Zebra Industries (Orogenesis Nova) Ltd v. Wah Tong Paper Products Group Ltd

HCMP 436/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 436 OF 2013

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JUDGMENT
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I. INTRODUCTION

1.This is an action brought by the plaintiff, Zebra Industries (Orogenesis Nova) Ltd (“ZION”), against the defendant, Wah Tong Paper Products Group Ltd (“Wah Tong”), principally for the purpose of setting aside a settlement agreement and a consent order made pursuant to that settlement agreement.  ZION’s case is that the agreement and order were obtained by economic duress and that Wah Tong had in any event repudiated the agreement.  The settlement put an end to the proceedings that ZION had instituted in HCCT 46 of 2011 with a view to appealing against parts of an amended arbitration award dated 7 September 2012.

2.The underlying commercial dispute between the parties dated back to 2004.  In order to put the matters arising in this action in context, it is necessary to set out in some detail the background including the history of litigation and arbitration that the dispute has engendered.[1]

II.  BACKGROUND

The agreement

3.ZION is a company incorporated in Hong Kong in June 2002 with a capital divided into 10,000 issued shares.  Originally Mr Elijah Saatori held 9,997 shares and his wife, Madam Roberta Coronetta, held 3 shares.  In July 2004 Mr Saatori transferred a number of shares to certain individuals and companies including one Mr Karl Jurgen Thorwirth. Thereafter, at all material times, Mr Saatori held 7,153 shares, his wife 697 shares, Mr Thorwirth 300 shares and other shareholders the remaining 1,850 shares.  Mr Saatori, his wife and Mr Thorwirth have always been the three directors of ZION, with Mr Saatori being the representative in its dealings with Wah Tong and in the related legal proceedings.

4.ZION held a board game (called Galaxion) and a card game (called Psilink) that Mr Saatori designed and developed in the 1990s, including the plastic injection moulds and intellectual property rights and the artistic designs.

5.Wah Tong is a company incorporated in Hong Kong that specialised in paper packaging products.  Mr Lai Yau Fai was a director of Wah Tong and the person who dealt with ZION.

6.In March 2003, Mr Saatori on behalf of ZION entered into an agreement with Wah Tong for the development, manufacture and promotion of the two games, anticipating that the products would be available for market by late 2003 or early 2004.  The written agreement dated 31 March 2003 provided as follows:

“The Investor and the Director [i.e. Mr Saatori] have agreed on the details for an investment opportunity for ZION, hereinafter known as “The Proposal”, and the Director has revealed the entire plan on a CD ROM, and by subsequent meetings, discussions, agreements and written communiqués under the following terms and conditions:

a)  (i) The Director offers 10% of a new Company called Zebra Industries (Orogenesis Nova) Ltd hereinafter known as ZION …, in return for a seed investment equal to a total of HK$280,000 to be realised in Production and Marketing Support Services equal to HK$210,000, being the manufacturing of 2,000 pcs of Galaxion and 2,000 pcs of Psilink in the cheapest, revised format – with new, simpler packaging artwork to be prepared by the Director according to final quotations pending for additional elements, being the Plastic Starcraft for Galaxion and the Layout Cloth for Psilink; plus 1000 four page A4 marketing leaflets and 1000 marketing letter headings, 1500 business cards and 1000 envelopes hereinafter known as “The Marketing Stationery”, and 500 pcs of normal blank letter headings, (without marketing letter wording) together with all new films to be made from new artwork, prepared by the Director, to upgrade all logos, Company name, address and text wording and marketing by-lines.

…

(iv)  The remaining investment balance of HK$70,000 is to be realised in seven monthly payments of HK$10,000 each time to ZION, beginning at the signing of this agreement with an initial start of two months, equal to HK$20,000 by cheque made payable to ZION …

…  

INVESTOR AND DIRECTOR RETURNS SCHEDULE

As agreed, the total proceeds from the sales of the first 2000 pcs of Galaxion and the first 2000 pcs of Psilink, will return entirely to ZION. Thereafter, all subsequent sales of Galaxion and Psilink only, will be spilt exactly 50/50 between the Investor and ZION, for the entire lifetime of Galaxion and Psilink, for as long as sales continue to occur.

…”

7.The agreement also contained an arbitration clause in Clause 5 as follows:

“This Agreement will be construed under the Laws Governing Hong Kong SAR. In the unlikely event of any breach or conflict, the Parties hereby agree to use every resource available to reconcile any disputes or breaches, in the spirit of friendship and integrity.

In the unlikely event of inability to resolve or reconcile any issues that may arise from the smooth implementation of this Agreement, the Parties hereby agree to employ the use of a professional, third party Christian Arbiter to resolve the issue, with such decision being final. If the decision of the Christian Arbiter is ignored, after 30 days, the aggrieved Party may then employ any legal method at their disposal to enforce full compliance, with all costs of enforcement being for the final account of the unsuccessful Party.  Any arbitration costs will also be the final responsibility of the unsuccessful Party.”

8.A dispute arose between the parties in 2004 in which ZION alleged that Wah Tong had, in breach of agreement, failed to produce in time samples of the games for them to be properly presented at the New York Toy Fair in February 2004.  ZION asked for compensation in the sum of $200,000.  Relationships between the parties deteriorated and on 20 April 2004, Wah Tong decided to withdraw from the agreement.  Years later, the arbitrator found that Wah Tong’s decision to withdraw on 20 April 2004, together with its subsequent conduct in refusing to proceed with the manufacture of 2,000 pieces of Galaxion, was a repudiatory breach of the agreement.

9.Initially Mr Edwin Leung – who was referred to in the agreement as Wah Tong’s “working partner” and was also one of the witnesses to the agreement – was asked to assist the parties to resolve their dispute.  Thus on 29 April 2004 Mr Saatori wrote to Edwin Leung requesting him to confirm whether Mr Lai was willing to discuss and try to resolve the issue. On 5 May 2004, Edwin Leung replied that he was willing to help “resolve disputes between brothers amongst ourselves” but only if both sides were to appoint him to act as “Arbiter”.  Mr Saatori then wrote in response, stating that ZION agreed that Edwin Leung “Mediates and Arbitrates to resolve ALL matters”.

10.On 6 May 2004, Edwin Leung had a meeting with Wah Tong.  Afterwards, he wrote an email with the subject heading of “Final Decision – ZION Projects” and informed Mr Saatori as follows:

“Dear Elijah,

Firstly, I am fear of being an Arbiter between ZION and WTG in this case and I did try my best to resolve this badly situation.

Well, today, I did bring this matter to the top management of WTG …  By listening their grievances and reviewing the correspondences, and records, the Board of Directors of WTG and those colleagues have come to realise the following conclusions …” [sic]

Edwin Leung then set out certain observations from the perspective of Wah Tong.  At the end he wrote:

“I am sure you will have a lot of responses to the above. But I feel WTG’s decision to depart is iron firm and no ‘face to face meeting’ is granted, unless you want to take other action, in which case, I will be out of this. Otherwise I will try my best to find a proper and compromised ending.”

11.Subsequently, when ZION wrote to Wah Tong’s solicitors (Messrs W K To & Co) invoking Clause 5 of the agreement, the solicitors replied:

“Our client will not agree to another arbitration. There is already the arbitration decision of Mr Edwin Leung.”

12.As will be seen below, an issue later arose between the parties as to whether the dispute resolution process undertaken by Mr Edwin Leung was the arbitration contemplated by Clause 5.

The action of HCA 1551/2004

13.In July 2004, ZION, taking the view that Wah Tong had repudiated the arbitration clause, commenced an action in the High Court (numbered HCA 1551/2004) against Wah Tong for damages for breach of contract.

14.Relying on the arbitration clause in the contract, Wah Tong took out a summons in HCA 1551/2004 on 9 July 2004 for a stay of proceedings for arbitration pursuant to the Arbitration Ordinance, arguing that the matters raised by the action should be referred to arbitration pursuant to Clause 5 of the agreement and stating that Wah Tong was and remained ready and willing to do all things necessary to enable all the matters in dispute to be determined by arbitration.

15.ZION then filed affirmations in response, taking the stance that arbitration had been attempted through Edwin Leung but failed because Wah Tong refused to have a meeting with Mr Saatori. 

16.Wah Tong’s summons first came before Chu J (as she then was) on 15 September 2004.  At ZION’s request, the judge adjourned the summons to a date to be fixed for hearing, and ordered costs against ZION in any event.

17.In reply, Wah Tong filed an affidavit in which Wah Tong took the stance that ZION had confused amicable settlement attempts with arbitration and that Wah Tong felt it was pointless to have any face to face discussion after around April 2004 when the relationship between the parties broke down.

18.At the hearing of the summons on 17 December 2004, Burrell J considered that there had not yet been any arbitration as required and made an order staying all further proceedings in HCA 1551/2004 for arbitration.  In his decision, Burrell J stated:

“6. I am satisfied that there has not been anything which could be construed as an arbitration or an arbitration award.

7. Initially, a Mr Edwin Leung was recruited to see if he could bring the parties together and reach an agreement. This was in pursuance of the first part of the arbitration clause in the contract namely ‘to use every resource available to reconcile any disputes or breaches in the spirit of friendship and integrity.’ Unfortunately, ‘a spirit of friendship’ was plainly lacking. The defendant did not even want to meet the plaintiff. Instead, they aired their grievances to Mr Leung at a meeting in the absence of the plaintiff.

…

10. … In support of his contention that there was an arbitration, Mr Saatori points to a letter written by the defendant’s solicitors on 28 May 2004 saying: ‘Our client will not agree to another arbitration’. Little weight can be attached to this for three reasons: (a) the letter is headed ‘without prejudice’; (b) it does not reflect what in fact had happened; and (c) it was a badly drafted letter.

…

14. Mr Leung’s reference to a ‘Final Decision’ is no more than a decision to withdraw from his attempts to mediate unless both parties are willing to meet.  Equally, it could be a reference to the defendant’s final decision not to meet the plaintiff.  It is plainly not a final arbitration award.”

19.In addition, he directed Wah Tong to “approach the HKIAC [ie Hong Kong International Arbitration Centre] and request the appointment of an independent, qualified arbitrator who is of the Christian faith within 14 days”.  He awarded costs to Wah Tong.

