YUEN CHING YUEN v. UNION INSURANCE SOCIETY OF HONG KONG LTD

1995, No. A13520

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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The Plaintiff's case

1. The Plaintiff was a former employee of the Defendant. The Defendant was and still is an insurance underwriter. In 1983, the Plaintiff joined the Defendant as its Superintendent of Administration and Personnel. His duty in the Defendant was to oversee its daily administration and was responsible for the running of its office. His duty did not involve the insurance aspect of the operation of the Defendant.

2. The Plaintiff was acquainted with senior officials of the Chekiang First Bank Limited ("the Bank"). He learnt from them that the Bank did not have an insurance department. If its customers were required to take up insurance policies, then each branch of the Bank would simply refer them to different insurance companies. The Plaintiff conceived the idea of referring the Bank to the Defendant and to help the Bank to set up an insurance department so that it could refer its insurance business to the Defendant.

3. At about the beginning of the second year of the Plaintiff's employment, he suggested to his supervisor, Mr Steven Lau ("Mr Lau") that he could introduce client to the Defendant provided that he would be appropriately remunerated. Mr Lau was then the senior manager of the Defendant. He later became the Assistant General Manager and is now the General Manager. Mr Lau welcomed the suggestion and assured him that his interest would be looked after if he was successful in introducing business to the Defendant. The Plaintiff then got in touch with the senior officers of the Bank and promoted the idea of setting up an insurance department for the Bank. They were receptive. The Plaintiff then introduced the Bank's officers to the Defendant.

4. With the assistance of the Defendant, which included the training of the Bank's officers, the Bank set up an insurance department. This department became the agent of the Defendant. It directed the Bank's customers to take out insurance policies with the Defendant. In return the Defendant paid the Bank agency commission.

5. As the Plaintiff had successfully procured and introduced the Bank to the Defendant, he believed that he should be remunerated for his effort. Thus, at about the beginning of 1986, he discussed with Mr Lau and it was then orally agreed between him and Mr Lau on behalf of the Defendant that the Defendant would give him a 5% allowance on the net premium (i.e. gross premium less return premium less agency commission) on every policy introduced by the Bank to the Defendant starting from 1st January 1985. Mr Lau told the Plaintiff that he would use the term "overriding expense allowance" ("the allowance") to describe his remuneration.

6. The Plaintiff received a memorandum dated 16th January 1986 ("the Memorandum") from Mr Lau which contained the terms of the agreement on the allowance ("the Agreement"). It stated that:

" Chekiang First Bank Ltd.

I refer to our recent conversation regarding the payment of an 'overriding expense allowance' to you for your introduction and servicing of the above agent and am pleased to advise that the General Manager has agreed to allow you a 5% allowance on net premium written (i.e. Gross Premium less return premium less agency commission) as from 1st January 1985.

I hope you shall maintain a close contact with them and keep me advised of any unusual developments"

By the time the Agreement was reached, the Plaintiff no longer needed to serve the Bank as the Bank had already become an agent of the Defendant.

7. At first, the allowance the Plaintiff received was calculated at 5% on the net premium. Later, when the business referred from the Bank grew, he asked Mr Lau for an increase. It was then agreed that the allowance was to be increased to 7.5% on the net premium of fire insurance policies. The Plaintiff also agreed that the Defendant could in future, if it found necessary, revise the percentage of allowance on fire insurance back to 5%. Later in about October 1987, the allowance on fire insurance business was reduced back to 5%. The net premium payable on marine, motor and employee insurance remained as 5%. This was evidenced by a memorandum dated 14th October 1987 from Mr Lau to the Accountant of the Defendant and copied to the Plaintiff.

8. The Plaintiff maintained his social contact with the officers of the Bank. On appropriate social occasions he urged them to introduce more business to the Defendant so that he could earn more commission. He did that on his own initiative and not as requested by the Defendant.

