AIA INTERNATIONAL LTD v. LAM CHE WAH

HCA 780/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 780 of 2013

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JUDGMENT
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Introduction

1.  The plaintiff carries on business developing and offering insurance products.  The defendant was one of the plaintiff’s agents.

2.  The facts in this case are not in dispute and I shall recite the relevant facts from a Statement of Agreed Facts signed by counsel for the parties, dated 17 November 2015.

3.  The issue in this case is the proper construction of clause 12 of a Letter of Understanding between the parties, signed by them on 30 September 2010.

Background

4.  Pursuant to clause 1 of the Letter of Understanding, the parties signed a Career Representative’s Contract (“the Contract”) and an Addendum to Agency Contract (“the Addendum”) on 1 November 2010.  (The Contract was also signed by another party, called “the Leader”.)  According to clause 1 of the Addendum, the defendant became one of the plaintiff’s agents on 8 November 2010, which was the date on which the Insurance Agents Registration Board approved the defendant’s registration as an insurance agent.  Under clause 5(a) of the Letter of Understanding, the commencement date of the Letter of Understanding was 8 November 2010.

5.  In accordance with clause 5(a) of the Letter of Understanding, the plaintiff paid the defendant a signing fee of HK$837,903 (“the Signing Fee”).

6.  In accordance with clauses 6(a) and (b) of the Letter of Understanding, the plaintiff paid the defendant:

(1) A 1^st Year Monthly Bonus totalling HK$523,680; and

(2) A 2^nd Year Monthly Bonus totalling HK$523,680.00.

7.  In accordance with clause 7(a) of the Letter of Understanding, the plaintiff paid the defendant a 1^st Year Agency Production Challenge Bonus (“the PCB”) of HK$523,689.50.

8.  In accordance with clause 7(b) of the Letter of Understanding, the defendant was entitled to be paid by the plaintiff but, as at the time of trial, had not been paid a 2^nd Year PCB of HK$104,737.90.

9.  By written notice, dated 5 April 2013, the plaintiff gave the defendant 15 days’ notice of termination of the Contract, with effect from 20 April 2013.  20 April 2013 was within the 3^rd year after the Commencement Date.

10.  The notice was given pursuant to clause 23(b) of the Contract, which provides:

“Subject to sooner determination of this Agreement by the [defendant] in accordance with Clause 25 of this Agreement, this Agreement may be terminated without any reason thereof:

(b) By either party upon 15 days’ notice in writing; …”

11.  The plaintiff did not give any reason for termination.

12.  By letter, dated 23 April 2013, the plaintiff demanded that the defendant refund to it the sum of HK$1,403,476.34, calculated as follows:

(1) 60% of the Signing Fee	HK$502,741.80
(2) 60% of the 1st and 2nd Year Monthly Bonuses	HK$628,416.00
(3) 60% of the 1st Year PCB	HK$314,213.70
(4) (Less 2nd Year PCB, subject to 60% refund)	(HK$41,895.16)
Net Amount	HK$1,403,476.34

13.  The demand for refund and its calculation was made pursuant to clause 12 of the Letter of Understanding:

“In the event that any of the Contracts is terminated for any reason by either the [defendant] or the [plaintiff] within the First (1^st) to fifth (5^th) year (hereafter called the ‘Guaranteed Period of Stay’) after the Commencement Date, the [defendant] agrees to refund the whole or part of the Signing Fee, Monthly Bonus and Agency Production Challenge Bonus received to the [plaintiff] immediately and unconditionally, in accordance with the terms as follows:

Thereafter appeared a table which showed that 60% percent of each of the Signing Fee, Monthly Bonus and Agency Production Challenge Bonus was to be refunded by the defendant upon termination of the Contract within the 3^rd year after the Commencement Date.

14.  The definition of the word “Contracts” used in clause 12 is found in clause 1 of the Letter of Understanding and includes the Contract.

The plaintiff’s case

15.  The plaintiff’s case is that the phrase “for any reason” appearing in clause 12 means what it says and a termination of the Contract by reason of clause 23(b) is a termination “for any reason”, which triggers the operation of clause 12 of the Letter of Understanding.

