after-the-fact justification for its refusal to extend the Licence Agreement” or even “to have the termination award set aside or to resist execution of the award.” However, he evidently did not consider such attacks likely to succeed, stating:
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.
Reacting to the adverse publicity, Egana informed the HKSE’s Lisiting Division on 27 May 1995 that it was unlikely that Mr Unruh’s Consultancy Agreement would be extended when it expired on 30 September 1995. When, in June and July 1995, Mr Unruh tried to secure agreement to an extension of his Consultancy Agreement and an acknowledgment by Mr Seeberger, on behalf of himself and Egana that Mr Unruh was entitled to the Special Bonus, he was unsuccessful. His Consultancy Agreement therefore expired but the Judge found that he thereafter did continue to assist in the arbitrations.
Under the MoA, any entitlement to the Special Bonus only arose after receipt by ESCT of the relevant monetary compensation. That was, in July 1995, still a long way off. On 10 July 1995, Benetton began a vigorous campaign in the Netherlands courts aimed at setting aside the Tribunal’s PFA and FFA in NAI 1325. As Mr Conway had anticipated, Benetton sought to rely in this context on the bankruptcy of ESCT’s Italian subsidiaries and on Mr Unruh’s plea-bargained conviction on 26 October 1994. Benetton was also simultaneously pursuing NAI 1616 and, on 29 April 1996, it raised the Italian bankruptcies and Mr Unruh’s Italian conviction in that context.
Eventually, Benetton was comprehensively defeated on all fronts. On 21 January 1996, the Netherlands Court of Appeal held that the Italian bankruptcies and conviction were irrelevant to the Licence Agreement. In NAI 1616, the Tribunal issued a PFA on 27 June 1997 holding that the Licence Agreement was still in full force and that Benetton was required to negotiate its extension in good faith. Characteristically, Benetton issued fresh court proceedings to challenge that PFA. It also took a European Community Treaty point all the way to the European Court of Justice where its challenge was rejected on 1 June 1999. On 16 September 1999, another decision of the Netherlands Court of Appeal was published rejecting the contention that Mr Unruh’s non-disclosure of his convictions amounted to fraud.
At this point, Benetton decided to commence settlement negotiations. This led to a Final Settlement Agreement dated 31 March 2000 (“the FSA”) between ESCT and Benetton. On the footing that there would be no admission of liability on either side in respect of NAI 1325 and NAI 1616 and the “various judicial proceedings arising therefrom” and that the settlement would “negate” the NAI 1325 award, Benetton agreed to pay to ESCT the sums of US$42,086,470.69 and NLG 22,902,881.55 respectively, with both parties thereafter releasing each other and waiving any claims, etc “arising out of or in connection with the [Licence Agreement], the parties’ conduct in connection therewith, the [related] litigation ...., and otherwise.” It was, in other words, a global settlement.
Pursuant to the FSA, payment of the settlement amounts were made to Trenité Van Doorne simultaneously with its execution. In Egana’s annual report dated 16 May 2000, it stated that a sum of about HK$338 million had been received in the Benetton settlement. When Mr Unruh became aware of the settlement, he pressed Mr Seeberger for payment of the Special Bonus under the MoA but to no avail. Eventually on 29 June 2000, S&S rejected his claim.
Four days later, on 3 July 2000, Mr Unruh issued the Writ in these proceedings against Mr Seeberger. It was, however, not until 9 November 2001, some 16 months later, that he sought leave to join Egana as a 2nd defendant to this action.
C. Mr Seeberger’s appeal
C.1 The relevant terms of the MoA
Three provisions of the MoA are relevant to the two arguments of construction raised on Mr Seeberger’s behalf:
C.2 Mr Seeberger’s liability under the proviso to Clause 5
In the normal course of events, one might have expected Egana to be liable to pay Mr Unruh a share of the successful arbitration’s proceeds. Since ESCT, a part of that Group, was to receive any such proceeds, one might have expected ESCT or Egana to be liable to Mr Unruh for his agreed share as part of the consideration for his ESCT shares.
Instead, because of concerns (reflected in the evidence and in the terms of the MoA itself) that such a connected party transaction would give rise to onerous disclosure requirements and might cause adverse comment prejudicial to Egana’s flotation, the parties accepted on 19 September 1992 that Egana would assume no liability for the Special Bonus unless specified conditions were satisfied. Thus, under the MoA Egana only becomes liable to pay the Special Bonus:
if it has taken professional advice;
if on the basis of that advice, Egana (presumably by its board) decides that it is lawful and prudent for it, as a company listed on the Stock Exchange, to pay the Special Bonus;
if its legal advisers have prepared the necessary documentation to give effect to such liability;
if it has entered into that documentation with all necessary parties (obviously primarily Mr Unruh); and
if and only to the extent that monetary compensation exceeding US$10 million is received by ESCT in respect of the Arbitration.
It is common ground that, apart from (e), those conditions have never been met and that Egana acquired no liability to pay the Special Bonus as envisaged by the MoA. Mr Unruh’s case is simple. He contends that in such circumstances, applying Clause 5’s proviso, Mr Seeberger is liable to pay. This was accepted by both courts below. The key words of the proviso are the following:
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.
Mr Ho SC argues, to the contrary, that those words impose a duty on Mr Seeberger to pay only if, Egana having first entered into the relevant documentation to make itself legally bound to pay, Egana should fail to meet its obligation. He argues that this is so because the event which triggers Mr Seeberger’s liability to pay, is a failure on the part of Egana to pay “in accordance with the provisions of this Clause” sums “which would otherwise be due to Mr Unruh.” He contends that no sum could be “due to Mr Unruh” from Egana unless Egana had first assumed liability to pay “in accordance with” the provisions concerning liability-creating documentation. Since Egana never took on such a liability, there has been no default and Mr Seeberger’s secondary liability to pay does not arise.
I am unable to accept that argument. First, as a matter of language, as Mr Burns points out, Clause 5 does not make Mr Seeberger’s liability to pay conditional on Egana’s failure to do so for any particular reason or in any particular circumstances. The words bear no such qualification: so long as Egana has failed to pay within 28 days of receipt of the monetary compensation by ESCT – for whatever reason, including the fact that Egana has never taken on liability to make the payment in the first place – Mr Seeberger’s liability to pay is triggered, provided of course, that the US$10 million threshold set by paragraph (b) of the proviso is crossed.
Mr Ho sought to argue that this construction involves the illegitimate insertion of the words “for any reason” to make the proviso read “fails for any reason to pay”. That is not a valid objection. To say that the condition is Egana’s failure “for any reason” to pay does not add to or modify the meaning of the clause. It merely emphasises that Egana’s failure to pay is the unconditional trigger for Mr Seeberger’s liability. On the other hand, I fully agree with the Judge’s observation that Mr Ho’s suggested construction requires an unjustified re-writing of the condition. His interpretation requires insertion (as formulated by the Judge) of the words “having entered into documentation to pay the Special Bonus and in breach of the provisions of such documentation” before the words “fails to pay”. Such a construction does add a substantive qualification which is not to be found in the language of the proviso and cannot be justified.
The construction advanced on Mr Seeberger’s behalf also deprives Clause 5 of any sensible commercial purpose. It attributes to the parties the intention of catering contractually for the wholly unrealistic prospect of Egana, after having satisfied itself that it is lawful and prudent to assume the liability and having gone ahead with executing the documentation to do so, proceeding to default on its obligations. It is suggested that the proviso is there to impose a liability to pay on Mr Seeberger solely in the event of such contingency. I again respectfully agree with the Judge’s comment that:
.... 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.
I take his Lordship’s reference to “the personal guarantee of Mr Seeberger” to be an intended reference to Mr Seeberger’s acceptance of primary personal liability to pay under Clause 5.
C.3 The monetary compensation to be shared under the MoA
The second argument of construction advanced on Mr Seeberger’s behalf concerns the intended scope of the MoA.
The potential entitlement of Mr Unruh under the MoA relates to “monetary compensation .... received by ESCT in respect of the Arbitration”.
Mr Ho submits that the definition of “the Arbitration” in Clause 1(h) must be understood to refer exclusively to NAI 1325, which is the only arbitration fitting the words there used (having been “commenced by ESCT in 1991 in The Netherlands under the terms of [the Licence Agreement]”).
He argues that the money received by ESCT as a result of the FSA dated 31 March 2000 was a global settlement and so cannot be said to be “monetary compensation .... received by ESCT in respect of the Arbitration”. Indeed, it is to be noted that it was a condition of the FSA that the NAI 1325 award should be negated.
Mr Ho’s primary argument is therefore that the FSA settlement monies fall outside the scope of the MoA and that Mr Unruh accordingly has no entitlement to any part thereof. Alternatively, since the sums received were paid by Benetton in settlement not only of NAI 1325 but also of NAI 1616 and of the “various judicial proceedings arising therefrom”, he argues that Mr Unruh can at best claim an entitlement to an apportioned amount representing 10% of the sums exceeding US$10 million received in so far as such sums can be attributed specifically to Benetton’s settlement of NAI 1325. Although it was initially his argument that such an apportionment was not possible, at the hearing, he produced suggested figures for apportioned amounts.
Mr Ho’s arguments were rejected by the Judge who concluded 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’”. Rogers VP, with whom the other members of the Court of Appeal agreed on this point, reached the same conclusion. I agree with the result arrived at in the courts below but on reasoning which focuses not so much on the meaning of the words “the Arbitration”, as on the MoA’s intended scope of application.
While it is clear that the parties to the MoA did indeed have in mind NAI 1325 (the only arbitration then in existence) when they referred to “the Arbitration”, I do not accept that their intention was to exclude from the scope of the MoA any other arbitral or judicial proceedings that might flow from the dispute with Benetton over the Licence Agreement which had occasioned commencement of NAI 1325.
In defining “the Arbitration” in Clause 1(h), the parties did not merely do so by referring to the Dutch seat of the arbitral proceedings and its year of commencement. More importantly, they identified the agreement under which the arbitration arose and the matter with which it was concerned, namely: “the arbitration proceedings commenced .... under .... the licence agreement dated 1st July 1986 entered into between [Bulova] (1) [Benetton] (2) and ESCT (3) in relation to the ‘Benetton by Bulova’ brand name....” In other words, the MoA identified its area of concern as the Benetton dispute and the proceedings commenced to resolve it. It was not seeking to limit the scope of its operation by reference to any particular arbitral, curial or procedural form which resolution of that dispute might take.
This view is fortified by consideration of the relief claimed by ESCT in NAI 1325 which must be taken to have informed the minds of the contracting parties when referring to that arbitration in the MoA. It is clear, and the Judge and the Court of Appeal so found, that as at 19 September 1992, the relief claimed in NAI 1325 encompassed all forms of potential relief flowing from Benetton’s repudiation and from its refusal to negotiate an extension of the Licence Agreement. The Judge’s finding was in these terms:
.... 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.
Although Mr Ho sought to question those findings, there is no doubt that they are correct. The fact that subsequently, the Tribunal decided to confine NAI 1325 to a claim for damages for the repudiation of the Licence Agreement, leaving the relief in respect of the non-extension claim to NAI 1616, does nothing to support Mr Ho’s argument. Indeed, the Tribunal’s decision to narrow the scope of NAI 1325 serves to emphasise the fact that the relief originally sought encompassed all aspects of the Licence Agreement dispute. That was the factual matrix in which the MoA was executed, strongly suggesting that while the parties made reference in the agreement to the particular arbitration then in existence, they intended this as a reference to the entire process by which ESCT’s claims arising out of the Licence Agreement against Benetton were to be pursued.
That conclusion receives further support from the terms of Clause 4(A). That clause imposes on Mr Unruh an obligation to use his best endeavours to assist not only in connection with “the Arbitration” but also “otherwise in respect of all outstanding proceedings, claims and otherwise to which ESCT is a party in any way whatsoever.” This demonstrates that the parties must have realised that while only NAI 1325 was on foot as at 19 September 1992, ESCT might become a party to other claims and proceedings. The MoA therefore stipulated that, so long as such other claims and proceedings remained outstanding, Mr Unruh’s best endeavours would be required also in connection therewith. It is noteworthy that the Clause covers ESCT being made a party “in any way whatsoever”, indicating that the parties were not seeking to limit the best endeavours obligation to proceedings or claims taking any particular form.