9. In March 1988, the Plaintiff left the Defendant's employment but continued to receive the allowance from the Defendant. The Plaintiff and his family migrated to Canada at the end of July 1992. In March 1992, shortly before he left Hong Kong for Canada, he had a meeting with Mr Lau who told him that the Defendant had to increase the commission payable to the Bank, and suggested that the Defendant would reduce the allowance on fire insurance from 5% to 2.5% on the net premium. The Plaintiff strenuously objected saying that the business introduced by the Bank to the Defendant had grown over the years and the Defendant could not vary the Agreement without his consent. He then left the meeting in a rage. As he was busy with the move to Canada, he did not pay any further attention to the matter.

10. He continued to receive the allowance from the Defendant for the following years:

1st April 1992 to 31st March 1993, $121,832.

1st April 1993 to 31st March 1994, $94,597.

1st April 1994 to 31st March 1995, $21,098.

14. In about October 1994, Leo Ma, who was a subordinate of Mr Lau, informed the Plaintiff that the Defendant would no longer perform the Agreement unless he could secure a letter from the Bank confirming its agreement to the payment of the allowance. The Plaintiff approached the Bank for the letter. The Bank refused and told him that the payment of allowance was a matter between him and the Defendant and had nothing to do with the Bank. The Plaintiff related the Bank's response to Leo Ma and told him that the Defendant should approach the Bank for the letter if the Defendant really wanted it.

15. The Plaintiff then received a letter dated 26th October 1994 from the Defendant saying that the Defendant could no longer afford to pay him the allowance and instead would pay him an entertainment fee of HK$50,000 annually effective from 1st July 1994. The entertainment fee would be payable by two equal instalments in arrears on the 31st December 1994 and 30th June 1996. The Plaintiff told Leo Ma that he would not accept the substitution of the allowance by the proposed entertainment fee. In any event, the Plaintiff had not received any entertainment fee. Then sometime in 1995 he received from the Defendant a sum of HK$21,098. He also received from the Defendant a Statement of Commission and Brokerage Payment to Brokers for period from 1st April 1994 to 31st March 1995. He did not know whether this sum covered the allowance.

16. When the Plaintiff returned to Hong Kong in mid-1995, he instructed his solicitor to inform the Defendant by a letter dated 11th July 1995 that his stance was to reject the substitution of the allowance by the proposed entertainment fee. There was no response from the Defendant. The solicitor then sent another letter dated 29th November 1995 to the Defendant. The Defendant responded by a letter dated 9th December 1995 stating, inter alia, that it would withdraw the offer of the entertainment fee and that the Bank was unwilling to authorize any further allowance payable to the Plaintiff.

The Defendant's case

17. Mr Lau agreed that sometime in 1983 the Plaintiff introduced the Bank to the Defendant. As the Plaintiff was not a professional insurance agent and his job did not include insurance servicing, no commission or allowance was paid to him at that time for bringing in the Bank. However, upon the Plaintiff's request, the Defendant agreed to reconsider the question of commission or allowance when the time come for a review of the volume of insurance business introduced by the Bank.

18. The size of business brought in by the Bank grew gradually and the question of commission or allowance was reconsidered in about late 1985 when the Plaintiff approached him and asked for an allowance. As the Plaintiff managed to show that he had incurred some expenses in entertaining the staff of the Bank, Mr Lau agreed to bring his request to the attention of Mr M.C. Burrell, the then General Manager of the Defendant who had the authority to agree an allowance. By a memorandum dated 15th January 1986, Mr Lau was informed by Mr Burrell that the management of the Defendant had agreed to pay an overriding expenses allowance to the Plaintiff. The amount payable was for the time being fixed at 5% of the net premium, subject to review from time to time as necessity arose.

19. By the Memorandum, notice was given to the Plaintiff of Mr Burrell's agreement to pay him the allowance. The Plaintiff knew very well that the payment of the allowance was purely a matter of discretion and that the amount payable was subject to change from time to time without notice. Mr Lau said that it was also clear from the wordings of the Memorandum that the allowance was paid in appreciation of the Plaintiff's past and continuing service to the Bank and it was only payable so long as the Plaintiff remained in the employ of the Defendant and continued to serve the Bank.