The defendant’s case

16.  The defendant’s pleaded Defence raised four issues:

(1) Upon the proper construction of the Letter of Understanding, clause 12 was not engaged and was inapplicable (the “Construction Issue”);

(2) Alternatively, there was an implied term in the Letter of Understanding that the plaintiff is entitled to clawback from the defendant the Signing Fee, Monthly Bonus and PCB, paid to the defendant in case of termination by the plaintiff within the Guaranteed Period of Stay, if the defendant fails to become an insurance agent or meet any of the minimum standards of performance set out by the plaintiff for any reasons set out in the Contracts and/or the Letter of Understanding or any of them (the “Implied Term” issue);

(3) The plaintiff’s termination was invalid because it contravened clause 24 of the Career Representative’s Unit Manager’s Contract; and

(4) The plaintiff’s failure to pay the defendant the 2^nd Year PCB constituted a breach of contract.

17.  At trial the defendant abandoned the third and fourth issues.

The construction issue

18.  As to the Construction Issue, the defendant’s Counsel’s (Mr Chung) principal submissions were as follows.

19.  One can see from the Preamble and clause 3 of the Letter of Understanding that the plaintiff offered the defendant the Signing Fee because it wanted the defendant to remain as an agent for five years.

20.  The Monthly Bonus and the PCB are incentives not only to remain as an agent but to meet or exceed certain financial targets, called validation requirements.

21.  Against the background of such incentives, it is not surprising that the defendant would be required by clause 12 to refund the whole or part of the Signing Fee, Monthly Bonus and PCB if he decided to leave and terminate the Contract.

22.  With regard to termination of the Contract by the plaintiff, the plaintiff could only terminate on the grounds provided for by clause 4 of the Letter of Understanding, which (Mr Chung emphasised) is the only clause in the Letter of Understanding which provided for the plaintiff’s entitlement to terminate either the Contract or the Letter of Understanding.  Clause 4 provides:

“If the [defendant] is not able to pass the insurance intermediaries Qualifying Examination as required by the Insurance Authority to become an insurance agent or meet any of the minimum standard (sic) of performance set out by the [plaintiff] for any reasons, the [plaintiff] is entitled to terminate the Contracts and/or this LOU as it sees fit in accordance with the terms set out in the Contracts and/or this LOU or any of them.”

23.  Mr Chung submitted that the plaintiff could only terminate the Contract or the Letter of Understanding if the defendant (a) could not become an agent of the plaintiff; or (b) could not meet the minimum standards of performance set out by the plaintiff, as provided for by clause 4.  (There is no dispute that neither of those events occurred.)

24.  Turning to clause 12 which provided that if “any of the Contracts is terminated for any reason by … the [plaintiff]”, Mr Chung submitted that this had to be read in light of clause 4, such that “for any reason” was limited to the two grounds for termination set out in clause 4.

25.  Mr Chung submitted that termination under clause 23(b) of the Contract was not a reason which triggered clause 12 because the Contract was signed more than a month after the signing of the Letter of Understanding (1 November 2010), such that, upon the making of the Letter of Understanding, termination by the plaintiff under the Letter of Understanding was only possible under clause 4.

26.  Mr Chung also submitted that the phrase “for any reason” was uncertain.  This was not pleaded and Mr Chung expressly did not press this submission.

27.  Following the submission set out in para 25 above, Mr Chung dealt with clause 25 of the Contract which provided:

“This Agreement becomes automatically terminated without prior notice to the [defendant] upon the occurrence of any of the following events:

(a) If the [defendant] does not meet training, production, persistency or other requirements in respect of the [defendant’s] operations which may be set by the [plaintiff] from time to time.

(b) If the [defendant] breaches any of the Terms and/or Conditions of this Agreement or in any way whether expressly or impliedly fails to comply with any such Terms, Conditions or Provisions.

(c) In the event of fraud, dishonesty or breach of trust on the part of the [defendant]. …”

28.  Mr Chung submitted that clause 25 set out minimum standards of performance, and failure to meet such standards was a ground for termination under clause 4.  Hence, termination under clause 25 of the Contract would trigger clause 12 of the Letter of Agreement.