20.Apparently because of the lack of funds for engaging legal representatives, ZION did not seek to appeal against Burrell J’s order until almost 4 years later.  Nor did Wah Tong (or ZION for that matter), despite Burrell J’s order, take steps to bring the matter to arbitration.

21.Belatedly, in 2008, ZION took out an application, numbered HCMP 2044/2008, for leave to appeal out of time against Burrell J’s order of stay.  That application was refused by Rogers VP on 3 November 2008 with costs on the ground of the 4-year delay.  In giving his decision Rogers VP said:

“2. Had it not been for the delay I might have given leave to appeal in this matter because I am not sure that the so-called agreement to arbitrate really was enforceable. In any event, it seems to me clearly arguable that the Defendant in this matter has no intention of arbitrating.

3. But in my view, the four year delay is simply too long, and I say that in the light of the fact that I do not think anything really is going to come out of this case at the end of the day, looking at the documents that I have seen.  All that is going to happen is that an enormous amount of costs will be spent.  If I were to give leave today, the first thing that would happen is that there would be applications for security for costs on appeal, security for costs on the action, and so on and so forth.  As far as I am concerned, it is really doing the Plaintiff a kindness to refuse this application.”

22.ZION renewed its application before a two-man court. On 8 January 2009, Tang VP and Sakhrani J dismissed ZION’s renewed application with costs.  They agreed with Rogers VP’s decision though they did not agree that the arbitration clause was unenforceable.  As to ZION’s reliance on the attempt by Mr Edwin Leung to resolve the parties’ dispute, the court said:

“11. Mr Bell submitted that by letter dated 28 May 2004, Messrs W. K. To & Co, solicitors for the defendant, had repudiated the agreement to arbitrate even if there had been an agreement to arbitrate when Messrs W. K. To & Co wrote in a letter marked without prejudice that:

‘Our client will not agree to another arbitration. There is already the arbitration decision of Mr Edwin Leung.’

12. This argument had not been raised before Burrell J.  In any event, we do not believe that leave should be granted at such a late stage to enable the plaintiff to raise a new argument which at best is barely arguable.”

The Court of Appeal also rejected the application on the ground that they did not consider the intended appeal to have any reasonable prospect of success. 

The first award

23.As a result, the dispute eventually went to arbitration.  The substantive arbitral hearing took place before a single arbitrator (Mr Timothy Hill, a solicitor practising in Hong Kong) on 15 April 2010.  After the hearing, ZION put in a statutory declaration dated 12 August 2010 containing additional evidence and further submissions and amending part of ZION’s claims from $58,000 to $268,000 with particulars.  On 1 September 2010, the arbitrator gave permission for ZION to rely on that statutory declaration.  Wah Tong did not submit any reply to the statutory declaration. 

24.On 24 September 2010, the arbitrator issued his final award on all issues save as to costs.  He awarded ZION damages in the sum of $58,000 for Wah Tong’s breach of contract in failing to manufacture the first 2,000 pieces of the board games, but rejected ZION’s claim that Wah Tong was contractually bound to manufacture anything beyond the first 2,000 pieces. 

The appeal against the first award

25.ZION then applied to the High Court for leave to appeal against the arbitral award, though it was 5 days late in doing so. Its application (made in HCA 1551/2004) was dismissed at first instance by Saunders J on 11 March 2011 who ordered costs against ZION, but succeeded on appeal to the Court of Appeal (in CACV 52/2011) which, by an order dated 11 October 2011, allowed the appeal on the ground that the arbitrator had wrongly failed to deal with ZION’s amended claim.  ZION also asked the Court of Appeal to deal with the issue of costs in HCA 1551/2004, but the Court of Appeal refused, stating that neither Saunders J nor the Court of Appeal had any jurisdiction to revisit the costs order made by Burrell J.

26.In the result, the Court of Appeal granted leave to ZION to appeal against the arbitral award out of time and directed ZION to bring its appeal against the arbitral award by an originating summons in fresh proceedings instead of in the original action of HCA 1551/2004.  The Court of Appeal ordered costs of the appeal in favour of ZION but did not disturb Saunders J’s order on the costs below except varying the indemnity basis to party and party basis.

27.Accordingly, on 14 October 2011, ZION issued an originating summons in HCCT 46/2011 to appeal against the arbitral award.  The originating summons was heard by Au J who, on 20 June 2012, allowed the appeal and ordered the award to be remitted to the arbitrator for reconsideration in accordance with the court’s opinion on the questions of law identified in the judgment.

28.In essence, Au J allowed the appeal on the grounds that:

(1) The arbitrator erred in law in failing to take into account the statutory declaration of ZION submitted after the arbitral hearing on which he had given leave for ZION to rely.

(2) The arbitrator erred in law in failing to deal with certain clauses of the agreement which might suggest that the agreement between ZION and Wah Tong was intended to be a joint investment agreement providing for a long-term business relationship.

(3) The arbitrator had erred in law by failing to take into account ZION’s claim that Wah Tong’s breach had caused the failure to secure venture capital fund investment and the listing of the business. 

(4) The arbitrator had erred in law in failing to deal with ZION’s claim that Wah Tong had misrepresented that it had the necessary competence and ability to carry out the manufacturing obligations under the agreement.

Au J, however, made it clear that, after the arbitrator had reconsidered the award in light of the opinion of the court, “it is entirely open to him to reach his conclusions as to whether Zebra has established its claims and the quantum of damages under those questions”.  Au J also ordered that the costs of the appeal be to ZION.

29.In the same decision, Au J refused to grant a number of other reliefs sought by ZION, such as a declaration that Wah Tong had breached Burrell J’s order for stay by not proceeding immediately to arbitration after the stay was granted and an order for the costs of the arbitration to be given to ZION.  His Lordship said:

“66. In the originating summons, Zebra also asks for other various reliefs which effectively ask this court to revisit the outstanding issue of costs and Burrell J’s Stay Order made under HCA 1551. It has also asked the court to set aside and lift the Burrell J’s Stay Order.”

Au J held that such claims were unrelated to the appeal against the award and related to matters which had already been judicially decided and which could not be re-opened by ZION.

30.Dissatisfied with that aspect of the court’s decision, ZION applied out of time for leave to appeal against Au J’s refusal to grant those additional reliefs.  On 25 July 2012, Au J dismissed that application on the grounds that it was out of time and that the intended appeal did not have any prospect of success.  He ordered costs in favour of Wah Tong.

31.ZION renewed its application for leave to appeal to the Court of Appeal (HCMP 1604/2012).  On 5 October 2012, the Court of Appeal (Kwan and Fok JJA) dismissed ZION’s application, and ordered costs in favour of Wah Tong, which were summarily assessed in the sum of $24,640.

Steps taken by Wah Tong to enforce the costs orders

32.On 14 March 2012, Wah Tong obtained two allocaturs certifying the amount of costs taxed and allowed based on the costs orders made by the courts.  The allocatur based on Chu J’s and Burrell J’s orders in HCA 1551/2004 came to $49,892.40.  The allocatur based on the order of Rogers VP and Tang VP and Sakhrani J in HCMP 2044/2008 respectively certified the amount of $85,250.00.

33.On 3 August 2012, Wah Tong served a statutory demand on ZION claiming a total sum of $143,942.40 based on the above two allocaturs and three further costs orders for minor sums made in HCMP 2044/2008.

34.On 5 October 2012, Wah Tong filed its bill in respect of the costs awarded by Saunders J (see paragraph 25 above).  On 12 November 2012, the Taxing Master directed that Wah Tong’s bill be set down for provisional taxation[2] on 11 December 2012.

The amended award

35.Meanwhile, in 20 June 2012, the parties entered into correspondence with the arbitrator regarding the remission of certain matters in the reference to the arbitrator. 

36.ZION initially took the view that the arbitrator would be unable to act fairly or impartially in revising the award.  On 2 August 2012, it filed a notice of originating motion in HCCT 46/2011 seeking to remove Mr Hill and have him replaced by two arbitrators.  (Affirmations were filed subsequently by the parties in support and in opposition to this application respectively.)  The grounds for that application included the allegations that Mr Hill had no commercial experience, had not provided evidence he was a baptized, practising Christian, and had breached the duty to act fairly and impartially.

37.Nevertheless, on 24 August 2012, a hearing took place before the arbitrator in relation to the matters remitted to him.  On 7 September 2012, the arbitrator produced an amended award.  The parties were notified that it was available for collection upon payment of the fees of $200,000 together with an amount of $29,058.65 which was outstanding in respect of his fees in preparing the original award.

38.Despite receipt of that notice, the parties did not immediately collect the amended award as ZION had difficulty in paying its share of the arbitrator’s additional fees in relation to the amended award and the arbitrator refused to release his award before payment of his fees.  I shall set out some of the relevant communications in which ZION referred to inability to pay in a subsequent part of this judgment.

39.In the end, in order to raise funds to pay the arbitrator, on 26 October 2012, ZION and Mr Saatori entered into an agreement with one Mr Martin Evans to borrow $129,058.65, promising to pay him 10% of the award within 60 days.  As security, ZION temporarily “signed over” the rights to Galaxion to Mr Evans and Mr Saatori personally guaranteed to repay $156,000 to him within 90 days, the excess being a return on his investment.

40.On 31 October 2012, Mr Saatori turned up at the arbitrator’s office and delivered a banker’s draft for $100,000, though he advised the arbitrator that ZION was not in a position to pay the remaining $29,058.65.  After some discussion, the arbitrator released the award to ZION after Mr Saatori paid $7,000 in cash and gave him a cheque for $22,059 post-dated to 30 November 2012.

41.In the amended award the arbitrator rejected ZION’s misrepresentation claim and maintained his decision that Wah Tong had no obligation to manufacture any further games beyond the first 2,000 pieces. He awarded ZION the sum of $268,000 as damages (representing the entire sale proceeds of the 2,000 pieces of each of two games) together with interest at 1% above prime with monthly rests from 21 April 2004 to the date of payment or the amended award, whichever was the earlier.  He awarded costs to ZION and stated that to the extent any costs had been paid by ZION (which would include ZION’s share of the arbitrator’s fee of $100,000), they should be reimbursed by Wah Tong.

