JEREMY PAUL EGERTON HOBBINS v. ROYAL SKANDIA LIFE ASSURANCE LTD AND ANOTHER

HCCL 15/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 15 OF 2010

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.  Clearwater is an insurance broker.  Mr. Hobbins was Clearwater’s client.  Acting as Mr. Hobbins’ agent, Clearwater arranged for Mr. Hobbins to purchase Investment Linked Assurance Scheme (ILAS) products from Skandia and other insurers. 

2.  On numerous occasions Clearwater made it known to Mr. Hobbins that he would not be paying anything for Clearwater’s services or investment advice.  Instead, from the outset of their relationship, Clearwater disclosed to Mr. Hobbins that it made money from commissions and fees paid by insurers (such as Skandia) whose ILAS products were purchased by Mr. Hobbins.

3.  The several ILAS products which Mr. Hobbins entered into with Skandia and other insurers did not perform as well as Mr. Hobbins had envisaged.  He now seeks to set aside those investment schemes and to be restored as much as possible to the position he was in immediately before entering into the same. 

4.  Mr. Hobbins says that he is entitled to restitution because, although Clearwater indisputably disclosed that it would be earning commission from insurers, Clearwater never informed Mr. Hobbins precisely how much commission it would be earning on each ILAS product purchased. 

5.  Accordingly, it is alleged that Clearwater breached the fiduciary obligations which it owed as Mr. Hobbins’ agent.  Further, it is said that the client agreements by which Mr. Hobbins engaged Clearwater’s services as well as the contracts by which Mr. Hobbins bought ILAS products were either contrary to s.9 of the Prevention of Bribery Ordinance (Cap.201) (PBO) or tainted by an underlying fraudulent misrepresentation.  The essential allegation is that, in recommending ILAS products, Clearwater was not acting in Mr. Hobbins’ best interests but acting solely so that Clearwater could profit from commission and fees paid by Skandia and other insurers.  

6.  The contracts being unenforceable and void for illegality or misrepresentation, all monies and other assets handed to Clearwater or Skandia pursuant to the same were transferred (the argument goes) without basis.  All such monies and assets should in consequence be restored to Mr. Hobbins.  Further, Mr. Hobbins asks for an order that Clearwater account to him for (and disgorge) the commissions and fees which it earned from insurers for transacting business on Mr. Hobbins’ behalf.

7.  That is the nub of this case.  The main issue is whether, as a matter of law, an insurance broker is obliged to disclose how much commission one earns on any particular transaction brokered for a client. In this Judgment, I focus on that question.  But in so doing I shall also deal with the subsidiary complaints levied by Mr. Hobbins against Clearwater and Skandia.

II.      BACKGROUND

8.  Mr. Hobbins is an extremely successful businessman.  He holds a senior position within the Li & Fung Group.  He was a director of Trinity Ltd. (a subsidiary within Li & Fung’s retailing business) both before and after Trinity was listed on the Stock Exchange in November 2009.  He has been a non-executive director of Integrated Distribution Services Group Ltd. (IDS), a listed subsidiary within the Li & Fung Group’s distribution business.  IDS has more recently been privatised and re-acquired by the Li & Fung Group. Within the Asia Pacific region, Mr. Hobbins has been a director of some 50 companies, most associated with the Li & Fung Group.

9.  Between August 2003 and July 2005 Clearwater entered into standard form broker agreements with various international insurance companies.  Those included Skandia, Zurich, Generali and Aviva. These agreements expressly stated that, although Clearwater would be paid a percentage or commission for business introduced to the insurance companies, Clearwater was not being appointed (and should not hold itself out) as their agent.

10.  Prior to July 2005 Mr. Hobbins’ financial advisors had been Towry Law and then TTG Wealth Management.  Under Towry Law, Mr. Hobbins had invested in what turned out to be high risk funds (managed by Global Diversified Trading Ltd. and Global Opportunities Trading Ltd.) intended for experienced investors.  In evidence, Mr. Hobbins stated that, when entering into those investments, he had not known (nor been made aware) that they involved high risk.