29.  I am unable to agree with Mr Chung’s submissions.  To begin with, clauses 5, 6 and 7 of the Letter of Understanding are all expressed to be subject to clause 12.  Second, I agree with the plaintiff’s Counsel’s (Mr Lam SC) submission that the phrase “for any reason” means what it says and is not qualified in the manner argued for by Mr Chung.  The defendant’s construction is, in effect, to re‑write clause 12 to read:

“In the event that any of the Contracts is terminated for any reason by the [defendant] or by the plaintiff pursuant to clause 4 of the Letter of Understanding … .”

30.  Clause 4 simply provides one more ground for termination in addition to the grounds set out in the Contract.  There is no conflict between clause 4 and clauses 23 and 25 of the Contract.

31.  Indeed, the Letter of Understanding anticipated the making of the Contract, required the defendant to abide by all of the terms and conditions of the Contract and its continuation was linked to the signing of the Contract; clause 1 of the Letter of Understanding provided:

“The [defendant] agrees to sign [the Contract] … on Nov 1, 2010 and to abide by all of the terms and conditions in [the Contract]. If the [defendant] is not able to sign [the Contract] within three months after the signing of this LOU, this LOU shall become null and void. …”

32.  This anticipation and linking indicates that termination of the Contract “for any reason” includes any reason provided for under the Contract and is not limited to the reasons set out in clause 4 of the Letter of Understanding or clause 25 of the Contract.

33.  Moreover, although the Letter of Understanding was signed before the Contract was signed, by its clause 5(a) the Commencement Date of the Letter of Understanding was the occurrence of the last of three events, which events included the signing of the Contract.  In other words, clause 12 did not have effect until the Contract was signed.  This indicates that termination of the Contract “for any reason” includes any reason provided for under the Contract and is not limited as argued for by counsel.

34.  I am assisted by Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222 at 231‑233, paras 19‑22, in which Mortimer NPJ reviewed the relevant authorities and affirmed the relevant principles including that, if the words used are free from ambiguity and devoid of commercial absurdity, their natural and ordinary meaning will apply unless the relevant circumstances demonstrate otherwise.  His Lordship noted that, if the parties failed to express themselves well or clearly, the surrounding circumstances are of particular value.

35.  The words of clause 12 are free from ambiguity and the parties have expressed themselves well and clearly.  I cannot perceive any commercial absurdity.  I consider that their natural and ordinary meaning should apply and that there are no circumstances which demonstrate otherwise.

36.  Mr Chung presented other arguments to support his submission regarding the construction issue.

37.  Mr Chung referred to clause 5(b) of the Letter of Understanding, which provides:

“The Signing Fee is subject to clawback as follows. If the Applicant does not meet the validation requirement in the 1^st and 2^nd contract years … in relation to the First Year Commission netted ….”

38.  Thereafter follows a formula for calculating the amount of clawback (or, in other words, repayment).

39.  Mr Chung submitted that the defendant’s entitlement to retain the Signing Fee was dependent upon his being able to meet the validation requirement, which, according to the formula was to be assessed at the end of 24 months. Counsel submitted that any suggestion that the plaintiff can clawback the Signing Fee by simply serving a notice terminating the Contract at any time, regardless of the defendant’s performance, is devoid of business commonsense. I see two answers to this submission.

40.  First, Clause 5(b) does not assist Mr Chung because it is concerned with clawback in circumstances other than termination.

41.  For the second answer, I begin by referring to Arnold v Britton & ors. [2015] 2 WLR 1593 in which Lord Neuberger SCJ stated at paras 17‑20:

“17. First, the reliance placed in some circumstances on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focusing on the issue covered by the provision when agreeing the wording of that provision.

18. Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse the drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

19. The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. …

20. Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.  The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.  Experience shows that it is by no means unknown for people to enter into arrangements which are ill‑advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice.  Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalize an astute party.”

