MASSMUTUAL ASIA LTD v. LEUNG KWOK KEY

CACV 158 & 159/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 158 & 159 OF 2003

(ON APPEAL FROM DCCJ NO. 15977 OF 2000)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a judgment of HH Judge Muttrie given on 23 May 2003. The matter before the judge was a claim and counterclaim in respect of commission arising out of the engagement of the defendant as a branch manager of the plaintiff. The judge gave judgment for the plaintiff in the sum of $289,905.40 together with interest and dismissed the defendant's counterclaim. Subsequently the judge gave leave to both the defendant and the plaintiff to appeal and cross-appeal respectively.

Background

2. The plaintiff is an insurance company previously known as CRC Protective Life Insurance Co. Ltd. The defendant was engaged by it as a branch manager (G2) as from 2 October 1999 in accordance with an agreement dated 3 September 1999 ("the Agreement"). That agreement was apparently termed an Agency Leader's Agreement. Amongst other duties the defendant was to recruit and supervise agents and also, importantly, to sell insurance on commission. Although the Agreement specified that it was not a contract of employment and that the relationship of employer-employee did not arise, the arrangement had some of the hallmarks of employment, for example, the defendant was not permitted to sell insurance on behalf of any other company without the plaintiff's permission. On 3 October 2000 the plaintiff terminated the Agreement on one month's notice. Although the termination was said to be with effect from 3 November 2000 it was clear that many restrictions were placed on the defendant, specifically he was not given access to materials and information which would normally have been available to him.

3. The dispute which arose in this case turned on the entitlement of the defendant to commission. The Commission in question was "First Year Commission" (or "FYC") and "Override Commission" in respect of a number of life insurance policies. There is no dispute that the provisions of clause 6 of the Agreement form the starting point of consideration of the issues. Before turning to clause 6 it should be mentioned that within a few days of the termination letter of 3 October 2000, seven persons who had previously agreed to take up policies on the introduction of the defendant indicated that they did not wish to do so. The defendant would, if those policies had remained in force in the ordinary way, have received commission in respect of them. In respect of four of the policies the premiums have been returned.

4. In respect of the remaining three policies, the plaintiff holds itself out as willing to return the premiums. Initially, in 2000, it sought confirmation as to the identity of the persons seeking the return of the premiums. That confirmation has never been forthcoming. At the trial Miss Wong, who gave evidence on behalf of the plaintiff, and was the only witness in the case, said:

"For the remaining three policies, the premium had already been placed at our office, waiting for the customers to come to claim them back."

The owners of those policies were Yang Fang, Rao Hua and Chen Yuan Yuan. According to the pleadings the commissions paid to the defendant in respect of those policies were as follows:

Policy Owner	Policy No.	Issue Date	FYC Commission Paid	Override Commission Paid	Commission Paid
Yang Fang	81259721	27 Sept 2000	45,362.69	11,340.66	56,703.35
Rao Hua	81259739	27 Sept 2000	45,362.69	11,340.66	56,703.35
Chen Yuan Yuan	81259747	26 Sept 2000	27,997.42	6,999.41	34,996.83

5. Thus it may be taken that, although the plaintiff is willing to return the premiums in respect of these three policies, it has not done so. Given the fact that Miss Wong was giving evidence on 7 April 2003 and the requests for cancellation of three policies had been received on 5 October 2000, the question must arise as to whether the plaintiff will ever refund those premiums. No indication was given to this court, which heard this appeal nearly a year after the original trial, that the premiums had been, or were about to be, refunded.

6. The dispute between the parties turns in large part upon the defendant's entitlement to commission in respect of the seven policies. It would be convenient, to mention how it came about that the relevant policies were not taken up.

7. The front cover page of each policy was headed "THIS IS A LEGAL CONTRACT-PLEASE KEEP IT IN A SAFE PLACE". Below that, there appeared the following statement:

"The terms of this policy are contained on this and the following pages and on the supplement(s) and endorsement(s) thereto."

