FWD LIFE INSURANCE CO (BERMUDA) LTD v. POON CINDY

CACV 181/2015

[2019] HKCA 697

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 181 OF 2015

(ON APPEAL FROM HCA 2202/2008)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

Factual background and history of proceedings

1.  From March to September 2008, the Defendant was engaged by the Plaintiff (previously known as ING Life Insurance Company (Bermuda) Limited) as an Agency Director.  The following documents were signed by the Defendant on 14 March 2008 for such engagement,

   (a)  an individual Agent’s Agreement (“IAA”);

   (b)  an Agency Management Agreement (“AMA”).

2.  Upon the appointment of the Defendant as its Agency Director, the Plaintiff paid the Defendant a sum of $492,000 by way of Signing Fee (“SF”) and another sum of $492,000 by way of advanced payment of Performance Bonus (“PB”).  Further, from March to August 2008, the Plaintiff paid the Defendant a total sum of $328,002, a by way of Monthly Special Bonus (“MSB”) calculated at $54,667 per month.

3.  These payments were made under the terms of a Letter of Offer of 6 March 2008 issued by the Plaintiff in favour of the Defendant except that the PB were paid in advance at the request of the Defendant.  According to those terms, these sums were repayable to the Plaintiff if the Defendant’s engagement was terminated within 30 months (for SF and MSB) or 12 months (for PB) from the date of her contract.

4.  The Defendant’s engagement was terminated by the Plaintiff on 24 September 2008.  Notice of termination was given on 18 September 2008 in accordance with Clause 7.2 of the IAA which reads:

“ 7.2 Subject to any subsequent agreement to the contrary, this Agreement may be terminated by either party by giving to the other party a notice of termination in writing to such effect and the notice period, unless with the consent of the other party, shall not be less than six (6) days.”

5.  A provision to similar effect can be found in the AMA at Clause 7:

“ 7. Either party shall be entitled to terminate this Agreement without any reasons being given thereof, by giving to the other six (6) days’ written notice of its intention to terminate the same.”

6.  Since the termination took place at a time when the Defendant had not been engaged for more than 12 months, the Plaintiff claimed against her for the repayment of the SF, MSB and PB.

7.  The Defendant said she had been wrongfully terminated.  At the court below (and in the pleadings), she put her case on two alternative bases:

   (a)  There was a collateral contract stemming from some oral representations from the agents who recruited her to join the Plaintiff. Those agents were the 1^st and 2^nd Third Parties.  She said that they had assured her that the Plaintiff would not terminate her IAA within 30 months if she fulfilled the requirements in the Letter of Offer. She also said that they had assured her that the Plaintiff would not terminate her IAA without valid reason.

   (b)  There was an implied term to the IAA that it would not be terminated without valid reasons and an implied term to the Letter of Offer that she would not be demoted from the position as Agency Director without any valid reasons given.  We shall refer to these implied terms as the Valid Reason implied term.

8.  The Defendant’s case was that the real reason for the termination of her IAA was her refusal to accept demotion in September 2008 after she discovered that the 2^nd Third Party Mr Danny Chan was only an Agency Manager.  From March to August 2008, Mr Chan had been receiving a commission (called override) in respect of the Defendant’s management earning (as he was the one who recruited the Defendant to join the Plaintiff and she was treated as his downline agent).  However, he could not continue to do so after he failed to meet the performance requirement for promotion to Agency Director because an Agency Director could not be a downline agent of an Agency Manager[1]. The only way to maintain his entitlement to the override from the Defendant’s earning was to demote the Defendant from Agency Director to Agency Manager.

9.  The Defendant said she refused to accept the proposed demotion.  As a result, she said, the Plaintiff terminated her IAA.  She said such termination was in breach of the collateral contract and/or the Valid Reason implied term.

10.  The Plaintiff’s case on the cause of termination was that the Defendant failed to meet performance target set for Agency Director.

11.  The trial of the action took place before the then Deputy High Court Judge Tony Poon (now T Poon J).  It lasted for 5 days in 2014.  By the time of trial, the Defendant had no legal representation and she acted in person.  The Plaintiff and the Third Parties were represented by different counsel.

12.  On 8 July 2015, the Judge handed down the judgment in the case.  He rejected the Defendant’s case on collateral contract as he did not believe that there were oral representations as alleged.  He also rejected the implied term argument as he held that there was no Valid Reason implied term in the IAA and the Letter of Offer.