42.  I should refer also to Jumbo King Ltd v Faithful Properties Ltd & ors (1999) 2 HKCFAR 279, in which Lord Hoffman NPJ stated, at para 296G‑H:

“If the ordinary meaning of the words makes 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 negotiations is inadmissible — and has no way of knowing whether a clause which appears to have an onerous effect was quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain.”

43.  Applying Lord Neuberger’s observations to this case, and bearing in mind Lord Hoffman’s observation, in the eyes of a reasonable reader the language of clause 12 is clear; “for any reason” means what it says and includes termination under clause 23(b) of the Contract.  If on one view that construction of clause 12 might result in a bad bargain, that is not a reason for departing from the natural language of clause 12.  Mr Lam accepted that the payment of the Signing Fee and other bonuses was to encourage the defendant to remain with the plaintiff for at least five years but, he submitted, the parties recognized that there may be a scenario in which the defendant is not required to serve for five years, for whatever reason, with a refund or clawback to be paid by the defendant and, no matter how unfortunate this may be for the defendant, both parties agreed to it.  I agree with this submission.

44.  Mr Chung also referred me to clause 13(b) of the Letter of Understanding, which provides:

“In the event that [the Contract] is terminated for any reason either by the [defendant] or the [plaintiff] within the Guaranteed Period of Stay as stated in Clause 12 or the [defendant] fails to meet the validation requirement as stated in Clause 5, 6 or 7, the [plaintiff] shall be entitled to clawback from the [defendant] the Signing Fee, Monthly Bonus and Agency Production Challenge Bonus paid to the [defendant]. If the [defendant] fails to repay 100% of the total clawback amount, the unrecovered amount from the [defendant] will become the Financing Cost as stipulated below. …”

45.  Mr Chung submitted that, in addition to the clawback provided for under clause 12 in the case of termination, the plaintiff may also be entitled to clawback if the defendant failed to meet the validation requirement stated in clauses 5, 6 or 7 under clause 13(b), which falls within the defendant not meeting any minimum standard of performance as set out in clause 4.

46.  Mr Lam submitted that clause 13 imposed an obligation on the Leader, not the defendant.  Mr Lam submitted that clause 13 is irrelevant in respect of the defendant’s obligations.  I agree.  Clause 13(a) is concerned with the Leader:

“The Leader and the agency leaders of the Leader shall receive overrides and bonus based on the production of the [defendant] and (where applicable) the entire agency and indirect agency managed by the [defendant] according to their respective relevant Career Representative Leader’s Contract.”

47.  Clause 13(b) continues following that part of it referred to by Mr Chung:

“The Leader and the agency leaders of the Leader agree to pay up to 50% of the Financing Cost with a maximum cap at the total amount of overrides and bonuses paid to the Leader and the agency leaders of the Leader … .

The [plaintiff] reserves the right to clawback the Financing Cost, which the Leader and the agency leaders of the Leader are liable to pay back to the [plaintiff], whether or not the Leader or the agency leaders of the Leader have terminated their respective Contracts with the [plaintiff].”

48.  Mr Chung also submitted that if the defendant was liable to refund under clause 12 in circumstances in which termination is for a reason other than those set out in clause 4, such would deprive clause 4 of its effect. 

49.  I do not agree. Clause 4 is not deprived of its effect because it provides for a ground for termination which is not provided for in the Contract, namely, failure to pass the Insurance Intermediaries Qualifying Examination and it gives the plaintiff a right to terminate the Letter of Understanding, which right is not provided for in the Contract.

50.  Mr Chung also submitted that if “for any reason” means what it says, it would not be necessary for the plaintiff to establish that the Contract was terminated validly; it could be terminated for a lawful or for an unlawful reason.  That cannot be right; termination must be for a lawful reason and, if the plaintiff terminated the Contract for an unlawful reason, he would have breached the Contract.

51.  Finally, dealing with Mr Chung’s point about the background of the incentives, set out in paras 19 and 21 above, it appears from the preamble to the Contract that the defendant had agreed to remain as an insurance agent of the plaintiff for five years (“in consideration of the [plaintiff] agreeing to pay the [defendant] a signing fee … and the [defendant] agreeing to remain as an insurance agent of the [plaintiff] for a minimum of five (5) years”) and I accept that a reason for paying bonuses was to encourage him to stay but there was no corresponding obligation on the plaintiff to keep the defendant as an agent for five years.  In the absence of such a corresponding obligation, I see no reason for going behind the clear language of clause 12.