Underneath the signatures on behalf of the plaintiff was the following:

"We trust that this policy will satisfy your financial needs, however if you are not completely satisfied you 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"

8. This statement was apparently introduced as a result of a code of practice introduced by the insurance industry in Hong Kong to provide a cooling-off period. The intent was to protect the public from their own impetuousness or, perhaps, high-pressure insurance salesmen. It is evident that if that mechanism is operated and the potential policy holder exercises the option, then the policy ceases to take effect and no benefits can be claimed under the policy. One of the questions that arises in this case is whether the return of the premiums in accordance with this clause constitutes a payment under the relevant policies. In my view it does. Quite simply the cover pages of the insurance policies provide that the terms of the policies are contained both in the policy and in the cover page. For my part, I find it difficult to conceive what else on the cover pages could constitute a term of the policies. Furthermore, it appears to me that this is a term which could be relied upon by the relevant prospective policy holder. If such a person were to comply with the provisions of that clause and return the policy with a letter of request for cancellation, I consider that the plaintiff would be contractually bound to cancel the policy and return any premiums. It is to be noted, too, that the judge below also considered that this was a term of each of the policies. It must be emphasised that what I have said relates to these policies and not to any other policy, differently drafted albeit with an intention of implementing the insurance industry's code of conduct.

9. It can be noted that under the heading "Appointment" clause 1.1 of the Agreement it was provided:

"With effect from the Commencement Date and subject to the terms of this Agreement, the Company shall appoint the Manager and the Manager shall as an Agent perform his obligations ...."

The provisions of the Agreement relating to commission are contained in clause 6. I set out those parts of clause 6 which appear relevant:

"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. The Company reserves the right at any time and from time to time to revoke, alter, add all modifies such terms and conditions and the interpretation thereof by the Company shall be final and binding on the Manager.
	(b)	The Manager's entitlement to such remuneration will be established by and conditional upon:
		i)	the issuance by the Company of a policy document (including endorsements and supplementary contracts where applicable), subsequent to its acceptance of an application endorsed with the name of the Manager or an agent recruited (as defined below) by the Manager or his subordinates; and
		ii)	the receipt by the Company of the required premiums; and
		iii)	the compliance by the Manager with the provisions of this Agreement in all respects; and
		iv)	the Manager remaining in the service of the Company, except as provided in Clause 10.1 (b) and (c) hereof.
...
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."

10. The effect, therefore, of these terms is that the provisions as to commission are to be found in the Agent's and Agency Leader's Basic Remunerations which prevail at any relevant time and are prescribed in the Agency Manual from time to time. The Agency Manual is a bulky document and although the Agency Manual changed from year-to-year the parties were in agreement that there was no relevant change which would affect the outcome of this case whether the Manual for 1999 or 2000 were treated as the relevant Manual.

11. Part II of the Agency Manual is headed "FOR ALL AGENTS". Under the part which is headed "AGENCY GRADING SYSTEM AND DEFINITIONS" the grading is apparently divided into two sections: the first relates to career agents which are referred to as "Agents". The basic rank of Agent is Marketing Executive (ME) and the second category relates to five grades in what is called the "agency management system"; those who come within this category are referred to as "Agency Leaders" or "Managers". It would appear that branch managers come within the second category and would be referred to when the term "Agency Leaders" or "Managers" is used in the Agency Manual.

12. Section B of Part II of the Agency Manual is headed "AGENT'S BASIC REMUNERATIONS". Section J is headed "AGENCY LEADER'S BASIC REMUNERATIONS (GRADE 1 TO 3). Section L is headed "AGENCY LEADER'S BASIC REMUNERATIONS (GRADE 4 OR ABOVE)". Thus it would be that in accordance with clause 6.1(a) of the Agreement the relevant sections for considering the defendant's remuneration would be sections B and J.

13. Section B commences "B. AGENT'S REMUNERATIONS" and it contains a number of sections which refer to, and set out tables for, the various commissions, benefits and bonuses that would be paid by the plaintiff for the introduction of business. Under the sub-heading "1. Basic Commission" are a number of provisions. At 1.1:

"First year commission as quoted in the Commission Schedule in this Section will be earned as and when the first year premium is received by the Company...."

