Case Document

100%Judiciary

CACV000293/2002

CACV 293/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 293 OF 2002

(ON APPEAL FROM DCCJ 9657 OF 2001)

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BETWEEN	PACIFIC CENTURY INSURANCE COMPANY LIMITED (formerly known as TOP GLORY INSURANCE COMPANY (BERMUDA) LIMITED)	Plaintiff

	AND

	CHENG HON CHUNG	Defendant

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Coram: Hon Woo and Ma JJA

Date of Hearing: 11 December 2002

Date of Judgment: 27 December 2002

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J U D G M E N T

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Hon Ma JA:

Background

1.The plaintiff was at all material times in this action an insurer authorised under the Insurance Companies Ordinance Cap. 41 ("the ICO") to carry on various classes of insurance business in Hong Kong. It was formerly known as Top Glory Insurance Company (Bermuda) Limited ("Top Glory").

2.In May 1998, the defendant was engaged as an insurance agent by Top Glory. The plaintiff's case is that the terms of the defendant's engagement were set out in four contracts signed by him and made with Top Glory:-

(1) An Agent's Contract for Selling Long Term Insurance Business dated 1 May 1998 ("the Agent's Contract").

(2) A Unit Manager's Contract also dated 1 May 1998 ("the Manager's Contract").

(3) A Manager's Financing Agreement dated 20 May 1998 ("the 1998 Financing Agreement").

(4) A Manager's Financing Agreement dated 1 May 1999 ("the 1999 Financing Agreement").

3.I shall in due course have to deal with these agreements in greater detail as well as the defendant's allegations as to the terms of his engagement.

4.By a letter dated 13 October 1999 from the plaintiff to the defendant, the latter's engagement was terminated with immediate effect. According to the defendant, however, he had in fact been told in June 1999 that his engagement would be terminated forthwith.

5.The plaintiff's case is that at the date of the termination of his engagement, the defendant was indebted to it in sums totalling $400,403.93, such liability arising under some or all of the four agreements to which I have referred. A letter before action dated 17 April 2001 was sent to the defendant by the plaintiff's solicitors.

6.On 15 June 2001, the plaintiff commenced proceedings in the District Court claiming the said sum of $400,403.93 and interest. An application for summary judgment was taken out on 7 December 2001.

7.On 26 April 2002, Deputy Judge R. Yu granted summary judgment in the said sum, together with interest and costs. The defendant appealed by a notice of appeal dated 12 July 2002 (leave to appeal having been granted by Mr Justice Rogers VP on 8 December 2002).

8.The issue before us on 11 December 2002 was whether the learned Deputy Judge was correct in granting summary judgment under RDC Order 14. At the hearing, Mr Lee Wing-kin appeared for the defendant, Miss Julia Lau for the plaintiff.

The parties' respective positions

9.It is first necessary to state briefly the effect of the four agreements alleged by the plaintiff to comprise the contractual relationship between it and the defendant.

10.The Agent's Contract:-

(1) By clause 1.3 thereof, it was expressly stated that the relationship between the plaintiff and the defendant was not that of employer and employee. The defendant was throughout referred to as an agent and indeed the terms of the Contract related to the defendant's engagement as an insurance agent selling long-term insurance business.

(2) Clause 6 set out the remuneration of the defendant as consisting of the commissions and bonuses set out in that clause and in the Schedule annexed to the Contract.

11.The Manager's Contract:

(1) Paragraph II of the Recitals reiterated that there was no employer-employee relationship between the parties. In this Contract, the defendant was referred to as a manager. It governed the terms of the defendant's position as a manager within the plaintiff company and his relationship with other agents under his direct supervision. It was envisaged under this Contract that the defendant would or might have a team of insurance agents working under him. These other agents would be recruited, trained and supervised by the defendant.

(2) A relevant example of the triangular relationship between the plaintiff, the defendant and these other agents is clause 6(a) of the Contract. It was stated in that clause that should the engagement of any of the supervised agents be terminated by the plaintiff, the defendant would immediately be liable to the plaintiff for half of what such agent owed under his financing agreement with the plaintiff.

(3) The defendant was entitled to the allowances, bonuses and overriding commission set out in the Schedules to the Contract as his remuneration thereunder.

12.The 1998 Financing Agreement:-

(1) This Agreement was stated to form part of the Manager's Contract (which in turn referred to the Agent's Contract).

(2) The purpose of the Agreement was to set out the terms of monthly payments which were to be made by the plaintiff to the defendant, these payments being in nature advances on the plaintiff's remuneration under the Manager's Contract. There were provisions in the Agreement as to the mutual accounting of such payments at the end of the relevant financial period.

(3) Under this Agreement, the monthly payments were fixed at $40,000.00 for a period of twelve months.

13.The 1999 Financing Agreement:-

(1) Again, this Agreement made express reference to the Manager's Contract.

(2) Its terms were the same as the 1998 Financing Agreement except that the relevant monthly advances were fixed at $20,000.00 and the relevant financial period was four months.

