MASSMUTUAL ASIA LTD v. LEUNG KWOK KEY

DCCJ15977/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15977 OF 2000

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JUDGMENT

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1. The plaintiff is an insurance company. The defendant was formerly employed by it as a branch manager. His job was to sell insurance on commission. He was employed under an Agreement dated 3 September 1999, and the defendant terminated his employment with effect from 3 November 2000 on one month's notice, which was given on 3 October 2000.

2. The plaintiff now claims against the defendant for:

$97,669.49 in respect of net commission earned by the defendant;

$196,368.00 in respect of special bonus;

$51,615.18 in respect of adjustment of production bonus.

3. The total is $345,652.67 but it appears from the Reply and Defence to Counterclaim that credit is to be given for a further $16,908.54 redeemed from a savings scheme; so the final total is $328,744.13.

4. In September 2000, the plaintiff negotiated and the defendant issued seven policies for clients. They were all issued on 27 September 2000. Each policy had a "cooling-off" period within which the policyholder could request the defendant to cancel his policy. In each of these cases, the policyholder did in fact request cancellation of the policy within that period. The defendant then became liable to repay the premiums paid to the policyholders and in fact paid back the premiums to three of them though for various reasons payment has not actually been made to the other four.

6. On 20 October 2000 the plaintiff paid the defendant a total of $355,642.00, which represented, inter alia, various kinds of earned commission and bonuses. The plaintiff's case is that, by reason of the cancellation of the seven policies, the commission earned, and likewise the bonuses payable to the defendant were reduced, so that the defendant now owes the plaintiff the sums sued for.

7. The defendant's case is that notwithstanding the cancellation of the policies, he remains entitled to the full commission and bonuses. Further he has been paid short. He counterclaims for an account, and payment of the sum due to him thereunder.

8. There is no real dispute on the facts. The defendant did not give or call evidence. It is not in dispute that the plaintiff and the defendant entered into an Agreement dated 3 September 1999 ("the Agreement") and a Memorandum on Special Income dated 30 September 1999 and effective from 8 September 1999 ("the Memorandum"). The defendant's Agency Manual ("the Manual") also forms part of the contract documents.

9. Under the Agreement the defendant was to receive "Special Income" of $32,728.00 monthly in arrears with effect from 8 September 1999, in addition to other earnings to which he was entitled. He was further to be entitled at the first anniversary of his commencement date to a "Special Bonus" equal to 50% of the aggregate of special income paid to him, subject to his meeting the production requirement that at the end of the first contract year, his Group First Year Actual Earned Commission ("FYC") was over $600,000.00 or his Group Annualised First Year Commission (net of lapses of policies) ("AFYC") was over $840,000.00. By a loan agreement dated 30 September 1999, the plaintiff advanced $196,368.00 as an interest-free loan against the Special Bonus which the defendant was expected to earn. If he met the production requirements he would earn that sum, and it would be automatically paid off at the anniversary; if not, he would have to repay the loan on demand.

10. According to the statement adopted as evidence in chief by the plaintiff's witness, Miss Wong, the defendant on the issue of the seven policies became entitled to, and was paid $146,730.63 in earned commission and $36,682.71 of override commission, giving a total of $183,413.34. The figures are set out in the First Schedule to Miss Wong's statement, which, along with the other Schedules, were annexed to the Statement of Claim. This figure when added to other commission earned brought the FYC for the plaintiff's first contract year to $631,692.80. Since this was over $600,000.00 he was therefore entitled to a Special Bonus of $196,368.00 at the first anniversary, which would offset the loan.

11. The total commission earned, including that on the seven policies, when applied to the defendant's AFYC as calculated to the end of the calendar year, entitled him to a production bonus of $142,238.89. The calculations are set out in the Third Schedule to the witness statement of Miss Wong.

12. The defendant was on 3 October 2000 given one month's notice of termination of his employment. In accordance with the plaintiff's policy, the defendant was denied access to confidential information, to the computer system, and to his own office, though he could continue to work through the Customer Service Department.