11.  As at July 2005, under TTG, Mr. Hobbins’ portfolio included loans of approximately $17.6 million (mostly mortgages), two ILAS products with Scottish Mutual and Friends Provident (assigned to banks to pay down mortgages on Mr. Hobbins’ UK properties) and a Collective Investment Bond (CIB) taken out with Skandia.

12.  Mr. Hobbins had been dissatisfied with the services rendered by both Towry Law and TTG.

13.  In July 2005 Mr. Hobbins first met Mr. Keating of Clearwater.  They had further meetings in the following months when they discussed Mr. Hobbins’ financial affairs, investment objectives and Clearwater’s services.  At one of these meetings, an Investment Risk Profiler Questionnaire was filled out.  This was updated in February 2006.

14.  On 23 September 2005 Mr. Hobbins withdrew US$650,000 from the CIB.

15.  On 7 October 2005 Clearwater presented an initial report to Mr. Hobbins.  That explained that Clearwater would be remunerated by commissions paid by the parties with whom Clearwater placed orders on Mr. Hobbins’ behalf.  Otherwise, Mr. Hobbins would not be charged for Clearwater’s services.

16.  In December 2005 Mr. Hobbins appointed Clearwater as his independent financial adviser (IFA).  He signed a Client Needs Analysis Questionnaire.  He also signed a client agreement with Clearwater covering two ILAS products: a Zurich Vista and a Skandia Managed Capital Account (MCA) Policy.  The client agreements acknowledged that the products had been explained to Mr. Hobbins and that Clearwater would be paid commission by Zurich and Skandia as a result of Mr. Hobbins’ having purchased the products.

17.  Accordingly, application was made for the Zurich Vista for the purpose of restructuring mortgages for two of Mr. Hobbins’ UK properties (one at Onslow Square, the other at Wentworth Gate). Application was also made for the MCA Policy with the objective of implementing a regular monthly saving plan for Mr. Hobbins’ retirement. The monthly payments for the MCA Policy were supposed to come from Mr. Hobbins’ salary.

18.  Brochures, policy schedules and conditions for the two products were provided to Mr. Hobbins.  Mr. Hobbins signed the applications forms issued by Skandia and Zurich for their respective products.

19.  The Zurich Vista was incepted on 9 Jan 2006 and the MCA Policy on 10 March 2006.  Commission was paid by Zurich and Skandia to Clearwater accordingly.

20.  In May 2006 Mr. Hobbins missed a monthly payment into the MCA Policy.  Mr. Hobbins instructed that the installment of £10,000 be paid from the CIB instead.

21.  In May 2006 Mr. Hobbins told Mr. Keating that he was interested in purchasing land in Bali.  Mr. Hobbins now denies this.  But it was apparent when Mr. Hobbins was giving evidence at trial that his recollection of events (especially their chronology) was hazy.  Here, therefore, I accept the evidence of Mr. Keating’s contemporaneous note as more reliable.  Mr. Barrie Barlow SC (appearing for Mr. Hobbins) suggested that the reference to Bali in Mr. Keating’s note was a recent fabrication, fraudulently added by Mr. Keating for the purposes of these proceedings to lend credence to his testimony.  But I find this suggestion far-fetched.  It is unsupported by any evidence apart from Mr. Barlow’s assertion. 

22.  It may have been that in May 2006 Mr. Hobbins had no particular property in Bali in mind. He may merely have been thinking of purchasing property there and was giving Mr. Keating an indication of this thinking so that Clearwater could assist Mr. Hobbins in raising the necessary funds as and when the intention became more concrete.  But that does not mean that Mr. Hobbins did not raise the possibility of buying a Bali property at the time.      

