NEW YORK LIFE INSURANCE WORLDWIDE LTD v. LI SUM MING

DCCJ3686/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3686 OF 2008

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BETWEEN

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D E C I S I O N

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1.  The defendant is appealing against the order of Master Lo on 5 June 2009 refusing the defendant’s application to set aside the judgment entered in default of acknowledgment of service of writ on 9 December 2008.

Background

2.  The service of writ was regular. The defendant admitted on affidavit that he had neglected the writ of summons issued against him and served on him due to his busy work schedule at his present insurance company. Therefore, the grounds of the defendant’s application to set aside the 9 December 2008 judgment against him is on the merits of his defence.

3.  On 24 May 2006, the plaintiff sent a letter of appointment appointing the defendant to be its sales manager. The offer letter set out the terms of appointment with an addendum on the finance arrangement. The defendant accepted the offer and on 2 August 2006 signed an agent’s agreement prepared by the plaintiff. On 4 March 2008 the defendant received a performance warning letter from the plaintiff urging him to improve on his work, it stated that for 6 months the plaintiff had not been happy with his performance. He was given 3 months to improve his sales performance and recruitment of insurance agents. However, on 29 April 2008, the plaintiff sent the defendant a letter of termination informing the defendant that his agent’s agreement will be terminated with effect from 9 May 2008.

4.  Subsequent to and as a result of the termination, the plaintiff demanded from the defendant the return of the special allowances and confirmation bonuses in the total sum of $472,443.41. These sums were payments made pursuant to the terms of the addendum 1 - finance scheme attached to the appointment letter of 24 May 2006 under clauses 1 and 2. The sum of $229,200 was paid as special allowances and the sum of $250,000 was paid as confirmation bonuses in July 2007 to the defendant.

5.  In seeking their recovery, the plaintiff relied on clause 3 of the addendum 1.

The Defence

6.  The defendant’s earlier defence when he applied to set aside the judgment entered before Master Lo was that clause 3.1 was wrongly interpreted by the plaintiff. In the defendant’s own interpretation, the defence claimed that the plaintiff can only recover the special allowances and bonuses if the agency agreement was terminated because “there are reasons that prevented the defendant from discharging his duties as an agent”.

7.  The defence is now abandoning this ground. Mr Kwong, who now represents the defendant, does not dispute the words “prevent you from discharging your duties” under clause 3.1 of the addendum 1, shall be read together with “by reasons of ill health and disability” in the same paragraph of clause 3.1

8.  Mr Kwong argued that the clause should be read in regard to the usual practice of the insurance industry and the circumstances under which the defendant joined the plaintiff company. He argued that in the insurance industry the agents often are invited to join an insurance company with a joining bonus as incentive. The more successful the sales record and history of the agent, the higher the joining bonus he would get when he joined a new insurance company. Thus, in the defendant’s agreement with the plaintiff, he was offered a confirmation bonus together with a special allowance payable monthly assessed based on his past sales record at his previous insurance company.

9.  Mr Kwong submitted that the defendant had assumed the obligation for producing the sales volume expected of him when he was offered and accepted the terms of his agent’s agreement and the terms of his appointment letter. However, Mr Kwong argued that an implied term must be read into the agreement. The term is that the defendant cannot be terminated for any reason other than for a valid cause. He submitted that the 4 March 2008 letter offered the defendant 3 months to improve his performance, yet he was not given the full 3 months. His contract was terminated by a letter dated 29 April 2008. He was notified that his contract would be terminated on 9 May 2008, effectively giving him a 10 day notice.

10.  He further submitted that it must be an implied term of the agent’s agreement that the defendant should be allowed to complete the period of service specified in the contract, otherwise the agent would be deprived of the full opportunity to earn his commission or remuneration within the period of the contract. Instead, all of the commissions he earned would have to be repaid back to the insurance company should the insurance company unscrupulously terminate the agreement on the eve of the expiry of the period stated in clause 3 of the addendum 1.

Findings

11.  What Mr Kwong submitted may be the result on the plaintiff’s terminating the contract effective in May 2008, 3 months short of the 2 years into the defendant’s agency contract. Clause 3.1 at page 6 of bundle 2 read as follows:

“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 and 2 of the addendum,  you will be required to repay such proportion as provided below of the confirmation bonus and additional confirmation bonus (bonuses) and special allowance already received by you under the terms of this letter and addendum together with costs of recovery: 3.1.1 - all (100 per cent) the bonuses and special allowance received if the date of termination is within the period of 2 years after the last finance payment date or the period of 3 years after the effective date, whichever is longer, or 3.1.2 - half, 50 per cent, of the bonuses and special allowance received if the date of termination is within the period from the second anniversary of the last finance payment date to the third anniversary of the last finance payment date (inclusive), or the period from the third anniversary of the effective date to the fourth anniversary of the effective date (inclusive), whichever is longer.  For the avoidance of doubt, you are not required to repay any bonuses and special allowance received if the agent’s agreement is terminated at any time, after the expiry of the period of 3 years after the last finance payment date, or the period of 4 years after the effective date, whichever is longer.”