1.3 provides that:

"The Agent shall have no claim for commission on any business unless his name and identification appears on the application...."

Importantly for the purposes of this case is provision 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."

14. Mr Jason Wong, who appeared on behalf of the defendant, sought to argue that the wider provisions of clause 1.8 were inapplicable because of the express provisions of clause 6.6(a) of the Agreement. However, in my view the provisions are consistent. The effect of clause 6.6(a) of the Agreement is to exclude altogether from inclusion as part of the remuneration anything which arises out of policies where the premiums have been returned otherwise than in accordance with the provisions of the policy. It is also clear that if premiums have been returned in accordance with the terms of the policy clause 6.6(a) of the Agreement is inapplicable. It is to be noted that clause 6.6(a) of the Agreement uses the word "return" whereas clause 1.8 uses the word "refund". It could be that this was intentional: the word "return" being used in this documentation where a policy was never issued or never took effect; "refund" being used as a more general word to cover situations where the premium was not kept. Furthermore, it appears to me that the provisions of clause 1.8 of Section B of Part II of the Agency Manual are very broad and would cover any situation where there is a refund of the premiums. Since clause 6.6(a) is a negative provision which is not in contradiction to clause 1.8, that is a further reason why I see no conflict between the two provisions.

15. Before leaving the provisions of Section B I would note that this is the only place in which entitlement to first year commission or "FYC" is laid down.

16. As already noted Section J is concerned with the remuneration of the Agency Leaders grades 1 to 3. The Section commences by dealing with "New Business Override" in respect of individual life and "HB" policies. 1.1.1 of this Section provides:

"Manager's remuneration will be mainly through an override on the FYC of their direct and indirect agents. (Managers will also receive the standard ME benefits on their own business.)"

(ME is used in the document to mean Marketing Executive.)

17. At 1.1.5 the levels of override commission are set out. In respect of Grade 2 Managers it is provided that they will be entitled to 25% of the First Year Commission in respect of Agents other than Marketing Managers and Senior Marketing Managers.

18. Applying these provisions together it would appear that a branch manager, in the position of the defendant, who secures a life policy business himself is entitled both to commission as an Agent (see 6.1 of the Agreement and also the reference to standard ME benefits at 1.1.1 of Section J) and to override commission in accordance with 1.1.5 of Section J i.e. an additional 25% of FYC. Indeed, that is how the defendant's commission appears to have been calculated as set out in the pleadings.

19. There was some discussion in the course of the hearing of this appeal as to whether clause 1.8 applied to the defendant because that clause referred to "Agents". In my view, despite the classification under the heading "AGENCY GRADING SYSTEM AND DEFINITIONS" it is clear that section B of Part II of the Agency Manual must apply to branch managers in so far as the FYC is concerned. When branch managers, i.e. Agency Leaders introduce business themselves in the words of 6.1 of the Agreement, they become entitled to "remunerations calculated in accordance with the Agent's .... Basic Remunerations prevailing, and prescribed in the Agency Manual ...." That must mean in accordance with all the provisions of Agent's Basic Remunerations and not just some of them. Indeed, this is confirmed by clause 1.1.1 of Section J of the Agency Manual. That makes quite clear that the Manager receives the "standard ME benefits" on business introduced by the manager himself and that must mean the net benefits under Section B. Neither Agent's Basic Remunerations nor ME benefits would include FYC the entitlement to which was lost and which was required to be repaid. Moreover, this was a point raised by this court in the course of argument. It had not been taken in the court below nor on the pleadings nor in the notice of appeal. As such it would not be open to the defendant to take it now, but it has to be said that it was a point which Mr Wong did not wish to take on behalf of the defendant.

20. The judge below came to the conclusion that the defendant was not entitled to any remuneration in respect of the seven policies referred to above. Mr Wong, on behalf of the defendant, sought to maintain the argument that clause 1.8 did not apply because of the provisions of clause 6.6(a). As already discussed, I consider that clause 1.8 is applicable where the premiums have been refunded. That, it seems to me, is the clear result of clause 1.8 and, for my part, I have no need to consider whether business efficacy would dictate such a construction, since the construction is clear.