42.Having obtained the amended award on 31 October 2012, ZION wrote to Wah Tong on the same day asking for payment of: (1) $210,000 (being the principal sum of the amended award, less the sum of $58,000 already paid under the original award), (2) $165,939.90 (being interest on $210,000 from April 2004 as calculated by ZION[3]), (3) reimbursement of the sum of $100,000 paid by ZION to the arbitrator earlier that day, and (4) $35,000 as a proposed lump sum for ZION’s costs from 20 June to 24 August 2012.  These items together came to a total of $510,939.90. Excluding the last item, the amended award therefore required Wah Tong to pay ZION a sum of around $475,000.

43.On 1 November 2012, Wah Tong’s solicitors replied, refusing to make payment for two reasons.  First, it was said that the appointment of the arbitrator himself was under attack by ZION by way of its application dated 2 August 2012 for removal of the arbitrator.  Affirmations had already been filed pursuant to the court’s directions given on 17 September on that application.  Wah Tong said that unless and until that application was disposed of, the amended award had to be stayed.  Secondly, it was said that ZION owed certain taxed and assessed costs to Wah Tong which were available for immediate set-off.

Challenge against the amended award

44.On 2 November 2012, ZION, being dissatisfied still with the amended award, filed an “Application to Appeal Sections of the Varied Damages Award … on Serious Errors of Law” in HCCT 46/2011.  There is no dispute that it is to be regarded in law as an application for leave to appeal against the amended award on a question of law under section 23(2) of the old Arbitration Ordinance (Cap. 341), governed by principles set out by the Court of Final Appeal in Swire Properties Ltd v Secretary for Justice (2003) 6 HKCFAR 236.  I shall call this the “Appeal Application”.

45.The Appeal Application was technically made out of time.  By RHC Order 73 rule 5(2) (in the applicable previous version), the time limit for serving the summons was “30 days after the award has been made and published to the parties”.  The phrase “made and published to the parties” is a term of art, which means when the arbitrator gives notice to the parties that it is ready for collection upon payment of his charges: Kwan Lee Construction Co Ltd v Elevator Parts Engineering Co Ltd [1997] HKLRD 965, 973.  Since this took place on 7 September 2012, the period of 30 days expired on 8 October 2012.[4] A delay in collecting the award does not automatically extend the time for applying for leave to appeal: Bulk Transport Corp v Sissy Steamship Co Ltd; The Archipelagos and Delfi [1979] 2 Lloyd’s Rep 289.

46.On the same date of 2 November 2012, ZION filed a notice to discontinue its motion for removal of the arbitrator.  Wah Tong responded by filing a summons on 6 November 2012 seeking an order to set aside the notice of discontinuance on the ground that it had been served, without leave of the court, more than 14 days after Wah Tong’s affirmation in opposition.[5]

47.Also on 6 November 2012, ZION filed a document with the title “Application to enforce payment of the varied arbitration award filed with the Court November 2^nd 2012”, seeking a court order to enforce the amended award against Wah Tong.

48.These matters came before Au J at a hearing held on 12 November 2012.  His lordship gave leave for ZION to discontinue its motion dated 2 August 2012, ordering ZION to pay 70% of Wah Tong’s costs.  He also gave directions for the filing of evidence for the Appeal Application, indicating that Wah Tong could not expect to oppose it only on the ground that it was made out of time and had to be prepared to deal with the merits.  In addition, Au J pointed out that Wah Tong had a duty to pay ZION under the amended award, but he did not make any order for enforcement as the document filed by ZION on 6 November 2012 was not the correct procedural step to take.

Steps taken by ZION to enforce costs orders

49.On 6 November 2012, ZION commenced the taxation process of its costs and filed bills of costs in respect of the appeal to the Court of Appeal against Saunders J’s decision refusing leave to appeal against the original award (CACV 52/2011) and the appeal to Au J against the original award (HCCT 46/2011).  ZION claimed $487,072.66 in costs for his appeal to the Court of Appeal and $599,383.00 in costs for the appeal before Au J.  On 7 November 2012, it applied for remission of fees for the taxation proceedings which the practice master refused.

Emails leading to the settlement agreement

50.On 12 November 2012, there began a series of correspondence by e-mail between the parties, initiated by ZION, in which various offers and counter-offers were made, culminating in a written settlement agreement signed by the parties and dated 29 November 2012.  It is common ground that there was no material oral communication between the parties during this period whether by telephone or at a meeting.  The entire communication between them was in writing. 

51.First, on 12 November 2012, shortly after the hearing before Au J was concluded, Mr Saatori wrote a email to W K To & Co headed “Payment of the Varied Arbitration Damages Award & Appeal Settlement Proposal”, stating that the amended award amounted to the sum of $510,418.47 and proposing that (i) all costs orders cancel each other out and the parties drop their taxation proceedings; (ii) Wah Tong pay $500,000 to ZION to settle all outstanding matters between the parties except the intended appeal against the amended award; and (iii) Wah Tong pay $3.7 million to ZION in full and final settlement of the intended appeal.

52.On 14 November 2012, W K To & Co responded, stating they were taking instructions from their client, that they and their client were actively considering and reviewing the case before making a proper reply, and that they hoped to be able to make a proper reply within 10 days.  Mr Saatori asked them to try to respond within 7 days instead.

53.On 21 November 2012, W K To & Co replied as follows:

(1) ZION had failed to take into account the taxed or assessed costs in favour of Wah Tong.

(2) Because ZION was not legally represented, the costs orders in favour of ZION would be taxed in lower amounts.  Taking the costs orders into account,

“the net position is either (i) ZION may have to pay WTG a positive sum, or (ii) all the sums owed to or owed by the parties roughly cancel out”.

(3) ZION’s view of the merits of the Appeal Application was unrealistic and misconceived and the proposed settlement sum of $3.7 million for the intended appeal was unacceptable.  Wah Tong counter-offered to pay ZION a sum of $200,000 in full and final settlement of all the matters including the Appeal Application.

54.Mr Saatori immediately responded by saying that the counter-offer was unacceptable.  W K To & Co then asked if ZION had any counter-offer to make.  Mr Saatori proposed that Wah Tong pay the award being $500,000, with both sides dropping their taxation proceedings and that the parties let the court determine ZION’s Appeal Application.

55.After another email from Mr Saatori, Mr Lai Yau Fai himself wrote to Mr Saatori as follows:

“Upto this very moment, we still have a very clear conscience that we have not done anything wrong to deserve your vengence and punishment. God will be our witness and final Judge. You simply cannot put all the blame on WTG. The case has now been thoroughly studied and concluded. Do you think the God you strongly believe in is too careless to overlook its conclusion? It is you who want War. It is you who play God. Stop it!

We will defend your false accusation till the end, does not matter how many more years to take. You should know you have nearly exhausted all your schemes. If you don’t take our counter offer, you will get nothing at the end.

As a gesture of good intent for settlement, on behalf of WTG board of directors, we increase our counter offer from 200,000 to HKD300,000 for all and final settlement of our earthly dispute and let God be our final Judge when we will surely meet Him.

I strongly ask you to think and pray, perhaps you should take it.”

56.After some further exchanges of email, Messrs. W K To & Co wrote to Mr Saatori on 22 November 2012 increasing the offer to $400,000 on the same basis as before, stating this was Wah Tong’s “bottom line” and “final offer”.

57.Shortly afterwards, Mr Saatori replied in these terms:

“Well you leave us no choice.

We are flat broke (because of the Contract breaches and the nine year legal battle) and cannot continue without either the Award being Paid or our Costs being Taxed and then used to ‘set off’ your costs bills.

It’s an impossible situation.

Our daughter’s University Bills are coming up and the lender that helped us get the Award wants his money back.

What choice do we have.

When will you issue the cheque for HK$400,000.00??”

58.Messrs. W K To & Co then replied announcing that a settlement agreement had been reached and stating that they would prepare the necessary court documents, and that the whole process should take no more than two weeks and ZION would receive the agreed settlement sum of $400,000 then.

Settlement agreement and consent order

59.The documents were subsequently prepared and sent to ZION.  ZION amended one clause in the settlement agreement which concerned the payment of outstanding fees to the arbitrator (to which I shall return below) but otherwise had no comments on the documents.  Eventually the settlement agreement was signed by both parties and dated 29 November 2012.  Mr Saatori signed it on ZION’s behalf, albeit using an unusual form of signature in order, he said, to mark his protest against the documents. 

60.The settlement agreement recited that the parties had agreed to come to an overall and global full and final settlement in respect of all the disputes arising out of their agreement dated 31 March 2003 and the various sets of legal proceedings arising out of their dispute as particularised in the recitals.  In essence, the settlement was that, in full and final settlement of their claims and disputes, Wah Tong agreed to pay ZION a sum of $400,000 and ZION agreed to withdraw or discontinue its Appeal Application against the amended award.

61.Pursuant to that agreement, both parties signed a consent summons which was filed with the court, and heard by Au J on 11 December 2012.  Mr Saatori, who appeared in court on behalf of ZION, confirmed that ZION did sign the consent summons, saying, “I’ve got no choice. I can’t get paid if I don’t.” 

62.Accordingly, on 11 December 2012, Au J made an order by consent in HCCT 46/2011, inter alia, granting leave to ZION to discontinue its Appeal Application.  The order was duly sealed.

Payment pursuant to settlement agreement

63.At that time, ZION still owed the arbitrator part of his fees in the sum of $22,059 (see paragraph 40 above) and there was correspondence on this subject between the parties and the arbitrator during the few days from 10 December 2012 onwards.  Eventually, on 14 December 2012, Wah Tong sent its solicitors’ cheque to ZION for the sum of $377,941 (being $400,000 less $22,059) and, on 18 December 2012, sent another solicitors’ cheque to the arbitrator for $22,059.  The cheques were cashed by the payees respectively, and the arbitrator returned ZION’s post-dated cheque mentioned in paragraph 40 above.

ZION’s challenge of the consent order

64.On 20 December 2012, by a summons taken out in HCCT 46/2011, ZION sought to set aside the consent order made by Au J on 11 December 2012, stating that it had been forced into giving consent by economic duress and that there had been a breach of the settlement agreement. 

65.On 6 February 2013, Au J dismissed that summons for procedural reasons, namely, that as far as HCCT 46/2011 was concerned, the court was functus officio and that an application to set aside the consent order ought to have been made by ZION in a fresh action taken out for that purpose.