14.As I have mentioned, it is the plaintiff's case that upon the termination of the defendant's engagement, the amounts due to it from the defendant totalled $400,403.93. As pleaded and as revealed in the documents before us, this sum can be broken down as follows:

(1)

$370,968.25 was allegedly due under the two Financing Agreements of which $363,364.40 was attributable to the 1998 Financing Agreement (taking into account repayments made by the defendant) and $7,603.58 was attributable to the 1999 Financing Agreement (also taking into account repayments).

(2) $28,649.95 was alleged to be due under the Manager's Contract.

(3) $785.73 was alleged to be due under some commission deductions due to internal replacement.

15.I now turn to the defences. Essentially, they can be distilled into the following (even though it must be said that there was much confusion in the way the defences are pleaded):-

(1) The true agreement between the parties was that the defendant had been engaged by the plaintiff as a unit manager with a guaranteed monthly income of $40,000.00 for twelve months. This agreement is alleged to have been made orally in May 1998 between the defendant and Mr Lam Yu Ming, the agency manager of the plaintiff. In the Re-Amended Defence and Counterclaim, the defendant admits the Agent's Contract and admits to signing the other agreements. It was, however, not clear from this pleading nor from the defendant's affirmation evidence just how the alleged oral agreement was to fit in. Before us, Mr Lee submitted that the oral agreement negated the effect of the 1998 Financing Agreement. He seemed to accept that the oral agreement did not affect the Agent's Contract, the Manager's Contract or the 1999 Financing Agreement. It is, however, unnecessary to decide this particular issue at this stage.

(2) In support of the oral agreement, apart from the affirmation of the defendant verifying the contents of the Defence and Counterclaim (in its amended form), there were also affirmations from one Mr Kwok Yim Ming, Mr Lee Siu Bun and Mr Lam Yu Ming himself. Mr Kwok and Mr Lee were former colleagues of the defendant at Manulife who had left that company to join Top Glory at about the same time as the defendant. All these deponents referred to the defendant's terms of employment with the plaintiff involving the monthly guaranteed payment of $40,000.00.

(3) In further support of the oral agreement, the defendant alleged that after working for about four months, he was provided with copies of the Agency Contract, the Manager's Contract and the 1998 Financing Agreement. After realising that instead of a guaranteed monthly income, he was subject to a monthly financing scheme (under the 1998 Financing Agreement), he protested to Mr Lam who is said to have promised to rectify "the relevant Agreement", but the defendant never received this. Mr Lam in his affirmations confirms this.

(4) As to the amounts alleged by the plaintiff to be due from the defendant, the thrust of Mr Lee's submissions was that in view of the oral agreement issue, the plaintiff's claims in this regard were therefore arguably bad. This accounts for the said sum of $363,364.40. As to the amounts alleged to be due under the 1999 Financing Agreement and the Manager's Contract, Mr Lee was not really able to submit that the defendant had an arguable defence which should be tried. All this was of course subject to the defendant's counterclaim to which I now turn.

(5) The crux of the counterclaim is that, having terminated the defendant's engagement as an insurance agent, the plaintiff failed to inform either the Hong Kong Federation of Insurers or the Insurance Authority of this termination within seven days thereof. This was said to be contrary to clause 14 of the Hong Kong Federation of Insurers' Code of Practice for the Administration of Insurance Agents, which was required under section 67 of the ICO and contrary to section 66(4) of that Ordinance. It was only on 15 September 2000 that the registration of the defendant as an insurance agent with the plaintiff was cancelled. As pleaded, the plaintiff was therefore in breach of statutory duty and contract or was negligent. It is alleged by the defendant that by reason of the plaintiff's breaches or negligence, he had suffered a loss of earnings in that he was prevented from gaining any employment with other insurers as an insurance agent. The earnings he could have expected as an insurance agent was put at $40,000.00 a month (two letters dated July 1999 were produced by the defendant evidencing this) but he was able only to get an employment as a driver at $10,000.00 a month. The difference was therefore $30,000.00 a month. The period for which this loss is claimed is 14 months (from June 1999 when the defendant was told by the plaintiff that his engagement was terminated to September 2000 when his registration as the plaintiff's agent was cancelled). The amount of the counterclaim is therefore said to be in the region of $420,000.00, thus exceeding the plaintiff's claim.

16.Are these triable issues?

Analysis of the defences and counterclaim raised by the defendant

17.The following represents settled and common approaches in Order 14 applications:

(1) Factually, is what the defendant says believable? This is the commonly applied test derived from the Court of Appeal's decision in Ng Shou Chun v Hung Chun San [1994] 1 HKC 155, at 158 per Godfrey JA. The test is not whether the defendant is to be believed (for the hearing of an Order 14 application is not a trial on affidavits but whether what the defendant says is believable (i.e. capable of belief)).

