Ace Life Insurance Co Ltd v. Lin Man Chi Andy

HCA 895/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 895 OF 2009

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BETWEEN

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Before: Deputy High Court Judge Burrell in Chambers

Date of Hearing: 5 March 2012

Date of Decision: 16 March 2012

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D E C I S I O N

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1.The plaintiff is an insurance company carrying on business in Hong Kong. From 10 July 2006 the defendant became an agent of the plaintiff to sell life insurance policies on its behalf.

2.The terms of the contract of engagement between the plaintiff and the defendant are contained in an appointment letter, an agent’s agreement and a manager’s agreement, collectively referred to an ‘the agreements’.  The agreements contained, inter alia, provisions for the agent’s remuneration.  For the purpose of this case these can be conveniently divided into two sources; firstly, basic remuneration and secondly, special allowances and bonuses.

3.Two important matters are not in dispute in this case, as follows:

(i)    The defendant’s appointment was terminated with effect from 13 July 2008 and that his period of engagement was such as triggered Clause 5.1 of his letter of appointment (infra).

(ii)   During his period of appointment he received, and was entitled to keep, basic remuneration in the sum of $2,358,483.  He also received special allowances and bonuses in the total sum of $6,500,000.  It has been conceded by the plaintiff that $5,500,000 of this sum was not paid for the benefit of the defendant and does not form part of the “bonuses” which are at the heart of the dispute in this claim.  The balancing figure of $1,000,000 has further been reduced by $12,315 which, it is agreed, represents outstanding commission to which the defendant is entitled.

4.The net effect is that, and this is the core issue in the case, the plaintiff claims that by virtue of Clause 5.1 of the appointment letter the defendant is bound to repay to the plaintiff the sum of $987,685.

CLAUSE 5.1

“In the event of the Agent’s Agreement is terminated for any reasons other than by reason of ill-health and disability that will, in the Company’s view, prevent you from discharging your duties as an agent, subject to Clauses 1, 2 and 3 of the Addendum you will be required to repay such proportion as provided below of the Personal Confirmation Bonus, Additional Personal Confirmation Bonus, Team Confirmation Bonus and Additional team Confirmation Bonus (‘Bonuses’) and Special Allowance already received by you under the terms of this Letter and Addendum together with costs of recovery …”

5.The plaintiff submits that there is no ambiguity in this provision and that there is no defence to their claim that the bonus must be repaid.  In a nutshell the plaintiff submits that the only interpretation of Clause 5.1 is that the defendant is required to repay the bonus because the agreement has been terminated (within the specified time) and the reason for the termination was not the defendant’s ill health and disability which prevented him from discharging his duties as an agent in the company’s view.

6.The plaintiff took out an Order 14 summons seeking summary judgment.  They were successful before the Master.  The defendant appealed, Deputy High Court Judge Carlson upheld the Master’s decision.  The defendant appealed again.  The Court of Appeal determined that the defendant did have an arguable case and allowed the appeal.

7.The matter has now come to trial.  In addition to the legal arguments the court has had the benefit of considering the evidence of Mr Daniel Tang Tat Shing, a Vice President of the plaintiff.  The importance of his evidence was that, inter alia, it purported to explain the rationale behind Clause 5.1 in the context of its meaning as contended by the plaintiff.

8.The plaintiff’s and defendant’s competing submissions can best be illustrated by inserting brackets around certain words in Clause 5.1.

9.The defendant does not come within the “ill health and disability” provision.  Which words therefore should be extracted from Clause 5.1 so as to read it minus the “ill health and disability” proviso?

10.The plaintiff submits:

“In the event of the Agent’s Agreement is terminated for any reasons (other than by reason of ill health and disability that will, in the Company’s view, prevent you from discharging your duties as an agent.) … you will be required to repay …”

11.The defendant submits:

“In the event of the Agent’s Agreement is terminated for any reasons (other than by reason of ill health and disability) that will, in the Company’s view, prevent you from discharging your duties as an agent … you will be required to repay …”

DECISION

12.For the reasons which follow I am satisfied that the plaintiff’s construction of Clause 5.1 is the one and only correct interpretation.  The reasons may be collectively summarized under three headings.