20. Mr Lau agreed that the allowance for fire insurance business was once increased from 5% to 7.5% in February 1987, but otherwise the situation remained the same until March 1988 when the Plaintiff left the Defendant and started his own China trade business. Mr Lau said that although the Plaintiff was strictly speaking not entitled to any more allowance upon leaving the Defendant, in view of his past service and the fact that he still had some contact with the Bank, the Defendant on a wholly discretionary basis continued to pay him an allowance at the rate of 5%.

21. In early 1992, the insurance market became more competitive and there were formal requests from the Bank for an increase of commission payment. Since the total amount payable to the Bank and the Defendant was fixed in advance, paying more to the Bank would lead to a corresponding decrease in the amount payable to the Plaintiff. After consideration, Mr Lau finally decided to reduce the allowance payable to the Plaintiff from 5% to 2.5% with effect from March 1992. He then orally informed the Plaintiff of his decision. The Plaintiff was not too happy with the reduction but he continued to receive payments at the reduced rate without complaint.

22. In about April 1994, in view of the fact that the Plaintiff was not providing any service to the Bank, the Defendant decided to stop making any pro rata payment to the Plaintiff. By a letter dated 26th October 1994, the Plaintiff was informed that, with effect from 1st July 1994, his usual allowance would be replaced by an annual entertainment fee of HK$50,000.

23. The sum of HK$21,095.87 paid to the Plaintiff during the period from August 1994 to March 1995 is particularised as follows:-

To comply with requirements of the insurance industry, the Plaintiff became a registered insurance agent sometime in mid 1994 in order for him to receive commission of some other insurance business he brought to the Defendant. The four commission payments were paid to the Plaintiff on that basis and they were not related to the Plaintiff's claim.

Plaintiff's entitlement to commission

24. The Plaintiff's case is that his entitlement to a 5% commission on the net premium received by the Defendant is perpetual. The only qualification is for the Defendant to continue to receive premium from business referred to it by the Bank. However, for the purpose of this case, the Plaintiff is prepared to calculate his entitlement up to his death and not beyond.

25. Mr Shieh, Counsel for the Defendant, argued that the factual matrix and the wording of the Memorandum made it clear that the Defendant's liability was to cease upon termination of the Plaintiff's employment. No issue was taken on the percentage of the allowance payable.

Case Law

26. It is important to bear in mind that many of the decisions in this area turned on the particular form of words used by the parties.

27. In Wilson v. Harper [1908] 2 Ch.370 Neville J. held:

"'So long as we do business with them you place on our books.' I think that shews quite clearly that the commission was not only in respect of orders given through the agent - if you like to call him so, as in one of the cases that has been cited to me - but that there was a commission of 5 per cent. to be paid as the price of an introduction of all business done by the firm with the customers introduced."

Further at 372, Neville J. stated:

"The defendants agreed with W. to pay him 5 per cent. commission on all accounts introduced by him so long as they did business with the persons he placed on their books. It was held that the commission on accounts introduced by W. continued to be payable to his executors after his death so long as the defendants continued to do business with the persons introduced by him.

Now it seems to me quite impossible to say that you are to read in business documents of this kind an implied limitation that no remuneration is to be paid to the executors of one of the contracting parties; because if you read 'you' as meaning 'you, and not your representatives after your death,' the result would be that earned commission, that is, commission in respect of orders already executed, would not be payable because there is nobody to receive; the man is dead and you are not bound to pay his executors."

28. In Marshall v. Glanville and Anr [1917] 2 KB 87, it was stated in the contract that:

"All accounts opened by Mr Marshall on the above grounds shall be retained by him for such time as he continues to represent Messrs. Cameron Banks (i.e. the Defendant)."

McCardie J. at p.92 stated that:

"Prima facie the liability to pay commission in cases of this kind ceases as to future trade with the cessation of the employment in the absence of a reasonably clear intention to the contrary."

He further held that:

"There was no expression of an intention that the Plaintiff shall retain a right to commission on trade done by the Defendant after his employment had ceased, but rather an indication to the contrary."