(2) As to whether a defendant's version is believable, the Court of Appeal in Re Safe Rich Industries Limited, unreported, 3 November 1994, CACV 81/1994, applied the Ng Shou Chun test in the context of an application to strike out a winding-up petition on the basis that the debt founding the petition was disputed. The Court asked itself the same question: was what was asserted by the company in that case believable? In dealing with this test, Bokhary JA (with whose judgment Nazareth VP and Litton JA agreed) observed at page 4 of the decision:

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognised - because failure to recognise it would create a debt-dodgers' charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute."

(3) There is also a legal side to the approach in Order 14 applications: even if the facts as alleged by the defendant are believable, do they as a matter of law provide an arguable defence?

18.The approaches I have just referred to relate to a consideration of defences raised by a defendant. Where the defendant makes a counterclaim, the court's approach was summarised by Keith JA in Shenzhen Baoming Ceramics Co Ltd v Companion-China Ltd [2000] 2 HKLRD 288, by referring to The Supreme Court Practice 1999:-

"An analysis of the authorities as to what order should be made where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely:

(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to defend to the extent of the set-off and the court has no discretion;

(b) where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

(c) where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;

(d) where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay;

the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case (United Overseas Ltd v. Peter Robinson Ltd, 26 March, 1991, CA Transcript 91/0297, per Bingham LJ)."

19.The passage just quoted is now also to be found in Hong Kong Civil Procedure 2002 Vol.1 at paragraph 14/4/14. That paragraph contains detailed discussion of the court's approach where a set-off or counterclaim is made by a defendant against whom summary judgment is sought. The key, I think, is flexibility to meet the justice of the case. In this context, I commend the sentiments expressed by Staughton LJ in Axel Johnson Petroleum AB v MG Mineral Group AG [1992] 1 WLR 270, at 275-276.

20.I have already set out above the defences and counterclaim raised by the defendant. In my view, the main defence of the oral agreement that the defendant was to be guaranteed a monthly income of $40,000.00 must be an issue to be determined at trial. That this is so factually can be seen from not only the defendant's own affirmation evidence but also the other affirmations to which reference has already been made. From a legal point of view, the effect of the alleged oral agreement is to change the nature of the 1998 Financing Agreement. Admittedly, that Agreement (made on 20 May 1998) was after the alleged oral agreement, but the defendant contends that when he signed the 1998 Financing Agreement, he was under the mistaken belief that the plaintiff would abide by the terms of the oral agreement. In law, this may amount to a unilateral mistake which, if known to the other side, would afford a defence, if not found a case on rectification. The promise by Mr Lam to rectify provides evidence of the plaintiff's knowledge. During the course of the hearing, Woo JA made reference to passages in Chitty on Contracts (28th Edition) Volume 1 at paragraphs 5-034 and 5-073. These passages in my view provide the legal basis for the defendant's defence here.

21.This disposes of the bulk of the plaintiff's claim (to the extent of $363,364.40) and it must follow therefore that there should be unconditional leave to defend in relation to this part.

22.As to the balance of the plaintiff's claim, while it would certainly appear that the defences to them are considerably weaker than that of the oral agreement, I think it right that unconditional leave should also be given in relation to these claims. I am of this view by reason of the counterclaim.

23.Here, Miss Lau fairly accepted that the counterclaim was arguable and indeed, her client has at no stage applied to strike it out. Her argument, rather, was that it was so remote from the plaintiff's claim that it was not a set-off (whether legal or equitable) and furthermore, did not arise out of the same transaction as the plaintiff's claim.

24.Unfortunately, I am unable to agree with her submissions:-

(1) As a matter of substance, the matters pleaded in the counterclaim (which must be read together with the defence) raise an equitable set-off.

(2) I accept as a general statement of the nature of an equitable set-off, the passage in Halsbury's Laws of England (4th Edition Reissue) Volume 42 at paragraph 430, "Where a cross-claim for a sum of money is so closely connected with a claim that it goes to impeach the plaintiff's title to be paid and raises an equity in the defendant, making it unfair that he should pay the plaintiff without deduction, the general rule is that the defendant may deduct with impunity the amount of the cross-claim, or raise it by way of equitable defnece when sued".

(3) In the present case, put succinctly, the plaintiff's claim arises out of its contractual relationship with the defendant. The defendant's counterclaim also arises out of that relationship. In my view, the counterclaim has the requisite mutuality with the plaintiff's claim for the purposes of an equitable set-off.

25.In these circumstances, I think as a matter of justice that unconditional leave to defend must be given for the whole of the plaintiff's claims.

Order

26.For the above reasons, I would allow the appeal, set aside the judgment dated 26 April 2002 and order that the defendant be given unconditional leave to defend.

27.As to costs, I would make an order nisi that:-

(1) The costs of and occasioned by this appeal be to the defendant to be paid by the plaintiff, such costs to be taxed if not agreed.

(2) The costs below to be costs in the cause.

Hon Woo JA:

28.I have had the advantage of reading Ma JA's judgment in draft and I entirely agree with it. The orders that this Court makes are those referred to in the two preceding paragraphs.