NEW YORK LIFE INSURANCE WORLDWIDE LTD v. HO TUNG HOI

DCCJ 3370 of 2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL JURISDICTION

ACTION NO. 3370 OF 2005

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BETWEEN

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DECISION

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A. INTRODUCTION

1.  This is the Defendant’s application for the determination of an issue under O.14A of the Rules of the District Court (“RDC”). The Defendant framed the issue in its summons as follows:

“Clause 11 of the Plaintiff’s Appointment Letter to the Defendant dated 13 June 2001 is unenforceable as it:-

(a)  constitutes a restraint of trade; and as

(b)  it is not reasonably necessary to protect any legitimate business interest of the Plaintiff.”

2.  The Plaintiff’s position is that the issues in dispute are not suitable for determination under O.14A. Even if it is suitable, the question of law or the construction of clause 11 should be determined in its favour. To the contrary, the Defendant submitted that the issues in dispute are not only suitable for O.14A procedure, clause 11 is not reasonably necessary to protect any legitimate business interest of the Plaintiff.

3.  The ultimate question for adjudication is one of the suitability. In the event that the Court finds the issues in dispute are suitable for determination under O.14A. I shall proceed to make the determination and consequential orders. Otherwise, I shall dismiss the Defendant’s summons for being inappropriate for O.14A procedure.

4.  It is more convenient to set out the background of this case before I identify the issues in dispute for the question of suitability.

B. BACKGROUND

5.  The Plaintiff is a company authorized to carry on the business of providing and selling life insurance policies in Hong Kong. The Defendant was one of its former insurance agent and Senior Sales Manager.

6.  The agency relationship between the Plaintiff and the Defendant was provided in 3 main sets of documents: the letter of appointment dated 13^th June 2001 (“ Appointment Letter”) as supplemented by 2 addendum letters dated 30^th July 2002 and 31^st July 2003 respectively; the Agent’s Agreement effective on 12^th July 2001; the Manager’s Agreement (effective on 12^th July 2001) which was replaced by another Manager’s Agreement effective on 1^st January 2002 when the Defendant was promoted to Senior Sales Manager.

7.  The sparking off event leading to this dispute is the Defendant’s resignation by way of a letter dated 29^th November 2004 with immediate effect. And the Defendant joined a competitor of the Plaintiff, namely, Sun Life Financial (Hong Kong) Ltd. That caused the Plaintiff to invoke clause 11 of the Appointment Letter. Consequently, after deducting the commissions owed to the Defendant, the Plaintiff demanded repayment of the sums of HK$839,689.59 and HK$480,000.00, being the Monthly Special Allowances and Extra Special Allowances advanced pursuant to the Appointment Letter and the addendum letters. The Plaintiff averred in the pleading that it shall waive any amount in excess of 1 million so that this action falls within the jurisdiction of the District Court.

8.  Clause 11 of the Appointment Letter, the crux of this application, provides as follows:-

“Disregard your then position or title in the Company at the time your Agent’s Agreement with the Company is terminated, if you, within 12 months from the date of termination of the Agent’s Agreement between you and the Company, engaged as a director, principal, partner, consultant or agent, or accept any employment in any capacity or otherwise be concerned or interested in any life insurance business in Hong Kong, you are required to pay back an amount equals to total special allowances paid to you in a lump sum immediately to the Company.  The amount to be paid back is calculated according to your services with the Company:

a)   all (100%) the special allowances received if i) the date of termination is within 2 years from the day the finance is ceased; or ii) you have been contracted with the Company for 3 years or less; whichever is longer; or

b)   half (50%) of all the special allowances received if i) the date of termination is more than 2 years and within 4 years from the date of finance is ceased; or ii) you have been contracted with the Company for 3 years and less than 5 years; whichever is longer;

c)   Not necessary to pay back the special allowances if i) the date of termination exceeds 4 years from the day of finance is ceased; or ii) you have been contracted with the Company more than 5 years.”

C.  ISSUES

9.  The Defendant says that clause 11 is a restraint of trade clause, it is unenforceable because it is not reasonably necessary to protect the Plaintiff’s legitimate business interest. In contrast, the Amended Statement of Claim contains elaboration as to how and why the Plaintiff says the clause is reasonably necessary to protect its legitimate business interest.

10.  It becomes lucid that the main issue is whether the clause is “reasonable” and “necessary” to protect the Plaintiff’s “legitimate business interest”. The subsidiary issues germane to the main issue are reflected in paragraphs 6A and 6B of the Amended Statement of Claim, against which the Defendant either made no admission, hence put the Plaintiff to the strict proof or denied it.