In Levy v. Goldhill [1917] 2 Ch.297, the Plaintiff in the course of travelling for his own business obtained orders for other traders on terms of commission. The defendant agreed with the plaintiff as follows: "I agree to pay you half profits on receipt of orders (provided the customer is good). Same applies to repeats on any accounts introduced by you." The defendant subsequently terminated the relation constituted by the agreement without giving any notice. It was held that notwithstanding the termination of the relation, the plaintiff was entitled to commission on orders whenever received if they came from customers introduced by the plaintiff. Peterson J. referred to the case of Bilbee v. Hasse & Co. 5 Times Law Report 677 and Times Newspaper January 16th, 1890 in which Bowen L.J. held:

"'The measure of his' - that is the plaintiff's - payment was to be calculated not by the work done by him, but by the fruits of that work, and those fruits might very well accrue to the defendant after the determination of the agency."

Entitlement dependant on employment

29. The Plaintiff's evidence is that at the beginning of 1996, it was orally agreed between him and Mr Lau that the Defendant would give him a 5% allowance on net premium on every policy introduced by the Bank to the Defendant from 1st January 1985. The Re-Re-Amended Statement of Claim pleaded that the agreement was evidenced by the Memorandum. The Memorandum did not simply state that the payment of allowance was based on every policy introduced by the Bank to the Defendant. It referred to the discussion on the payment for the introduction and servicing of the Bank. It has not been argued that the Memorandum was inaccurate in this regard. In the circumstances, one must look at the Memorandum to ascertain the agreement of the parties on the duration of the allowance.

30. The issue is one of construction of the terms of the Memorandum. One is not entitled to look at the earlier memorandum of 15th January 1986 in construing the agreement of the parties. That document was not disclosed to the Plaintiff. In my view, one should not construe the Memorandum simply by reference to the following words: "The General Manger has agreed to allow you a 5% allowance on net premium written (i.e. gross premium less return premium less agency commission) as from 1st January 1985." On their own, they may suggest that the entitlement was not subject to any limitation on duration and would continue even if the Plaintiff had left the employment of the Defendant. One should also regard that the discussion for payment was in respect of "your (i.e. the Plaintiff's) introduction and servicing of the above agent (i.e. the Bank)". Although the Plaintiff had by then already introduced the Bank to the Defendant, his entitlement to the allowance would depend on him servicing the Bank. This is not confined to the past service but a continuing service. The word used is "servicing". This requirement can be gathered from the concluding part of the Memorandum which stated that: "I hope you shall maintain a close contact with them and keep me advised of any unusual development". The use of the word "hope" would not diminish the obligation of the Plaintiff. In my view the service could only be performed so long as the Plaintiff remained an employee of the Defendant. Although the Plaintiff was not involved in the insurance operation of the Defendant, it was by reason of his employment with the Defendant that he was able to secure the Bank as its agent.

31. Mr Lau stated that insurance servicing includes explaining the different types of insurance products to the client, issuing insurance policies as quickly as possible, socialising and familarising with the client so that more business could be generated. The Plaintiff was clearly not required to provide any technical insurance service to the Bank. However, he must nonetheless service the Bank in terms of socialising and maintaining contacts with its officers as an employee of the Defendant. The allowance was not perpetual in nature. It ceased upon the Plaintiff leaving the employment of the Defendant.

Subsequent conducts

32. The Plaintiff relied on the subsequent conducts of the Defendant to show that the only inevitable conclusion is that it had agreed to pay the allowance even after the termination of the Plaintiff's employment. Mr Li, Counsel for the Plaintiff, argued that the Plaintiff had received the allowance for a period of six years. There had been payment of the allowance from 1988 when the Plaintiff left the Defendant's employment to April 1994. The total sum paid during this period was about $600,000. Further, the Defendant had chosen to discuss the question of reducing the percentage of the allowance on fire insurance policies after the Plaintiff had already left the Defendant's employment. He submitted that it was unreal to suggest that the Defendant would handle the matter in this way oblivious of its original intention that no allowance was payable to the Plaintiff after he had left its employment.