III.  THE PRESENT ACTION

66.As a result, ZION commenced the present action herein (ie HCMP 436/2013) by originating summons on 5 March 2013, seeking an order to set aside the compromise.  Pleadings were subsequently filed pursuant to the court’s directions.

ZION’s pleaded case

67.On the basis of its re-amended statement of claim, ZION’s case is that the consent order dated 11 December 2012 should be set aside because it was obtained by economic duress exerted upon ZION during November and December 2012.  In summary, ZION contended that it was impecunious at the time to the knowledge of Wah Tong.  Wah Tong’s refusal to pay the amended award was a source of duress and the only way ZION could get recovery under it was to sign the settlement agreement and consent summons.  Wah Tong’s attempt to set off its costs was illegitimate because Wah Tong ignored the two costs bills in favour of ZION totalling $1,086,455.66 (see paragraph 49 above), with both parties’ bills yet to be taxed.  Wah Tong made an illegitimate link between paying a sum which was less than it had to pay under the amended award and the cessation of the Appeal Application.  Its payment contained no consideration.

68.Further, ZION contends that to go to court to enforce the amended award would take too long and ZION would have forfeited its rights in Galaxion to Mr Evans who could enforce his security for the loan advanced to ZION.  Rent and electricity, telephone and internet bills were outstanding and Mr Saatori’s family would have been evicted from their home because of the inability to pay rent.  Further, a bill for Mr Saatori’s daughter’s university fees in the sum of $137,297.55 was overdue.  ZION contends therefore that if it did not accept the settlement it would have lost everything.

69.ZION contends that as a sign of entering into the settlement upon duress and under protest, Mr Saatori signed the documents in a signature different from his usual signature.

70.Finally ZION contends that Wah Tong had repudiated and breached the settlement agreement by issuing a cheque for only $377,941 instead of $400,000, as a result of which “the entire foundation for the phony so called consent summons and the subsequent Court Order have been destroyed”.

71.ZION seeks an order to set aside the settlement agreement and the consent order.  It also claims damages of $744,000 and additional damages of $46,500 per month from 11 April 2014 onwards (said to be ZION’s monthly operating cost), as well as a sum of $97,059 said to be the unpaid balance under the amended award.

Wah Tong’s pleaded case

72.In its defence, Wah Tong denies having made any illegitimate threat to or exerted any illegitimate pressure on ZION or Mr Saatori, and avers that ZION’s agreement to the settlement was a “spontaneous” act in circumstances in which ZION was able to exercise its independent free will.  Wah Tong does not admit that ZION was impecunious and denies that it knew or had any ground to know the actual financial condition of ZION or Mr Saatori.  In relation to the alleged breach in issuing a cheque for $377,941 rather than $400,000, Wah Tong avers that it was the parties’ common intention that out of the sum of $400,000, the amount of $22,059 was to be used to pay the arbitrator.  Given that there was no indication that ZION would pay the arbitrator directly, Wah Tong paid the arbitrator directly and deducted the sum from the $400,000 payable to ZION.  Wah Tong avers that ZION is estopped from claiming $22,059 from it.

73.I shall first deal with ZION’s case of economic duress, followed by the alternative case that Wah Tong breached and repudiated the settlement agreement.

IV.  THE WITNESSES

74.At trial ZION called four witnesses to give evidence, namely, Mr Saatori himself, his wife Ms Roberta Coronetta, Mr Karl Jurgen Thorwirth and Mr Martin Evans.  There was no cross-examination of the latter three witnesses by Mr Josiah Chan, who appeared for Wah Tong, apart from ascertaining from them whether any of them had ever met or communicated with Mr Lai Yau Fai of Wah Tong.

75.Mr Saatori is a person of strong opinion.  He described himself as a born-again Christian.  He felt strongly that he and ZION had been wronged and victimised by Wah Tong and as a result held a strong sense of grievance.  This, in my view, has led him to read more into certain events than is justified, to take a highly aggressive approach in the allegations he has made and even to vilify Wah Tong’s solicitors and counsel with, sometimes, offensive allegations.  I cannot align myself entirely with his characterisations of events or the conduct of Wah Tong or its representatives. Nevertheless Wah Tong has not suggested that Mr Saatori’s evidence of primary facts is not credible or should otherwise be rejected in any significant respect.  The tenor of Mr Chan’s cross-examination had not been to undermine Mr Saatori’s credibility but to highlight facts that Wah Tong considered favourable to itself.  I am satisfied that as a witness, Mr Saatori is basically honest and truthful in his evidence of primary objective facts within his direct personal knowledge.  Such evidence is of course to be distinguished from his opinions, inferences or conclusions with many of which I am unable to associate. 

76.Likewise I accept the evidence of ZION’s other witnesses on the primary objective facts on which they testified.  Such evidence was unchallenged in cross-examination but is, again, to be differentiated from their interpretation of events and documents and their inferences and opinions.

77.Wah Tong has filed a witness statement of Mr Lai Yau Fai but elected not to call him to testify.  I shall deal with the inferences that are appropriate as a result in a later section of this judgment.

V.  ECONOMIC DURESS

78.As Lord Goff noted in Dimskal Shipping Co SA v International Transport Workers Federation [1992] 2 AC 152, 165, while it had at one time been thought that, at common law, the only form of duress which would entitle a party to avoid a contract was duress of the person, it is now accepted that

“economic pressure may be sufficient to amount to duress for this purpose, provided at least that the economic pressure may be characterised as illegitimate and has constituted a significant cause inducing the plaintiff to enter into the relevant contract”.

It is well established that an order made by consent can be set aside on any of the grounds upon which an agreement can be set aside: Ng Shui Hang v Lai Hang [1983] 1 HKC 158, 162.  There is no dispute that if ZION establishes that it had entered into the settlement agreement as a result of economic duress, then the agreement and consequently the consent order are both liable to be set aside. 

79.The concept and constituent elements of economic duress have been discussed in a number of cases in the last few decades.  Thus in Pao On v Lau Yiu Long [1980] AC 614, 635, on an appeal from Hong Kong, Lord Scarman giving the opinion of the Privy Council stated:

“Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. … In determining whether there was a coercion of will such that there was no true consent, it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it.”

80.In Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 45-46, however, McHugh JA rejected the theory that economic duress was based on the overbearing or compulsion of the will, observing that

“A person who is the subject of duress usually knows only too well what he is doing. But he chooses to submit to the demand or pressure rather than take an alternative course of action. The proper approach in my opinion is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress.”

In Dimskal Shipping, supra, at p 166, Lord Goff also doubted whether it was helpful in this context to speak of the plaintiff’s will having been coerced.  Since then, the emphasis of the cases has been on whether the party in question has been induced to enter into the contract by pressure or threat and if so whether that pressure or threat has exceeded what is legitimate.

81.In DSDN Subsea Ltd v Petroleum Geo-services ASA [2000] BLR 530, Dyson J stated:

“The ingredients of actionable duress are that there must be pressure, (a) whose practical effect is that there is compulsion on, or a lack of practical choice for, the victim, (b) which is illegitimate, and (c) which is a significant cause inducing the claimant to enter into the contract: see Universe Tankships Inc of Monrovia v International Transport Workers’ Federation (“The Universe Sentinel”) [1982] 2 All ER 67 at 88, [1983] 1 AC 366 at 400, and Dimskal Shipping Co SA v International Transport Workers’ Federation, The Evia Luck [1991] 4 All ER 871 at 878, [1992] 2 AC 152 at 165.  In determining whether there has been illegitimate pressure, the court takes into account a range of factors.  These include whether there has been an actual or threatened breach of contract; whether the person allegedly exerting the pressure has acted in good or bad faith; whether the victim had any realistic practical alternative but to submit to the pressure; whether the victim protested at the time; and whether he affirmed and sought to rely on the contract.  These are all relevant factors.  Illegitimate pressure must be distinguished from the rough and tumble of the pressures of normal commercial bargaining.”

This statement of the law was applied by Dyson J again in Carillion Construction Ltd v Felix (UK) Ltd (2000) 74 Con LR 144, §24.

82.In R v Attorney General for England and Wales [2003] UKPC 22 at §16, Lord Hoffmann stated:

“Generally speaking, the threat of any form of unlawful action will be regarded as illegitimate.”

83.In Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corporation Ltd [2007] 3 HKLRD 439, Stock JA stated:

“154. The key to proving economic duress is proof of the illegitimacy of the suggested pressure. Much commercial activity necessarily involves pressure, often considerable and sometimes overwhelming, exercised by parties who find themselves in powerful bargaining positions. But that of itself is not illegitimate. It was suggested by McHugh JA, as he then was, in Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40, 46 that:

‘Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, would not necessarily constitute economic duress.’

155. The reference there to ‘unconscionable conduct’ itself needs explanation. It has been explained in the Australian courts by reference to a special disadvantage suffered by the weaker party of which the stronger party takes advantage and is discussed in Australia & New Zealand Banking Group v Karam and Others (2005) 64 NSWLR 149 at paragraphs [46] and [66]. In Commercial Bank of Australia Ltd v Amadio [1982-1983] 151 CLR 447, 462 Mason J, as he then was, explained the significance of the adjective ‘special’ in the phrase ‘special disadvantage’:

‘I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.’ ”

Stock JA went on to refer to the English authorities but did not consider it necessary to explore the differences between the two approaches.

84.In Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2011] 1 All ER (Comm) 46 at §92, Christopher Clarke J stated that the authorities established the following principles:

“(i) Economic pressure can amount to duress, provided it may be characterised as illegitimate and has constituted a ‘but for’ cause inducing the claimant to enter into the relevant contract or to make a payment. See Mance J in S.L. Huyton S.A. v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620.

(ii) A threat to break a contract will generally be regarded as illegitimate, particularly where the defendant must know that it would be in breach of contract if the threat were implemented.

(iii) It is relevant to consider whether the claimant had a ‘real choice’ or ‘realistic alternative’ and could, if it had wished, equally well have resisted the pressure and, for example, pursued practical and effective legal redress. If there was no reasonable alternative, that may be very strong evidence in support of a conclusion that the victim of the duress was in fact influenced by the threat.

(iv) The presence, or absence, of protest, may be of some relevance when considering whether the threat had coercive effect.  But, even the total absence of protest does not mean that the payment was voluntary.”