13. Then on 5 October 2000, notices were received from three of the seven policyholders asking for cancellation of their policies. On 8 October, notices were received from the other four. The plaintiff tried to contact the policyholders for verification, but could not contact the first three whose notices had been given on 5 October. It was while the plaintiff was in process of verifying or trying to verify the cancellations that it paid out to the defendant a total of $355,642.00. This was paid under express reservation of the plaintiff' rights to claim against the defendant for refund of the commission, Special Income and Special Bonus.

14. In fact, the plaintiff is still holding the premiums paid for first three cancelled policies. Apparently letters were received from one Pacific Law Firm of Guangzhou with authorisation letters bearing to come from the policyholders but the plaintiff did not accept that the signatures thereon were the same as those in the policy applications. The plaintiff sought verification but it was never received. The plaintiff later received another letter from a Mr Yang Min of the Pacific Law Office of Guangzhou bearing to follow up the letter from the Pacific Law Firm, but when the plaintiff sought documents to prove his authorisation no answer was forthcoming. In respect of the other four policies, refunds were made on 22 November 2000.

15. Miss Wong says that the effect of the cancellation of the seven policies and the plaintiffs liability to refund premiums paid thereunder was that the defendant became liable under Clause 6.6 of the Agreement and Clause 1.8 of the Manual to pay back the commission on them of $183,413.34. This was however subject to deductions or set-off which brought the figure down to $97,669.49. The deductions are not in dispute and it is not necessary to set them out here.

16. Miss Wong further says that because of the deduction of earned commission on the seven policies of $146,730.63 from achieved FYC of $631,692.80 the defendant's FYC was reduced to $484,962.17. This meant that he failed to meet the production requirement of FYC of $600,000.00, which in turn meant that he was not entitled to receive the Special Bonus of $196,368.00 and became liable to repay the advance of that sum. The figures are set out in her Second Schedule.

17. She further says that taking into account the seven policies, the defendant was entitled in accordance with Clause 3 of Part B of the Manual to receive a production bonus of $142,238.89 in October 2000. However, once the policies were cancelled and the defendant was liable to repay the premiums, the production bonus fell to $90,623.71. The defendant is therefore liable to repay the difference between the two figures, i.e. $51,615.18. The figures are set out in her Third Schedule.

18. The main issue here is whether the defendant, notwithstanding the cancellation of the seven policies, remains entitled to commission on their premiums. If he does, then he is also entitled to the special bonus and the production bonus. This depends on the interpretation of the contract documents. There are also issues as to whether the defendant was in any event entitled to a higher figure in respect of the production bonus and to a figure in respect of a savings scheme. These depend on evidence as it came out in the cross-examination of Miss Wong.

19. The relevant contractual terms appear in the Agreement and the Manual. Clause 6 of the Agreement provides:

6. Remunerations and Advances

6.1 (a) For the services to be rendered by the Manager under this Agreement the Manager shall be entitled to remunerations calculated in accordance with the Agent's and Agency Leader's Basic Remunerations prevailing, and prescribed in the Agency Manual, from time to time for the services to be rendered by the Manager under this Agreement the Manager shall be entitled to remunerations calculated in accordance with the Agent's and Agency Leader's Basic Remunerations prevailing, and prescribed in the Agency Manual, from time to time. The Company reserves the right at any time and from time to time to revoke, alter, add or modify such terms and conditions and the interpretation thereof by the Company shall be final and binding on the Manager.

.........

6.6 (a) If the Company returns the premium or premiums under any policy, otherwise than in accordance with the provisions of the policy, the Manager will not be entitled to any commissions in respect of such a returned premium or premiums and shall repay promptly to the Company any commission which has been paid in this respect whether the premium is returned during the continuance or after the termination of this Agreement.

Clause 1 of the Manual provides:

1. Basic Commission

........