Mr Ho accepts that Clause 4(A) places this broad obligation on Mr Unruh – an obligation extending to claims and proceedings beyond “the Arbitration”. However, he seeks to maintain that when it comes to Clause 5, the MoA’s intention is to limit Mr Unruh’s recompense to a participation solely in NAI 1325 proceeds. The proposed asymmetry is inexplicable. If, as Mr Ho’s argument must admit, the parties recognized, in Clause 4(A), that the Licence Agreement dispute might involve ESCT in proceedings other than NAI 1325 and saw the necessity for securing Mr Unruh’s best endeavours in respect thereof, there is no sensible explanation as to why the incentive provided by Clause 5 should have been excluded from applying equally to such endeavours.
C.4 Alleged failure to use best endeavours
The next argument advanced on behalf of Mr Seeberger is that Mr Unruh failed to use his best endeavours as required by Clause 4(A) so that he does not qualify for the Special Bonus. It is contended that satisfaction of the best endeavours obligation is a condition precedent to any entitlement to the Special Bonus.
Mr Seeberger’s pleaded case is that Mr Unruh breached the best endeavours obligation in one specific way, namely, by failing to make timely disclosure of his German conviction and the Italian charges, the allegation being that the lateness of the disclosure prejudiced the preparation or conduct of ESCT’s case in the arbitration. At the hearing, there was an attempt by Mr Ho to extend this argument by suggesting that “the very existence” of the Italian charges and German conviction “coupled with” their non-disclosure constituted a breach which enabled Benetton to prolong the proceedings.
In my view, the argument falls at the first hurdle since I can see nothing in the language of the MoA or otherwise to suggest that compliance with the best endeavours obligation is a condition precedent to payment of the Special Bonus. In Mr Seeberger’s printed case, it is asserted that there is no dispute as to Clause 4(A) having that status, relying on something said by Mr Unruh in evidence. However, it is a question of construction and hence of law whether a contractual term operates as a condition precedent. The court decides the question objectively and not by reference to the subjective views of the parties to the contract.
The structure of the MoA militates against the condition precedent argument. Payment of the Special Bonus is regulated by Clause 5. So far as that Clause is concerned, two conditions must be satisfied before Mr Unruh is entitled to payment:
ESCT must have received monetary compensation in excess of US$10 million in respect of the Arbitration; and
Egana must have failed to pay the Special Bonus within 28 days of ESCT’s receipt of the money, in which case Mr Seeberger must make payment at the end of that period.
It follows that Clause 5 makes entitlement to the Special Bonus depend on a substantially successful outcome to the claim, an outcome yielding more than US$10 million in compensation. If such success is not achieved, Mr Unruh receives no Special Bonus in any event, whether or not he had properly used his best endeavours under Clause 4(A). But where that degree of success has been achieved and the two conditions are satisfied, Clause 5 treats Mr Unruh as having earned his Special Bonus comprising a 10% share in the proceeds which exceed US$10 million, setting a 28 day time-limit for payment to be made. The language of Clause 5 therefore favours a clear-cut entitlement to payment within the prescribed period upon satisfaction of the stipulated conditions.
Where such a substantial degree of success has been attained, any complaint that Mr Unruh may have failed to use his best endeavours under Clause 4(A) is inherently likely to involve a breach which is, in relative terms, minor. This favours the conclusion that the parties must have intended that such a best endeavours complaint should sound only in damages and should not operate as a bar to Mr Unruh’s entitlement if the requirements of Clause 5 have been met. The structure of Clause 5 is therefore incompatible with the condition precedent argument. There was no counterclaim for damages for breach of Clause 4(A).
The Judge and the Court of Appeal were both apparently prepared to entertain the best endeavours argument as potentially resulting in a bar to Mr Unruh’s claim. They found, however, that on the evidence, no breach had been established. I respectfully agree and their concurrent findings are unassailable.
The Judge found that by June 1992, Mr Conway, the lawyer who had the conduct of the claim for ESCT, was informed by Mr Unruh of the Italian charges and that by July 1993, all concerned had been made aware of the German conviction. It was not until 1995, some two years later, that Benetton first sought to rely on those matters. His Lordship found (particularly in the absence of Mr Conway) that there was simply no evidence to show that ESCT had been disadvantaged in any way by the disclosures not having been made earlier. As noted in section B.5 above, Benetton was comprehensively defeated on all fronts and the Netherlands Court of Appeal twice rejected the Italian and German convictions as irrelevant. There is simply nothing to show that the preparation or conduct of the proceedings were in any way hampered by the timing of the disclosures.
I turn next to Mr Ho’s suggestion that the breach of the best endeavours obligation consisted of “the very existence” of the Italian and German issues “coupled with” a lack of timely disclosure since this permitted Benetton to prolong the proceedings. With respect, it is a difficult argument to understand. If it turns on the “very” existence of the Italian and German issues, it is hard to see why the timeliness of disclosure is also mentioned. If existence of the Italian and German issues cannot stand as a ground without also showing that there was a lack of timely disclosure, then it adds nothing to the argument which I have just rejected. On the other hand, if it is indeed an argument that rests solely on the very existence of the German conviction and the Italian charges (which, after October 1994, became the Italian conviction), then it is difficult to see how Mr Unruh’s conduct which brought them about is capable of constituting a breach of his duty to use best endeavours to assist ESCT in connection with the Arbitration, etc under Clause 4(A). That obligation is executory. It addresses the conduct required of Mr Unruh after entry into the contract. It does not impose contractual obligations of a different character. It does not operate as a warranty for the absence of incidents in his past which might have a bearing on his assisting in the Arbitration. No such warranty was given in the MoA. Mr Seeberger’s best endeavours argument must accordingly fail.
The next argument is that the MoA is unenforceable because it is champertous and contrary to public policy in that it is an agreement for Mr Unruh to share in the proceeds of ESCT’s arbitration against Benetton in return for his assistance in its prosecution.
Mr Unruh submits that this argument should be rejected on three grounds:
because the agreement is not champertous since it is clear that he had a genuine commercial interest in rendering assistance in the arbitration and receiving a share of the proceeds;
that even if the agreement might domestically be regarded as champertous, it is not against public policy in Hong Kong to enforce such an agreement since it involved assisting in an arbitration taking place in a jurisdiction where maintenance and champerty are not contrary to public policy; and
that maintenance and champerty do not apply to arbitrations at all, whether domestic or international.
I shall endeavour to set out the applicable principles before seeking to apply them to the questions in issue.
C.5a Maintenance and champerty in Hong Kong
The origins of maintenance and champerty are ancient and obscure. English statutes from at least the 13th century were enacted to deal with champerty and maintenance, but there is a solid body of authority for concluding that they have their origins in the common law and were supplemented by statute. Thus, in Neville v London “Express” Newspaper Limited, Lord Finlay LC stated as follows:
.... maintenance is a common law offence. It is true that various statutes were passed inflicting particular penalties upon various kinds of maintenance. The statutes are 3 Edw I c 28, 28 Edw I c 11, 1 Edw III c 14, 1 Rich II c 4, and 32 Hen VIII c 9. Some of them relate particularly to the abuse of maintenance by the King’s officers and to maintenance by false evidence or other sinister means, which would, of course, be an aggravation of the offence, but none of them in any way cut down the common law upon the subject.
The view has generally been taken that maintenance and champerty form part of Hong Kong law. In Low Chun Song v Ka Wah Bank Ltd, the Court of Appeal was content to take that for granted. In Cannonway Consultants Limited v Kenworth Engineering Ltd, decided in 1994, Kaplan J held that they applied by virtue of s 3 of the Application of English Law Ordinance (Cap 88), which imported the common law and rules of equity into Hong Kong. I respectfully agree. The common law rules making maintenance and champerty criminal offences, torts and a ground of public policy for invalidating tainted contracts, were part of Hong Kong law prior to 1997 and remain applicable by virtue of Article 8 of the Basic Law.
In England and Wales, the position was changed by the Criminal Law Act 1967. Section 13(1) abolishes “any distinct offence under the common law of England and Wales of maintenance (including champerty, but not embracery)”. And s 14(1) provides:
No person shall, under the law of England and Wales, be liable in tort for any conduct on account of its being maintenance or champerty as known to the common law ....
However, s 14(2) of the 1967 Act contains an important saving in the following terms:
The abolition of criminal and civil liability under the law of England and Wales for maintenance and champerty shall not affect any rule of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal.
It follows that the rules relating to maintenance and champerty survive in England for the purposes of deciding whether contracts are invalidated on such grounds. This gives continued relevance to post-1967 developments in English case-law, although in our jurisdiction, where no equivalent to the 1967 Act exists, such authorities bear not only on the enforceability of contracts, but also on potential tortious and criminal liability. The same applies to the Australian jurisprudence in the field.
C.5b The changing content of maintenance and champerty
Definitions of maintenance and champerty given over the centuries have retained a notable similarity. As Lord Coleridge CJ stated in Bradlaugh v Newdegate: “There are many definitions of maintenance, all seeming to express the same idea.” Among the older definitions of maintenance which his Lordship lists are those of Blackstone and Coke:
Blackstone calls it ‘an officious intermeddling in a suit which no way belongs to one by maintaining or assisting either party with money or otherwise to prosecute or defend it’. ‘Maintenance,’ says Lord Coke, ‘signifieth in law a taking in hand, bearing up, or upholding of a quarrel, or side, to the disturbance or hindrance of common right.’
An early definition of champerty cited by Scrutton LJ in Haseldine v Hosken, taken from the statute 33 Edw I, stat 2, is as follows:
Champertors be they that move pleas and suits, or cause to be moved either by their own procurement, or by others, and sue them at their proper costs for to have part of the land in variance, or part of the gains.
Echoes of Coke and Blackstone can be heard in British Cash and Parcel Conveyors, Ltd v Lamson Store Service Co Ltd where Fletcher Moulton LJ described maintenance in the following terms:
It is directed against wanton and officious intermeddling with the disputes of others in which the defendant has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse.
As to champerty, Lord Finlay LC stated in the London “Express” case as follows:
Champerty is a form of maintenance, and occurs when the person maintaining another takes as his reward a portion of the property in dispute.
As the statute of Edward I had indicated, that which marks out champerty from other forms of maintenance is “the notion of a division of the spoils”.
However, one must not be misled by the similarity between the early and the modern definitions. The resemblance lies merely on the surface. The prohibition of maintenance and champerty is a matter of public policy and involves a value judgment that certain conduct should be considered “officious intermeddling” in someone else’s litigation or “trafficking in litigation” which deserves to be made unlawful. Unsurprisingly, the content of that value judgment has fundamentally changed, reflecting the radical development of society in general and of the legal system in particular over the last seven hundred years.
The early law of maintenance and champerty evolved in an age when:
The mechanisms of justice lacked the internal strength to resist the oppression of private individuals through suits fomented and sustained by unscrupulous men of power. Champerty was particularly vicious, since the purchase of a share in litigation presented an obvious temptation to the suborning of justices and witnesses and the exploitation of worthless claims which the defendant lacked the resources and influence to withstand.
In its attempts to bridle such abuses, the early law laid down stringent constraints on participation in other people’s litigation. As Lord Coleridge CJ stated, “....the danger of the oppression of poor men by rich men, through the means of legal proceedings, was great and pressing; so that the judges of those days, wisely according to the facts of those days, took strict views on the subject of maintenance.” To take one example, it was in olden times the offence of maintenance to give evidence without being subpoenaed to do so – a proposition which sounds bizarre when it is today regarded “as part of the duty of citizens to be ready and willing to assist the administration of justice by giving evidence when they can do so usefully”. Another aspect of such stringency was the common law’s view that choses in action were not assignable at all. While that rule was mitigated by equity’s recognition of equitable assignments, equity nevertheless refused to permit assignments of a “bare cause of action” because it “savoured of maintenance”.
C.5c The shrinking scope of maintenance and champerty
The early policy imperatives have long gone and by the 19th century, it was widely recognized that maintenance and champerty had acquired a wholly different complexion. Thus, in 1883 Lord Coleridge CJ stated that the old authorities “hold a multitude of things to be maintenance which would not be held so now ....” And in 1982, Lord Roskill commented that in the 20th century, “the courts have adopted an infinitely more liberal attitude towards the supporting of litigation by a third party than had previously been the case.”