21. However, in contrast with the position with regard to the other four policies, I consider that the three policies where the premiums have not been refunded are in a different category. The plaintiff has sought to recover the commission paid in respect of these three policies on the footing that the commission should not have been paid because the defendant was not entitled to commission and was required under clause 1.8 to return any commission paid. In order to establish that, it seems to me that the plaintiff must show that the premiums have been refunded. It is not sufficient for the plaintiff to show that a liability to refund the premium has arisen. The whole tenor of clause 1.8 is on the basis that the entitlement to commission ceases and the agent comes under an obligation to repay commission when the plaintiff has refunded the premium. To read the clause as if a liability to refund the premium were sufficient to trigger the obligation to repay the commission would be to add words to the clause which are not there.

22. In paragraphs 27 and 28 of the judgment the judge held that the non-refunded premiums of the three policies were held on trust by the plaintiff and that the important point was that the policies had been cancelled. It was said that once the policies were cancelled the defendant lost the right to commission paid on the premiums. For the reasons I have given I do not consider that is the correct construction of clause 1.8. I would add that I, for my part, would not be prepared to hold that the plaintiff held the premiums of these three policies on trust. To create a trust out of what is a contractual obligation to return premiums and hence a contractual debt, is, to my mind, a step that I would not take lightly.

23. In my view, the plaintiff can only rely upon the clear words of clause 1.8 and it is necessary for it to show that the premiums have been refunded. That, it cannot do. It may be that it brought action prematurely or it may well be that the premiums never will be refunded and eventually the plaintiff will be entitled to keep the premiums. It may also be that the plaintiff could have framed its case on the basis of seeking a declaration rather than an order for immediate repayment. What it seems to me the plaintiff cannot do is to establish that it has refunded premiums and, therefore, its claim for immediate repayment of commission must fail.

24. I would therefore allow this appeal to the extent that the defendant is entitled to retain the commissions and the consequential benefits in respect of the three policies where the premiums have not been refunded.

The cross-appeal

25. The plaintiff has cross-appealed on the basis that the defendant was only entitled to 70% of the "production bonus" whereas the judge held that he was entitled to 100%. The important provisions here are clauses 3.7 and 3.8 of the Agency Manual:

"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."

26. There is no dispute between the parties that the year which is referred to in these clauses is the calendar year, namely from 1 January to 31 December. The argument on behalf of the plaintiff is that the defendant is only entitled to 70% of the production bonus. In this respect the plaintiff points to the fact that 70% payment of the production bonus was an advance payment and the full production bonus would only be paid at the end of the calendar year. The plaintiff goes further and says that in awarding 100% of the production bonus the judge overlooked clauses 6.1(b)(iv) and 10.1(a) of the Agreement. Those clauses provided that the defendant would only be entitled to remuneration payments if he remained in service at the relevant time. Since the defendant's engagement under the Agreement was terminated prior to the end of the calendar year the defendant would only be entitled to the amounts payable prior thereto. In my view, the plaintiff's arguments in this respect are correct and I would accordingly allow the cross-appeal.

27. I would therefore be disposed to make orders in respect of the appeal as set out in paragraph 24 above and to allow the cross-appeal. The parties should agree the amounts to be inserted in the order and in default of agreement the matter should be listed for mention. I would make an order nisi that the costs of the appeal be to the defendant and the costs of the cross-appeal be to the plaintiff.

Hon Yuen JA:

28. I have had the benefit of reading in draft the judgment of the Vice-President and would adopt his narrative of the background facts. I would only add that I do not consider that the existence of the clause in the Agreement whereby the Defendant is required to provide his services exclusively to the Plaintiff is indicative of an employer-employee relationship, but that is of no relevance to the issues arising on this appeal.

29. In my judgment, the Defendant's appeal should be allowed in full for the following reasons.

30. As far as commission (not the production bonus) was concerned, it was not disputed that the Defendant was originally entitled to commission after the policies were issued and the Plaintiff received the premiums. It has not been suggested by the Plaintiff in the appeal documents that the Defendant had not satisfied the conditions for entitlement to commission under clause 6.1(b) of the Agreement.