1.   The application of the general principles of interpretation of contracts support the plaintiff’s construction

13.Somewhat lengthy extracts from two cases in which Lord Hoffman set out these principles merit mention at the outset.  In Investors Compensation Scheme Ltd v West Bound Building Society [1998] 1 WLR at p 912 he said:

“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent …

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax …

(5)   The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.  On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties in an intention which they plainly could not have had …”

14.And in Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR at p 296 he said:

“… The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve … if the ordinary meaning of the words make sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement — evidence of such negotiation is inadmissible — and has no way or knowing whether a clause which appears to have an onerous effect was a quid pro quo for other concession. Or one of the parties may simply have made a bad bargain … But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear; it is that meaning which must prevail.”

15.In my judgment the ordinary sensible reading of the Clause is that advanced by the plaintiff.  As shown later, the matrix of fact upon which Mr Tang’s evidence focuses, explains why the plaintiff’s construction is the one intended and understood by both parties against the background of the insurance industry and the defendant’s job.

16.In my judgment the defendant’s alternative construction falls into error.  It is a result of, as Lord Hoffman put it, “a game with words”. A person drafting the clause and wanting to give effect to the meaning advanced by the plaintiff would have drafted it in the way in which it is drafted.  On the other hand a person drafting the clause and wanting to give effect to the defendant’s interpretation would not have drafted it in the way it is drafted.

17.The purpose of Clause 5.1 is to inform the agent that if he leaves or is terminated within a specific time (about which there is no issue in this case) the requirement to repay will be triggered (unless the ill health and disability proviso applies).  Clause 5.1 is plainly about when an agent leaves not why he leaves.

18.In further support of this interpretation, I refer to extracts (which I consider to be correct) from Mr Jose Maurellet’s (counsel for the plaintiff) written submission:

“If its meaning was intended to be what D contends for, i.e. the requirement to repay the Special Allowances and Bonuses only applied when the Agent’s Agreement is terminated for any reasons that, ‘in the Company’s view, prevent D from discharging his duties as an agent’, the inclusion of ‘other than by reason of ill health and disability’ would have been superfluous. It would then follow the exception of ill health and disability would be entirely defeated by this interpretation.”

The ‘defence’ interpretation, in my judgment, to use Lord Hoffman’s words, would be to “attribute to the parties an intention which they plainly could not have had”.

2.   The evidence of Mr Tang explains the rationale behind the proper construction of Clause 5.1

19.The clause must be read in context.  This means in context with all the contractual documents and in context with the job that the defendant was being asked to perform and in context with the insurance industry in which he was to carry out that job.

20.Mr Tang was carefully cross-examined by the defendant’s counsel, Mr Anthony P.W. Cheung.  However, those parts of his evidence to which I shall now refer was evidence which I accept as true and accurate and which was unshaken by cross-examination.

21.Mr Tang explained that ‘life policies’ are generally long term products.  The ‘bonus’ element of an agent’s remuneration takes into account the agent’s ability to maintain the policies.  The ‘bonus’ is a payment over and above the agent’s commission (which is unaffected by Clause 5.1).  The amount of the bonus depends, inter alia, on the size and the length of the policy.  At the outset the ‘bonus’ has not been earned (in the ordinary sense of the word) but becomes “earned” with the passage of time.

22.It is reasonable to assume that the agent is aware of and understands this philosophy.

23.Mr Tang’s evidence continued as follows:

“Agents often have a long term relationship with their clients. As a result, when an agent leaves NYL for a competitor he will usually encourage the client to terminate their insurance cover with NYL and take out a new policy with the new insurer. This is a common occurrence and is colloquially referred to in the insurance industry as ‘twisting’.