85.It is not essential for the plaintiff to establish that the defendant appreciated that the plaintiff was acting under duress: Chitty on Contracts (31^st ed), vol. 1, §7-018; Universe Tankships of Monrovia v International Transport Workers Federation (“The Universe Sentinel”)[1983] AC 366.

86.There is no dispute that settlement agreements, just like other contracts, can be vitiated by economic duress; see for an example Borrelli v Ting [2010] UKPC 21; Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620, 629-630.  It seems to me, however, that two matters have to be borne in mind when examining a plea of economic duress raised to impugn a settlement agreement.  First, a settlement agreement, or a compromise, is by definition an agreement reached between parties who are in dispute.  They are opponents rather than collaborators, engaged in adversarial positions.  Typically they are, or are about to be, involved in litigation or arbitration.  Each side usually threatens to pursue its professed rights in court or in arbitration, in the absence of settlement, in the hope that the other side will succumb to its demands.  Their negotiations may sometimes involve bringing ruthless pressure to bear on each other.  The risk of the adjudicator agreeing with the other side, the time and cost of the exercise, and the sheer uncertainty inherent in the process are often reason enough to lead parties to settle.  Illegitimate pressure in the context of economic duress, if so broadly defined as to encompass the ordinary burdens of litigation, may unravel many a genuine compromise based on perfectly acceptable commercial considerations. Secondly, and in the same vein, the courts have an interest in upholding agreements to compromise disputes.  As Butler-Sloss LJ said in Colchester Borough Council v Smith [1992] Ch 421, 435:

“Where parties to a dispute reach a compromise which brings that dispute to an end and avoids the need for litigation or further litigation, such a compromise is a valuable part of the resolution of disputes within the machinery of the administration of justice. The compromise has to be genuine, entered into freely by all parties to it without concealment of essential information or undue advantage taken by one party of another party, and preferably with the assistance of lawyers. Consequently, an agreement to compromise an action or a dispute which may lead to litigation is binding and is enforceable against the party seeking subsequently to repudiate it. As Roskill LJ said in Binder v Alachouzos [1972] 2 QB 151, 160, ‘Any other course would cause very great difficulty in the administration of justice.’ ”

87.The above brief survey suggests that economic duress is an area of law shaped by relatively high-level principles rather than readily applicable tests.  There are few hard and fast rules.  Each case has to be decided on its own facts based on the guidance provided by the cases.  In the present case, for clarity of exposition, I propose to examine and analyse the facts and circumstances by reference to the following questions (although there is some overlap among them).

(1) Was ZION impecunious at the time?

(2) Did Wah Tong know ZION was impecunious at the time?

(3) Did Wah Tong apply pressure on ZION?

(4) Did the pressure arise from a breach of contract?

(5) Did ZION have a practical alternative?

(6) Did ZION have access to independent advice?

(7) Did ZION make any contemporaneous protest?

(8) Was the pressure illegitimate in all the circumstances?

(9) Was the illegitimate pressure a cause of ZION’s entry into the settlement agreement with Wah Tong?

(1)  Was ZION impecunious at the time?

88.ZION’s case was that it and Mr Saatori’s family were impecunious at the time.  The available audited accounts of ZION, for the period from May 2006 to August 2010, show a net loss for the period, negative equity, and accumulated losses of over $450,000.  There were no subsequent audited accounts as ZION did not have the funds to commission another audit.

89.The Saatori family with three children had been surviving on the wife’s salary but that was insufficient and they were falling behind on various bills and sinking deeply into debt.  They had no money and had to borrow from Mr Evans to pay the arbitrator’s fee for producing the amended award, before they could collect it, as a result of which the rights to Galaxion were charged as security for Mr Evans.  They had to repay Mr Evans pursuant to that agreement or Mr Evans might exercise his security rights over Galaxion. They were unable to pay the court fees for taxation[6] of the costs pursuant to the two costs orders in ZION’s favour referred to in paragraph 49 above.  By the beginning of November 2012, they owed the landlord of their home overdue rent in the sum of around $31,000 and were being threatened with eviction in default of payment by 20 November 2012.  So although they had borrowed $129,059 from Mr Evans to pay the arbitrator, they only paid $100,000 to the arbitrator and used the rest towards paying overdue rent.  The tuition fees of their daughter were overdue in the sum of $137,297.55 and if not paid urgently she would lose her place at St John’s University in New York, not to mention that the next set of university fees were coming up for payment.  They were also unable to pay various utilities bills and faced an imminent shutdown of ZION’s server and internet facilities unless the bills were paid.

90.This part of ZION’s case was not seriously disputed.  Wah Tong’s pleaded case was that it did not admit ZION was impecunious.  At trial, Mr Chan cross-examined Mr Saatori on certain historical matters relating to ZION’s and Mr Saatori’s financial position between 2009 and 2011, but did not challenge the evidence of impecuniosity as at November 2012. Ms Coronetta’s evidence that every month there was nothing left over from her salary, except growing debts, that they had only managed to survive with financial charity from close friends and family, and that they were financially desperate and needed the money from Wah Tong urgently, was unchallenged.  Mr Evans testified that Mr Saatori and Ms Coronetta had approached him in late October 2012 in a financial crisis and explained that they had no one else to turn to, having exhausted all their personal and family contacts for investments and loans.  That evidence was also unchallenged.  I accept ZION’s evidence and find that as at November 2012, ZION and Mr Saatori’s family were, and had been for some time, impecunious and facing grave financial difficulty.

(2)  Did Wah Tong know ZION was impecunious at the time?

91.ZION contends that Wah Tong knew at the time that it was impecunious.  Wah Tong denies that it knew the “actual financial condition” of either ZION or Mr Saatori.[7] Since the only witness of Wah Tong, Mr Lai Yau Fai, was not called to give evidence, whether or not Wah Tong had knowledge of ZION’s impecuniosity has to be resolved as a matter of inference.

92.ZION relies on a number of matters in support of its case:

(1) On 29 June 2012, Mr Saatori sent emails to the arbitrator asking him not to make any amended award (for reasons that need not be gone into), stating

“ZION is totally impecunious and flat broke now and cannot pay to receive the award in any event.”

Although the emails were sent to the arbitrator alone, the arbitrator sent copies to Wah Tong for its information.

(2) In ZION’s final submissions in the arbitration on 24 August 2012, it was stated that ZION had been “rendered totally impecunious” by the breaches of contract committed by Wah Tong.  At the arbitration hearing itself, ZION also stated it was impecunious.

(3) On 7 September 2012, after being notified that the award was available for collection upon payment of fees, ZION wrote to the arbitrator (copied to Wah Tong’s solicitors):

“How do you suggest that ZION pays the Arbitrator HK$129,058.65 to receive an Award that was only Varied because of errors made by the Arbitrator, when she has NO money, solely because of the Proven Contract breaches?”

(4) ZION wrote again on 9 September 2012 to the arbitrator (copied to Wah Tong) to ask for the indulgence of releasing the amended award for the designated costs-paying party to pay the arbitrator’s fees within 30 days.

(5) When the arbitrator refused to accommodate ZION, on 14 September 2012, Mr Saatori wrote to the arbitrator (copied to Wah Tong and its solicitors), stating:

“We cannot ‘make provision’ for your unrighteous bill because we are all broke now, thanks solely to Wah Tong. … Where did you think we were going to find HK$130,000 to pay for an Award Variation that is simply you CORRECTING your own past mistakes?”

(6) On 18 September 2012, Mr Saatori wrote to Wah Tong, stating “ZION does not have the funds to pay the missing 50% to the Arbitrator” and asking “if wah tong will pay to have the Award released, as ZION is unable to do so”.

(7) On 10 October 2012, ZION wrote again to Mr Hill (copied to Wah Tong’s solicitors):

“So, if one party cannot pay 50% of your fee because of the proven Contract breaches, how can the new Award ever be released?”

(8) On 27 October 2012, ZION wrote to Mr Hill (copied to Wah Tong’s solicitors):

“ZION has finally managed to borrow the monies to pay our 50% share of your fee for the release of the New Award.”

(9) On 31 October 2012, the arbitrator sent an email to the parties putting on record that Mr Saatori had delivered a draft for $100,000 and advised that ZION was not in a position to pay the remaining $29,058.65 that day.

(10) In the Appeal Application filed on 2 November 2012, ZION stated that it “remains impecunious” because of the proven breaches of contract committed by Wah Tong.

93.Mr Chan referred to the fact that Wah Tong’s request in the arbitration for security for costs was rejected by the arbitrator.  Apparently, in August 2009, Wah Tong’s solicitor had made an affirmation stating Wah Tong’s belief that ZION was impecunious.  In early 2010, however, ZION was able to provide evidence of certain funds it had on deposit.  In the end the arbitrator ruled in mid-2010 that the evidence available provided no basis for concluding that ZION was in fact impecunious, and that even if Wah Tong was able to establish ZION was impecunious, ZION might well be able to argue that its impecuniosity arose from the subject matter of the dispute.  In my view, this matter does not assist Wah Tong.  The monies were available in late 2009 or early 2010, but this does not mean that they were still there in November 2012.  Mr Saatori’s evidence, which I accept, was that the money was a donation from his mother in around 2009 and had long run out. 

94.Mr Chan also relied on the fact that to Wah Tong’s knowledge, Mr Saatori’s family resided in Aquamarine Garden in Castle Peak Bay, a desirable residential estate, and that no one had told Wah Tong that they had in fact moved out in around December 2010.  But this does not help Wah Tong.  First, as a matter of public record the house did not belong to Mr Saatori’s family but was rented and the tenant was a company known to Wah Tong to be Ms Coronetta’s employer.  Further, although Wah Tong knew Mr Saatori to be living in Aquamarine Garden in August 2009, this did not prevent Wah Tong from stating on affirmation its belief then that ZION was impecunious.  (In fact, although not known to Wah Tong at the time, Mr Saatori’s family had since 2011 moved to a more modest property in So Kwun Wat.)

95.As I have mentioned above, Wah Tong elected not to call its only witness Mr Lai Yau Fai to give evidence.  I then drew the parties’ attention to the authorities on the inferences arising from a failure to call witnesses.  In his closing speech Mr Saatori submitted that for that reason I should draw an inference adverse to Wah Tong.  The principles on the drawing of inferences from the failure to call a witness have been set out in two English cases cited with approval in Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd (CACV 90, 91, 93-96 of 2012, 17 September 2013) at §§106-107.  The relevant passages as set out by Kwan JA are as follows:

“106. The relevant principles are as set out by Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340:

“(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.

