NEW YORK LIFE INSURANCE WORLDWIDE LTD. v. FONG HOK YIN

DCCJ 4042/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4042 OF 2002

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Judgment

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The defendant applies to set aside the default judgment entered against him on 6 August 2002 for $92,445.94, interest and fixed costs.

2. The plaintiff is an insurance company. In September 1999 it took on the plaintiff as its agent to sell insurance, and pursuant to a scheme it had for newly appointed agents, paid him allowances for the months from September 1999 to May 2000 in the total sum of $92,445.94. Payment of such allowances was conditional on the defendant fulfilling various requirements as to training, attendance, activities and production, and there was a provision that if the defendant should be engaged as an agent or employed by a direct competitor of the plaintiff within 12 months after termination of the agreement between the parties, he would be liable to repay the development allowances. The defendant terminated the agreement with the plaintiff in July 2001 and, three months later, went to work for another insurance company, Cigna Worldwide Insurance Co.

3. On 8 June 2002, through its solicitors, the plaintiff demanded from the defendant repayment of the allowances. There followed correspondence between the parties up to 11 July 2002. In the meantime the plaintiff had issued the Writ on 2 July 2002 and had served it on the defendant. On 3 July 2002 the defendant, who was not legally represented, filed an Acknowledgment of Service indicating that he did not intend to contest the proceedings and that he did intend to apply for a stay of execution. He added a note saying

"I have sent a letter to New York Life stating my agreement to settle the debt by instalment. Terms still yet to be constructed in due course."

4. The plaintiff then served on the defendant a Notice of Intention to Enter Judgment dated 30 July 2002 (which would have been appropriate had there been default of defence) and on 6 August 2002 obtained judgment under Order 13 Rule 1 of the Rules of the District Court on the basis that no notice of intention to defend had been filed.

5. The defendant now applies to set the judgment aside. His case is basically that acknowledged service in the way he did because he was legally unrepresented, trying to reach a settlement with the plaintiff, misled by the plaintiff into thinking that there would be some kind of settlement meeting and ignorant of reserving his rights to contest the claim. He has a meritorious defence to the action in that the contractual provision requiring repayment of the allowances is void and unenforceable as being in restraint of trade and/or void for uncertainty; and it is severable, leaving the defendant's entitlement to the development allowances unaffected and operative.

6. There is no dispute that the judgment is regular. The defendant's solicitor has considered in some detail whether it was granted under Order 13 Rule 1, or in default of defence under Order 19 Rule 2 (because the plaintiff followed the Rule 8A procedure in serving the notice) or on admission under Order 27. The plaintiff says that it was under Order 13 and I think that must be right. The application for it was made under that Order and the court acted on it accordingly. I do not think it matters in any event. I do not see that I am precluded from setting aside the judgment by the defendant's having indicated that he would not defend but I will revisit the point later if need be. In any event where the judgment is regular the court's power to set it aside is discretionary; but for the discretion to be exercised in its favour the 1st defendant must show a real prospect of success; see Alpine Bulk Transport Co Inc. v. Saudi Eagle Shipping Co. Inc. [1986] 2 Lloyd's Rep. 221, CA, and the line of authorities following it. So the major question is whether the defendant can show a real prospect of success.

7. By an Agent's Agreement effective from 9 September 1999 (the "Agent's Agreement"), the plaintiff appointed the defendant to solicit applications for its insurance policies, collect the premiums, and perform such other duties as were specified in the Agreement. The plaintiff agreed not to sell insurance for any other company, unless authorised to do so by the plaintiff. The territory assigned to the defendant was Hong Kong. By a letter of appointment dated 10 September 1999 (the "Letter of Appointment") the plaintiff appointed the defendant as a Business Development Associate. This also required the defendant to sell insurance for the plaintiff as an agent. Paragraph 2 of the Letter of Appointment reads:

2. Compensation and Requirements

2.1 During the first 12 months, a monthly Development Allowance (DA-BDA) of amount HK$10,000 will be paid to you subject to your fulfillment of the validation requirements including personal production stated in Clause 2.2 below.

This monthly Development Allowance is not guaranteed and you must meet the validation requirements and is paid subject to Clause 7.2 below.

In addition to the DA-BDA validated, you will be paid 100% of the normal remuneration as stated in the Agent's Agreement.