31. The onus was therefore on the Plaintiff to establish that the Defendant was liable to repay the commission to it.

32. In seeking to discharge that onus, the Plaintiff has relied on only two express provisions, viz. clause 1.8 of the Agency Manual and clause 6.6(a) of the Agreement.

33. I would note at the outset that these express provisions are found in documents drafted by the Plaintiff. (Although the judgment does not contain any findings in this respect, the Defendant's reliance on the contra proferentum rule has not been challenged by the Plaintiff on the ground that it was not the author of the documents in question). As such, any ambiguities should be construed against the Plaintiff unless to do so would result in such "business nonsense" that a reasonable man would know that the parties plainly could not have intended the meaning suggested by the Defendant (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913).

34. Further, it should be noted that it has not been suggested by the Plaintiff that any mistakes of meaning or syntax have been made in the drafting of the documents.

35. I turn now to examine whether either clause serves the Plaintiff's object of requiring the Defendant to repay commission. The terms of clause 1.8 of the Agency Manual and clause 6.6(a) have been reproduced in paragraphs 13 and 9 respectively of the Vice-President's judgment.

Clause 1.8 Agency Manual

36. The first clause relied on by the Plaintiff, clause 1.8 of the Agency Manual, expressly applies only to "Agents". On the face of it, it does not apply to the Defendant. The term "Agent" has been clearly defined in clause 1.1.1:

"'Agents' as mentioned hereafter in this document refers to Marketing Executives, Associate Marketing Manager, Marketing Manager and Senior Marketing Manager".

The Defendant was none of these. He was at all material times a Branch Manager. As such, he was, according to the definitions in the Agency Manual, not an "Agent" but an "Agency Leader" or "Manager", as clause 1.1.2 clearly provides:

"'Agency Leaders' or 'Managers' as mentioned hereafter in this document refers to Unit Managers, Branch Managers, Senior Branch Managers, Deputy General Managers, General Managers, Chief General Managers, and Directors of Agency" (emphasis added).

37. That clause 1.8 does not apply to the Defendant was not argued below, and when this court drew it to the attention of counsel for the Defendant, he declined to advance any submissions that clause 1.8 does not apply to the Defendant as it had been agreed that that clause did apply.

38. In my judgment, however, even if clause 1.8 applies to the Defendant, it still has to be read together with clause 6.6(a) of the Agreement. Clause 1.8 is one clause in a bulky booklet, incorporated by reference into the Agreement, called the Agency Manual which covers agents ranging over a wide spectrum of grades (but with the main division being between career agents and management). In contrast, clause 6.6(a) is a specific clause in the Agreement signed between the Plaintiff and the Defendant. In my judgment, when both clauses are read together, it is clear that it is clause 6.6(a) which should apply because by its express terms, it is intended to govern the entitlement to commission of Managers specifically (as opposed to "agents" in general).

Clause 6.6(a) of the Agreement

39. Coming then to clause 6.6(a), it would be noted that it expressly provides for 2 different situations when a premium is returned, drawing a distinction between a situation where the premium is returned in accordance with the provisions of the policy, and a situation where it is returned otherwise than in accordance with the provisions of the policy.

40. I respectfully agree with the Vice-President that the way the policies in this case have been prepared, an objective reader of the policy would reasonably regard the cancellation term reproduced in paragraph 7 of the Vice-President's judgment as a provision of the policy.

41. This view is supported by the fact that the insured has to be informed of this term before the policy is issued (Insurance Law and Practice in Hong Kong paragraph 24-33). The Plaintiff would therefore not be able to contend that the insured had given no consideration, or past consideration, for this benefit.

42. Further, the contractual obligations of the Plaintiff and the insured arise immediately upon the issue of the policy. It is not as if they become effective only after the brief "window of opportunity" period has passed without cancellation. Since the policy comes into being immediately, where the Plaintiff returns the premium to an insured who has decided to cancel during the window period, in my judgment that is a return of premium "under the provisions of the policy".