1.8 If the Company shall refund any premium paid in respect of a policy issued by the Company, the Agent shall lose all his rights and entitlements to commissions on such premiums and shall immediately repay to the Company the amount of commissions received by him on the premiums so refunded by the Company.

20. It is also necessary to set out the provision, which appears on the front cover page of each policy, for its cancellation within the cooling-off period:

"We trust that this policy will satisfy your financial needs, however if you are not completely satisfied should return this policy with a letter to request cancellation with your signature on it. Your request to cancel must be received directly by our office at the address below within 14 days after the Issue Date or 21 days after your application date if later. The policy will then be cancelled and the premium(s) paid will be refunded. No refund can be made if a claim payment has been made"

21. The defendant's first argument is that this provision for cancellation and return of the premiums was a provision of the policy. Clause 6.6(a) of the Agreement refers to return of premiums "otherwise than in accordance with the provisions of the policy". Cancellation under the "cooling-off" provision can only be cancellation in accordance with the provisions of the policy. Therefore, Clause 6.6(a) does not apply and the defendant remains entitled to commission in respect of the returned premiums.

22. The defendant's second argument is that even if the clause 6.6(a) of the Agreement does apply the effect of clause 1.8 of the Manual is that only when a premium is returned does the agent lose his right and entitlement to commission on it, and become liable to repay that commission. Therefore, the defendant is in any event entitled to commission on the premiums in respect of the three policies for which repayment has not been made. Miss Wong in cross-examination was asked to recalculate her figures on that basis, which she did, and I will consider the effect of the recalculation if necessary after I have dealt with the questions of interpretation.

23. The modern principles of interpretation were set out by Lord Hoffmann in Investors Compensation Scheme Ltd. v West Bromwich Building Society [1998] WLR 896 at 912:

"I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237 at 240-242, [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

(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. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(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 (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense 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 an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:

'. . . if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.'"

24. Obviously the fundamental purpose of the contract are that the defendant should sell the plaintiff's insurance policies, and be remunerated by commission. Where a policy is cancelled within the "cooling-off' period, it amounts to an agreed rescission between the plaintiff and the policyholder; it returns them to their original position. The effect is as if no sale had ever been made. That is why provision is made, in such a situation, for the defendant to lose his right or entitlement to commission, and to repay it.

25. It is difficult to see that return of the premium under this provision is a return "otherwise than in accordance with the conditions of the policy". However, the defendant's interpretation of Clause 6.6(a) clearly flouts business common sense. It would mean that the defendant would remain entitled to commission on a sale which was no sale at all. No principal will do business with an agent on that basis, and no agent can expect his principal to do so. Worse than that, it would allow an agent to conspire with others to take out policies and cancel them within the "cooling-off" period, themselves acting on a commission from the agent for so doing. I do not say that this happened there; there is no evidence of it; but it is an illustration of how far the interpretation is from making any kind of business common sense.

26. It seems to me therefore that the parties could never have intended that an agent should keep the commission, when a policy is cancelled in the "cooling-off" period.

27. I turn to Clause 1.8 of the Manual. Again one has to try to arrive at the intention of the contracting parties. Overall the intention of the parties be that if the contract with the policyholder is rescinded, there is no right to commission. The trigger for the loss of right to commission is the rescission. Repayment in these circumstances is not at the plaintiff's option; once the policyholder cancels, the premium must be repaid. The parties cannot be taken as having intended that the defendant should have the right to retain commission, to which he had ceased to be entitled, until the plaintiff returned the premium to the policyholder, which it would in any event be holding on trust. That would not make business common sense as indeed it did not in fact here; the plaintiff was, it appears, prepared to hand over the premiums but did not do so because it was not satisfied of the identities of the claimants or the authority of their Mainland representative.

28. I hold that once the policyholders cancelled the policies, the defendant lost the right to commission paid on the premiums. It follows that he must repay the commission paid to him. He loses his entitlement to the Special Bonus so the advance must be repaid. The production bonus must be recalculated from the new commission figure.