11.  The Plaintiff pleaded in paragraph 6A as follows:-

“Notwithstanding the Restrictive Covenant, the entire clause 11 of the Appointment Letter was and remains valid and enforceable against the Defendant as it only seeks to protect the legitimate interests of the Plaintiff and is no wider than was necessary:

(1)   When an agent commenced work with the Plaintiff, there would be a period when the agent would receive little or no income through commissions as it would take time for the agent to complete the requisite training and to make initial sales.

(2)   In recognition of such difficulties faced by agents on their start up, the Plaintiff provided its agents (such as the Defendant) with a special allowance as income support in anticipation that the agent would establish a long term working relationship with the Plaintiff.  Such special allowance was separate from an agent’s remuneration package and did not represent sums earned by way of commission on sales.

(3)   The special allowance represented an income support by way of a gift, although the receipt of which was subject to certain conditions being met.  The special allowance is premised on the Plaintiff and the agents (such as the Defendant) forming a long-term relationship over the course of which the agent’s commission income would increase and the premiums on the policies sold would in time recoup the special allowance for the Plaintiff.

(4)   Normally, it would take over 2 years for the agents to be making sufficient contributions to cover the commission and special allowance to them.  Taking into account policy expenses and overhead expenses, a new agent would generally be a net expenses to the Plaintiff for at least 5 years.

(5)   The Plaintiff was prepared to provide a new agent with a special allowance on the assumption that the new agent would stay with the Plaintiff long enough to sell sufficient policies to earn the Plaintiff the money it gave as special allowance and to cover the expenses of accommodating and training the new agent.  To address the obvious unfairness that would arise where a new agent was given the special allowance, accommodation and training costs, the payment of the special allowance was made subject to the repayment provisions in clause 11 of the Appointment Letter.

(6)   The reason for the step down provisions in clause 11 for how much an agent might keep reflected the fact that the longer the agent has been with NYL and the longer the agent has not been receiving the special allowance, the more the agent has earned for the Plaintiff to cover the funds provided under the special allowance.  The structure of clause 11 was based on the Plaintiff’s estimate of how long it would take to recoup the special allowance (i.e. about 4 years from the last payment of the special allowance).

(7)   The repayment provision in clause 11 took into account the likelihood that the Plaintiff would continue recouping on its investment in the agent after they left because the Plaintiff would likely be receiving renewal premiums on policies that were sold by the agent prior to them leaving the Plaintiff.  Provided the clients would stay and continue to renew their policies, the Plaintiff would eventually recoup the special allowance and thus did not need the agent to repay them.  

(8)   The risk faced by NYL was the loss of a significant number of clients if the agent leaves and joins another life insurance provider.  An experienced agent who has established a long-term relationship with his clients may be able to convince many of them to switch to the new insurance provider.  Thus, the repayment provision in clause 11 are limited to circumstances where the agent left and joined another life insurances provider in Hong Kong as this posed a real risk to the Plaintiff eventually recouping the special allowance.”

12.  The Plaintiff goes on to plead in paragraph 6B that in the event the restrictive covenant is held to be invalid and unenforceable, it should be severed from clause 11 and the remaining “pay back” provision would remain valid and enforceable.

13.  Although there are some other pleaded issues, I shall focus myself on the issue as framed by the Defendant in its summons, the main issue and the subsidiary issues as identified above.

D. THE PLAINTIIFF’S POSITION

14.  On the question of suitability, the Plaintiff cited various authorities in support of the legal propositions. Firstly, even if the relevant question is one of law or of the construction of a document and the question should be determined under the O.14A procedure, the Court has a residual discretion not to embark on a determination of a question.

15.  Secondly, where there are factual disputes and where the issues of facts are interwoven with the legal issues to be determined, O.14A is likewise not suitable.

16.  Thirdly, when there is a question of reasonableness, especially whether a particular clause is reasonable, the question is fact-sensitive and it is not suitable for determination under O.14A because it is essential that all the facts and circumstances must be gone into for the court to come to a broad and common sense view of the reasonableness of the restraint covenant or parts of the covenant.

17.  Applying the legal propositions into the present case, Counsel for the Plaintiff, Mr. Rimsky Yuen SC, submitted that the issues in dispute are not suitable for determination under O.14A because firstly, the parties join issues with each other on a number of factual issues. Secondly, the determination of the enforceability of clause 11 will not dispose of this action in its entirety. He identified the factual issues as follows:

(1)   whether there were any discussions over clause 11 of the Appointment Letter when the Defendant joined the Plaintiff;

(2)   whether the Defendant requested for a continuation of the Monthly Special Allowances, which resulted in the addendum letters;

(3)   whether the knowledge and consent on the part of the Defendant is one of the material considerations in deciding the reasonableness of clause 11;

(4)   whether the Defendant was an experienced and seasoned insurance agent;

(5)   whether a newly recruit insurance agent would receive little or no income in the initial period;

(6)   whether it is a common phenomenon in the insurance industry that an insurance agent would divert or twist customers to his newly joined company;

(7)   whether the Defendant was required to repay his former insurance company payments similar to the Special Allowances.  This is relevant to the Defendant’s knowledge and the practice of the insurance industry, hence a weighing factor on the question of reasonableness.