43. Returning then to the clause relied upon by the Plaintiff to establish the Defendant's liability to repay, clause 6.6(a) provides only that "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, ...". For my part, I do not see how this clause disentitles the Defendant to commission when the premium was returned in accordance with the provisions of the policy. In my view, the Plaintiff's case ignores the proviso italicised above, the clear meaning of which is that the disentitlement only applies where the premium is returned for reasons extraneous to the policy (such as rights of rescission under common law, due to e.g. undue influence or mistake).

44. In my view, the court should be very slow to reject a clear construction unless that construction would lead to business absurdity. I am not satisfied that there would be such absurdity in the present case. The trial judge thought that if a manager could keep the commission even after cancellation of the policy, that would allow him to conspire with clients to take out policies and then cancel them within the window period. In my view, that is looking at the worst case scenario and assuming it to be of general application. A manager owes fiduciary duties to the plaintiff. If there was indeed proof of conspiracy, then the plaintiff would have other remedies under the law.

45. In a normal situation, it is not absurd for the Plaintiff to allow its Managers (though not agents in lower grades) the benefit of keeping commission where there has been a return of the premium for reasons allowed in the policy. The Manager has, no doubt after expending time and effort and incurring expenses (see clause 2.3(a) of the Agreement), successfully caused a policy to be issued, and as between the Plaintiff and the Manager, it is not objectively absurd that the risk of an exceptional act of a third party (a cancellation during the brief window period) should be borne by the Plaintiff.

46. The analogy with a lapse in premium does not in my view support the Plaintiff's case. Clause 6.6(b) provides:

"in the event the first year premium is payable by quarterly or monthly instalments and the policy is lapsed before two such quarterly instalments or four such monthly instalments have been received and accepted by the Company any first year commission already credited to the account of, or paid to, the Manager in respect of the instalments or instalments of premium paid shall be immediately refunded to the Company by the Manager ...".

It can be seen that there is a sharing of the risk between the Company and the Manager in that where the policy lapses after two quarterly instalments or four monthly instalments have been received, the Manager keeps the first year's commission. If that is the case for lapsed premiums, it is not absurd for the Plaintiff to bear the risk in the case of "window period" cancellations.

47. Finally, I would deal briefly with the question whether a distinction should be drawn between "refund" and "return" of premium. This was not a point argued by the Plaintiff whether below or in this court and Mr Yuen SC has not been able to refer to anything in any of the documents before us to establish a meaningful difference between "refund" and "return". In my view, in the present case both mean "repayment" of premium. A cancellation during the window period is not dissimilar to termination of a policy before the expiration of a contemplated period of insurance. In such situations, where the policy allows, it is common to refer to a proportionate "return" of the premium paid (see e.g. Halsbury's Laws of Hong Kong Vol. 15(1) Insurance paragraph 220.150). As for the view that the word "return" might have been intended to be used in situations where a policy was never issued or never took effect, the intention that a premium may be "returned" where a policy is in force is shown in clause 6.6(a) itself which provides "if the Company returns the premium or premiums under any policy, otherwise than in accordance with the provisions of the policy ...".

48. For the reasons set out above, I would allow the Defendant's appeal based on what, to me, is the clear wording of clause 6.6(a). The Agreement having been drafted by the Plaintiff, it would have been easy enough for it to have expressed its intention if it wished to disentitle Managers to commission whenever premiums have to be repaid.

49. If however I am wrong, I would agree with the Vice-President that the Plaintiff was not holding any monies on trust for the three insured, as there was no evidence that the monies had been ear-marked or placed in a separate fund. The three premiums not having been refunded, the appeal should be allowed to that extent as the Defendant is under no present liability to the Plaintiff in respect of those policies.

50. As for the cross-appeal, this is concerned solely with the amount of "production bonus". The first issue is that the commission paid on the cancelled policies should be excluded and the production bonus adjusted accordingly. As far as this issue is concerned, I refer to the reasons set out in the preceding paragraphs for my judgment that the Defendant is entitled to the commission paid on the cancelled policies.