13.  However, on the reason for termination of the IAA, his findings set out at [38] to [41] are as follows:

“ 38. 另一方面，鄭指被告人曾對他作出口頭承諾會於半年內業績達標的說法，亦是殊不可信。從列出業務總監業績指標的文件上可見，各項業績要求是需參考該名業務總監或經理的全年業績的。鄭的證供，是指他當時要求被告人在入職半年之內達成一名業務總監全年的業績。本席實在難以理解，鄭在當時為何會對被告人作出這麼不合理的要求。而這樣做，對於原告人、鄭、陳或被告人，又有何好處？又有甚麼迫切性，不能給予被告人正常的時間，來證明她的工作能力？

39. 本席認為，由於是陳引薦被告人進原告人處工作，所以在鄭和陳之間已有默契，陳將會得到被告人的「override」。但當時陳的職位已經由業務總監降職至業務經理，所以鄭和陳均要求被告人加入成為業務經理而不是業務總監。但因為被告人堅持，他們才不得不將被告人的入職職位改成業務總監。到了後來被告人發現原來陳只是業務經理而非總監時，為了讓陳能夠名正言順地收取「override」，他們便向被告人施加壓力，希望她能同意降職。被告人的口頭承諾此說，實在是虛構的藉口。

40. 本席認為，由於被告人堅持不肯降職，並且要求調區，鄭和陳覺得已經不能完全掌握被告人和她能帶來的利益，導致雙方關係破裂，所以決定要促使終止被告人的合約。

41. 本席認為，原告人是否終止經紀合約，一般都是聽隨區域總監的建議。所以雖然Edmond Lee對被告人的業績沒有不滿，但是也接納鄭的建議，和被告人終止合約。”

14.  In short, the Judge rejected the Plaintiff’s case and accepted the Defendant’s case as to the cause of termination. However, he gave judgment in favour of the Plaintiff because he rejected the Defendant’s case on the collateral contract and implied term.  He therefore held that the Plaintiff was not in breach of the IAA or the Letter of Offer in exercising its power of termination under Clause 7.2.  The Plaintiff was therefore entitled to recover the SF, MSB and PB.

15.  The Judge also dismissed the Counterclaim of the Defendant and the Third Party’s claims by the Defendant against the two Third Parties [2] based on the oral representations and breach of warranty of authority.

16.  On 31 July 2015, the Defendant acting in person brought an appeal against the judgment.  She also applied for stay of execution pending appeal.  The application was refused by the Judge on 6 October 2015.

17.  On the same date, the Plaintiff issued a statutory demand to the Defendant.  As she did not pay the judgment sum, the Plaintiff petitioned for her bankruptcy on 11 January 2016.  On 25 April 2016, the court made a bankruptcy order against the Defendant.

18.  By virtue of her bankruptcy, the Defendant could not prosecute the appeal without the consent of the trustee in bankruptcy.  At first, the trustee in bankruptcy did not consent and the appeal was stayed on 7 September 2016.

19.  The Defendant had applied for legal aid and at first she was unsuccessful.  She applied again in June 2017 and legal aid was granted to her on 14 July 2017 and counsel was first assigned on 17 October 2017.

20.  With the assistance of her lawyers, the Defendant obtained the consent of the trustee in bankruptcy on 1 March 2018 to proceed with the appeal.

21.  On 28 June 2018, the Court granted an order lifting the stay to enable the appeal to proceed.

22.  We heard the appeal on 30 May 2019. After hearing submissions, we reserved our judgment.

The Good Faith and Rationality implied term

23.  At the hearing of the appeal, Mr Dawes SC (appearing together with Mr Chan for the Defendant) relied on a further implied term which was first set out in a draft Amended Notice of Appeal attached to a summons of 18 April 2019.  The relevant paragraphs are at para 2(1A) and (2A) of the draft and we shall refer to them as the Good Faith and Rationality implied term:

“ (1A) Alternatively, the power to terminate the IAA under Clause 7.2 thereof would be exercised in good faith and would not be exercised for arbitrary, capricious, perverse or irrational reasons.

(2A) Alternatively, the power to demote the Defendant from her position as Agency Director would be exercised in good faith and would not be exercised for arbitrary, capricious, perverse or irrational reasons.”

24.  As the Plaintiff opposed leave to be granted to these two sub‑paragraphs, we heard submissions on the same at the hearing on 30 May 2019.  After considering the submissions, we decided to grant leave to the Defendant to add these sub-paragraphs to the Notice of Appeal.

25.  Though we can see that the focus of the Good Faith and Rationality implied term is slightly different from the Valid Reason implied term, most (if not all) the factual matrix of the Defendant’s case concerning the Good Faith and Rationality implied term had been canvassed in the evidence.