NYL does not include any non-competition post termination restrictions in its agreements with agents. Agents are free to immediately join a competitor on leaving NYL. Further NYL does not include any non-solicitation of clients restriction in recognition of the fact that clients may wish to follow their preferred agent to his new principal. However, if agents are free to join a new competitor and twist policies (subject to the statutory regime to prevent clients being disadvantaged), then NYL is at considerable risk of losing clients and future policy premium when an agent leaves NYL.

As such, when an agent leaves NYL, it is exposed to the loss of the future premium to be earned form the agent’s particular clients which NYL has already taken into account in paying the Bonuses. It is therefore essential that NYL be able to recoup Bonuses through Clause 5.

In this case I am aware and can confirm that 46 of the 47 policies sold by the Defendant in 2007 (i.e the year in which the Bonuses were awarded) did not survive two policy years.”

24.Mr Tang further explained that the “claw back” provisions are staggered over a period of time so that the 100% claw back only operates after a short relationship between principal and agent.

25.In this particular case the agency was terminated due to the defendant’s poor performance to which I refer later in this judgment at paragraph 42.

26.Mr Tang explained why, and I agree and accept, the defendant’s interpretation of Clause 5.1 makes no commercial sense.  It would permit an agent to move from company to company and earn repeated bonuses on the same policy.  He added, importantly, that in his (long) experience in the insurance industry the interpretation of Clause 5.1 (or similar clauses) suggested by the defendant had never been advanced before.  In this particular case there is no evidence from the defendant himself to contradict Mr Tang’s evidence.  Thus there is no evidential challenge to the plaintiff’s submission that the defendant must have been aware that the purpose of Clause 5.1 was as advanced by the plaintiff.  The defendant has failed to file any evidence within time.

3.   The defendant’s submissions carry little or no weight in the face of the compelling evidence and legal arguments from the plaintiff

27.I shall deal briefly with the points raised at trial by the defence. It is not incumbent on a judge to deal with every point raised.  All matters have been considered, the following merit comment.

(a)   The Court of Appeal’s decision in the O.14 proceedings

28.When allowing the defendant’s appeal against the O.14 summary judgment Rogers VP rightly said:

“Since this is an application for summary judgment under Order 14 it is undesirable for this court to decide anything further than is necessary for the determination of this appeal.”

29.He did nevertheless go on to comment on the merits of the defendant’s case upon which reliance is placed in this trial.

30.The issue before the Court of Appeal was whether or not the defendant had no defence at all.  The differences between the appeal proceedings and this trial are threefold.  Firstly, the legal issues are not the same; secondly, this court has had the benefit of important evidence from the plaintiff’s witness and thirdly, this court must consider the matter ab initio.

(b)   Defence submissions on Clause 5.1

31.The starting points of Mr Cheung’s submissions are flawed. At the outset he submits that “to deprive an agent of such allowances and bonus — by termination for whatever reasons — long after they had been paid is not reasonable”.  In my judgment such repayment is not “long after” and is not “unreasonable”.  It is not unreasonable for the reasons explained by Mr Tang.  I do however agree that it would be unreasonable if they had to be repaid after a truly long period of engagement i.e. many years.  The plaintiff and the contract recognizes this.

32.In the same vein Mr Cheng complains that the plaintiff’s interpretation permits it to claim back bonuses “at the very end of the contractual period”, by which he means the very end of the period (2‑3 years) to which Clause 5.1 applies.  It would be unreasonable to claw back a bonus “at the very end” of the life of the insurance policy but plainly not in the first year or two of its life.

(c)   Submissions on the words “that will, in the Company’s view …”

33.It is fundamental to the defendant’s case that the words “that will, in the company’s view” do NOT qualify the words “ill health and disability” but only refer to the words “for any reasons”.