23.  In July 2006 Mr. Hobbins decided to fund monthly payments into the MCA Policy from the CIB.  Mr. Hobbins confirmed this instruction in writing.  This was contrary to Mr. Keating’s advice as payment from the CIB would mean that Mr. Hobbins was not engaging in regular saving, thereby defeating the rationale for entering into the MCA Policy.  Indeed, the result of Mr. Hobbins’ instruction was that a sum paid into the MCA Policy would potentially be subject to two management charges, once when injected into the CIB and again when transferred into the MCA Policy from the CIB.

24.  The Zurich Vista having done relatively well, in September 2006, Mr. Hobbins decided to increase his monthly contribution to the product from $20,000 to $30,000.

25.  At about the same time, Mr. Hobbins applied to Skandia for an Executive Investment Bond (EIB).  Mr. Keating suggested this in response to Mr. Hobbins having indicated a desire to create a family trust.  In contrast to the CIB (into which only cash could be injected), the EIB permitted the injection of cash and other assets (including shares).  The idea was that the trust, insofar as eventually formed, could hold the EIB (including any shares therein) as trust assets.

26.  Mr. Hobbins now denies having made up his mind at this point about creating a family trust.  Nonetheless, it seems to me given the vagueness of Mr. Hobbins’ memory that on this point Mr. Keating’s recollection (aided by his contemporaneous notes) is the more reliable.  Here I accept Mr. Keating’s evidence.

27.  Mr. Hobbins signed a client agreement with Clearwater in relation to the EIB.  That explained that Clearwater would be remunerated via commission paid by Skandia for the introduction of Mr. Hobbins as purchaser of a Skandia EIB.  Mr. Hobbins signed the application and Know Your Client (KYC) forms in relation to the EIB.

28.  The EIB was incepted on 29 September 2006.

29.  In January 2007 Mr. Hobbins applied for another ILAS product, the Generali Vision.  This was the result of Mr. Hobbins having told Mr. Keating of his intention to purchase a property for his step‑daughter. The Generali Vision functions like the Zurich Vista.  It can be assigned to a bank to pay-off a mortgage in whole or part.  Mr. Hobbins signed application forms and a questionnaire in connection with the Generali Vision.  Mr. Keating believes (and I accept) that Mr. Hobbins entered into a client agreement in relation to the Generali Vision with Clearwater.  However, no copy of that client agreement can now be found.

30.  On 22 January 2007 the Generali Vision was incepted.  Generali paid commission to Clearwater for introducing Mr. Hobbins’ business.

31.  On 28 January 2007 Mr. Hobbins discussed his plan to purchase a beachfront property in Bali.  There is a contemporaneous note to that effect by Mr. Keating.  Mr. Hobbins disputes the authenticity of the note.  But I accept the note as accurate.  Again, Mr. Hobbins may not yet have had a clear idea precisely what beachfront property he was going to buy. But he in all likelihood intimated to Mr. Keating that he was thinking of buying a beachfront property in Bali.

32.  On 9 February 2007 about $17 million was injected into the EIB.  The funds were the proceeds from the sale of some of Mr. Hobbins’ IDS shares.

33.  On 17 February 2007 Mr. Hobbins applied for the 1st Aviva With Profit Bond (WPB), an ILAS product.  The purpose was to serve as a long-term pension product for Mr. Hobbins’ retirement.  The Aviva WPB would also diversify Mr. Hobbins’ portfolio in the sense that it was capital protected (albeit subject to reduction for early surrender).

34.  In April 2007, against Mr. Keating’s advice, the CIB having insufficient funds, Mr. Hobbins decided to pay the MCA Policy from the EIB.  A further C$102,000 was injected into the EIB.

35.  On 9 May 2007 the 1st Aviva WPB was incepted. 

36.  On 1 May 2007 Mr. Hobbins informed Mr. Keating that he wished to use a forthcoming allotment of IDS shares to leverage funds.