This change has been achieved by the common law in typical fashion. To cite Fletcher Moulton LJ again:
The present legal doctrine of maintenance is due to an attempt on the part of the Courts to carve out of the old law such remnant as is in consonance with our modern notions of public policy ....
The “carving out” process has produced a catalogue of various instances where conduct which would otherwise constitute maintenance or champerty has been excluded from the sphere of such liability. This prompted Fletcher Moulton LJ to remark that “it is far easier to say what is not maintenance than to say what is maintenance.”
One category of excluded cases involves what may be called the “common interest” category. Certain relationships have been judicially recognized as involving persons with a legitimate common interest in the outcome of litigation sufficient to justify one of them in supporting the litigation conducted by another without engaging the prohibition against maintenance and champerty. Thus, in the London “Express” case, Lord Finlay LC, citing an 1824 edition of Hawkins’ Pleas of the Crown, notes that acts otherwise constituting maintenance:
.... may be justified in various cases - eg, if there is an interest in the thing at variance, in respect of kindred or affinity, in respect of other relations as lord and tenant or master and servant, or in respect of charity. In s 26, p 460, the learned author says: ‘It seems to be agreed, that anyone may lawfully give money to a poor man to enable him to carry on his suit.’
And Lord Coleridge CJ commented that:
.... in all these cases the interest spoken of is an actual valuable interest in the result of the suit itself, either present, or contingent, or future, or the interest which consanguinity or affinity to the suitor give to the man who aids him, or the interest arising from the connection of the parties, eg, as master and servant, or that which charity and compassion give a man in behalf of a poor man who, but for the aid of his rich helper, could not assert his rights, or would be oppressed and overborne in his endeavour to maintain them.
Clearly, this “common interest” category is not closed. Public policy is likely to regard groups and associations pursuing legitimate objectives as possessing a sufficient common interest in related litigation to warrant their exclusion from the scope of maintenance and champerty. One example is Martell v Consett Iron Co Ltd where it was held that an association formed to protect fisheries and to prevent the pollution of rivers had a sufficient common interest for it lawfully to support an action brought by members who claimed that their fishery was being polluted by effluents from the defendant’s ironworks.
A second excluded category involves what might today be referred to as cases involving “access to justice” considerations. In Hong Kong, Article 35 of the Basic Law recognizes access to the courts as a fundamental right. It has never been a defence to an action nor a ground for a stay to show that the plaintiff is being supported by a third person in an arrangement which constitutes maintenance or champerty. Neither does liability for maintenance or champerty depend on the action or the defence being bad in law. It follows that an attack on an arrangement said to constitute maintenance or champerty could well result in a claim which is perfectly good in law being stifled where the plaintiff, deprived of the support of such an arrangement, is unable to pursue it. This is a powerful argument for such cases to be excluded from the ambit of maintenance and champerty. This was recognized by the Privy Council in Ram Coomar Coondoo v Chunder Canto Mookerjee where their Lordships stated:
.... a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, ought not to be regarded as being, per se, opposed to public policy. Indeed, cases may be easily supposed in which it would be in furtherance of right and justice, and necessary to resist oppression, that a suitor who had a just title to property, and no means except the property itself, should be assisted in this manner.
Lord Phillips of Worth Matravers MR in R (Factortame Ltd) v Transport Secretary (No 8) recently placed conditional fees in the same context, stating:
Conditional fees are now permitted in order to give effect to another facet of public policy – the desirability of access to justice. Conditional fees are designed to ensure that those who do not have the resources to fund advocacy or litigation services should none the less be able to obtain these in support of claims which appear to have merit.
It is again obvious that this access to justice category is not static. The development of policies and measures to promote such access is likely to enlarge the category and to result in further shrinkage in the scope of maintenance and champerty. Different measures, whether statutory or judicial, may be taken in different jurisdictions. Here in Hong Kong, a litigant who is funded by the Supplementary Legal Aid Scheme is required to make a contribution out of recovered proceeds for the benefit of the Fund. In England and Wales, conditional (but not contingency) legal fee agreements have received statutory support in certain types of cases. This has entailed the development of after the event insurance against adverse costs orders. The development of multi-party litigation or class actions raises questions concerning the conduct of promoters and funders of such litigation.
Thirdly, there exists a miscellaneous category of practices accepted as lawful even though, as pointed out by Gummow, Hayne and Crennan JJ in the recent decision of the Australian High Court in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd, such practices do not differ in substance from practices which have traditionally been roundly condemned. Their Honours refer to the sale and assignment by a trustee in bankruptcy of an action commenced in the bankruptcy to a purchaser for value; and the development of the doctrine of subrogation as applied to contracts of insurance as instances.
C.5d The current approach to maintenance and champerty
The foregoing discussion shows that the thrust of legal development has been (as Fletcher Moulton LJ pointed out) to carve out areas of conduct for exclusion from liability, forming what was referred to in Campbells Cash and Carry as a “patchwork of exceptions and qualifications”. But by what criteria is one able to determine that certain conduct does attract liability under those heads? That question translates into one asking: What are the considerations of modern public policy which result in conduct being characterised as maintenance or champerty? In particular, what public policy considerations result in a contract being vitiated on grounds of maintenance or champerty? I would make four points in answer.
In the first place, the traditional legal policies underlying maintenance and champerty continue to apply although they must substantially be qualified by other considerations. Thus, the mischief to be discouraged by the law of maintenance is still “officious intermeddling” in litigation, in particular where this results in oppression of the person against whom the action is brought and possibly if it may result in the general encouragement of litigiousness. Thus, the Privy Council in Ram Coomar Coondoo v Chunder Canto Mookerjee, recognized that funding a poor person’s litigation might advance the cause of justice, but their Lordships added that such funding agreements “ought to be carefully watched” because of the risk, among other things, that the arrangement may involve “abetting and encouraging unrighteous suits, so as to be contrary to public policy”.
The public policy against champerty has traditionally involved two concerns and continues to do so.
The first is that an agreement to share in the spoils of litigation may encourage the perversion of justice and endanger the integrity of judicial processes. As Lord Denning MR put it in In re Trepca Mines Ltd (No 2): “The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.”
Next, a champertous arrangement may be objectionable in that it involves a stranger to the litigation in “trafficking” or “gambling” in the outcome of the litigation. Thus, in Trendtex Trading Corporation v Credit Suisse, an assignment was struck down as champertous because it “.... involved the possibility, and indeed the likelihood, of a profit being made, [by a third party with no genuine commercial interest in the transaction] out of the cause of action … [which] manifestly ‘savours of champerty,’ since it involves trafficking in litigation – a type of transaction which, under English law, is contrary to public policy.” Such activity is obviously unacceptable to the court which sees its role as the administration of justice and not the provision of a market for speculators in litigation.
Secondly, the fact that an arrangement may be caught by the broad definitions of maintenance or champerty is not in itself sufficient to found liability. The totality of the facts must be examined asking whether they pose a genuine risk to the integrity of the court’s processes. In R (Factortame Ltd) v Transport Secretary (No 8), Lord Phillips MR stated: “.... one must today look at the facts of the particular case and consider whether those facts suggest that the agreement in question might tempt the allegedly champertous maintainer for his personal gain to inflame the damages, to suppress evidence, to suborn witnesses or otherwise to undermine the ends of justice.” It is not enough simply to say that it is the type of agreement which “savours of” champerty.
Thirdly, countervailing public policies must be taken into account, especially policies in favour of ensuring access to justice and of recognizing, where appropriate, legitimate common interests of a social or commercial character in a piece of litigation. The traditional public policies against intermeddling in litigation must be weighed against such competing values and if the balance is in favour of the latter, the conduct complained of should not be regarded as contrary to public policy.
Fourthly, it is important not to confuse related but separate policies with those which properly underlie the operation of maintenance and champerty. For example, an agreement to take a share of litigation proceeds may be primarily objectionable because it involves the unconscionable exploitation of a vulnerable litigant. Or it may be considered objectionable for solicitors to enter into such an arrangement because it is thought likely to give rise to conflicts between the solicitor’s interest in financial gain and his duties to the court and to the client. It may be right to strike down the arrangement in some cases. But in others, doing so (and characterising the conduct as criminal) in reliance on the law of maintenance and champerty may be to use too blunt an instrument. It may, for instance, result in the litigant being left with no means to pursue a good claim. Resort might more appropriately be had in such cases to other doctrines and remedies more suited to granting relief to the exploited party or to confronting professional misconduct.
C.5e The principles applied: genuine commercial interest
There can be no doubt that Mr Unruh independently had a genuine commercial interest in the outcome of the arbitration. His position as at 19 September 1992 is examined in section B.3 above. He was legitimately interested in the arbitration as the means whereby the value of the asset which he had sold to Egana in an independent business transaction was to be realized. He was legitimately interested in realizing for himself at the same time what is properly regarded as a deferred part of the consideration he was to receive for that sale. As he was uniquely placed to deal factually with Benetton’s complaints, there is no basis for suggesting that his participation as a witness in the arbitration was in any way artificial or likely to pose a genuine risk to the integrity of the arbitral process.
Mr Chang did not make any submissions to the contrary. His primary argument was that a genuine commercial interest does not avail to prevent the MoA, with its provisions for sharing the arbitration’s proceeds, from being champertous. He contended that while a legitimate common interest, including a genuine commercial interest in the proceedings, negatives maintenance, champerty stands on a different footing, being regarded by the law as so obnoxious that it cannot be justified by any such interest.
That argument relies on a dictum of Millett LJ (as he then was) in Thai Trading Co v Taylor, a decision of the English Court of Appeal which (as we shall see) is of a problematical status, although such status does not affect the structure of Mr Chang’s argument. In Thai Trading, a woman successfully brought an action against the defendant. Her husband, who was a solicitor, had acted for her. The trial judge found that he had done so on the footing that he would not charge her if the action failed but would charge his normal fees if the action succeeded. This was referred to as a “conditional normal fee” agreement and the judge held it to be champertous and void so that the losing side did not have to indemnify the plaintiff in respect of such costs. Millett LJ, giving the reasoned judgment of the Court of Appeal, decided that the Judge was wrong and that a conditional normal fee is not champertous. Plainly, there was a sufficient common interest by virtue of their relationship as man and wife to justify the husband helping the plaintiff in her litigation, so that such help did not constitute maintenance. Nor did the arrangement become champertous by virtue of the conditional normal fee arrangement. Accordingly, there is nothing in the ratio of the decision to assist Mr Chang’s argument that one should differentiate between grounds capable of justifying what would be maintenance as opposed to champerty.
However, it is fair to say that Millett LJ may have accepted obiterthat, notwithstanding the arrangement falling outside the law of maintenance by virtue of the parties’ common interest, it would still theoretically have been possible for the husband’s conduct to constitute champerty if the conditional normal fee had been found to be champertous. Mr Chang seeks to argue that, by analogy, while a genuine commercial interest may prevent the MoA from constituting maintenance, such interest does not save it from being champertous. The dictum of Millett LJ relied on is as follows:
Champerty was described by Scrutton LJ in Ellis v Torrington  1 K.B. 399, 412 as ‘only a particular form of maintenance, namely, where the person who maintains takes as a reward a share in the property recovered.’ This last formulation does not assume that the maintenance is unlawful. There can be no champerty if there is no maintenance; but there can still be champerty even if the maintenance is not unlawful. The public policy which informs the two doctrines is different and allows for different exceptions.
The Thai Trading case is problematical because it was subsequently held in Awwad v Geraghty & Co (a firm) to have been decided per incuriam in relation to the status of certain Law Society Rules which have no bearing on this appeal. The Court of Appeal in Awwad also differed from Thai Trading, holding that a conditional normal fee agreement is contrary to public policy. However, that decision does not advance Mr Chang’s argument either because it involved no separate relationship between the solicitor and the client (unlike the solicitor and his wife in Thai Trading) where the fee arrangement might avoid maintenance but nonetheless attract liability for champerty. (I would interject here that I wish expressly to leave open the question whether the Thai Trading approach or the Awwad approach to conditional normal fee arrangements should be adopted in Hong Kong. As Schiemann LJ pointed out in Awwad, this is an area “in which judicial perceptions have differed and in which there has been much public .... debate.” His Lordship also noted that “there are substantial arguments in favour of the enforceability of normal fee agreements” as well as arguments on the other side.)