(2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

(4) If the reason for the witness’s absence or silence satisfies the court, then no such adverse inference may be drawn.  If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.”

107.  And as Lord Sumption has stated in Prest v Petrodel Resources Ltd [2013] UKSC 34 at §44:

“There must be a reasonable basis for some hypothesis in the evidence or the inherent probabilities, before a court can draw useful inferences from a party’s failure to rebut it. For my part I would adopt, with a modification which I shall come to, the more balanced view expressed by Lord Lowry with the support of the rest of the committee in R v IRC, ex parte TC Coombs & Co [1991] 2 AC 283, 300:

‘In our legal system generally, the silence of one party in face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence. Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case. But, if the silent party’s failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified.

Cf Wisniewski v Central Manchester Health Authority [1998] PIQR 324, 340.’ ”

96.In my view, in light of the matters set out in paragraph 92 above, there was a case for Wah Tong to answer that prima facie it knew or at least had reason to think that ZION was impecunious by around September 2012.  Mr Chan submitted that the documentary evidence was sufficient to dispose of most issues in the present case and that there was no issue on which Mr Lai could be expected to give material evidence.  I do not entirely agree: at the very least the question of Wah Tong’s knowledge was an area on which Wah Tong could reasonably be expected to call Mr Lai to give evidence.  It was an issue on the pleadings and an issue in relation to which Au J had specifically refused to strike out an exhibit to Mr Saatori’s reply affirmation.  It was also a matter peculiarly within Mr Lai’s knowledge.  Wah Tong’s case that it had no knowledge of the “actual” financial condition of ZION was vague to begin with.  There was no satisfactory explanation why Mr Lai was not called.  I think in all the circumstances the failure to call Mr Lai fortified ZION’s case that Wah Tong knew that ZION was financially in bad shape. 

97.There is a limit to the inferences that can be drawn, however.  I do not think there is any basis to infer specifically that Wah Tong knew Mr Saatori was facing eviction from his home or, until he mentioned it in his email of 22 November, that there was difficulty in meeting his daughter’s university bills.  The appropriate inference is, and I find, that by October and November 2012, Wah Tong knew, or at least strongly suspected, that ZION was impecunious.  Wah Tong knew that ZION did not have funds to pay the arbitrator and had to borrow money to do so.  That money would, in all probability, have to be repaid.

(3)  Did Wah Tong apply pressure on ZION?

98.Although many cases refer to a “threat”, it does not seem to me that an express threat is as a matter of principle essential for economic duress.  As stated in Virgo, The Principles of the Law of Restitution (2006) p. 198, cited with approval by Fok J (as he then was) in Profit Step Development Ltd v Sun Rising Developing (Agriculture) Ltd (HCA 1649/2008; 30 November 2010) at §108, economic duress can arise “where the defendant resorts to illegitimate commercial pressure, whether express or implied from circumstances, in support of his or her demands”.  In Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620, 629, Mance J said the duress may involve illegitimate pressure, consisting in the non-performance or threat of non-performance of an obligation.  It is also stated in Goff & Jones, The Law of Unjust Enrichment (8^th ed), §10-42, that most important is the nature of the pressure; it will often take the form of a threat, although a threat is not a necessary requirement.

99.Wah Tong was under an obligation to pay the amended award.  Leaving aside for present purposes ZION’s own costs which had yet to be agreed or assessed, the amount payable included[8] the principal sum of $210,000, pre-award interest of approximately $165,939.90, and reimbursement of the share of the arbitrator’s fee paid by ZION of $100,000, together with interest on the total amount of the award from the date of the award at judgment rate under s. 2GI of the previous Arbitration Ordinance (Cap 341)[9] which I estimate to be in the region of $5,000 by November 2012.  The total may be taken approximately to be the rounded sum of $480,000.

100.Wah Tong was entitled to deduct from the amount, by way of legal set-off, any costs already taxed or assessed in its favour, including: (i) the taxed or assessed costs as set out in the statutory demand dated 3 August 2012 referred to in paragraph 33 above in the sum of $143,942; (ii) interest on this up to 31 August 2012 in the sum of $60,039.99 and further interest thereafter to 13 November 2012 in the sum of $2,334.70; and (iii) costs ordered by the Court of Appeal in HCMP 1604/2012 (see paragraph 31 above) in the sum of $24,640, which totalled approximately $230,000 in round sum.[10] 

101.It follows that Wah Tong ought to have paid ZION forthwith the sum of approximately $250,000 ($480,000 – $230,000) pursuant to the amended award.  But Wah Tong, with knowledge of ZION’s impecuniosity, refused to comply with the award and to pay this amount to ZION.  It did not pay even after ZION filed an application to enforce the award on 6 November 2012, which unfortunately was in the wrong form.  During the email negotiations, when ZION asked Wah Tong to pay the award and let the court deal with the Appeal Application (see Mr Saatori’s email of 21 November 2012 at 4:32 pm – paragraph 54 above), the response was Mr Lai’s email to Mr Saatori on the same date (quoted in paragraph 55 above), stating “If you don’t take our counter offer, you will get nothing in the end”.  The conduct and words of Wah Tong, seen in the context, made it clear to ZION that unless ZION came to a compromise that included the Appeal Application on terms acceptable to Wah Tong, Wah Tong would not pay the amended award voluntarily.  Irrespective of what Mr Lai intended by his email, it simply made explicit to ZION what was already clear, namely that unless it compromised the Appeal Application on Wah Tong’s terms, it would not get paid the net amount immediately due to it under the amended award.  In my judgment, there was pressure exerted on ZION.

(4)  Did the pressure arise from a breach of contract?

102.As can be seen from the authorities referred to above, the law draws a distinction between the rough and tumble of commercial pressure on the one hand and illegitimate pressure on the other.  The dividing line is, however, not always clear.  There is no single criterion applicable in all cases to test whether a threat or pressure is illegitimate.  The answer depends on a broad range of factors which extend to all the circumstances of the case.

103.Mr Saatori sought to contend that there was illegitimate pressure on two main grounds.  First, he submitted that the costs orders which Wah Tong sought to set off against the amended award were wrongfully and fraudulently obtained.  Secondly, he submitted that Wah Tong was bound to pay the amended award and had wrongfully failed to do so. 

104.The alleged fraud in the first point is said to be that Edwin Leung had already arbitrated the dispute in 2004 and it was fraudulent for Wah Tong to deny there had been an arbitration and to seek a stay of the action for arbitration.  This argument is in my judgment not open to ZION.  At several earlier stages in these proceedings, ZION had unsuccessfully sought to raise the allegation that the costs orders were obtained by fraud.  The latest attempt was an application for leave to re-amend its statement of claim which I substantially rejected in my decision dated 27 October 2014.  Paragraphs 52 to 81 of my decision, which will not be repeated here, explain why I refused to permit that claim to be run.  I would add that as can be seen from the decision of Burrell J on 17 December 2004 (quoted in paragraph 18 above), his Lordship had already considered the relevant materials and explained why he took the view that the process before Edwin Leung, however labelled by the parties, could not properly be regarded as an arbitration.  His Lordship took the view that despite Wah Tong’s solicitors’ “badly drafted” letter dated 28 May 2004 which referred to the “arbitration” before Edwin Leung, there had not been any real arbitration.

105.I turn to the second ground relied upon by ZION. An arbitration award creates a fresh cause of action in favour of the winning party: F J Bloemen Pty Ltd v Council of the City of Gold Coast [1973] AC 115, 126C-D.  There is an implied contractual obligation in connection with the arbitration agreement that the parties will perform the award: Bremer Oeltransport GmbH v Drewry [1933] 1 KB 753; Hassneh Insurance Co of Israel v Steuart J Mew [1993] 2 Lloyd’s Rep 243, 247; Stargas SpA v Petredec Ltd (“The Sargasso”) [1994] 1 Lloyd’s Rep 412, 415.  The award ordered payment of money which ought to be paid forthwith.  In relation to the original award made in 2010, when Wah Tong initially failed to pay the $58,000 awarded and ZION sought assistance from the arbitrator, the arbitrator had already expressed surprise and stated that his expectation had been that his award “should be honoured without delay”.  Was there any justification then for Wah Tong not to pay the amended award in 2012?  Two reasons were given in Wah Tong’s email of 1 November 2012 for refusing to pay (see paragraph 43 above): first, ZION had an outstanding motion to remove the arbitrator; secondly, ZION owed certain taxed and assessed costs to Wah Tong which were available for set-off. 

106.The first reason is, in my opinion, plainly invalid. An award, once given, should be complied with.  ZION’s motion did not have the effect, in itself, of staying the award.  Wah Tong was strenuously opposing that motion.  There was neither an order of the court or arbitrator nor an agreement between the parties that the amended award should be stayed pending ZION’s motion.  Furthermore, in immediate response to Wah Tong’s email, ZION had filed a notice of discontinuance of its motion on 2 November 2012.  It is true that under RHC Order 21 rule 2(3A), ZION needed the court’s leave to discontinue its motion, but leave was readily granted by Au J on 12 November 2012.  ZION also filed on 2 November 2012 (i) the Appeal Application challenging parts of the amended award and complaining essentially that the arbitrator awarded too small a sum of damages, and (ii) an application to enforce the order for payment in the award (see paragraph 47 above).  It was quite plain, from 2 November onwards, that ZION had no intention of pursuing the motion for removal. In any event, as the motion was discontinued with leave given on 12 November 2012, the excuse was thereafter not available.

107.The second reason is a valid reason for Wah Tong to deduct the amount of taxed and assessed costs in its favour from the amount payable to ZION pursuant to the award, but not for a blanket refusal to pay the award altogether or the net amount.  It is true that as at November 2012 there were also certain untaxed costs orders in favour of Wah Tong[11], but it seems to me, for the following reasons, they did not justify the refusal to pay the award. 

(1) First, Wah Tong itself did not refer to them in its email as a reason for not complying with the award. 