37.  On 13 June 2007 Mr. Hobbins increased his monthly contribution to the Zurich Vista from $30,000 to $50,000.

38.  On 18 July 2007 Mr. Hobbins applied for a 2nd Aviva WPB on the basis of the good performance of the 1st Aviva WPB.

39.  On the following day, on Mr. Hobbins’ instruction, the CIB was surrendered.  The CIB’s surrender value was US$51,881.30.  The cost of early surrender was US$18,150.90.

40.  On 27 July 2007 the 2nd Aviva WPB was incepted.

41.  On 9 October 2007 Mr. Hobbins increased his yearly contribution to the Generali Vision from £20,980.46 to £30,000.

42.  In October 2007 Mr. Hobbins received an allotment of 5 million IDS shares, then worth $30 per share.  The shares were held in the name of Martinville (a BVI Company), as Mr. Hobbins’ nominee.  Mr. Hobbins instructed Mr. Keating to inject some of the IDS shares into the EIB.  The balance of the IDS shares were deposited with Coutts as custodian. 

43.  Mr. Hobbins told Mr. Keating that he wished to borrow against the shares injected into the EIB for the purpose of buying pre-IPO shares in Trinity and a Bali property.  Mr. Hobbins said to Mr. Keating that he wished to hold on to the IDS shares for the time being as he expected that they would increase in price. 

44.  Mr. Hobbins now says that he was never averse to selling the IDS shares.  He denies having told Mr. Keating that he categorically did not wish to sell the shares.  He also disputes Mr. Keating’s contemporaneous notes recording that Mr. Hobbins wished to leverage (raise money against) the IDS shares for the purpose of buying Trinity shares and a Bali property. 

45.  But, again I think that Mr. Keating’s notes are the more reliable indicator of what actually happened.  Again this is because Mr. Hobbins’ recollection of the actual course of events is unclear and there is nothing to support Mr. Hobbins’ bare allegation that Mr. Keating fabricated relevant notes after the event.  At trial it seemed to me that Mr. Hobbins was alleging that notes were made up not just because Mr. Hobbins could not remember whether he said or did not say what the notes recorded, but more particularly because he simply disagreed with what they recorded.

46.  On 31 October 2007 Mr. Hobbins withdrew £150,000 from the EIB and lent that amount to his brother at 7% interest. 

47.  Pursuant to Mr. Hobbin’s instructions, a Share Exchange Scheme (SES) application was made for 2.5 million IDS shares to be injected into the EIB.  That application (as well as another KYC form) was signed by Mr. Hobbins.  Further, Mr. Hobbins signed a client agreement with Clearwater in connection with the injection of the IDS shares into the EIB. 

48.  Clearwater then negotiated with Bank of Scotland (BOSI) to lend US$2 million to Mr. Hobbins against the security of the EIB. The US$2 million was to enable Mr. Hobbins to subscribe to the pre-IPO Trinity shares.

49.  The application to inject IDS shares into the EIB was sent to Skandia on 5 November 2007.  In accordance with its normal practice and the terms governing the EIB, Skandia valued the shares at US$30  million as at 9 November 2007, the date when Skandia received the shares.  Skandia confirmed the injection of the IDS shares (following their registration in Skandia’s name) into the EIB on 19 November 2007.

50.  On 22 November 2007 Coutts extended a facility of US$1 million to Mr. Hobbins.

51.  Due to delay in obtaining the US$2 million loan from BOSI, Clearwater arranged a 6 month bridging loan from Skandia.  Skandia lent the relevant amount (US$2 million) to Mr. Hobbins on 19 December 2007.  The urgency was due to the impending deadline for subscribing to the pre‑IPO Trinity shares.