I have no hesitation in rejecting Mr Chang’s argument that a genuine commercial interest does not avail against a charge of champerty. Such an argument was advanced and convincingly rejected both by the Court of Appeal and the House of Lords in Trendtex Trading Corporation v Credit Suisse. Thus, Oliver LJ, having referred to counsel’s argument, stated:
.... I am unable to follow why, once it is established that there is a sufficient interest in a third party to justify his supporting another’s action, that interest should not equally justify his participating in the proceeds of the action, for instance by taking a charge on such proceeds for what is due to him and for expenses incurred in supporting the litigation. It is perfectly true that in In re Trepca Mines Ltd (No 2)  Ch 199, 219, Lord Denning MR observed that champerty was a species of maintenance for which the common law rarely admits of any just cause or excuse, but that was in the context of an agreement under which the third party who supported the litigation had no conceivable interest in it beyond that which he had acquired by purchasing a share in it. .... If, therefore, the supporting of the action is itself justified by a sufficient interest in the person lending support, so that he does not (or did not prior to 1967) commit the offence of maintenance, the fact that he participates in the proceeds cannot logically render him guilty of an offence which, by definition, depends upon his also being guilty of maintenance.
In the House of Lords, the vice was held not to lie in Credit Suisse taking an assignment of Trendtex’s action against the Central Bank of Nigeria – Credit Suisse having had ample commercial justification for doing so – but in the fact that Credit Suisse intended to re-sell the claim to a third party who had no genuine commercial interest in the pre-existing transactions. Lord Wilberforce stated:
If no party had been involved in the agreement of January 4, 1978, but Trendtex and Credit Suisse, I think that it would have been difficult to contend that the agreement, even if it involved (as I think it did) an assignment of Trendtex’s residual interest in the CBN case, offended against the law of maintenance or champerty. As I have already shown, Credit Suisse had a genuine and substantial interest in the success of the CBN litigation.
This aspect of the House of Lords’ decision was summarised by Lloyd LJ in Brownton Ltd v Edward Moore Inbucon Ltd, as follows:
That summary was adopted by the Hong Kong Court of Appeal in Low Chun Song v Ka Wah Bank Ltd.
I respectfully agree with the reasoning in those cases and can see no basis in logic or policy for holding that a genuine commercial interest sufficient to eliminate maintenance from the equation will not suffice to avoid liability for champerty. As I have already indicated, nothing in the ratio of Thai Trading supports the contrary proposition advanced by Mr Chang in his original argument. Moreover, both Thai Trading and Awwad were cases concerning fees chargeable by solicitors with particular duties owed by them as officers of the court, raising aspects of public policy of no present relevance.
In the course of argument, Mr Chang modified his argument to propose instead that while a genuine commercial interest may provide a justification for an otherwise champertous arrangement, this was only so where the court was satisfied that the potential gain under the relevant agreement is proportionate to the value of the maintainer’s commercial interest. I do not accept the correctness of that proposition.
In Advanced Technology Structures Ltd v Cray Valley Products Ltd, Pratt v Cray Valley Products Ltd, a company purported to assign its cause of action against a defendant company to an individual who was an employee of the company. The assignment was held to be a sham entered into with a view to that individual pursuing the company’s claim at the expense of the legal aid fund. It was also held to be champertous. Hirst LJ accepted, on the basis of Trendtex, that “where an assignee can show that he has a genuine commercial interest in the enforcement of a claim assigned to him, he does not fall foul of the rules against champerty.” However, in that case, the individual had a claim for arrears of salary against the company totalling a mere £10,000 while the asserted value of the assigned claim was in the region of £10 million. Commenting that while “there could be no objection to an assignee with a genuine commercial interest in the fruits of litigation obtaining a reasonable profit” citing Brownton’s case, his Lordship held that these figures were “massively disproportionate” making the assignment champertous.
This case should not be read as placing some duty on the court to consider whether the potential return on an allegedly champertous arrangement is proportionate in value to the third party’s pre-existing commercial interest in the litigation. Such an enquiry would require a full-blown trial which the court would be ill-placed to conduct. Rather, this case suggests that a potential return may be so vastly disproportionate to the interest alleged as to call into question the genuineness (as opposed to the proportionality) of the commercial interest asserted. There is, in any event, no basis for suggesting that the Special Bonus provided for by Clause 5 was to any degree disproportionate to Mr Unruh’s genuine commercial interest in the outcome of the arbitration.
It follows that the challenge to the MoA as a champertous agreement fails both in respect of Mr Seeberger and, to the extent that it is relevant, of Egana. Although this disposes of the champerty ground, it may nevertheless be useful to deal briefly with the alternative argument advanced on Mr Unruh’s behalf regarding Hong Kong public policy on maintenance and champerty in relation to arbitrations in foreign jurisdictions where objections on such grounds do not form part of their public policy.
C.5f Public policy regarding foreign proceedings and arbitrations
It is common ground that the doctrines of maintenance and champerty are unknown to Netherlands law. It is, in other words, not against Netherlands public policy for a third person to provide assistance or support to a party to an arbitration or to legal proceedings in that jurisdiction, whether or not for a share in the proceeds. Assuming for the purposes of this argument that the MoA would, as a matter of purely domestic law be regarded as champertous, should the court refuse to enforce it, being a contract made in Hong Kong and subject to Hong Kong law, on the ground that it is champertous notwithstanding the absence of objection under Netherlands law?
In my view, as a matter of principle, Hong Kong public policy should not invalidate such a contract. As discussed in section C.5c of this judgment, considerations regarding access to justice are of increasing importance in discussions of public policy in this area. Access to a court is recognized internationally as a fundamental right and the many countries which have acceded to relevant international instruments can be expected to pursue measures appropriate to their individual circumstances to give effect to that right. They will strike their own balances between countervailing demands, determining the scope to be accorded to that right in the light of their resources, institutions and traditions. Moreover, as we have noted, public policy in a particular jurisdiction in this respect is apt to change. The continued retention by Hong Kong of criminal and tortious liability for maintenance and champerty may not be justified and this question merits serious legislative attention. This makes it particularly inappropriate for Hong Kong to seek to impose its current public policy against maintenance and champerty on mature commercial parties (who are likely to include foreigners) who have chosen to arbitrate in a jurisdiction which does not recognize those concepts and who may accordingly have made arrangements in Hong Kong to finance the arbitral (or judicial) proceedings without being aware of any constraints.
Similar concerns were voiced in Trendtex in the Court of Appeal where Oliver LJ stated:
The judge in the instant case said: ‘I must confess to being unhappy that a transaction which business men in Switzerland may well regard as so unobjectionable that they would enter into it without appreciating that there was any possibility of its being ineffective, should be held to be contrary to public policy in this country.’ I share that unhappiness.
No direct authority was cited on the question under discussion, but such dicta as exist are against invalidation of such contracts.
Thus, in In re Trepca Mines Ltd (No 2), Lord Denning MR in discussing contracts which were champertous and to be performed in England, remarked: “If they had concerned French litigation, they might have been lawful, because I understand champerty is lawful in France.”
This was referred to with approval in the Court of Appeal in Giles v Thompson, Steyn LJ stating:
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 whenever 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.
This was followed by Papera Traders Co Ltd v Hyundai Merchant Marine Co Ltd, at first instance.
It is accordingly my view that the champerty argument advanced on the appellants’ behalf fails on this additional ground. The Hong Kong court should not strike down an agreement on the grounds of maintenance or champertous where it is to be performed in relation to judicial or arbitral proceedings in a jurisdiction where no such public policy objections exist.
I leave open the question whether maintenance and champerty apply to agreements concerning arbitrations taking place in Hong Kong since it does not arise in the present case.
In the result, none of Mr Seeberger’s grounds of appeal succeed and his appeal must be dismissed.
D. Egana’s appeal
As I have rejected the argument that the MoA is champertous, what remains to be decided is whether Egana is right in its submission that the courts below were wrong to hold that an estoppel by convention could be made good on the facts and that it serves to found Egana’s liability as a matter of law.
D.1 Approach adopted to estoppel by convention
Mr Unruh advances a case of estoppel by convention and not any other form of estoppel. The case has therefore been argued throughout on the footing that in applying the law of estoppel, it remains necessary to distinguish among different categories of estoppel, each constituted by particular elements and carrying legal consequences which may vary. Retention of this approach is championed in the valuable treatise on estoppel by Justice K R Handley, recently published. The learned author succinctly highlights differentiating aspects of some of the categories in the following summary:
Estoppel by deed, by grant, and by convention are common law doctrines which preclude contradiction but do not require a change of position induced by belief in the truth of facts. Estoppel by representation, developed in equity and borrowed by law, precludes contradiction if the representee’s belief in the truth of the representation induced a detrimental change of position and the rights of the parties are governed by the facts as represented.
Proprietary and promissory estoppels are equitable. Proprietary estoppel by encouragement enforces proprietary expectations which the person estopped has created or encouraged when their repudiation would be unconscionable. Proprietary estoppel by standing by enforces an equity against the fraud of an owner who seeks to rely on his property rights to profit from the known mistake of another. Promissory estoppel is a defensive equity which restrains the enforcement of positive rights by a person whose promises induced a change of position which makes such enforcement inequitable. The distinctly equitable estoppels change the rights of the parties, while the others change them indirectly by changing the facts. Each form has a separate history and a distinct source in law or in equity. The various rationales – recital, grant, convention, representation, positive promise or encouragement, fraud and mistake, and negative promise are different. There is no single over-arching principle.
This reflects the approach generally adopted in common law jurisdictions. I will take a like approach. Invitations to adopt a unifying theory of estoppel, whereby all disparate heads of estoppel are treated as having merged into a single over-arching doctrine giving rise to a directly enforceable equity have been declined on a number of occasions.
At the same time, it should be acknowledged that while they have so far not carried the day, powerful judicial voices have been heard in support of such a unifying theory. The learned authors of the current edition of Spencer Bower express sympathy with such a doctrine and suggest that there may be “future development of the law to remove the obstacles to merger of the doctrines based on detrimental reliance in terms of over-arching principle” for the benefit of “doctrinal coherence, clarity and flexibility”. This is plainly an area where the law continues to develop.
D.2 Estoppel by convention: statements of principle
Statements of principle by Dixon J in two cases in the Australian High Court in the 1930’s have proved extremely influential in the development of estoppel by convention in the common law world. In Thompson v Palmer, he identified an estoppel founded on an “assumption [which] formed the conventional basis upon which the parties entered into contractual or other mutual relations, such as bailment” as a distinct species of estoppel in pais (by conduct) at common law, stating:
The object of estoppel in pais is to prevent an unjust departure by one person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other’s detriment. Whether a departure by a party from the assumption should be considered unjust and inadmissible depends on the part taken by him in occasioning its adoption by the other party. He may be required to abide by the assumption because it formed the conventional basis upon which the parties entered into contractual or other mutual relations, such as bailment; or because he has exercised against the other party rights which would exist only if the assumption were correct, [as in the authorities cited] .... or because knowing the mistake the other laboured under, he refrained from correcting him when it was his duty to do so; or because his imprudence, where care was required of him, was a proximate cause of the other party’s adopting and acting upon the faith of the assumption; or because he directly made representations upon which the other party founded the assumption.
In Grundt v The Great Boulder Proprietary Gold Mines Ltd, his Honour explained the object of this estoppel:
The principle upon which estoppel in pais is founded is that the law should not permit an unjust departure by a party from an assumption of fact which he has caused another party to adopt or accept for the purpose of their legal relations ..... One condition appears always to be indispensable. That other must have so acted or abstained from acting upon the footing of the state of affairs assumed that he would suffer a detriment if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption .... [The basal purpose of the doctrine] .... is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it.
By 1998, in The “Indian Endurance”,Lord Steyn was able to state that the doctrine was well-settled:
It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention.
I turn to a consideration of the elements of estoppel by convention in greater detail.
D.3 The common assumption
D.3a The commonality of the assumption
As the statements of principle make clear, the parties must enter into some legal relationship on the basis of an assumption that is shared by or common to them both. The commonality of the assumption is what marks out estoppel by convention as a distinct form of estoppel.