52.  It seemed that Mr Chung was also arguing that the term “Guaranteed Period of Stay” in clause 12 created an obligation on the plaintiff to engage the defendant for at least five years.  I do not agree because the term “Guaranteed Period of Stay” in clause 12 is no more than a definition to denote a period of time.  Also, such an argument is inconsistent with clauses 23 and 25 of the Contract.

53.  Mr Chung’s submissions were about context and construing the Contract as a whole and, in this regard, he reminded me of Ma CJ’s statement in Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351 at para 15:

“15. We have been referred to the very well‑known statement of principle regarding the construction of contracts contained in the speech of Lord Hoffman in ‘Investors Compensation Scheme Ltd v West Bromwich Building Society’, to which can be added the judgment also of Lord Hoffman NPJ in ‘Jumbo King Ltd v Faithful Properties Ltd’. What emerges from these cases — and other authorities on contractual interpretation — is the overall importance of context when construing contractual terms. … It is in my view not particularly helpful in most cases to refer to the ‘ordinary and natural meaning’ of words because, as very often experience tells us, there can be much debate over exactly what is the ordinary or natural meaning of words. The surer guide to interpretation is context. Here, I would just add that in the areas of statutory and constitutional interpretation, it is context that is key; context is the starting point (together with purpose) rather than looking at what may be the natural and ordinary meaning of words.”

54.  I have kept context and the Contract as a whole in mind but, for the reasons I have given, I do not agree with Mr Chung’s construction.

The implied term issue

55.  Mr Chung submitted that the term set out in para 16(b) above should be implied into the Contract for the following reasons:

(1) Business efficacy.  Such implication is necessary to give effect to the reasonable expectation of the parties;

(2) Obvious inference from the agreement.  It was so obviously a stipulation in the Letter of Understanding that the parties must have intended it to form part of their contract; and/or

(3) Prevention of performance.  The plaintiff should not do any act which would prevent the defendant from fulfilling his obligation under the Letter of Understanding and at the same time be permitted to penalize the defendant.

56.  As to business efficacy, the question is whether such a term is strictly necessary to give effect to the reasonable expectation of the parties.  On the defendant’s case, the parties’ reasonable expectation would be that, if the defendant terminates the Contract, he would be required to pay a refund to the plaintiff but, if the plaintiff terminates the Contract for reasons other than those set out in clause 4, then it cannot claim a refund.  For the reasons I have set out in respect of the Construction Issue, there is nothing in the language of the Contract or its context which indicates such an expectation or, for that matter, the obvious inference argued for in para 55(2) above.  In any event, an implied term cannot contradict an express term of a contract and to imply such a term would contradict the express term in clause 12, which provides for termination for any reason.

57.  Turning to the prevention principle as formulated by the defendant for the purposes of this case, such a formulation contradicts the express terms of clause 12 and clauses 23 and 25 of the Contract all of which provide for termination and, in the case of clause 12, for refund.

Disposition

58.  For the reasons set out above, I find that the plaintiff is entitled to the sum of HK$1,403,476.34 together with interest pursuant to section 48 of the High Court Ordinance, Cap 4.  As for the date from which interest should accrue, clause 12 provides that the refund is payable “immediately”.  However, by letter, dated 23 April 2013, the plaintiff demanded payment by 30 April 2013, ie, within seven days.  I shall take 1 May 2013 as the date when the cause of action arose and order interest to accrue from that date.

59.  Costs should follow the event and I order the defendant to pay the plaintiff’s costs, to be taxed if not agreed.

60.  The defendant had a counterclaim but this fell away when he abandoned his claim based upon alleged contravention of clause 24 of the Career Representative’s Unit Manager’s Contract and alleged failure to pay the 2^nd Year PCB (the claims referred to in paras 15(c) and 15(d) above).