26.  Further, as explained below, the common law on Good Faith and Rationality implied term has developed since 2015.  In particular, the judgment in Tadjudin v Bank of America CACV 12/2015 was handed down on 20 May 2016 and the judgment in So Sheung Hin Ben v Chubb Life Insurance [2018] 5 HKC 47 was handed down on 20 April 2018.  In light of these developments, given the factual matrix and the evidence already advanced in the present case, we are of the view that it would not be just to deprive the Defendant the chance to rely on the Good Faith and Rationality implied term in the present case.

27.  The primary facts to support the plea of breach of both implied terms are the defence case on her refusal of unjustified demotion as the cause of termination.  This had been pleaded at para 19 of the Re-Re-Re-Re-Amended Defence and Counterclaim.  In this sense, though the emphasis is different, in the present context, the Valid Reason implied term and the Good Faith and Rationality implied term can be regarded as the two sides of the same coin.  The Valid Reason implied term requires the Plaintiff to give a valid reason for the proposed demotion and (if demotion was not accepted) termination [3].  In the context of the Good Faith and Rationality implied term, the requirement on the Plaintiff is to exercise the power of demotion and termination in good faith and rationally.

28.  As observed at the hearing, the battle line between the Plaintiff and the Defendant on the real reason for proposed demotion and termination had been clearly drawn at the time of the trial [4].  The Plaintiff relied on the evidence of Mr YY Cheng as well as the evidence of the Third Parties.  The Defendant gave evidence herself.  In the end, after assessing the evidence, the Judge came to a finding in favour of the Defendant [5].

29.  In this connection, we do not accept Mr Nip’s submission that as the Judge accepted Mr YY Cheng as an honest and credible witness, it must be taken as accepting Mr YY Cheng’s account for the real reason for termination set out at paras 39 and 40 of his witness statement.  Such reading of the judgment flies in the face of the other paragraphs in the judgment which we quoted at [13] above.

30.  On this part of the case, the Judge obviously accepted the Defendant’s evidence as summarized at [27] to [29] of the judgment.  It is also consistent with the rejection of Freddie Cheng’s evidence on the alleged oral promise by the Defendant at [38].  Mr YY Cheng did not have personal knowledge about the termination of the Defendant’s IAA.  In his oral evidence, Mr YY Cheng accepted that the termination process was handled by Freddie and Danny.  It is also apparent from the transcript that Mr YY Cheng had difficulty in explaining to the Judge why the performance assessment of the Defendant was done after she joined the Plaintiff six months instead of after one year (and the performance target in the Plaintiff’s manual was set by reference to an agent’s annual performance).

31.  It is noteworthy that in their witness statements, both Freddie and Danny said that after discussion between themselves in September 2008 it was decided that the Defendant should be demoted.  Then upon her refusal to accept the demotion, they informed her that her agency would be terminated [6].

32.  Mr Nip submitted that the Plaintiff would wish to adduce further evidence in order to challenge if the Good Faith and Rationality implied term could arise from the facts of the present case.  Counsel however fairly accepted that at this stage he could not contend that the defence case based on such an implied term is unarguable.

33.  In our judgment, the concession of counsel was made properly.  In light of the fact that we are going to remit to the court below for determination of the issue if an implied term could have arisen on the facts of the present case, we shall not pre-empt the determination of the same by saying more than necessary in this judgment.

34.  Under Clause 7.2 of the IAA, the Plaintiff (and the Defendant) could terminate the agreement by giving the other party not less than six days’ notice.  But the effects of termination have to be assessed together with the terms of the Letter of Offer.  By virtue of the terms of the Letter of Offer, if termination (for whatever reason) occurred within 12 months, the Defendant would have to repay the PB.  If termination occurred within 30 months, the Defendant would have to repay SF and MSB.

35.  Thus, if the Plaintiff were to exercise its power under Clause 7.2 within 12 months or 30 months, it could affect the entitlement of the Defendant in terms of PB, SF and MSB.  If such power is regarded as a contractual discretion, the principle of law discussed by the UK Supreme Court in British Telecommunications plc v Telefónica O2 UK Ltd [2014] Bus LR 765 and Braganza v BP Shipping Ltd [2015] 1 WLR 1661 might be engaged.  In British Telecommunications plc v Telefónica O2 UK Ltd, supra, Lord Sumption set out the general rule as follows:

“ As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously …. This will normally mean that it must be exercised consistently with its contractual purpose ….”

36.  In Braganza v BP Shipping Ltd, supra, Baroness Hale explained the rationale behind this principle at [18]:

“ Contractual terms in which one party to the contract is given the power to exercise a discretion … are extremely common. It is not for the courts to rewrite the parties’ bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear conflict of interest. That conflict is heightened where there is a significant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.”