52.  On 2 January 2008 Mr. Hobbins instructed Clearwater to raise a further US$1 million by 28 January for the purchase of a beachfront property in Bali.  Clearwater approached Skandia.  But Skandia was initially not prepared to lend anything more.  Nonetheless, on 15 January, US$1 million was transferred from the EIB to Mr. Hobbins’ HSBC account for the purpose of buying a Bali property.  Skandia then retrospectively agreed to treat that withdrawal as a loan of US$1 million on 30 January.

53.  On 23 January 2008, pursuant to a subscription agreement between him and certain Li & Fung entities dated 7 January 2008, Mr. Hobbins obtained 4,234,500 Trinity shares at $3.55 per share (total price about US$2 million).  The shares were registered in the name of Martinville as Mr. Hobbins’ nominee.

54.  On 13 June 2008 Mr. Hobbins applied for a 3rd Aviva WPB.  That was incepted on 25 June 2008.  As with the 1st and 2nd Aviva WPBs, Mr. Hobbins signed a Clearwater client agreement in respect of the 3rd Aviva WPB.

55.  In late 2008, due to the global financial crisis, BOSI required further security (apart from the EIB) for its loan of US$2 million.  BOSI was not prepared to take IDS shares (being a portfolio consisting of shares in only one company) as security.  In the event, BOSI accepted the 3 Aviva WPBs as additional security for the US$2 million. 

56.  In March 2009 Mr. Hobbins terminated Clearwater’s appointment as IFA.  He transferred his account to Private Capital Limited. The latter is a competitor of Clearwater’s.

III.     DISCUSSION

57.  Mr. Barlow SC has broken the core issues down to the following:-

(1)    Was Clearwater Skandia’s agent either as a matter of law or by reason of the Insurance Companies Ordinance (Cap.41) (ICO)?

(2)    Were the ILAS contracts between Mr. Hobbins and Skandia illegal by reason of the PBO or ICO?

(3)    Did Clearwater breach any fiduciary, common law or statutory duties which it owed to Mr. Hobbins?

(4)    Is Skandia liable as principal for breaches (if any) of Clearwater’s fiduciary or statutory duties owed to Mr. Hobbins?

(5)    Are the ILAS product contracts between Mr. Hobbins and Skandia void or unenforceable?

(6)    Are Skandia or Clearwater liable to account for, make restitution of, or pay damages in respect of, any wrong done to Mr. Hobbins?

58.  In this Section, I shall consider the six core issues in turn.

A.      Issue (1): Was Clearwater Skandia’s agent?

59.  An agent is someone whom a principal has vested with authority to enter into transactions with third parties on the principal’s behalf.  As a result of the authority vested by the principal on the agent, the agent has the power to affect the principal’s relations with third parties.

60.  Clearwater accepts that it acted as Mr. Hobbins’ agent. 

61.  Clearwater and Skandia, however, deny that Clearwater ever acted as Skandia’s agent.  They maintain that Clearwater was never empowered by Skandia to enter into contracts or other obligations with third parties on Skandia’s behalf. 

62.  In support of their contention, Clearwater and Skandia point out that the contract whereby Skandia agreed to pay commission to Clearwater upon any sale of Skandia ILAS products to Clearwater’s clients, expressly stipulates that Clearwater is not being appointed as Skandia’s agent. 

63.  In particular, the contract in Skandia’ standard terms provides:-

“The Intermediary [Clearwater] is not Skandia’s agent. The Intermediary will have no authority to bind Skandia in any manner whatsoever and shall make no statement, perform any act or do anything or omit to do anything which claims to bind Skandia. The Intermediary will not do or allow to be done anything which may imply that the Intermediary or any of its employees, agents or representatives are employees, agents or representatives of Skandia.”

64.  I doubt that one can be clearer than that. Plainly, Clearwater had no express or implied authority to act as Skandia’ agent.  There is no suggestion by Mr. Barlow that Clearwater had apparent authority so to act as a result of any representation by Skandia to Mr. Hobbins. 