8. The validation requirements related to training, attendance, activities and production. What the training was to be was not specified, but the defendant was required to attend all the training sessions meetings and functions required by the company, the agency office and the direct agency. The attendance requirements related to the defendant's actual attendance in the office and the activities related to the completion of reports. The production requirements seem rather complicated. Maintenance requirements for each production month had to be fulfilled. If the production requirements were not achieved in any month the allowance could be withheld but "catching-up" over 3-month periods was provided for. If, however, the production requirements were not fulfilled at the end of the third, sixth or ninth month of the contract the finance would cease and no further finance would be available even though the production fulfilled the requirements in the succeeding months.

9. Paragraph 7(2) reads:

7.2 If you, within 12 months from the date of termination of the Agent's Agreement between you and the Company, engaged as a director, principal, partner, consultant or agent, or accept employment in any capacity or otherwise be concerned or interested in any life insurance business in Hong Kong which is a direct competition with the Company, you are required to pay back an amount equals to total Development Allowance paid to you less any First Year Commission still withheld by the Company in a lump sum immediately to the Company. The amount to be paid back is calculated according to your services with the Company:

a) if you have served the Company for 36 contract months or less, you are required to pay back 100% of the Development Allowance received; or

b) if you have served the Company for 37 to 60 contract months, you are required to pay back 50% of the Development Allowance received; or

c) if you have served the Company more than 60 contract months, you are no need to pay back the Development Allowance.

10. In order to obtain the Development Allowance the defendant was required to sign a form of Application for Finance under the Financing Scheme for Business Development Executives. This form refers to the Development Allowance as DA-BDE. It also provides for a Career Allowance. The scheme provides for a financing period of up to one year and repeats the validation requirements set out in Paragraph 2 of the Letter of Appointment for both the Development Allowance and the Career Allowance. The Career Allowance is repayable after the end of the financing period; the Development Allowance is not. However, in respect of the Development Allowance, Paragraph 2.2.2. of this form repeats the requirements of Paragraph 7.2 of the Letter of Appointment; the only difference is that it refers to "the Agent" rather than "you".

11. So far as I can see the effect of Paragraph 2 and 7(2) was that the plaintiff could have his allowances, if he undertook training, and otherwise did his job properly, so far as attendance and reporting were concerned, and fulfilled his production requirements, for which he would in any event be paid commission. If he did not fulfil his production requirements for each three-month period the allowances would cease. If, however, he left the defendant at any time within 5 years, and within 12 months after leaving went to work for a competitor in any capacity, the plaintiff could claw back the whole or part of the allowances paid to him.

12. The defendant says that provision is in restraint of trade. It is similar to the provisions struck down by the courts where an employer has purported to stop an ex-employee's pension (e.g. Wyatt v Kreglinger and Fernau [1933] All E.R. 349, Bull v Pitney-Bowes Ltd. [1996] 3 All E.R. 384) or ongoing commission (Sadler v Imperial Life Assurance Co. of Canada Ltd. [1988] IRLR 388, Marshall v NM Financial Management Ltd. [1995] 4 All ER 785) where the ex-employee or agent goes to work for a competitor. The plaintiff says that it is not a "restraint of trade" clause in the sense that the defendant is restrained from joining a competitor but rather an agreement to repay financial support granted on conditions in the event that the defendant joins a competitor.

13. It seems to me that this provision cannot be said merely to be an agreement to repay financial support. The plaintiff could have made the allowances repayable or partly repayable on the defendant's leaving it within a given time frame (which appears to be the position with the "Career Advance" but not the Development Allowance) but it did not. The provision only comes into play if, within 12 months of leaving, the defendant goes to work for a competitor. It is a financial disincentive to him to do so. It must therefore be regarded as being in restraint of trade.

14. To justify such restraint the defendant must show that it is reasonably required for the protection of some legitimate interest. The plaintiff argues that it is for the repayment of money granted to the defendant to develop his business in his first year as an agent for the plaintiff; there was therefore a financial investment in the defendant which the plaintiff can legitimately seek to protect; it is aimed to limit the financial losses which might be suffered as a result of the defendant's joining a competitor; it was reasonable in terms of time and place; and the defendant was aware of the condition and agreed to it.