(2) Secondly, there is no suggestion that the costs orders would meet all the conditions for them to be available for equitable set-off against the amended award.  Specifically it is doubtful whether they were sufficiently closely connected with the award for equitable set-off to operate: Karpex (HK) Ltd v Yasmine Printing (China) Ltd [2008] 1 HKLRD 199; Wu Sheng Long v C-Corp Precious Metals Ltd [2011] 2 HKLRD 936.  Indeed, Wah Tong in its email referred only to the sums already taxed or assessed as being “available for immediate set-off”, implicitly recognising that equitable set-off did not apply to the untaxed costs orders.  At trial, Mr Chan also expressly disclaimed any reliance on equitable set-off.[12]  On the contrary, he submitted that a costs order does not give rise to a debt until the amount payable has been ascertained by taxation or agreement.

(3) Thirdly, if untaxed costs orders were to be taken into account, then one must also put into the equation the untaxed costs orders in the opposite direction, including, in particular, costs of the appeal from Saunders J to the Court of Appeal in CACV 52/2011 and costs of the appeal against the original award before Au J in HCCT 46/2011 (see paragraph 49 above), which had been ordered in favour of ZION against Wah Tong.  ZION claimed a sum of $1,086,455.66 on account of those costs.  It was not clear who would emerge with a net claim so far as these untaxed costs are concerned.  While the arbitrator had previously allowed a rate of HK$570 per hour for the work done by Mr Saatori on behalf of ZION in the arbitration, ZION had since produced evidence of an agreement with Mr Saatori agreeing that his work for ZION in the litigation could be charged at HK$2,700 per hour.  And while RHC Order 62 rule 28A(3) might apply to work done by ZION as the litigant in person itself, it is not clear that it had the effect of limiting the fees payable by ZION to Mr Saatori to $200 per hour.

108.As Wah Tong well knew, the amount of taxed and assessed costs was not sufficient to set off the liquidated amount payable under the amended award.  It was also aware that there had not been any order or direction staying the amended award pending the motion.  The failure to pay ZION the balance of the amended award after deducting taxed and assessed costs – the net sum of approximately $250,000 – was quite unjustified.  In my judgment, Wah Tong’s refusal to pay the balance of the amended award within a short time after it was collected on 31 October 2012 was a breach of its contractual obligation to comply with it.  Wah Tong had consciously refused to perform its side of the bargain embodied in the reference to arbitration. 

109.Wah Tong might have taken the view that ZION’s Appeal Application had no merits, on which I express no view.  But that application did not provide a reason for not paying the amended award.  Wah Tong could have paid the amended award (after permissible deductions) and let the Appeal Application be disposed of in the ordinary course, as was indeed suggested by Mr Saatori in one of his emails of 21 November 2012.  But Wah Tong continued not to pay the amended award, in breach of its obligation, and effectively offered to pay only if ZION dropped the Appeal Application.  This breach continued throughout the period in which the parties negotiated a settlement, and so did the pressure generated by withholding the payment of $250,000 to which ZION was indisputably and immediately entitled.

(5) Did ZION have a practical alternative?

110.In cross-examination Mr Chan suggested to Mr Saatori that instead of settling with Wah Tong he could have sought enforcement of the award through the court.  In the initial demand for payment dated 31 October 2012, ZION did indicate that if no payment was received by 6 November, ZION would apply to the High Court for enforcement of the award.  And when Wah Tong made no payment, ZION did file an application for enforcement on 6 November.  Unfortunately that application did not follow the correct procedure and regrettably Wah Tong still did not pay ZION anything. 

111.The correct procedure for formal enforcement was to make an ex parte application supported by an affidavit as required by RHC Order 73 rule 10.  But even if leave to enforce is granted, the order will usually provide that the award should not be enforced if, within 14 days of service, the debtor applies to set aside the order.  If the debtor does apply to set aside the order, the award cannot be enforced until after the setting aside application has been finally disposed of.

112.Having regard to the history of the dealings between the parties I think Mr Saatori was justified in anticipating opposition from Wah Tong to enforcement of the amended award and in thinking that formal enforcement through the court would not be swift enough in the circumstances.  There would be a need to get directions on the filing of evidence.  It would be uncertain when a directions hearing and ultimately the substantive hearing might have been secured.  Apart from going to court Mr Chan did not suggest ZION had any other practical alternative.  Mr Saatori said credibly that he had no plan how to overcome the financial difficulties he and ZION faced if there was no payment from Wah Tong as a result of the settlement.  He said it was “the end of the line” for them and that they were “just going to go under” if the money was not urgently received.  The evidence was not challenged.

113.In the course of the email negotiations Mr Saatori did write an email to Wah Tong on 21 November 2012 at 4:17pm “declaring war” and indicating ZION would make an application to enforce the amended award, but I accept that, as Mr Saatori explained in his evidence, it was a “bravado” email and that seeking formal enforcement through the legal process was not in fact a realistic and effective option.  The email was quickly followed by another email at 4:32pm from Mr Saatori asking Wah Tong to pay the amended award and let the court decide the Appeal Application, to which Mr Lai responded with what Mr Saatori perceived to be a threat (i.e. the email quoted at paragraph 55 above).

114.On the evidence, I conclude that there was no practical or effective alternative for ZION.

(6)  Did ZION have access to independent advice?

115.ZION was throughout represented by Mr Saatori and since 2009 had had no legal representation or legal advice.  While Mr Saatori had some experience with litigation and arbitration (from the dispute with Wah Tong), he was by no means familiar with all the relevant law and procedure and had already made a number of procedural mistakes.

(7)  Did ZION make any contemporaneous protest?

116.It seems to me there was ample contemporaneous protest by ZION against the pressure it faced.  In its email of 22 November 2012, ZION stated that Wah Tong left it “no choice” and that it faced an “impossible situation”.  Mr Saatori also said in court on 11 December 2012 that he had no choice because he could not get paid if he did not sign the consent summons.  Very soon afterwards, on 20 December 2012, ZION filed a summons to set aside the consent order, albeit it was set aside because it was the wrong procedure.

(8)  Was the pressure illegitimate in all the circumstances?

117.As the authorities referred to above show, whether pressure is illegitimate cannot be answered by a hard and fast rule but depends on a range of factors. The fact that pressure was imposed by a breach or threatened breach of contract is a factor but by no means conclusive.  I must take into account all the circumstances of the case.  This is a case where ZION had obtained an arbitral award in its favour.  The courts and arbitrators expect parties to arbitration to abide by and comply with arbitral awards.  Apart from the set-off of taxed and assessed costs, there was no legal justification, and no reasonable excuse, for Wah Tong not to pay ZION forthwith the balance of the amended award in the sum of $250,000 after set-off.  There was a conscious breach of contract in the refusal to pay the amended award.  There was no genuine belief on the part of Wah Tong that it was legally entitled to withhold payment.  There is nothing to suggest that Wah Tong was for some reason unable to comply with the amended award.  Clearly, Wah Tong was in possession of the money to pay.

118.To Wah Tong’s knowledge or as it at least strongly suspected, ZION was impecunious at the time and still owed some third party money it had borrowed to pay the arbitrator.  On 22 November 2012 Wah Tong was told that Mr Saatori’s daughter’s university bills needed to be paid.  In continuing breach of its contractual obligation, Wah Tong failed and refused to pay ZION the balance of the amended award.  Withholding the money to which ZION was entitled created pressure on ZION to seek payment through a compromise.  In the negotiations Wah Tong insisted upon including the Appeal Application as part of the settlement.  As Wah Tong steadfastly refused to pay anything under the award, ZION had no real alternative to a compromise except to seek from the court a formal order for enforcement.  That however would not have been a practical and effective alternative given the time that it would take, particularly in light of the opposition that ZION could reasonably anticipate from Wah Tong.  In the particular circumstances the pressure generated by withholding payment was highly coercive leaving ZION with no real choice.

119.In all the circumstances of this case I am of the opinion that the pressure exerted on ZION was illegitimate.

(9)  Was the illegitimate pressure a cause of ZION’s entry into the settlement agreement with Wah Tong?

120.Judges and academics have propounded different formulations of the requirement of causation for economic duress.  Thus Stock JA observed in Esquire (Electronics) Ltd, supra, at §157:

“In Huyton SA v Cremer G.m.b.H. & Co. [1999] 1 Lloyd’s Rep 620 Mance J, as he then was, comprehensively reviewed authority and academic learning directed at the issue of causation: whether all that had to be shown was that the illegitimate pressure must constitute ‘a’ reason for the weaker party to have entered in the agreement now sought to be vitiated (the test applied by the majority in Barton v Armstrong [1976] AC 104), or (assuming there to be a difference, which I do not think there is) a ‘significant cause’ (Dimskal Shipping Co SA v International Transport Workers Federation ( The Evia Luck) [1992] 2 AC 152); ‘a predominant cause’ (Professor Birks in An Introduction to the Law of Restitution (1985); or the ‘but for’ test, which Mance J favoured.”

It was however unnecessary for the Court of Appeal to decide the issue in that case.

121.It is likewise unnecessary for me to determine in the present case which test should be applied in Hong Kong.  Nor is it necessary to discuss the question of the burden of proof of causation, which Mance J referred to in Huyton v Cremer, supra, pp 638-639 as a “relatively unexplored area”.  I am satisfied on the evidence that whichever test is adopted, ZION was caused by the illegitimate pressure to enter into the settlement agreement.  Mr Saatori and Ms Coronetta stated as much and that evidence was effectively unchallenged.  If Wah Tong had paid ZION the amount of the award (even after the legal set-off), it is quite clear that Mr Saatori would not have agreed to give up the Appeal Application for what he regarded to be a paltry amount.

122.Mr Chan submitted that ZION’s entry into the settlement agreement and its acts done pursuant to it were “spontaneous acts” done in circumstances in which ZION was “able to exercise an independent free will”.  It is clear that ZION’s consent to the settlement was a conscious act. That alone, however, is not sufficient to negate duress.  As McHugh JA said in Crescendo Management Pty Ltd (quoted in paragraph 80 above), a person subjected to duress usually knows only too well what he is doing.  To ask whether or not it was a “free” act begs the question whether it was induced by illegitimate pressure. 