12.  This, in fact, meant, if the defendant’s contract was terminated by the plaintiff within the 2-year period, 100 per cent of the confirmation bonuses and special allowances received by him shall have to be returned after the last effective date within the 3 years of the effective date, and 50 per cent of the bonuses and special allowance if the termination is within the period from the second anniversary of the last finance payment date to the third anniversary of the last finance payment date, or the period from the third anniversary of the effective date to the fourth anniversary of the effective date, whichever is the longer.

13.  The provision in clause 3 in the final paragraph further stated that in any event the agent is not required to repay the bonuses and special allowances received if the termination takes place after the expiry of 3 years after the last finance payment date or 4 years after the effective date, whichever is the longer. For present purposes, the defendant’s agent agreement was terminated within 2 years.

14.  Mr Brown, representing the plaintiff, objected to Mr Kwong’s raising the issue of the insurance industry practice for the first time in the appeal today. I do not think it is an issue that is unraisable in an appeal such as this one so long as it is part of the defendant’s defence. I would consider it on its merits. Since the plaintiff does not have an opportunity to reply to the so-called trade practice, I will not treat it as a trade practice but would approach it with common sense.

15.  First of all, the agent’s agreement did specify the relationship between the plaintiff and the defendant as an independent individual and that the relationship is not one of employer and employee. It stated the defendant to be an independent contractor, therefore, the usual considerations under the Employment Ordinance, or the employment law, do not apply in this case. The court has to look at the agreement as a commercial agreement between two independent parties.

16.  Under such circumstances, the issue is whether the court needs to take into account other considerations as to whether it is unfair for the plaintiff to require the defendant to repay all the confirmation bonuses and special allowances received by him should he fail to meet the agreed sales volume stipulated under the addendum under clause 3 to the agreement. In my view, the answer is no. The defendant is not an inexperienced insurance agent. He joined the plaintiff as an insurance sales manager. Mr Kwong admitted the package of special allowances and confirmation bonuses was calculated based on his client’s past record of sales. This was not the first agent’s agreement he entered. He knew under the agreement he has to meet a sales target to keep the special allowances and confirmation bonuses under the express provisions of clause 3.

17.  Further, the bonuses were specified as confirmation bonus, not joining bonus. There is no clause that interprets what is meant by ‘confirmation bonus’, but the addendum did specify that the confirmation bonus can be payable in advance at any time as required by the defendant.

18.  The court has therefore to look at the contract terms specified in the agent’s agreement and the appointment letter with the addendum. If the contract terms are clear and unambiguous, should the court then consider whether there were further implied terms to the contract. The defence claimed the defendant was given a 3-month period to improve his performance, but his contract was terminated after only 2 months of the warning. In other words, in spite of the warning letter in early April 2008, his contract was terminated within 2 months of the warning letter, not 3.

19.  Mr Kwong argued, this showed the agreement was not terminated with a valid reason although under clause 16 of the agent’s agreement the plaintiff can terminate the defendant’s agreement at any time and for any reason. In Mr Kwong’s argument, the plaintiff is not allowed to demand repayment of the bonuses and special allowances if the defendant was not terminated for a valid reason.

20.  I have not been given an interpretation of what Mr Kwong would regard as a ‘valid reason’. I cannot agree with Mr Kwong’s interpretation of the agent’s agreement and the addendum 1 to the appointment letter. If it is not written in the agreement or in the appointment letter or the addendum, would the plaintiff be required to give a valid reason before terminating the defendant’s contract?

21.  All the agreement stated was, under clause 3.1, should the defendant’s contract be terminated for any reason within 2 years, he shall have to pay back the bonuses and special allowances. The only exception to this is ‘should he fail to perform due to ill health and disability, then the plaintiff would not require the defendant to pay back the confirmation bonus and special allowance received by him’. That is the plain reading of clause 3.1.

22.  It is not the kind of contract where fairness and conscience are incorporated as an implied term. It is a commercial contract between two independent parties based on the agreed sales volume and businesses brought in by the agent. Failing to reach the promised target within the first 2 year period, the agent would get nothing, pure and simple. Furthermore, the agent’s agreement did not specify the period of the contract. The only specification as to any period is under addendum 1 - finance scheme, a period within which the agent’s confirmation bonus and special allowance would have to be repaid should he fail to meet the targeted sales.

23.  For the aforesaid reasons, I confirm Master Lo’s order. I cannot see any merits in the defendant’s defence, the appeal is therefore dismissed with costs to be taxed, if not agreed.