E.  THE DEFENDANT’S POSITION

18.  On the question of suitability, Mr. Thomas Lee, Counsel for the Defendant, relied on TSC Europe (UK) Ltd v Massey [1999] IRLR 22, as an illustration to say that where there was no material factual differences, the Court should dispose of an issue, if not all issues expeditiously, so as to save expense and avoid delay.

19.  He also relied on a prior correspondence from the Plaintiff’s solicitors to suggest that the Plaintiff once perceived clause 11 involves legal argument only.

F. DISCUSSION

THE LAW

20.  O.14A, r.1 provides that:-

“The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that-

(a)   such question is suitable for determination without a full trial of the action; and

(b)   such determination will finally determine (subject only to possible appeal) the entire cause or matter or any claim or issue therein.”

21.  In respect of the approach under O.14A, Recorder Geoffrey Ma SC (as he then was) expounded in Rockwin Enterprises Ltd v Shui Yee Ltd [2003] 3 HKC 174 as follows:

“(1)  Once seized of an O.14A application, the court’s approach is essentially a three-step approach:

(i)   Is the relevant question one of law or of the construction of a document?

(ii)  If so, is that question one that should be determined under the O.14A procedure?

(iii) If the answer to (ii) is “yes”, what is the determination of that question and what orders should the court make as a consequence of determining that question?

(2)   Whilst step (i) usually cause little difficulty, step (ii) requires the Court to be satisfied of the following:

(i)   That the question of law or construction is one that is suitable for determination without a trial.  In other words, the court has all the necessary facts and matters before it in order to determine the question of law or construction.

(ii)  That if so suitable and should it be determined by the Court, that it will finally determine (subject to a possible appeal) the entire cause or matter or any issue or claim therein.

(iii) Even if the above two conditions are fulfilled, that the Court in its discretion is satisfied that the question is one that ought to be determined under O.14A.

(3)   It is clear that the Court has a residual discretion whether or not to embark on a determination of a question under O.14A even where the first two requirements (i.e. those set out in sub-paragraphs (1)(i) and (ii) above) are fulfilled.  How this discretion is to be exercised in any given case depends on the circumstances.”

22.  In so far as the authorities cited by the parties regarding suitability of O.14A and the law on the restraint of trade, I do not see there is any divergence on the legal propositions. I would refer to the relevant passages when I need to come to that. However, in respect of the judicial trend on the law of the restraint of trade clause, the parties had different views. The Plaintiff says the law is in the transitional period, there is a judicial trend that the court inclines to enforce this kind of clause. The Defendant disagreed that there was such a trend. In my view, an overview of all the recent judgment, including those cases cited by the parties, seems to suggest that there is no judicial trend of tipping in favour of the enforcement of a restraint of trade or striking down a restraint of trade clause. Each case depends on its own facts and circumstances. A particular restraint of trade clause is reasonable in a solicitors partnership agreement may not be reasonable in the position of a bank manager, or a particular restraint of trade clause is reasonable in a property agency agreement may not be reasonable in the position of a hair-stylist. Likewise, a restraint of trade clause is reasonable in relation to an independent contractor may not be reasonable to a restraint of trade clause in an employment contract. In short, I do not see any uncertainty of the law in this area or the law is now in the transitional phase that will go to a particular destination. I would say that the development of law is never ending and most cases are facts-sensitive. Hence, assuming that there is a transitional period, I do not agree that once the law is in the transitional period by itself will necessarily make O.14A procedure inappropriate.

23.  Nonetheless, I am of the view that the case of TSC Europe does not avail the Defendant. Simply put, the facts contained in the affidavits filed in that case were not disputed and were accepted by the parties to be sufficient and comprehensive for determining the question. In contrast, this case involves a number of material factual disputes as pleaded and summarized above. It must be noted that the Defendant made no admission and put the Plaintiff to the strict proof, if not a denial of the assertions made in paragraph 6A of the Amended Statement of Claim. Those assertions are material to decide whether clause 11 or any part thereof is “reasonable”, “necessary” or “being too wide”.

24.  Likewise I do not see how the Plaintiff once perceived clause 11 involves legal argument only would prevent the Plaintiff from arguing on suitability. Even if the dispute is a hybrid of law and fact, as in this case, it may still be considered as involving legal argument.

25.  Mr. Lee also relied on a District Court judgment by HH Judge Muttrie in New York Life Insurance Worldwide Ltd v Fong Hok Yin DCCJ 4042/2002. In that case, there were similar provisions and Judge Muttrie made some remarks about whether the clause was reasonably necessary for the protection of the Plaintiff’s interests. Those remarks have to be viewed against the background of an application for setting aside a default judgment. Judge Muttrie made those remarks and concluded that the defendant showed a real prospect of success. He did not make a determinative findings that the clause shall be struck out. After all, the fate of that clause had to go to trial.