33. The decisions of Schuler v. Wickman [1974] AC 235 and James Miller v. Whitworth Street Estates [1970] AC 572 clearly showed that it is not permissible to use as an aid in the construction of the contract anything which the parties said or did after it was made. Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later, per Lord Reid in James Miller at page 603. Mr Li relied on a passage in Chitty on Contracts, 27th Ed, Vol.1, para.12-111 in which it was stated that:

"...although they (i.e. the subsequent conducts) are admissible to show whether there was a contract and what the terms of the contract were, either originally or by variation, or as the basis for an estoppel."

34. I would deal with the question of estoppel later on. However, it is not in dispute that an agreement existed between the parties and no variation of contract is alleged . It is difficult to understand what the authors of Chitty are referring to when they say that subsequent acts can be looked at to ascertain the original terms of the contract. This approach is clearly not in accordance with the decisions of the House of Lords. It is not necessary for me to rule on the argument advanced by Mr Shieh, Counsel for the Defendant, that one is only allowed to look at subsequent conducts to ascertain the original terms of a contract where there is a dispute of evidence as to what the original express terms are.

35. Mr Li further relied on a passage in Lewison on the Interpretation of Contracts, 2nd Ed, para.2.11 in which it was stated that:

"The court may not look at the subsequent conduct of the parties to interpret a written agreement. However, where the agreement is partly written and partly oral, subsequent conduct may be examined for the purpose of determining what were the full terms of the contract."

Mr Li argued that the Plaintiff's pleaded case is that the agreement was evidenced by the Memorandum (para.3 of the Re-Re-Amended Statement of Claim). The Defence pleaded that the agreement was made partly orally and partly in writing. That being the case, the Court is entitled to examine the cause of dealings between the parties.

36. I do not accept this argument. Despite the pleadings, the Defendant had not relied on any oral terms made between the parties. The Plaintiff did not dispute that the Memorandum contained all the terms of the agreement reached between the parties. This being the case there was no room for departure from the principle stated by the House of Lords.

Estoppel

37. The Plaintiff pleaded that he had been paid the allowance under the Agreement from the time he left the employment of the Defendant to 31st March 1994 and the Defendant was estopped from asserting that the allowance was not payable to him after he had left the employ of the Defendant.

38. Counsel agreed that the only relevant estoppel is that of estoppel by convention. For an estoppel by convention to apply, the following conditions have to be satisfied :

(1) There must be a common mistaken assumption by both parties as to the existence of a state of affairs or as to the construction of a document.

(2) The mistaken assumption must have been communicated to each other.

(3) Both parties must have conducted themselves on the basis of such a mistake.

(4) It would be unjust to allow one party to go back on that assumption.

(5) Once an understanding is shown to be a mistaken one, the estoppel would not apply to future dealings between the parties.

The Vistafjord [1998] 2 Lloyd's Rep 343 at 349 column 2 to 352 column 2, per Bingham LJ and Chitty para.3-080 to 3-084.

39. I agree with Mr Shieh's submission that in this case the conditions have not been fulfilled because :

(1) There was no common mistaken assumption by both parties. The Plaintiff may well be under a mistaken assumption that he was entitled to be paid for life. However, the Defendant was not under such a mistaken impression. I accept Mr Lau's evidence that when the Plaintiff left the employment in 1988, the question of the need to continue to pay him the allowance was simply not considered. And later on, in the 1990s, the Defendant did not stop the allowance because it took into account the fact that it was due to the efforts of the Plaintiff that the Bank became its client. In my view, the continuous payment of the allowance was in gratitude to the efforts of the Plaintiff rather than under a mistaken assumption that the Plaintiff is entitled to payment for life.

(2) There was no communication of the mistaken assumption. All that the Plaintiff can show is mere payment and receipt of money which is inadequate for this purpose.

(3) Even if there was a common mistaken assumption, only the Defendant could be said to have acted on the mistake. There is no evidence that the Plaintiff had so acted. The mere receipt of money cannot support an estoppel.

(4) There is nothing unjust in depriving the Plaintiff of the payment. This is not a case where the Plaintiff had conducted himself or done things in a way that he otherwise would not have done.

(5) Once the assumption is revealed to be mistaken, the estoppel would not apply to future conduct. The estoppel would not entitle the Plaintiff to obtain perpetual payment.