15. I do not see that this can be right. The Development Allowances were obviously intended as an incentive for the defendant to learn the business of insurance agent, and get "up to speed" in it as soon as possible. I do not understand exactly what the production validation schedule means but is it seems obvious that the target which the defendant had to meet went up sharply over the first three months. The aim seems to have been to make a commission of US$23,040 over the first twelve months. Paragraph 3 provided for promotion to Assistant Sales Manager if that target could be reached. There was obviously a benefit to the plaintiff because the amount of business would increase. The plaintiff was paying for that benefit with the Development Allowances. It is easy enough to see that the benefit would cease if the defendant left. I could see the force of requiring repayment of allowances on the defendant's ceasing to work for the plaintiff. That is, I think, common enough where an employer provides or finances training. But repayment was not required unless the defendant went to a competitor. The skill, knowledge, experience and goodwill which the defendant had built up would be his own property and he could not lawfully be restrained from taking them to a competitor. I cannot see what legitimate interest there was which the plaintiff could protect by restraining the defendant from working for a competitor.

16. It seems to me therefore that there is no justification for this restraint of trade. As to the other ground of uncertainty I am less sure. The term "any life insurance business in Hong Kong which is a direct competition to the company" seems certain enough. However, the categories of interest in such business from which the plaintiff sought to restrain the defendant from taking, i.e. any interest at all, seems very wide. Even if the plaintiff had a legitimate interest which it could protect by restraining the defendant from selling insurance for a competitor (and the question of what customers he might sell to is left open) it could hardly be reasonable for him to be restrained from working for a competitor in some other capacity not involving sales.

17. The more important question is whether Paragraph 7(2) can be severed. The principles set out in Sadler, above, are:

1. The unenforceable provision is capable of being removed without the necessity for adding to or modifying the wording of what remains.

2. The remaining terms continue to be supported by adequate consideration.

3. The removal of the unenforceable provision does not so change the character of the contract so that it becomes 'not the sort of contract that the parties entered into at all'".

18. The judge in Marshall adopted these principles and suggested the addition of a fourth one, namely "that the severance must be consistent with the public policy underlying the avoidance of the offending part".

19. Here Paragraph 7 (2) and the reference to it in Paragraph 2 could easily be removed without the necessity for adding to or modifying what remains. The remaining terms continue to be supported by adequate consideration, i.e. the validation requirements, fulfilment of which, as I have indicated, benefits the plaintiff. The removal of the provision does not change the character of the contract because it is really quite incidental to the contract which is for the appointment of the defendant as the plaintiff's selling agent and the payment to him of certain allowances in consideration of his learning the business of insurance agent, and getting "up to speed" in it as soon as possible. As to public policy, severance is consistent with the public policy against restraint of trade.

20. It seems to me therefore that the defendant has shown a real prospect of success. As I have indicated I do not see that I am precluded from setting aside the judgment by the defendant's having indicated that he would not defend. What he was really trying to do was to settle the matter on terms. He indicated that he would ask for a stay, and pay by instalments. The position is similar to that in Evans v Bartlam [1937] AC 473 where a defendant failed to enter an appearance so that judgment was signed against him in default; he then asked for time to pay but even so subsequently succeeded in obtaining an order setting aside the judgment and giving leave to defend.

21. The judgment is therefore set aside and the defendant granted leave to file and serve a defence within 14 days from the date of the order to be made herein.

22. I have heard argument about costs. The defendant accepts that the normal order would be for him to pay them; but he says that here the question before the court was largely one of law, and the plaintiff should, on legal advice, have elected not to oppose the application; therefore costs should be in the cause. The plaintiff says on the other hand that the defendant should pay costs on the indemnity basis because what he had indicated was tantamount to an admission, and his explanations are unbelievable.

23. I do not see that indemnity costs are appropriate; the defendant was, when he filed his Notice, unrepresented and trying to settle. Every case has a settlement value; perhaps he thought that one suitable to him could be reached. At the same time, he did indicate that he would not defend and now seeks the indulgence of the court in setting aside the regular judgment granted against him on that basis. I do not see that he can avoid paying the costs of obtaining that indulgence. The costs of the summons will therefore be to the plaintiff in any event, on the party and party basis.