26.  Thirdly, I do not see how the qualified admission made by Mr. Lee is helpful. He said that for the purpose of this hearing, the affidavits prepared by Mr. Tam for the Plaintiff can be accepted in its entirety. Unless there are unequivocal admitted facts, my view is that the qualified admission cannot be treated as admitted facts for consideration. Nevertheless, assuming Tam’s affidavits were accepted in full, it is likely that the Plaintiff may establish the point on legitimate interest. Nor should I take this qualified admission to treat the Defendant having admitted paragraph 6A of the Amended Statement of Claim.

27.  As Mr. Yuen SC pointed out that, on the question of reasonableness of a restraint of trade clause, the material factual findings required include, inter alia, whether the Defendant knew or ought reasonably to have known of the existence and extent of a term (having regard, among other things, to any custom of the trade and any previous course of dealings between the parties); whether there was similar term in the same trade; whether it is reasonable at the time of contract to expect that the Defendant can choose to “pay back’ or to abide by the restrictive covenant, whether the choices are reasonable and practicable. It seems to me that this Court is not seized with all the relevant facts arising out of the pleaded issues. I refer to Rockwin Enterprises Ltd v Shui Yee Ltd [2003] 3 HKC 174. Recorder Geoffrey Ma SC (as he then was) stressed as follows:

“… Here, it is important to emphasis that the question of law or construction is one that is suitable for determination without a trial.  In other words, the court must have all the necessary facts and matters before it in order to determine the question of law or construction.  Where the Court is not seized of all the relevant facts, it would be an extremely rare case (if ever) in which the procedure under O.14A would be adopted.”

28.  Further, it seems to me that in construing clause 11, I need to consider the factual matrix. The facts relevant to the factual matrix are in dispute in the present case and not all the facts are before me: B + B Construction Ltd v Sun Alliance and London Insurance Plc [2001] 1 HLRD 1; Shell Hong Kong Ltd v Yeung Wai Man Kiu Yip Co Ltd (2003) 6 HKCFAR 222; Ng Chun Kong v First Star Development Ltd [2007] 3 HKLRD 281.

29.  Last but not least, I agree with what was expounded by Waung J in BSC Building Materials Supply Co Ltd v Cheung Chi Hung Michael [1998] 2 HKC 425:

“Third, the diverse authorities suggest that the reasonableness of any particular restraint covenant is peculiarly sensitive to facts… .  It is because a court judgment on the reasonableness of elements cannot be precise that it is essential that all the facts and circumstances must be gone into for the court to come to a broad and common sense view of the reasonableness of the restraint covenant or parts of the covenant (arising after considering severance).  In my view this fundamental aspect of this case (indeed of all restraint of trade cases) was overlooked by the defendant and this fundamental aspect presents an insurmountable obstacle on top of an already high burden inherent in a striking out exercise.  An employer is entitled at the trial to bring out all facts and circumstances (special circumstances in the words of an ex-employee (no matter how aggressive or calculating) is not entitled to deprive the employer such right, except in the plainest and most obvious of cases and this action is certainly not one of these cases.”  

30.  In a nutshell, having considered the submission and the materials put before me, I come to the conclusion that although the question stated in the summons is the relevant question of law or of the construction of a document. I am not seized with all the necessary facts and matters, either because the relevant facts are not before me or there are material facts in dispute pending findings. In essence, I come to the view that the question is not suitable for determination without a trial.

31.  Having made the above ruling, I shall refrain from making rulings on the reasonableness of clause 11 and on the question of severance (severing clause 11 from the Appointment Letter for being unreasonable), those are the matters for trial.

G. CONCLUSION

32.  For the above reasons, I decline to determine the question under O.14A. Accordingly, I dismiss the Defendant’s summons. Cost of and occasioned by this summons be to the Plaintiff with certificate for counsel. I shall then consider summary assessment of costs.

33.  Upon hearing counsel for the parties, on the question of summary assessment of costs, I make the following directions:-

(1)  Parties do seek to agree to the amount of costs within 14 days from the date hereof, in default of any agreement, the Plaintiff is directed to file and serve the statement of costs within 7 days thereafter and the Defendant do file and serve the grounds of objections within 7 days thereafter;

(2)  Parties do fix date for hearing the summary assessment of costs with an estimation of the length of 30 minutes.

(3)  Liberty to apply.

34.  Finally, I am indebted to both Mr. Yuen SC and Mr. Lee for their thorough research and able assistance that not only expedite this hearing, they also widen my horizon on the law of the restraint of trade.