In this respect, it may differ from an estoppel by representation. The origin of the common assumption often is, but does not have to be, a representation made by A to B to induce the assumption in B. It may arise where A and B independently (and often by mistake) make, and then deal with each other upon, the same assumption. This appears, for instance, to have occurred in the Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd, where both parties assumed that the plaintiff’s guarantee covered the loans made by the bank to the plaintiff’s subsidiary and dealt with each other accordingly.
It must, however, be shown that the assumption was communicated between the parties and acted upon. There must be some “mutually manifest conduct of the parties” as Kerr LJ pointed out in The “August Leonhardt”:
All estoppels must involve some statement or conduct by the party alleged to be estopped on which the alleged representee was entitled to rely and did rely. In this sense all estoppels may be regarded as requiring some manifest representation which crosses the line between representor and representee, either by statement or conduct. It may be an express statement or it may be implied from conduct, eg a failure by the alleged representor to react to something said or done by the alleged representee so as to imply a manifestation of assent which leads to an estoppel by silence or acquiescence. Similarly, in cases of so-called estoppels by convention, there must be some mutually manifest conduct by the parties which is based on a common but mistaken assumption. The alleged representor’s participation in this conduct can then be relied upon by the representee as a basis for this form of estoppel.
But there is no necessity for the parties or either of them to believe that the assumed state of affairs is true. Nor is it necessary for them (notwithstanding what Kerr LJ stated) to have been mistaken about the matters assumed. As Dixon J pointed out in Grundt:
It is important to notice that belief in the correctness of the facts or state of affairs assumed is not always necessary. Parties may adopt as the conventional basis of a transaction between them an assumption which they know to be contrary to the actual state of affairs. A tenant may know that his landlord’s title is defective, but by accepting the tenancy he adopts an assumption which precludes him from relying on the defect.
What is important is for them to act in the belief, manifested by words or conduct, that they are both proceeding with the transaction on the basis of the same shared assumption. As Handley puts it: “The representation is not necessarily that the convention is true but that it has been mutually adopted and each party relies on its adoption when they enter into the transaction.” He cites in support, William Parker Burkinshaw v Jonathan Nicholls, an authority on estoppel in pais, in which Lord Blackburn stated that where a person induced another to act on the basis that a certain state of affairs exists: “.... their rights should be regulated, not by the real state of the facts, but by that conventional state of facts which the two parties agree to make the basis of their action.”
D.3b The matter assumed must be clear
As Sir Andrew Morritt VC stated in Baird Textiles Holdings Ltd v Marks & Spencer Plc, the content of the common assumption must be “sufficiently certain to enable the court to give effect to it”. It was established in Woodhouse A C Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd, that the promise relied on in support of a promissory estoppel must be “clear and unequivocal.” The Vice-Chancellor indicated that he was applying the same test for the conventional estoppel sought to be raised. While in Troop v Gibson, Ralph Gibson LJ suggested that a lesser test might be appropriate because estoppels by convention were likely to involve a course of negotiation or transactions rather than specific promises, he nevertheless concluded that:
.... the extent to which the importance of clear and unequivocal statements is reduced in cases of estoppel by convention is probably small. In all cases the representation or statement must be sufficiently clear; and, since the doctrine of estoppel, when applied deprives a party of the ability to enforce a legal right for the period of time and to the extent required by the equity which the estoppel has raised, the clarity required will seldom fall below what is unequivocal for the relevant purpose.
I respectfully agree as to the degree of clarity required, but not with the characterisation of an estoppel by convention as equitable or of such an estoppel raising an equity. The effect of an estoppel by convention is discussed below.
D.3c The assumption may be about fact or law
Some of the earlier authorities suggest that the doctrine of estoppel by convention is confined to cases where the common assumption relates to a factual (and not a legal) state of affairs. This was problematical because the importance of the common assumption is plainly linked, not merely to the facts assumed per se, but to their legal implications. This led to acknowledgment that the common assumption may involve “mixed fact and law”. Thus, in Waltons Stores v Maher, Brennan J stated:
The assumed state of affairs to which a party may be bound to adhere may be more than a state of mere facts; it may include the legal complexion of a fact as well as the fact itself, that is, a matter of mixed fact and law. Thus in Sarat Chunder Dey v Gopal Chunder Lala (1892) LR 19 App 203 the subject of the estoppel was the validity of a conveyance, and in Yorkshire Insurance Co Ltd v Craine  2 AC 541 the subject of estoppel was the validity of a claim lodged out of time under a policy of fire insurance.
As Lord Steyn states in the passage cited in section D.2 above, it is now settled law that the doctrine applies “where parties to a transaction act on an assumed state of facts or law”. There is no good reason to exclude such assumptions while giving effect to assumptions regarding factual situations (or those said to involve mixed fact and law) which are significant only because of their legal implications for the transaction or relationship entered into by the parties. This is, of course, subject to questions of illegality and any overriding public policy. As Handley puts it: “An estoppel by convention cannot make lawful a transaction that was unlawful.”
D.4 The “transaction”
As is made clear in the statements of principle cited in section D.2 above, an estoppel by convention is concerned with a common assumption relied upon as the basis upon which the persons sharing such assumptions enter into a transaction, with the word “transaction” to be understood here in the broad sense of the parties engaging in acts or omissions affecting their mutual legal relationship.
Thus, Dixon J referred to an assumption which “formed the conventional basis upon which the parties entered into contractual or other mutual relations, such as bailment.” And later he spoke of assumptions adopted or accepted by the parties “for the purpose of their legal relations”. And Lord Steyn spoke of the estoppel arising “where parties to a transaction act on an assumed state of facts or law”.  Many other instances can be cited. I will merely add a reference to the Texas Bank case, in which both Eveleigh LJ and Brandon LJ applied the formulation appearing in the third edition of Spencer Bower and Turner, which referred to “an agreed statement of facts the truth of which has been assumed, by the convention of the parties, as the basis of a transaction into which they are about to enter.”
The current (fourth) edition of that textbook has modified its definition to speak about “relationships” rather than “transactions” perhaps to take into account Bingham LJ’s remarks in The “Vistafjord”, which questioned aspects of the formulation in the previous edition, discussed below. However, this does not affect the focus of estoppel by convention upon a transaction or legal relationship entered into in reliance on a common assumption. As Mance LJ puts it: “It is .... an established feature of both promissory and conventional estoppel that the parties should have had the objective intention to make, affect or confirm a legal relationship.”
The link between the common assumption and the transaction based upon that assumption may be illustrated by a few examples. I use the letters A and B to refer to the parties who share the common assumption, with B being the party who later seeks to resile from it.
A and B both erroneously believed that B’s guarantee covers loans made by A’s subsidiary C, to B’s subsidiary D. On the faith of that common assumption, A channelled the loans via its subsidiary C to D and allowed interest to build up on the indebtedness. B was not permitted to depart from the common assumption that it was liable under the guarantee: The Texas Bank case.
Landlord B and tenant A engaged in an arbitration in 1974 on the common assumption that there was nothing to restrict A’s assignment of the lease. That was incorrect, a restriction having been overlooked by both. On the basis of that assumption A effected an assignment of the lease to C in 1980. B was not permitted to terminate the lease by reason of the assignment: Troop v Gibson.
A and B both believed that service of legal process by A on an authorised agent of B was good personal service on B when this was not permitted by the rules. In reliance on the common understanding, A effected service on the agent and omitted to serve B personally while there was still time to do so. B was estopped from contending that he had not been properly served and that it was now too late to serve him: approach suggested obiter by Lord Goff in Kenneth Allison Ltd v A E Limehouse & Co.
A entered into a sub-charter of a cruise ship with B on the common assumption, shared with B’s authorised agent X, that A was entitled to payment of commission by B on passenger sales to be achieved by A on the related head charter of the vessel to a third party. B was not permitted to resile from that common assumption: The “Vistafjord”.
A and B, believing that a London arbitration clause in their charterparty was valid, went through the arbitration in that shared belief. The clause was actually void. B was not permitted to contend that it was void after the claim had become time-barred in the jurisdiction where proceedings should have been started: The “Amazonia”.
In the last three examples given, the transaction entered into was between the parties who shared the common assumption. But the first two examples show that this need not be the case. The transaction entered into by A in each of those two cases was with a third party, as occurred in the Texas Bank case (where the loans went to B’s subsidiary D) and in Troop v Gibson (where A assigned the lease to C). Nevertheless, those were transactions entered into by A on the basis of an assumption made regarding the status of A’s legal relationship with B: that B was a guarantor of A’s loan to D; and that B was A’s landlord who did not have power to prohibit an assignment to C. B’s attempted departure from the common assumption, if permitted, would have caused A detriment which it would not have suffered if it had not entered into the transaction in question on the footing of the common assumption.
It is also clear from the second example, Troop v Gibson, that the common assumption may endure for a long time (there for some six years) before a relevant transaction is entered into on the strength of that assumption and before an attempt is made to desert it.
It is in this context that Bingham LJ’s remarks in The “Vistafjord”, should be understood. His Lordship, in approving and agreeing with an unreported judgment by Peter Gibson J in Hamel-Smith v Pycroft & Jetsave Ltd, criticised the formulation in the third edition of Spencer Bower (cited above) and stated:
.... I do not see why the parties need be about to enter a transaction when they make the common assumption. .... Estoppel by convention is not dependent on a contract, but on a common assumption. Take, for example, a case where there is a partnership agreement terminable at will, and shortly after the partnership commences all the parties misconstrue an important provision of the partnership agreement. Thereafter the partners continue in partnership on the basis of the misconstrued agreement for many years before the partnership is terminated, at which point one partner realises the error and seeks to go back on the common assumption. I cannot see on what rational principle it would be right to say that estoppel by convention could not apply to such a case.
What is important for an estoppel by convention is that there should have been a common assumption which has been acted upon. Further, such action need not follow immediately after the common assumption is made, nor be in the course of the same transaction between the parties. [Citing Troop v Gibson as an example]
In my view, Bingham LJ was merely stressing the points which have also been made above, namely: (i) that the transaction entered into in reliance on the common assumption and the attempted departure from that assumption may take place years after the common assumption was first adopted; and (ii) that the transaction in question may involve a third party and not necessarily the parties who shared the common assumption. In questioning whether the parties “need to be about to enter a transaction”, his Lordship was not suggesting that estoppel by convention does not involve a linkage between a transaction and the common assumption. Indeed, the partnership example given illustrates such linkage. The partners shared a common assumption as to the contents of the partnership agreement on the strength of which they entered into many transactions as partners over the years. What took a long time to emerge was the attempt to resile from the common assumption.
D.5 Departure and detriment
Two further elements must be established for constituting an estoppel by convention. First, there must be an attempt by one party to depart from the common assumption which departure would be unjust because of “the part taken by him in occasioning its adoption by the other party”. Secondly, the other party would suffer detriment arising out of his having entered into the relevant transaction on the basis of the common assumption “if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption” when abandoning the common assumption.
D.6 Legal effect of an estoppel by convention
There was discussion in argument and in the courts below as to whether Mr Unruh’s reliance on estoppel by convention involved an impermissible attempt to use it as a cause of action – “a sword” – on the footing that it is only permissible to deploy the doctrine defensively, as “a shield”. Such nomenclature is not particularly helpful to an understanding of the legal effect of an estoppel by convention and, as Brandon LJ stated, is “no more than a matter of semantics”.
It is clear that, unlike equitable estoppels which create enforceable equitable rights, an estoppel by convention is not a source of legal obligation. However, such an estoppel may, in the circumstances of the particular case, result in an otherwise ineffective or incomplete cause of action being made viable. The doctrine therefore does not play a wholly defensive role in litigation.
In the Texas Bank case, Brandon LJ illustrated this by postulating an action by the bank on the guarantee, a plea by Amalgamated in the defence that the indebtedness fell outside the scope of the guarantee and a plea in the reply that Amalgamated was estopped from questioning the parties’ common interpretation of the guarantee. His Lordship continued:
This illustrates what I would regard as the true proposition of law, that, while a party cannot in terms 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 necessarily have failed.
Brennan J takes a similar view and provides an exposition of the mechanism of the estoppel (which he dealt with in terms of an estoppel in pais):
The effect of an estoppel in pais is not to create a right in one party against the other; it is to establish the state of affairs by reference to which the legal relationship between them is ascertained.