34.The rationale of the plaintiff’s interpretation is plain. Firstly, the qualifying words immediately follow “ill health and disability”. Secondly, the company is entitled to have an opinion on the seriousness of the “ill health and disability”.  It is far from unreasonable to permit the plaintiff to have an opinion as to whether the “ill health and disability” exception should operate or not.  The test being whether the agent’s ability to perform his or her duties is affected or not.  If “the company’s view” was not linked to “ill health and disability” there would be no mechanism for determining the seriousness of it.

35.Mr Cheng also submits that the provision violates Cap 487, the Disability Discrimination Ordinance.  He says “ill health” and “disability” require no definition.  “Disability” (but not “ill health”) is defined in section 2 of Cap 487.  Therefore “the Company’s view”, it is submitted, is not relevant.  This argument has no application to “ill health” at all and in my judgment, is misconceived with regard to “disability”.

36.Mr Cheng cites section 20(2) of Cap 487:

“S.20(2) of the Ordinance provides that: ‘It is unlawful for the principal, in relation to work to which this section applies, to discriminate against a person with a disability who is a commission agent‑

(a) in the terms on which he allows the person with a disability to do that work;

(b) by not allowing that person to do it or continue to do it;

(c) in the way he affords that person access to any benefits, services or facilities or by refusing or deliberately omitting to afford that person access to them; or

(d) by subjecting that person to any other detriment.’ ”

37.Leaving aside the “ill health” scenario, Mr Cheng’s reliance on section 20(2) is misplaced because the use of the word “disability” in Clause 5.1 creates a situation which would entitle an agent to keep his bonus not (as would otherwise be the case) lose it.  Far from discriminating against him, it protects him. The fact that that protection is subject to the “company’s view” might qualify the protection but does not convert it into discrimination.

38.Thus, even if an agent has only been an agent for a very short period, Clause 5.1 will not apply if the agency is terminated by “ill health and disability”.  It is implicit that the “company’s view” on the matter must be objective and reasonable.  Taken as a whole and on this analysis the Clause 5.1 should not, in my judgment, be regarded as violating Cap 487.

(d)   Contra Proferentem

39.Mr Cheng submits that the application of the contra proferentem rule to the ambiguous Clause 5.1 should result in an interpretation in the defendant’s favour.

40.Before the contra proferentem rule applies the party relying on it must establish doubt and/or ambiguity as to meaning.  For the reasons above, with particular reference to the application of the basic principles of construction of contracts, I do not consider that doubt or ambiguity has been established.

(e)   Lack of defence evidence

41.It is an important feature of this case that the defence at trial has been based on (apart from the cross-examination of Mr Tang) legal submissions only.  The plaintiff’s case has the additional benefit of persuasive and helpful testimony.  It is worthy of further comment in this context that the defendant’s defence dated 8 May 2009 makes no reference to the interpretation now being advanced which at least suggests that it was not an interpretation held by the defendant himself at that time.  Paragraph 11 of the defence is telling.  It reads:

“Even if the Defendant is legitimately terminated by the Plaintiff, which is denied, the most the Defendant shall be liable is HK$1,000,000 minus the commission payable to the Defendant.”

(f)   The alternative claim of “wrongful dismissal”

42.The claim that the defendant is entitled to keep his bonus on the ground that he was wrongfully or unfairly dismissed must also fail. It was not abandoned at trial but was not enthusiastically persued either.  It fails firstly because he was an agent, not an employee.  It fails secondly on evidential grounds.  The unchallenged evidence from the plaintiff explains the reason for his termination.  The procedure adopted cannot be faulted.

43.There will be judgment for the plaintiff in the sum of $987,685 plus interest (to be agreed) from 30 March 2009 plus costs to be taxed if not agreed in accordance with Legal Aid Regulations.

Mr Jose Maurellet, instructed by Messrs Kennedys, for the plaintiff

Mr Anthony P.W. Cheung, instructed by Messrs Raymond Kwong & Co., for the defendant

Please refer to CACV78/2012 for the relevant appeal(s) to the Court of Appeal.