37.  In recent years, this principle has been applied in Hong Kong in the context of the exercise of the power to terminate an employment contract.  In Tadjudin Sunny v Bank of America, supra, the Court of Appeal applied this principle in an employee’s claim for loss of performance bonus due to the exercise by the employer of the power to terminate on one month’s notice.  After reviewing the authorities, the Court said at [55]:

“ In all, a power or discretion given to a party to a contract which on its face is unqualified is generally to be read as being subject to an implied requirement that it can only be exercised in good faith, rationally and for a proper purpose, and not arbitrarily or capriciously or in a manner which is not bona fide. Such restrictions are implied in order to give effect to the reasonable expectations of the parties to the contract.”

38.  Subsequently, the principle was applied by the Court of Appeal to a claw-back claim of performance bonus and allowances by an insurance company against an agent in So Sheung Hin Ben v Chubb Life Insurance, supra.  The point arose in the context of an application by the agent to set aside a statutory demand issued by the insurance company.  Kwan JA (as Kwan VP then was) (with whom Yuen and McWalters JJA agreed) held it was reasonably arguable that there was an implied term that the power of termination had to be exercised in good faith and set aside the statutory demand accordingly.

39.  In that case, Kwan JA also referred to the judgment of G Lam J in Re Shing Pui Keung Ex-p Chubb Life Insurance Co Ltd HCB 686/2017, 20 December 2017.  G Lam J again held that it was reasonably arguable that the insurance company owed a duty to an agent not to conduct its performance evaluations in an irrational, perverse or arbitrary manner that was not bona fide.

40.  Mr Nip submitted that when a contract gives one of the parties an absolute right the court will not imply a term restricting how the right is to be exercised.  He cited the case of Greenclose Ltd v National Westminster Bank plc [2014] 2 Lloyd’s Rep 169.  That was a case concerning the right to extend the term on interest rate for a further two years.  Counsel further cited Monde Petroleum SA v Westernzagros Ltd [2017] 1 All ER (Comm) 1009 for the proposition that the term cannot be implied in respect of the right of termination.  However, that case was about the right to terminate upon default.

41.  Counsel also referred us to other authorities on similar implied term.  Given the way in which we shall dispose of this appeal, we do not think it is profitable for us to go through them at length in this judgment.  Mr Dawes cited to us a recent article by Professor Michael Bridge QC [7] in which the recent developments were reviewed and his conclusion was that there is no bright line test for determining if there is an implied term of good faith and rationality.

42.  Mr Nip submitted that the Defendant had not pleaded the Good Faith and Rationality implied term in the pleadings before the Judge.  Had such an implied term been pleaded, the Plaintiff would adduce further evidence to resist the claim based on such implied term.

43.  We accept that the parties and the Judge did not address the Good Faith and Rationality implied term.  This is not surprising as the most relevant authorities in a similar context (Tadjudin Sunny v Bank of America, supra and So Sheung Hin Ben v Chubb Life Insurance, supra) had not yet been decided.  Thus, as a matter of fairness, we are of the view that the Plaintiff should be allowed to adduce further evidence relating to the implied term.  But we do not consider it right to permit the findings of the Judge on the real reason for termination to be re-opened as that had already been a live issue at the trial and the battle line had been clearly drawn.

44.  Hence, the evidence that the Plaintiff may adduce should primarily address the question if the facts and circumstances surrounding the making of IAA and the acceptance of the Letter of Offer could give rise to the Good Faith and Rationality implied term.  In that connection, Mr Nip indicated that the Plaintiff would adduce evidence on the nature, rationale and the relative size of the SF, MSB and PB compared to an agent’s normal commission remuneration.

45.  Mr Nip also wished to adduce evidence from Mr Edmond Lee on the motive behind the termination.  In light of our refusal to permit the re‑opening of the findings in that respect, we do not think such evidence could be allowed.

46.  Notwithstanding the evidence at [29] and the finding at [41] of the judgment, counsel also said the Plaintiff might advance submissions on attribution.  This would be a matter for the Judge at the remitted hearing.

The Valid Reason implied term

47.  Turning back to the Valid Reason implied term, the Judge ruled it out essentially for two reasons:

   (a)  There was no necessity for such implied term [8] ; and

   (b)  It was held by a Judge in the District Court in Fortis Insurance Co v Liu Betty DCCJ 408/2007, 31 December 2009 that the insurance company’s entitlement does not depend on its having to justify the termination [9].

48.  The Judge did not give much consideration to the Valid Reason implied term against demotion since the Defendant did not actually accept the demotion [10]. He so held notwithstanding he was aware of the nexus of the proposed demotion and the termination. 