51. Apart from that, if I understand Mr Yuen SC correctly, the Plaintiff submits that clauses 6.1(b)(iv) and 10.1(1) preclude the Defendant from 100% of the production bonus, although it is accepted that he is entitled to 70%. It seems to me that, on the basis of clauses 3.7 and 3.8, the Defendant is only entitled, at the end of each quarter, to 70% of what he is likely to get at the end of the calendar year, with the balance of 30% to be paid at the end of the calendar year, when the actual production bonus would be calculated based on the actual AFYC (Annualized First Year Commission) and persistency for the year.

52. As events transpired, the Defendant was not in service at the end of the calendar year because the Plaintiff gave him notice of termination under clause 9.1 of the Agreement. It was not the Defendant's case that the Plaintiff was not entitled to terminate the Agreement at the time it did. Further, the trial judge did not make any finding of an implied term that where the Defendant was not in service solely because the Plaintiff had terminated the Agreement, the Defendant would be entitled to the production bonus as if no notice had been given and the Agreement not terminated. There was no respondent's notice in the Plaintiff's cross-appeal. Accordingly, I would agree that the Plaintiff's cross-appeal be allowed in principle, the effect on the quantum to be referred back to this court if not agreed.

Hon Chu J:

53. I have had the benefit of reading in draft the judgment of the Vice President and the judgment of Yuen JA. I will not repeat the factual background of the case.

The defendant's appeal

54. I agree with the Vice President that the defendant's appeal should be allowed to the extent that the defendant is not liable to repay the commissions and consequential benefits in respect of the three policies that had been cancelled but the premiums of which have not been refunded. I would add the following points.

55. Under clause 1 of the Agency Agreement dated 3 September 1999 made between the plaintiff and the defendant ("the Agency Agreement), the defendant had three main duties:

(a) To seek and nominate suitable persons to become agents of the plaintiff: clause 1.2;

(b) To monitor the behaviour and to report on any breach of the agents so nominated by him: clauses 1.3; and

(c) To act as agents in soliciting insurance policies and other business for the plaintiff: clause 1.5.

56. The defendant's remuneration for services he rendered under the Agency Agreement is regulated by clause 6. The starting point of his entitlement is clause 6.1(a), which provides that the remuneration is to be "calculated in accordance with the Agent's and Agency Leader's Basic Remunerations prevailing, and prescribed in the Agency Manual, from time to time". Two points are clear. Firstly, the Agency Manual forms part of the contract between the plaintiff and the defendant by express incorporation. Secondly, it is contemplated that the defendant would earn commissions and income both in the capacity of an agent in respect of insurance sold by him directly, and in the capacity as a branch manager (G2) for insurance sold by him and by his direct and indirect agents. This point is reinforced by clause 1.1.1 of Section J of the Agency Manual, which provides that managers will also receive the standard marketing executive benefits on their own business.

57. The plaintiff's claim against the defendant as appeared by the Amended Statement of Claim is for repayment of: (i) over payment of first year commission (FY commission) and overriding commission (overrides), less credit due to the defendant; (ii) special bonus; and (iii) over payment of production bonus. The fundamental point underlying the plaintiff's claim is the calculation of the FY commission because this would affect the amount of overrides and production bonus that the defendant is entitled to and would also affect the defendant's entitlement to special bonus.

58. So far as the entitlement and calculation of FY commission and production bonus are concerned, they are governed by Section B of the Agency Manual. Clause 1.1 provides that FY commission is earned when the first year premium is received by the plaintiff. Clause 1.8 further provides that an agent has no entitlement to commission on premium paid but subsequently refunded by the plaintiff, and he is liable to repay to the plaintiff if he had received the commission. Clause 3 sets out the formula for determining the amount of production bonus payable to agents of the plaintiff.

59. As for overrides payable to agency leaders of grades 1 to 3, clause 1.1.1 of Section J of the Agency Manual states that a manager's remuneration is mainly through an override on the FY commission of his direct and indirect agents. A manager will also receive overriding commission in respect of policies sold by him. Clause 1.1.2 goes on to provide that overrides is based on the FY commission earnings less any amount of the earnings repaid or due to be repaid to the plaintiff under the agent's agreement.