123.If by saying the acts were “spontaneous”, Mr Chan means that it was Mr Saatori who initiated the settlement negotiations in the first place, then the following may be noted.  First, while in the cases pressure or threat was often accompanied by a demand, no case has laid down a rule that a compromise cannot be set aside for duress unless a settlement was first proposed by the party exerting pressure.  In my opinion there cannot in principle be such a rule.  Secondly, on the evidence, ZION was caused to propose a settlement because Wah Tong simply would not pay.  Thirdly, at the beginning, ZION was asking Wah Tong to pay the award (with each side’s costs cancelling out each other) and to settle the Appeal Application for a separate payment.  Later ZION proposed that Wah Tong simply pay the award and let the court decide its Appeal Application.  It was Wah Tong who demanded in the negotiations that the amended award and the Appeal Application be compromised by a single payment.  It was Wah Tong who insisted on linking payment of the award to the settlement of the Appeal Application.

124.I conclude therefore that ZION has established that the settlement agreement and consent order were obtained as a result of economic duress and are liable in principle to be set aside.

Counter-restitution

125.A contract entered into under duress is voidable and not void.  In avoiding the contract, the party subjected to duress should, as a general rule, be required to restore the benefits he has received under the contract.  However, the primary concern is to prevent unjust enrichment of the party who inflicted the duress, and whether counter-restitution in any form will be required will depend on the circumstances of the case: Chitty on Contracts (31^st ed), vol. 1, §7-055.

126.The need for counter-restitution, in this sense, was not pleaded by Wah Tong.  The issue was first raised by this court during the trial.  Nevertheless, in closing, Mr Chan submitted, albeit briefly and without reference to any authorities, that there should only be rescission if ZION is both willing and able to make counter-restitution.  In my view, despite the lack of pleading, this is a matter I should consider since it is part and parcel of the equitable remedy of rescission.

127.Pursuant to the compromise, Wah Tong paid out $400,000.  This sum has to be analysed in three parts.  First, there is an amount of approximately $250,000 of which ZION was entitled to immediate payment, as the quantified amount of the amended award after deducting the taxed and assessed costs orders that Wah Tong had obtained in litigation.  As ZION was legally entitled to payment of this sum, there would, in my view, be no unjust enrichment of ZION if the compromise was rescinded without ZION being required to disgorge this amount: c.f. Burrows, The Law of Restitution (3^rd ed), pp 88-89; Goff & Jones, The Law of Unjust Enrichment (8^th ed), §2-32.

128.An alternative way of looking at it, with broadly the same result, is that, assuming ZION prima facie had to make counter-restitution of the whole amount it received under the agreement, it would nevertheless be entitled to set off against this ancillary obligation the sum of approximately $250,000 as an amount immediately due to it under the amended award. 

129.Secondly, there is an amount of $22,059 which Wah Tong paid, not to ZION, but to the arbitrator.  As I shall explain below, Wah Tong acted in breach of the terms of the settlement agreement by paying the arbitrator directly.  ZION did not receive the money as such.  The benefit it received was the discharge of an obligation owed to a third party.  However, it appears that, had there been no settlement, if ZION had paid this amount to the arbitrator, Wah Tong would have been obliged to reimburse ZION in respect of this amount as a result of the costs orders made by the arbitrator in connection with the original award: see the email from the arbitrator referred to in paragraph 138 below, and see the last sentence in clause 5 of the agreement dated 31 March 2003 quoted in paragraph 7 above.  Accordingly I consider that there would be no enrichment on the part of ZION on account of this sum, which was paid to the arbitrator.

130.The third part is the balance less the first two sums above.  This is an amount received by ZION in December 2012 pursuant to the settlement agreement.  ZION was not otherwise entitled to the immediate payment of this sum.  I consider that justice requires that upon rescission of the settlement agreement, there should be counter-restitution by ZION in respect of this sum.  Since I have been using approximate figures, I think the rounded sum of $125,000 may be adopted for this purpose. 

Damages claim for economic duress

131.ZION claims damages in the sum of $744,000 and additional damages of $46,500 per month from April 2014.  These represent the monthly operating costs of ZION.

132.Without going into the question whether economic duress is actionable per se as a tort, on which see Universe Tankships Inc of Monrovia v International Transport Workers’ Federation(“The Universe Sentinel”), supra, 385B-C and 400B; Dimskal Shipping Co SA, supra, 166F-H, it seems to me there is no basis for saying that the continuing operating costs of ZION were caused by the economic duress in question.  ZION’s claim for damages for duress must therefore be rejected.  Nor do I think there is any sufficient basis for ordering any “compensatory” damages.

Claim for balance of award

133.ZION also claims $97,059 as money allegedly as yet unpaid on the amended award.  This represented the difference between $475,000 (the approximate amount of the award as calculated by ZION) and $377,941 (the amount of the cheque Wah Tong sent to ZION pursuant to the settlement agreement).  It is clear from the above that there is no separate entitlement on the part of ZION to this amount.

VI.  BREACH OF SETTLEMENT AGREEMENT

134.In case I am wrong in my conclusion on economic duress, I go on to consider ZION’s alternative claim that Wah Tong had repudiated the settlement agreement by paying ZION not $400,000, but only $377,941, and paying the remainder of $22,059 to the arbitrator instead.

135.Wah Tong’s email to ZION on 22 November 2012 announcing a settlement agreement had been reached stated that ZION “will receive the agreed settlement sum of HK$400,000” in about two weeks’ time.  Clause 1(a) of the settlement agreement dated 29 November 2012 clearly required Wah Tong to pay ZION a sum of $400,000 within 5 days after the consent order. There is no provision for Wah Tong to deduct the sum of $22,059 and pay it to the arbitrator instead.  To the contrary, such a provision in the draft agreement was removed by ZION with the agreement of Wah Tong.  This was recorded in Mr Saatori’s email to Wah Tong’s solicitors on 26 November 2012, as follows:

“Note: We have slightly amended the agreement by removing this clause:

‘(b) to fully settle the sum of HK$22,059.00 it owes to the arbitrator by honouring its post-dated cheque for the same amount delivered to Messrs. Hogan Lovells on 31^st October 2012 or otherwise by agreeing to Wah Tong to pay on its behalf of deducting the said sum from the amount stated in Paragraph 1(a) above.’

We do not agree with this clause nor its consequence by including therein.

We will take care of this independently.”

136.When Wah Tong later enquired with the arbitrator on 10 December 2012 whether ZION had paid the arbitrator the sum of $22,059, ZION stated:

“Cannot pay the bill until we receive payment from wah tong. ZION has no money.”

137.On 12 December 2012, Wah Tong proposed to pay $22,059 to the arbitrator direct, deducting that sum from the amount payable to ZION, to which ZION responded:

“We have an agreement that HK$400,000.00 is to be paid to ZION.

Once we receive that we will pay the Arbitrator – simple.”

138.On 12 December 2012, the arbitrator replied that $22,059 remained outstanding in respect of his fees and that

“Although I hold a post-dated cheque from the Claimant in this sum, I have not presented it in the light of the Claimant’s advice that it will not be honoured.

The parties remain jointly and severally liable in respect of this sum.  I understand that were this sum to be paid by the Claimant it would be reimbursed by the Respondent, as a consequence of my costs orders.  In these circumstances might I suggest that the respondent pay the sum to my firm directly.”

139.The arbitrator was not aware of the settlement between the parties, hence his belief that the sum would be reimbursed by Wah Tong to ZION in any event.  Further, I accept Mr Saatori’s evidence, which is supported by his email to the arbitrator dated 26 November 2012, that what he had told the arbitrator in fact was that the post-dated cheque should not be presented as Wah Tong had not paid ZION and there was no money in the account and the cheque would bounce.  He said he would revert once payment had been effected by Wah Tong which should be concluded by 14 December 2012.

140.On the same day of 12 December 2012, ZION sent another email to Wah Tong, stating:

“Pay me the full figure and we will pay the Arbitrator.

That’s it, unless he waives the fee as requested.”

141.In the end, Wah Tong withheld a sum of $22,059 and sent its solicitors’ cheque for only $377,941 to ZION on 14 December 2012. On 18 December 2012, Wah Tong sent a solicitors’ cheque for $22,059 to the arbitrator.  The arbitrator cashed Wah Tong’s solicitors’ cheque and returned ZION’s cheque.

142.In my judgment there was no legal basis for Wah Tong to decide to pay the arbitrator $22,059 directly and deduct that amount from the sum of $400,000 it should pay to ZION.  On its proper construction, even without looking at the deletion of the draft clause which ZION removed as described above[13], there is nothing to suggest that Wah Tong’s obligation to pay $400,000 was conditional on ZION paying the arbitrator first the sum of $22,059.  Wah Tong’s obligation was to pay $400,000 to ZION within 5 days of the consent order, without qualification.  If there was a risk that ZION might fail to pay the arbitrator and the arbitrator might seek payment from Wah Tong of the sum of $22,059 on the basis that Wah Tong was jointly and severally liable for it and Wah Tong might then need to ask ZION for reimbursement, it was, in my view, a risk Wah Tong accepted under the settlement agreement.  The fact that ZION asked the arbitrator for a waiver of the fees did not mean that ZION was not going to pay them if they were not waived.

143.Wah Tong argued that it was the common intention of the parties that $22,059 out of the sum of $400,000 was to be utilised for paying the arbitrator.  I do not think there is any basis for this contention, either in the language of the settlement agreement or in the admissible factual background.

144.Wah Tong, therefore, in my view, acted in breach of the settlement agreement.  Irrespective of whether or not this was serious enough to constitute a repudiatory breach, however, ZION could not terminate the settlement agreement on this ground now because it took the cheque for $377,941 without trying to terminate the settlement agreement for repudiation.

145.Nor do I think that ZION could claim any substantial damages for this breach.  The only thing it could be said to have lost was the chance of getting a waiver or remission by the arbitrator of his fees.  In my assessment the chance was nil.  For this breach, if the contract had subsisted, I would therefore have ordered only nominal damages of $10.

VII.   DISPOSITION

146.For the foregoing reasons, ZION’s claim for rescission of the settlement agreement on the ground of economic duress succeeds in principle.  There will be an order that, conditional upon payment of the sum of $125,000 by ZION to Wah Tong, the settlement agreement dated 29 November 2012 and the consent order dated 11 December 2012 be set aside.  There will be liberty to apply.

147.I make an order nisi that Wah Tong do pay ZION the costs of the action, to be taxed if not agreed.

Mr Elijah Saatori, the Director of the plaintiff company, for the plaintiff

Mr Chan Chung Ming Josiah, instructed by W.K. To & Co., for the defendant