49.  We find that to be unsatisfactory.  Given the nexus between the proposed demotion and the termination, the Judge should examine the Valid Reason implied term in both contexts together.  The necessity and obviousness for a Valid Reason implied term to restrict the power of demotion (which is clearly easier to establish than a general Valid Reason implied term to restrict the power of termination) could affect the necessity and obviousness for a Valid Reason implied term for termination.  If the court is satisfied that there was indeed a Valid Reason implied term for demotion, it would go far in establishing the Valid Reason implied term for termination in the context of a termination based on refusal to accept demotion.  Otherwise, if the Plaintiff could simply resort to exercise of its power of termination when the Defendant refused to accept demotion without valid reason, the Valid Reason implied term on demotion would be illusory.  In this connection, one must not let form triumph over substance and the absence of allusion to the true cause of termination would not stop the court from examining the same, see Blakeney-Williams v Cathay Pacific Airways (2012) 15 HKCFAR 261 at [70].

50.  There was no demotion issue in the Dirstict Court case of Fortis Insurance Co v Liu Betty, supra, and that case was decided prior to Tadjudin Sunny v Bank of America, supra and So Sheung Hin Ben v Chubb Life Insurance, supra.

51.  Thus, we are of the view that the Judge’s assessment of the Valid Reason implied term is erroneous.

52.  However, in view of the Good Faith and Rationality implied term being introduced, it maybe that the focus should now be placed on this implied term at the remitted hearing.

Collateral contract

53.  Mr Dawes also advanced grounds of appeal challenging the Judge’s conclusions on collateral contract.  The main hurdle in that challenge is that the Judge made a finding that no oral representations as alleged had been made [11].

54.  Counsel said the Judge had failed to take account of or misunderstood the relevant evidence in coming to such finding. He said the Judge overlooked the evidence that the Defendant had requested for amendment of the Letter of Offer and that had been refused.  Further, he said the Judge failed to consider the reasonableness of the Defendant accepting the oral representations from the Third Parties without seeking confirmation of Mr Edmond Lee.

55.  With respect, it is plain that the Judge did not overlook the evidence on request for amendment as he recited the same at [23] of the Judgment.  Nor do we accept that the Judge erred in disbelieving that the Defendant would simply accept the oral representations with seeking confirmation from Mr Lee.  The arguments of Mr Dawes failed to persuade us that this is a proper case for disturbing the findings of fact by the Judge in this respect.

56.  For these reasons, we reject the grounds of appeal in respect of the collateral contract claim.  It also follows that the Judge was correct in dismissing the third party proceedings.

Disposition

57.  We would allow the appeal, set aside the judgment of the Judge regarding the Plaintiff’s claim and remit the following question to the Judge for determination:

“ Based on the findings at [38] to [41] of the judgment, whether the Defendant can successfully resist the Plaintiff’s claim and pursue her counterclaim based on the Good Faith and Rationality implied term and the Valid Reason implied term.”

58.  Depending on the Judge’s determination of this question, he may also have to address the Plaintiff’s counterclaim at the remitted hearing.

59.  We direct the parties to within 28 days take out a summons returnable before the Judge to seek directions on the further conduct of the determination of the remitted question.

60.  As indicated by counsel, the pleadings have to be amended before the remitted issue is to be considered.  We direct the Defendant to file and serve draft amendments to the Re-Re-Re-Re-Amended Defence and Counterclaim within 14 days to set out her case on the Good Faith and Rationality implied term properly.  If the Plaintiff has any objection to the amendments notwithstanding our permission for such term to be relied upon, such objections will have to be considered by the Judge at the direction hearing.  If the Plaintiff has no objection, it may file and serve draft amendments to the Re-Re-Re-Amended Reply and Defence to Re-Re-Re-Re-Amended Counterclaim within 14 days thereafter.  

61.  The Judge may also consider to what extent the parties may be permitted to adduce further evidence on the remitted question in light of the amended pleadings and give directions on the filing of such evidence.

62.  As indicated, we shall dismiss the appeal against the judgment on the third party proceedings.  We also make a costs order nisi that the Defendant shall pay the costs of the Third Parties in the appeal.

63.  As between the Plaintiff and the Defendant, we would invite submissions from counsel before we make any order for the costs of the appeal and the costs below.  We direct the Defendant to lodge and serve submissions on costs within 14 days, and the Plaintiff to lodge and serve submissions on costs within 14 days thereafter.  The Defendant can lodge and serve submissions in reply (if so advised) within 14 days after the Plaintiff’s submissions.