It has been said that estoppel in pais is merely a rule of evidence and not a cause of action (Seton v Lafone (1887) 19 QBD 68; Low v Bouverie  3 Ch 82; Re Ottos Kopje Diamond Mines, Ltd  1 Ch 618) but that proposition needs some explanation. If the estoppel relates to the existence of a contract between the parties, the legal relationship between the parties is ascertained by reference to the terms of the contract which has been assumed to exist. If, in the assumed state of affairs, the contract confers a cause of action on the party raising the estoppel, the cause of action may be enforced. The source of legal obligation in that event is the assumed contract; the estoppel is not a source of legal obligation except in the sense that the estoppel compels the party bound to adhere to the assumption that the contract exists.
The second point which may be of relevance in the present case is that an estoppel by convention necessarily “only applies for the purposes of the transaction or relationship in which the convention was adopted.” This follows from the object of the estoppel, which, as indicated in section D.2 above, is to prevent the detriment which flows from a party having entered into the transaction, caused by the opposite party resiling from the common assumption upon which the transaction was based. It also follows, as Handley puts it, that: “A convention cannot estop a party against someone who is neither a party nor a privy.” Moreover, the court will only give effect to the estoppel to the extent that justice so requires. Where the circumstances have developed and no injustice would result from the opposite party resiling from the common assumption the estoppel is not given continued effect.
E. Application of the estoppel principles to the facts
E.1 A claim based on the DoA
Mr Unruh’s estoppel case leans heavily on the DoA, the genesis of which is discussed in section B.4 above. It will be recalled that, in consequence of the “No Claims clause” contained in the Consultancy Agreement, Egana was advised by S&S in April 1994 that Mr Unruh had been released from all his liabilities to Egana accrued up to 29 September 1993, including liabilities incurred under the indemnities given by him. Efforts to get Mr Unruh to agree to a set-off between his accrued liabilities and the final $1 million instalment payable to him under the Consultancy Agreement were unsuccessful. The impasse was then resolved when, in response to a letter of 4 January 1995 from Egana enclosing a draft of the DoA (“the January Egana letter”), Mr Unruh duly executed the DoA, dated 5 January 1995 and received his final instalment without deduction.
The January Egana letter, signed by Mr Peter Lee and Mr Tony Chik, directors of Egana, was in the following terms:
As you are aware, we have been pretty engaged in finalising the accounts for 1994 for audit purpose. As there are certain indebtedness remain outstanding from you in ESCT account as of December 31, 1994, the auditors would probably go through each item of the receivables in these operating companies and assess its recoverability. In order not to have any adverse effect on the financial position and to ensure that your indebtedness will be duly reimbursed to ESCT, we suggest that a Deed of Acknowledgement of Debts be entered into by you in favour of ESCT and [Egana].
Please see attached the draft Deed for your consideration. If it is to your satisfaction, please make a good copy of it, sign and return same by fax with the original to follow for our execution. Upon receipt of same, we shall arrange for payment of the consultancy fee in the amount of HK$1,000,000 accordingly.
The DoA, which was not drawn up with the help of lawyers, contains an acknowledgment by Mr Unruh in Clause 1 that he owes ESCT $752,406.50 (defined as “the Indebtedness”) and that he is liable to continue to indemnify “ESCT or Mr Seeberger to the extent of 50% of the total liabilities to be incurred in accordance with the MoA.” It goes on to identify Mr Unruh’s entitlement to the Special Bonus pursuant to Clause 5 of the MoA and then, in words which are central to Mr Unruh’s estoppel argument, states in its Clause 2:
.... Notwithstanding with any contrary provisions as provided in the Memorandum [which has been defined as the MoA], Mr Unruh hereby agrees and confirms that [Egana referred to as EIH] shall be entitled to set off the Indebtedness and any further liabilities as abovestated against the amount of Special Bonus to be payable by Egana. Mr Unruh covenants with Egana that he will pay any balance of the Indebtedness which are not set-off by the Special Bonus within 10 days from the date of the payment of the Special Bonus .... failing which a penalty default interest shall be charged ....
E.2 How Mr Unruh’s case is put
Mr Burns submitted that the Court should uphold the Judge’s decision on estoppel. However, the argument he developed diverged from the Judge’s approach in one important respect, namely, as to how an operative common assumption could be established. I shall deal with both versions of the argument.
Mr Unruh has not at any stage sought to assert a cause of action founded simply on the DoA. It is not his case that Egana, as a party to the DoA, made a promise under deed to pay the Special Bonus. This is quite understandable since the DoA does not contain any such promise.
Nevertheless, Mr Unruh submits that the DoA’s conferment of a right of set-off only makes sense if Egana had undertaken an unconditional liability to pay Mr Unruh the Special Bonus against which his Indebtedness could be set-off. The Judge agreed, holding that Clause 2 of the DoA “amounted to an acknowledgement on the part of Egana that it had agreed to pay Mr Unruh the Special Bonus.” He pointed out that the words giving Egana the right of set-off were not qualified or conditional on Egana subsequently making itself liable to pay Mr Unruh because, he suggests, if the DoA had stipulated any such conditions “.... 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.” The meaning attributed to the DoA is therefore the springboard of both arguments.
It is at this point that the decision of the Judge (supported by the majority in the Court of Appeal) diverges from the case as argued before the Court. The Judge, held that the relevant common assumption was constituted by Clause 2 in the DoA itself. He noted that 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” and found that this had been done “here in the DoA”.
He formulated the common assumption in the following terms:
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.
He then held that Mr Unruh was “induced to continue to provide assistance” in the arbitrations on the basis of this common assumption and that he had consequently suffered detriment by being deprived of the opportunity to press Mr Seeberger and Egana to enter into legal documentation to secure Egana’s liability to pay him the Special Bonus. His Lordship stated:
.... 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’.
There was no independent analysis of the requisite elements of estoppel by convention in the majority judgments in the Court of Appeal. Rogers VP noted the reasoning of the Judge which he accepted. However, he specifically rejected the argument that Clause 2 should not be construed as meaning that Egana had undertaken unconditional liability to pay the Special Bonus stating:
If Mr Chang’s argument were correct, it would mean that the operative part of the DoA was clause 1 and that clause 2 was, in effect, highly deceptive verbiage designed to obfuscate the true position from the auditors in order that they should not require the accounts to be presented in a manner which they considered was necessary to give a true and fair view of the financial state of the 2nd defendant. In consequence, if Mr Chang’s argument were correct, clause 2 of the DoA was designed to fool the auditors, deceive the public as to the true and fair view of the financial state of the 2nd defendant and cheat the plaintiff into extending his liability in a number of respects.
Mr Burns’ argument differs to the extent that he contends that the common assumption “pre-existed the DoA” and, although he was unable to say when and in what circumstances it had been adopted, he submitted that the set-off provided for by the DoA compelled the court to draw the logical inference that there must have been an earlier mutual acknowledgment that Egana was unconditionally liable to pay the Special Bonus. He relied on the terms of the Consultancy Agreement of 29 September 1993 and correspondence leading up to it in support. Those documents are considered below.
It follows that, as argued in this Court, Mr Unruh’s case was that he and Egana had reached a common assumption at some time prior to 5 January 1995 that Egana would pay the Special Bonus; that this is evidenced by Clause 2 of the DoA; and that in reliance on that common assumption, Mr Unruh had continued to provide assistance in the arbitration and had suffered the detriment found by the Judge.
E.3 Mr Unruh’s estoppel case analysed
E.3a The construction of the DoA
While I accept that the set-off provision in Clause 2 shows that the parties to the DoA contemplated a liability to pay the Special Bonus being undertaken at some time by Egana, I am not persuaded that it should be read as meaning that Egana had unconditionally done so as at 5 January 1995.
First, while Mr Unruh’s argument proceeds purely as a matter of purported inference from the words concerning a set-off, Clause 2 specifically addresses the legal source of Mr Unruh’s Special Bonus. Its opening words are: “Pursuant to Clause 5 of the MoA, Mr Unruh is to receive [the Special Bonus] .... from any successful outcome regarding the Benetton Arbitration.” It is therefore pursuant to the MoA and not any other arrangement – particularly, not any agreement with Egana – that Mr Unruh is said to have an entitlement to the Special Bonus. There is no suggestion anywhere in the DoA that the MoA has been modified. One must therefore take it that in referring to Mr Unruh’s entitlement pursuant to Clause 5, the parties to the DoA had in mind its terms (set out in section C.1 above) stipulating that Egana was not to be liable to pay unless and until the five conditions referred to in section C.2 above were satisfied. As it is common ground that such conditions had not, as at 5 January 1995, been satisfied, a fact that must have been known both to Mr Seeberger and Mr Unruh, the opening words of Clause 2 run strongly counter to the suggestion that the parties should be taken to have regarded Egana as there and then unconditionally bound to pay the Special Bonus.
Secondly, the set-off provision itself refers to a set-off “against the amount of Special Bonus to be payable by Egana”. If they were assuming in common that Egana had undertaken liability to pay, one might have expected the clause simply to refer the “Special Bonus payable by Egana.” Read together with the DoA’s reference to Clause 5 just discussed, “to be payable” suggests a future and conditional meaning.
This is supported by a third aspect of the DoA. For Egana to have an accrued right to set-off the Indebtedness, the debts had to be owed to Egana. Yet by Clause 1 of the DoA, the Indebtedness was expressly said to be owed by Mr Unruh to ESCT, not Egana. No doubt it was contemplated that Egana, being ESCT’s parent company would be able to procure ESCT to assign the debt to Egana. However, this shows that the parties were not at that stage dealing with rights of set-off involving accrued cross-liabilities between Egana and Mr Unruh, but with a contemplated set-off that could only take effect if and when certain steps were taken in future to make this possible.
Fourthly, whether there would be any sums derived from the arbitrations available for a set-off was unknown as at 5 January 1995. Egana will have had no doubt realistic hopes of receiving monetary compensation because the Tribunal had issued a PFA in its favour in February 1993 and, on 3 November 1993, it had started Phase 2 with a view to quantifying the award. But they did not know in January 1995 how much they would get. If it was less than US$10 million, the set-off provision would have no effect. Moreover, Benetton had meanwhile started its counter-attack by commencing NAI 1616 which included a counterclaim which might affect any ultimate recovery. The FAA did not appear until 23 June 1995 and settlement did not actually occur until 31 March 2000, only after vigorous court challenges mounted by Benetton. The set-off clause was therefore necessarily of conditional application and incapable of taking effect immediately.
Rogers VP appears to have suggested in effect that Egana could not be heard to advance a construction to similar effect. He held that Egana had executed the DoA primarily to satisfy the concerns of its auditors as to the recoverability of the Indebtedness by showing that it would be recoverable by means of a set-off. His Lordship suggested that Egana must obviously have known that a DoA which does not contain an immediately operative set-off would not have been accepted by the auditors, so that it must have been represented to them that the set-off took immediate effect. If the argument now advanced were correct, this would imply that Egana had fooled the auditors, deceived the public and cheated the plaintiff “into extending his liability in a number of respects”.
I am unable to subscribe to such a view. It proceeds on the assumption that the auditors were or were predominantly concerned about recoverability in the sense of looking for a means by which Mr Unruh’s Indebtedness would be funded. It suggests that it was only by demonstrating that it could be funded through an operative set-off that the auditors could be satisfied. However, it was common ground that Mr Unruh was sufficiently wealthy to pay the debt out of his own resources. And as pointed out above, the evidence suggests that the real concern was about legal irrecoverability in relation first, to the indebtedness accrued for the financial year 1994 (as indicated in the January Egana letter) in the light of S&S’s advice that Mr Unruh been released from liabilities incurred up to 29 September 1993 as a result of the Consultancy Agreement; and secondly, in relation to expenses incurred after that date especially given the approaching expiry of the Howard Lau Deed. It was, in other words, far more likely that the auditors’ concerns referred to in the January Egana letter related to the lack of a legal basis to enforce recoverability and not to a need for identifying a funding source for discharging the debt. As the very title of the Deed of Acknowledgment suggests, its main purpose was to obtain Mr Unruh’s fresh acknowledgment of his liability for the accrued debts (set out in Clause 1) and his liability in respect of future expenses. The set-off appears to me to have addressed an ancillary point made in the S&S letter of advice.