29. I turn to the question of the production bonus. This is governed by Clauses 3.7 and 3.8 of the Manual which provide:

3.7 Subject to meeting the year to date minimum production quota at the end of each quarter, 70% of the expected year-to-date production bonus as determined above less the sum of all production bonus payments made previously in the year, will be paid at the end of that quarter as an advance of year end production bonus.

3.8 At the end of the year, the actual production bonus will be calculated based on the actual AFYC and persistency for the year. This actual production bonus, less the sum of all production bonus payments advanced at the end of the previous quarters will be paid at the end of the year. If the sum of the payments made in the previous quarters exceeds the actual production bonus calculated at year end, the Company will claw back the overpaid amount.

30. It appears that the year, for the purpose of production bonus is the calendar year. From Miss Wong's Third Schedule it appears that the AFYC required as at September was multiplied by 1.34 to produce a projected figure for the calendar year from which the production bonus scale of 39% was taken. That scale was applied to the actual FYC of $473.655.99, and the result multiplied by 70%, to produce the release percentage, and that figure was multiplied again by 110% to produce the actual production bonus paid, i.e. $142,238.89.

31. If the commission-paid figure of $146,730.63 was deducted from $473,655.99 the result was $326,925.36. The reduced AFYC figure resulted in a production bonus scale of 36%, but in arriving at the figure which she says the defendant should have been paid, Miss Wong applied the same 70% release percentage and 110% persistency adjustment.

32. Under cross-examination, Miss Wong agreed that the plaintiff multiplied the production bonus scale percentage by 70% up to date at the end of each quarter and paid the defendant the result. She agreed that there was an assumption that another 30% would be paid at the end of the year, but said that that would only be the case if the defendant was still working for the plaintiff. His real entitlement would then be calculated and the balance released to him.

33. It seems to me that the effect of this evidence is that, had the policies not been cancelled and had the defendant gone on working up to the end of the year, but earned no further commission, his FYC for the year would still have been $473,655.99. Other things being equal the defendant would have been entitled to 100% of the production bonus i.e. $473,655.99 x 39% (bonus scale) x 110% (persistency adjustment) = $203,198.41. Similarly if the defendant had gone on working to the end of the year, even though the policies were cancelled, and still earned no more commission, on Miss Wong's adjusted figures he would have been entitled to $326,925.36 x 36% (bonus scale) x 110% (persistency adjustment) = $129,462.44. Miss Wong in re-examination explained the persistency adjustment, but I think there would be no difference, because the adjustment would only go downwards if there were policy lapses, and she clearly took into account the cancellations, which she said were regarded as lapses, when she applied the same percentage in arriving at her adjusted figure of $90,623.71.

34. There is nothing in Miss Wong's evidence to explain why the defendant should not, even on her reduced figures, at the end of the year have been entitled to 100% rather than 70% of the production bonus. It seems to me therefore that the proper figure for clawback of production bonus can only be $142,238.89 - $129,462.44 = $12,776.45.

35. It seems to be argued for the defendant that he is also owed the figure of $31,803.80. According to Miss Wong this was taken into account in arriving at the figure of deductions and set-off to be applied against the commission clawback. There is nothing in her cross-examination to suggest that this is not right and I accept it.

36. It follows that the final figures owing by the defendant to the plaintiff are:

Clawback of net commission	$97,669.49
Clawback of net of special bonus	$196,368.00
Clawback of production bonus	$12,776.45
Less agreed savings scheme figure	- $16,908.54
Total	$289,905.40

37. There will accordingly be judgment in favour of the plaintiff for $289,905.40 with interest thereon from the date of the writ until the date of judgment at the best lending rate plus 1% and thereafter at the judgment rate until payment and costs to be taxed if not agreed. The defendant's counterclaim is dismissed with costs to the plaintiff to be taxed if not agreed. Since the judgment is to be handed down, the costs orders are nisi.