60. The entitlement to and the calculation of special bonus are set out in a separate memorandum made between the parties dated 30 September 1999 ("the Memorandum"). Under its terms, the amount of FY commission earned by the agents within the defendant's team would determine whether the defendant would be paid the special bonus.

61. Accordingly, the core issue in the defendant's appeal is whether any FY commission is payable on the premiums for the seven policies cancelled. It should be noted at the outset that these seven policies appeared to be concluded by the defendant personally, and it is on that basis that he was initially paid the FY commission. In other words, it is a marketing executive benefit received by him on business produced by him personally.

62. In a case where a career agent within the defendant's team has concluded a policy, his entitlement to FY commission is regulated by clauses 1.1 and 1.8 of Section B of the Agency Manual. Thus, when the plaintiff refunds the premium, the agent will have to repay to the plaintiff the FY commission on the refunded premium. Further, by reason of clause 1.1.2 of Section J of the Agency Manual, the repaid FY commission should be excluded from the calculation of the defendant's overrides.

63. In the present case, the FY commission was paid to the defendant because he concluded the seven policies as his name was endorsed on the policies. It is plain that Section B of the Agency Manual governs the basis and the extent of the entitlement to FY commission. The Agency Manual, including Section B, has been incorporated into the defendant's contract expressly by clauses 1.6 and 6.1(a) of the Agency Agreement. That explains why the plaintiff's claim for repayment of over paid FY commission is pleaded on the basis of clause 1.8 of Section B of the Agency Manual, and in my view, rightly so.

64. The defendant, in his Re-Amended Defence and Counterclaim, relies on clause 6.6(a) of the Agency Agreement and contends that he is not liable to refund any commission earned on the seven policies because the return of the premiums by the plaintiff was in accordance with the provisions of the policies. For the reasons set out in their respective judgment, I agree with the Vice President and Yuen JA that the cancellation term is a provision of the policies such that the return of the premiums of four of the policies were made in accordance with the provisions of the respective policies. But I do not agree that clause 6.6(a) of the Agency Agreement affords the defendant a defence to the claim.

65. In the first place, given the clear terms of clause 6.1(a) of the Agency Agreement, the whole of Section B of the Agency Manual should be looked at in ascertaining the defendant's entitlement to FY commission. There is no justification to look only to clause 1.1 to establish the entitlement, but not to clause 1.8 when a refund of premium occurs. Similarly, there is no justification to ignore the clear terms of clause 1.1.2 of Section J when determining the amount of overrides.

66. Secondly, there is nothing in the Agency Agreement and the Agency Manual to suggest that in calculating a manager's remuneration, a distinction is drawn between policies concluded through the career agents within his team and policies concluded by the manager personally. As analyzed above, if it were a career agent within the defendant's team who concluded the seven policies in question, based on Section B of the Agency Manual, he would have to repay the FY commission on the refunded premiums. This would reduce the commissions and other benefits payable to the defendant and the other managers (as well as the career agents) within the team. By contrast, on the defendant's argument, as a result of these policies being concluded by the defendant and by applying clause 6.6(a) of the Agency Agreement, the defendant would not have to repay the FY commission on the refunded premiums. Further, there would be no reduction in the other commissions and benefits payable to the defendant and the other managers and agents in the team.

67. In my view, in the absence of any or any clear indications, it is not open to the court to infer that the parties had intended such a difference in entitlement and calculation. I am not prepared to adopt a construction that would produce the difference, which does not reflect the parties' intention as appeared by the contractual documents. It is therefore not open to the defendant to rely on clause 6.6(a) of the Agency Agreement to limit or to dis-apply clause 1.8 of Section B of the Agency Manual.

68. In view of the wording of clause 1.8, the defendant's obligation to repay only arose when the plaintiff had refunded the premiums. Accordingly, the plaintiff is not entitled to claim a repayment or clawback on the commissions paid in respect of the premiums of the three policies not yet refunded.

The plaintiff's cross-appeal

69. For the reasons given by the Vice President and Yuen JA, I agree that the plaintiff's cross-appeal should be allowed in principle and have nothing to add.

Hon Rogers VP:

70. There will therefore be an order in terms of paragraph 27.