If the auditors had been keen to find an immediately operative set-off, they could not have derived much comfort from the DoA. The value, if any, of the potential Special Bonus was then wholly uncertain so that there might be nothing available to set-off the Indebtedness.
Moreover, given the known facts, it is implausible, to say the least, that Egana would have sought to represent to the auditors that it had undertaken liability under the MoA, merely to demonstrate to them that there existed a funding source to ensure recoverability of the Indebtedness. If this had been suggested, the auditors would have been prompted to examine the basis upon which Egana had taken on that liability. They would have discovered that, contrary to what was envisaged in Clause 5 of the MoA, Egana had never obtained relevant legal advice nor entered into any legal documentation to take on the liability nor passed any board resolution to do so. Such issues would have produced far more serious concerns on the part of the auditors. Provoking such concerns would not have been a rational course for Egana to take.
I therefore do not consider the discussion of the impact of the DoA on the auditors’ beliefs relevant either to the meaning to be given to the DoA or to Mr Unruh’s case on estoppel.
E.3b The alleged common assumption
The Judge’s finding that Mr Unruh and Egana had reached a common assumption that Egana would pay the Special Bonus without qualification (as discussed in section E.2 above) rested solely on his construction of the DoA and the inferential meaning he attributed to the set-off provision. On the view I take of the meaning of the DoA, the Judge’s finding is wholly undermined.
Mr Burns’s argument is also severely damaged since he relies heavily on the DoA being given the aforesaid meaning for it to serve as evidence of a pre-existing common assumption involving Egana’s acceptance of unconditional liability. But Mr Burns sought to rely also on evidence extrinsic to the DoA. For his case to survive, he had to show (as discussed in section D.3a) that the alleged common assumption was mutually manifested by words or conduct on the part of Mr Unruh and Egana.
In my view, Mr Burns was wholly unsuccessful. If one is to look at the extrinsic evidence, the starting-point must be the MoA dated 19 September 1992. It made it clear that Egana had no liability to pay the Special Bonus and would not take on such liability unless and until the specified conditions were satisfied. It follows that Mr Unruh requires evidence that Egana positively took on that liability at some later stage and communicated this to Mr Unruh, inducing in him a common assumption to such effect.
No relevant evidence is identified until we arrive at the Consultancy Agreement dated 29 September 1993. By its clause 13, Mr Unruh acknowledges that he has “no claims (outstanding or otherwise) of any kind whatsoever against the Group and/or [Mr Seeberger] ....” The Group is defined as Egana and its subsidiaries. Furthermore, there is an express saving of Mr Unruh’s claims under Clause 5 of the MoA, stating:
For the avoidance of doubt, this sub-clause shall not be taken to relate to the rights of the Consultant [Mr Unruh] under Clause 5 of the [MoA] dated 19th September 1992 and entered into between the Consultant and [Mr Seeberger].
It follows that the Consultancy Agreement positively shows that as at 29 September 1993, far from there being any relevant common assumption, Mr Unruh was expressly acknowledging that he had no claims against Egana and making it clear that the only rights he was preserving were rights against Mr Seeberger personally under the MoA. So Mr Unruh needed to put up evidence to counter this reinforcement of the case against him. But none was produced in the period leading up to 5 January 1995.
The evidence beyond that date is also against the existence of any common assumption. It will be recalled that Mr Unruh had originally sought to set up an oral agreement allegedly made at the end of May or early June 1995 whereby Egana was said to have orally agreed via Mr Seeberger to take up the liability. That was rejected by the Judge and not pursued in the Court of Appeal. But the fact that it was thought necessary to make the allegation at all calls into question the existence of any clearly-defined common assumption that Egana was already liable at a date prior to January 1995.
Moreover, the documents relied on by the Judge for rejecting that oral agreement provide further good reasons for rejecting the suggested common assumption. Those documents consist of communications passing between Mr Unruh and his lawyers in which a “side letter” was being drafted which Mr Seeberger would be asked to sign, confirming that notwithstanding expiry of the Consultancy Agreement, Mr Unruh would remain entitled to his share of “any claim compensation in connection with the arbitrations”. In the course of that correspondence, Mr Unruh’s lawyers, Messrs Haldanes, stated in a fax of 7 June 1995 that they were drafting the side letter on the basis that “nothing has been done or signed to vary” Clause 5 of the MoA. If there had, by January 1995, been a common assumption that Egana would take on the liability, Mr Unruh would surely have corrected the solicitors’ misimpression. But he did not do so. Moreover, the original draft was altered to ask Mr Seeberger specifically to state: “This letter constitutes acknowledgment of the above matters by ESCT and Egana as well as by me personally.” It is hard to see why this should have been needed if Mr Unruh and Egana already shared a common assumption that Egana would pay the compensation. The Judge held that the evident need for this confirmation showed that there had been no oral agreement. It also shows that there was no common assumption.
Finally, Mr Chang submits with much force that if Mr Unruh genuinely believed, as part of a common assumption, that Egana had accepted liability to pay, it is inexplicable that when payment was not forthcoming, his Writ was issued only against Mr Seeberger, with Egana only added as a second defendant some 16 months later.
In summary, like Stone J who dissented, I am unable to discern any evidence of a common assumption or agreement for Egana to pay the Special Bonus “come what may”. Certainly, the evidence comes nowhere near establishing a common assumption of the certainty and clarity required, as discussed in section D.3b above. On the contrary, the evidence tends completely in the contrary direction.
E.3c The transaction
It is hard to identify any transaction which Mr Unruh and Egana can be said to have entered into on the basis of the alleged convention. Mr Unruh relies merely on his continued assistance in the arbitrations. Yet, as the Judge himself found:
.... 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.
As previously noted, Mr Unruh’s assistance in the arbitration was part of the process of realizing the asset he had sold to Mr Seeberger which he had undertaken in the MoA to use his best endeavours to promote. It was also assistance given with a view to crystallizing part of the consideration he was to receive on the sale (if the arbitration proceeds should exceed US$10 million). His continued assistance is therefore entirely explicable on these bases. I find it impossible to accept that he would not have rendered such continued assistance but for a belief that Egana had now stepped in to accept liability to pay the Special Bonus. He had always looked to Mr Seeberger, the other party to the MoA, for such payment and would no doubt have continued to do so. In the result, no transaction relevant to an estoppel by convention has been identified.
The detriment alleged is that Mr Unruh was lulled by the alleged common belief in Egana’s acceptance of liability into not doing anything to obtain documentation from Mr Seeberger and Egana to confirm liability on Egana’s part. It is suggested that somehow Mr Unruh was deprived of an opportunity to obtain such documentation. The brief answer is that this is not what the evidence shows. As we have seen, Mr Unruh did seek such documentation. He tried to get Mr Seeberger to provide the side letter in June 1995, as mentioned in section 3.b above. He was initially ignored and then rebuffed both by Mr Seeberger and Egana. I cannot in any event see how he can be said to have been deprived of the chance of asking for documentation even if he believed that there was a relevant – but undocumented – common assumption.
It follows, in conclusion, that Mr Unruh’s case on estoppel by convention falls at every single hurdle. It is unnecessary to deal with the “sword and shield” argument beyond what is said in section D.6 above.
F. No case based on alternative oral agreement
Finally, the Judge held that if the estoppel that he found established did not give rise to liability in Egana, such liability could be established on an alternative basis, stating: “.... the facts giving rise to the cause of action, namely an agreement to pay the Special Bonus, existed independently of the estoppel”. He was evidently referring to some actionable agreement coming into existence at or about 5 January 1995. Rogers VP noted this aspect of the Judge’s decision but it is unclear whether it was accepted. Le Pichon JA agreed with Rogers VP’s reasons for dismissing the appeal but placed her own decision primarily on the ground that the Judge’s alternative basis of liability should be sustained so that reliance on estoppel by convention was not necessary for establishing Egana’s liability.
At the hearing, Mr Burns did not feel able to support this alternative ground of liability. With respect, I consider his concession rightly made. As Stone J succinctly pointed out in his dissent:
.... the learned judge was in error in alternatively basing his decision upon a separate and unpleaded oral agreement consistent neither with the specific oral agreement relied upon by the plaintiff (and specifically rejected), nor with the plain terms of the Memorandum of Agreement.
For the foregoing reasons, I would:
dismiss Mr Seeberger’s appeal;
allow Egana’s appeal and set aside the orders of the Judge and the Court of Appeal giving judgment against Egana;
I would make orders nisi:
that Mr Seeberger pay Mr Unruh’s costs; and
that Mr Unruh pay Egana’s costs here and below;
direct that the parties be at liberty to file and serve any written submissions on costs on or before Friday 2 March 2007.
Justice McHugh NPJ
I agree with the judgment of Justice Ribeiro PJ.
Chief Justice Li
The Court unanimously dismisses Mr Seeberger’s appeal, allows Egana’s appeal, sets aside the orders of the Judge and the Court of Appeal giving judgment against Egana and makes the orders nisi and gives the directions set out in the concluding paragraph of Justice Ribeiro’s judgment.
9 MARCH 2007
JUDGMENT ON COSTS
Chief Justice Li
The judgment of the Court on costs will be delivered by Justice Ribeiro PJ.
Justice Ribeiro PJ
On 9 February 2007, the Court dismissed Mr Seeberger’s appeal and allowed Egana’s appeal. Costs orders nisi were made for Mr Seeberger to pay Mr Unruh’s costs and for the latter to pay Egana’s costs here and below, with the parties given liberty to file submissions on costs.
Mr Unruh has filed submissions contending that the order in respect of Egana should be varied so that Egana is required to pay his costs in this Court, although it is recognized that he should pay Egana’s costs at first instance and in the Court of Appeal.
The basis of this submission is a Calderbank letter in which Mr Unruh proposed that if Mr Seeberger should drop his appeal, agree to an order for payment out to Mr Unruh of the judgment sums then in court, and pay Mr Unruh’s costs; he would agree to Egana’s appeal being allowed by consent or alternatively (if the Court was not prepared to go along with that suggestion) to undertake not to enforce the judgment against Egana or to agree to a permanent stay of execution, with Mr Unruh paying Egana’s costs of the proceedings below.
Mr Seeberger and Egana both rejected that proposal and Mr Unruh submits that since, in the end, Egana achieved no more than it could have achieved by its acceptance of the Calderbank offer, it should have to pay Mr Unruh’s costs in this Court.
We are not persuaded by this argument. Although it is stated that Mr Seeberger held almost 40% of the issued shares in Egana at the time of the without prejudice offer, Egana is a public company and obviously an entity quite separate from Mr Seeberger. They each had their own interests to consult and were separately represented throughout.
As was rightly accepted on Mr Unruh’s behalf, the Court does not generally allow appeals by consent, but requires to be satisfied that the judgment below was erroneous before that judgment is set aside. Accordingly, an order simply allowing Egana’s appeal by consent was most unlikely to be forthcoming. Egana was therefore being asked to accept the continued existence on the record of the adverse judgments of the Court of First Instance and the Court of Appeal on a permanent basis, subject only to Mr Unruh’s undertaking not to enforce them or to his consenting to a permanent stay of execution. It was perfectly reasonable for Egana, a public company, to regard that proposal as unacceptable and to pursue its appeal with a view to having those judgments expunged. Moreover, the offer in favour of Egana was made conditional on Mr Seeberger’s agreement to drop his own appeal, a matter which Egana could not be expected to control. Egana can hardly be penalised in costs because Mr Seeberger chose to pursue a course dictated by his own interests so that there was in any event no basis for Egana accepting the offer put forward.
Mr Unruh chose to add Egana as a party to his action against Mr Seeberger (as an afterthought decided upon some 16 months after issuing the writ against Mr Seeberger) on grounds which have been shown to be misconceived. There is no basis for him to escape paying Egana’s costs and the costs orders nisi are accordingly made absolute.
 HCA 6641/2000, 3 September 2004.
 Rogers VP, Le Pichon JA and Stone J, CACV 297/2004 and CACV 298/2004, 7 October 2005.
 Kenneth Allison Ltd V A E Limehouse & Co  2 AC 105 at 126-127; Furness Withy (Australia) Pty Ltd v Metal Distributors (UK) Ltd, The “Amazonia”  1 Lloyd’s Rep 236; Hyundai Engineering and Construction Company Ltd v Vigour Ltd  2 HKC 505, §114.