Description of the allowance

40. In my view, no useful purpose is achieved by looking at the description of the payment in determining whether the Plaintiff is still entitled to the payment after he had ceased to be an employee of the Defendant. The Defendant did not offer any explanation why it chose to use the words "overriding expenses allowance". It is obviously not simply an reimbursement to the Plaintiff of the expenses he had incurred in socialising with the senior staff of the Bank. It involved a calculation of the premium received and commissions paid to the Bank.

Consideration

41. Paragraph 3 of the Statement of Claim pleaded that: "...in consideration of the Plaintiff introducing (the Bank)... the Defendant agreed to give the Plaintiff a 5% allowance...."

42. The Defendant argued that the Plaintiff's case as pleaded was bad in law because it was only supported by past consideration which was inadequate to support an enforceable promise: Chitty on Contracts (27th Ed) (Vol 1) Para 3-022 - 3-026. The Defendant argued that at the time of the Memorandum, the Plaintiff had already introduced the Bank to the Defendant. Further the Plaintiff's entitlement to future payment is unsupported by any act performed by the Plaintiff or by any promise by the Plaintiff to do any act after the Memorandum.

43. I agreed with Mr Li that the Defendant is not entitled to raise this defence as it is not pleaded. The defence of past consideration is not merely a matter of law which, as the Rules provide, may be, but not must be, pleaded. The question of consideration is based on facts. If this defence is pleaded, the Plaintiff might well adduce evidence in that regard. Mr Shieh stated that he would not seek to amend the Defence if it is a matter that needed to be pleaded.

Compensation

44. If I am wrong on the interpretation of the Memorandum, then the question of compensation and assessment will arise. I will set out my views on this issue.

45. The Plaintiff is seeking an order of account and inquiry and specific performance of the Agreement; alternatively compensation. The claim for specific performance of the Agreement is analogous to a claim of declaration that the Plaintiff is entitled to commissions in the future. It is clear from the authorities that such a declaratory relief is not appropriate. The right remedy is compensation in a money sum: Roberts v. Elwells Engineerings [1972] 2 QB 586 per Lord Denning M.R. approving Levy v. Goldhill. In that case, Paterson J. stated that:

"There has been a repudiation by the defendant of his obligation to pay in respect of repeat orders; accordingly there has been a breach of the contract, and, as was held by Mathew J., damages can be obtained for the breach of the contract."

He followed the approach of Mathew J. in Faulkner v. Cooper & Co. 4 Com. Cas. 213, 215 in which the measure of damages was stated in the following terms:

"I have to consider what amount of commission would have been earned by the plaintiff if the relations between him and the defendant company had not been broken off, and in arriving at a conclusion upon that point, I must take into account the chances of human life, the vicissitudes of trade, the probability of the plaintiff's customers ceasing to deal with the defendant company, and various other considerations."

Peterson J. further held that:

"What has to be ascertained is the present value of the probability or the possibility of the defendant receiving orders in the future from customers who were introduced by the plaintiff before the relations between him and the defendant were terminated."

Assessment of damages

46. Mr Shieh argued that as the Plaintiff has not proved his damages, he is only entitled to nominal damage. He relied on Born Chief Co. (trading as Beijing Restaurant) v. George Tsai and another [1996] 2 HKLR 188 in which the Court of Appeal held in that in the absence of an order for a separate trial on liability and damages, the Court should not direct an inquiry as to damages by the master at the conclusion of the trial and should award nominal damages to the Plaintiff in the absence of evidence adduced on damages.

47. This is not a case where damages can be quantified by the Plaintiff without an inquiry of damages. The Defendant expressly denied in the Defence that it has any duty to render any account. The calculation of damages will depend on the accounts to be produced by the Defendant. It makes sense in this case for the issue of liability to be determined first before accounts are furnished by the Defendant.

48. In the event that my finding is wrong then the issue of compensation has to be assessed by the master in accordance with the principle I have referred to.

Conclusion

49. The Plaintiff's case is dismissed with costs nisi to the Defendant.