 Printed case §58.
 Shareholders Agreement dated 16 August 1991 between Mr Seeberger, Mr Unruh and Haru Pacific.
 Deed of acquisition of Shares dated 21 September 1992 between Haru Pacific, Mr Unruh and Egana.
 Deed of Acquisition of Shares dated 19 September 1992 between Mr Seeberger, Mr Unruh and Egana.
 Participation & Cooperation Agreement dated 11 January 1992 between Mr Unruh and Egana, §7 as amended by MoA §3.
 Service Agreement dated 19 September 1992 between Mr Unruh and Mr Seeberger.
 MoA §4(A).
 MoA §5.
 Deed of Acquisition of shares dated 19 September 1992 between Mr Seeberger, Mr Unruh and Egana.
 Deed of Acquisition of shares (supra), §6(A) and MoA §4(C).
 Consultancy Agreement §13(A).
 Judgment §163.
 Judgment §161.
 As stated in the FSA.
 Judgment §196.
 Court of Appeal §§37-38.
 Court of Appeal §37.
 Judgment §194.
 Mr Seeberger’s Printed Case §41.
 Judgment §§231-238.
 Court of Appeal §39.
 See Professor Percy H Winfield, “The History of Maintenance and Champerty” (1919) 35 LQR 50 at 56 et seq.
  AC 368 at 386.
 See Professor Eric T M Cheung, “The Modern Application of the Medieval Law of Maintenance and Champerty” (Law Lectures for Practitioners 2005, Sweet & Maxwell Asia) 83 at 84, which illustrates the continuing practical importance of the doctrines in Hong Kong.
  1 HKC 241.
  1 HKC 179 at 188-189.
 Article 8: “The laws previously in force in Hong Kong, that is, the common law, rules of equity, ordinances, subordinate legislation and customary law shall be maintained, except for any that contravene this Law, and subject to any amendment by the legislature of the Hong Kong Special Administrative Region.”
 Embracery involves improper attempts to influence a juror and is of no concern in this appeal.
 In New South Wales (Maintenance, Champerty and Barratry Abolition Act 1993, ss 3 and 4) and Victoria (Wrongs Act 1958, ss 32 and 322A), criminal and tortious liability have been abolished, but maintenance and champerty remain grounds for vitiating contracts. In the Australian Capital Territory, (Civil Law (Wrongs) Act 2002, s 221), only criminal liability for those offences has been abolished.
 A word which Lord Coke explains comes from manutenentia which “is derived from the verbe manutenere”, ie, a taking in hand (of someone else’s quarrel). (Co Litt 368b)
 A word which Sir William Blackstone explains comes from campi-partitio “being a bargain with a plaintiff or defendant campum partire, to divide the land or other matter sued for between them, if they prevail at law; whereupon the champertor is to carry on the party’s suit at his own expence.” (Bl Comm Bk iv, c 10, s 12).
 (1883) 11 QBD 1 at 5.
 Bl Comm book iv c10, s 12.
 Co Litt 368 b.
  1 KB 822 at 831.
 The Regnal Year corresponding to 1274/5.
  1 KB 1006 at 1014.
 A statement approved by Lord Mustill in Giles v Thompson  1 AC 142 at 161.
 Neville v London “Express” Newspaper Limited  A C 368 at 382.
 Per Lord Mustill in Giles v Thompson  1 AC 142 at 161.
 Ibid at 153.
 Bradlaugh v Newdegate (1883) 11 QBD 1 at 7.
 British Cash and Parcel Conveyors, Ltd v Lamson Store Service Co Ltd  1 KB 1006, per Fletcher Moulton LJ at 1013.
 Glegg v Bromley  3 KB 474 at 489-490.
 Bradlaugh v Newdegate (1883) 11 QBD 1 at 11.
 Trendtex Trading Corporation v Credit Suisse  AC 679 at 702.
 British Cash and Parcel Conveyors, Ltd v Lamson Store Service Co Ltd  1 KB 1006 at 1013.
 Ibid at 1014.
  AC 368 at 378-379.
 Bradlaugh v Newdegate (1883) 11 QBD 1 at 11.
  Ch. 363.
 Article 35: “Hong Kong residents shall have the right to confidential legal advice, access to the courts, choice of lawyers for for timely protection of their lawful rights and interests or for representation in the courts, and to judicial remedies. Hong Kong residents shall have the right to institute legal proceedings in the courts against the acts of the executive authorities and their personnel.”
 Martell v Consett Iron Co Ltd  Ch 363 at 421-422; Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd  80 ALJR 1441, §82.
 Neville v London “Express” Newspaper, Limited  AC 368 at 382-383.
 (1876) LR 2 App Cas 186 at 210, per Sir Montague E Smith.
  QB 381 at §62.
 Legal Aid Ordinance, Cap 91, s 32. The Director has a charge over the proceeds for such contribution: s 18A (3A).
 Pursuant to the Courts and Legal Services Act 1990, s 58 and the Conditional Fee Agreements Order 1995 (S.I. 1995 No. 1674) and the Conditional Fee Agreements Regulations 1995 (S.I. 1995 No. 1675).
 See the discussion of conditional fees and after the event insurance in Callery v Gray  1 WLR 2000 (HL).
 See Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd  80 ALJR 1441.
  80 ALJR 1441 at §75.
 Ibid at §86.
 (1876) LR 2 App Cas 186 at 210.
  Ch 199 at 219.
  AC 679 at 694, per Lord Wilberforce.
  QB 381 at §36.
 The Privy Council in Ram Coomar Coondoo v Chunder Canto Mookerjee (1876) LR 2 App Cas 186 at 210, thought such agreements needed to be carefully watched in case they should be “found to be extortionate and unconscionable, so as to be inequitable against the party....”
 As stated by Buckley LJ in Wallersteiner v Moir (No 2)  QB 373, 401-402.
  QB 781.
  QB 781 at 788.
 Ibid at 786.
  QB 570.
 Ibid at 575.
 Ibid at 588-589.
  QB 629.
  AC 679 .
  QB 629 at 669.
 Counsel submitted that: “A legitimate interest in the outcome of the suit that might justify maintenance will not justify champerty: see Hutley v Hutley (1873) LR 8 QB 112. Champerty can never be justified; there can be no exception to its unlawfulness, and there is no authority to the contrary.”  AC 679 at 685.
  AC 679 at 694. See also Lord Roskill at 701-704.
  3 All ER 499.
 Ibid at 509.
  1 HKC 241.
  BCLC 723.
 Ibid at 733.
  3 All ER 499.
 Trendtex Trading Corporation v Credit Suisse  QB 629 at 663.
  Ch 199 at 218.
  3 All ER 321 at 332.
  2 All ER (Comm) 1083 at 1092, §43.
 Justice K R Handley, Estoppel by Conduct and Election (Thomson, Sweet & Maxwell, 2006). The passage has been cited without its footnotes.
 At p 20-21, §1-028.
 See for instance Lord Steyn in Republic of India v India Steamship Co Ltd (No 2), “The Indian Endurance” and “The Indian Grace” (No 2)  AC 878 at 914; Lord Goff in Johnson v Gore Wood & Co  2 AC 1 at 39-41; Millett LJ in First National Bank v Thompson  Ch 231 at 236; and Baird Textiles Holdings Ltd v Marks & Spencer Plc  1 All ER (Comm) 737.
 Including Lord Denning MR in Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd  1 QB 84 at 122, cited with approval by Lord Bingham in Johnson v Gore Wood & Co  1 All ER 481 at 501; Mason CJ and Wilson J in Waltons Stores(Interstate) Ltd v Maher (1987- 1988) 164 CLR 387 at 404; and Mason CJ and Deane J in Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 409-413, 440 and 445.
 P Feltham, D Hochberg and T Leech, Spencer Bower on Estoppel by Representation (LexisNexis, Butterworths, 4th Edition) at pp 22-25, §§I.8.2-5.
 Handley, op cit, at p 4, §1-007 provides a long list of well-known cases where Dixon J’s statements have been cited with approval.
 (1933) 49 CLR 507 at 547.
 Namely, Yorkshire Insurance Co v Craine  2 AC 541 at 546-7; cf Cave v Mills (1862) 7 H & N 913 at 927-8;158 ER 740 at 746-7; Smith v Baker (1873) LR 8 CP 350 at 357; Verschures Creameries Ltd v Hull and Netherlands Steamship Co  2 KB 608 at 612; and Ambu Nir v Kelu Nair (1933) 60 IA 266 at 271.
 (1937) 59 CLR 641 at 674.
 Citing: K Lokumal & Sons (London) Ltd v Lotte Shipping Co Pte Ltd  2 Lloyd’s Rep 28; Norwegian American Cruises A/S v Paul Mundy Ltd  2 Lloyd’s Rep 343; Treitel, The Law of Contract, 9th ed (1995), pp 112-113.
 Republic of India v India Steamship Co Ltd (No 2), “The Indian Endurance” and “The Indian Grace” (No 2)  AC 878 at 913.
  1 QB 84.
  2 Lloyd’s Rep 28 at 34-35.
 (1937) 59 CLR 641 at 676.
 Handley, op cit, at 115, §8-001.
 (1878) 3 App Cas 1004 at 1026.
  1 All ER (Comm) 737;  EWCA Civ 274 at §38.
  AC 741 at 755, 761 and 771.
  1 EGLR 1 at 6. Mance LJ cited this passage with approval in Baird (above) §84.
 Waltons Stores(Interstate) Ltd v Maher (1987- 1988) 164 CLR 387 at 415-416.
 Republic of India v India Steamship Co Ltd (No 2), “The Indian Endurance” and “The Indian Grace” (No 2)  AC 878 at 913.
 See section A above.
 Op cit, p 128, §8-018.
 Thompson v Palmer (1933) 49 CLR 507 at 547.
 Grundt v The Great Boulder Proprietary Gold Mines Ltd (1937) 59 CLR 641 at 674.
 Republic of India v India Steamship Co Ltd (No 2), “The Indian Endurance” and “The Indian Grace” (No 2)  AC 878 at 913.
 Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd  1 QB 84 at 126 and 130-131.
 Estoppel by Representation, 3rd ed. (1977), at p 157.
 Norwegian American Cruises v Paul Mundy Ltd (“The Vistafjord”)  2 Lloyd’s LR 343 at 351-352.
 Baird Textiles Holdings Ltd v Marks & Spencer Plc  1 All ER (Comm) 737;  EWCA Civ 274 at §92.
 Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd  1 QB 84
 (1986) 277 EG 1134.
  2 AC 105.
 Norwegian American Cruises v Paul Mundy Ltd (“The Vistafjord”)  2 Lloyd’s LR 343.
  1 Lloyds Rep 236.
 Norwegian American Cruises v Paul Mundy Ltd (“The Vistafjord”)  2 Lloyd’s LR 343 at 351-352.
 (Unreported; judgment delivered on the Feb 5, 1987).
 Per Dixon J in Thompson v Palmer (1933) 49 CLR 507 at 547.
 Per Dixon J in Grundt v The Great Boulder Proprietary Gold Mines Ltd (1937) 59 CLR 641 at 674.
 Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd  QB 84 at 131.
 Waltons Stores(Interstate) Ltd v Maher (1987- 1988) 164 CLR 387 at 414.
 Ibid at 415.
 Handley, op cit, p 127, §8-015.
 Norwegian American Cruises v Paul Mundy Ltd (The “Vistafjord”)  2 Lloyd’s LR 343 at 351.
 Judgment §167.
 Judgment §173.
 Judgment §172.
 Judgment §171.
 Judgment §177.
 Court of Appeal §52.
 Court of Appeal §55.
 Printed case §9.
 Court of Appeal §85.
 Judgment §177.
 Judgment §187.
 See Court of Appeal §61.
 Court of Appeal §69.
 Court of Appeal §86
Ambrose Ho SC and Ms Linda Wong (instructed by Messrs To, Lam & Co) for the 1st Appellant.
Denis Chang SC, Mr Hectar Pun and Mr Newman Lam (instructed by Messrs To, Lam & Co) for the 2nd Appellant.
Ashley Burns and Mr Alexander Stock (instructed by Messrs Haldanes) for the Respondent.
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