65.  In those premises, the answer to the first issue must be “no”.

66.  Mr. Barlow, however, has sought to argue the contrary.  He contends that Clearwater was Skandia’s agent because Skandia paid commission to Clearwater in respect of Skandia ILAS products bought by Clearwater’s clients.

67.  I do not agree that the mere payment by A to B of money (whether one has referred in a relevant contract or elsewhere to such payment as “commission,” “remuneration,” “financial incentive” or otherwise) is enough at law to turn B into A’s agent.  The payment of money is just that, the payment of money.  To establish agency, it must additionally be shown that as a result of (say) the payment B has been expressly or impliedly authorised to enter into transactions on A’s behalf.

68.  Here, in the light of the contract between them, Clearwater had no express or implied authority to enter into any transaction or act in any way on Skandia’s behalf.

69.  I add, in this connection, that it has long been established at common law that insurance brokers (such as Clearwater) are acting solely as agents for an insured.  The mere fact that an insurer pays brokerage fees to a broker does not mean that the broker is undertaking to perform any obligation on behalf of the underwriter.  See, for example, Pryke v. Gibbs Hartley Cooper [1991] 1 Lloyds Rep 602 (at 614 (Waller J)).

70.  Mr. Barlow has sought to bolster his agency argument by reference to the ICO.  He refers to ICO s.2 which defines an “insurance agent” (for the purposes of the ICO) as "a person who holds himself out to advise on or arrange contracts of insurance in or from Hong Kong as an agent or subagent of one or more insurers".  He suggests that Clearwater falls within that definition.

71.  I do not see how.  There is not a shred of evidence that Clearwater at any time held itself out as giving any financial advice to Mr. Hobbins as agent of Skandia or any other insurer. 

72.  It is true that Clearwater disclosed in its various client agreements with Mr. Hobbins that it was not charging Mr. Hobbins anything for financial advice, but instead would be remunerated by way of fees “from the financial institutions with which the client’s business is placed”.  But by no stretch of the imagination can such disclosure be treated as a holding out by Clearwater that it was acting in some manner as agent for Skandia or any insurer from whom fees might be received.  On the contrary, the client agreements also stated that at all times Clearwater was acting as Mr. Hobbins’ IFA.

73.  Accordingly, I do not see how the definition of “insurance agent” in ICO s.2 helps Mr. Barlow.  Clearwater does not fall within the definition.

B.      Issue (2): Were Skandia’s contracts with Mr. Hobbins illegal?

74.  The ILAS contracts between Skandia and Mr. Hobbins are alleged to have been negotiated through Clearwater as Skandia’s agent in breach of ICO provisions relating to insurance agents.  Given my conclusion that Clearwater was not Skandia’s "insurance agent" within the definition of that term in ICO s.2, there could not have been a breach by Skandia or Clearwater of ICO provisions relating to insurance agents.

75.  It only remains then to consider whether the contracts whereby Mr. Hobbins purchased ILAS products from Skandia were illegal by reason of the PBO. 

76.  The PBO provides:-

“9. (1) An agent who, without lawful authority or reasonable excuse, solicits or accepts any advantage as an inducement to or reward for or otherwise on account of his:--

(a) doing or forbearing to do, or having done or forborne to do, any act in relation to his principal’s affairs or business; or,

(b) showing or forbearing to show, or having shown or forborne to show, favour or disfavour to any person in relation to his principal’s affairs or business,

shall be guilty of an offence.

(2) Any person who, without lawful authority or reasonable excuse, offers any advantage to any agent as an inducement to or reward for or otherwise on account of the agent’s:--

(a) doing or forbearing to do, or having done or forborne to do, any act in relation to his principal’s affairs or business; or,

(b) showing or forbearing to show, or having shown or forborne to show, favour or disfavour to any person in relation to his principal’s affairs or business,

shall be guilty of an offence.

….

(4) If an agent solicits or accepts an advantage with the permission of his principal, being permission which complies with subsection (5), neither he nor the person who offered the advantage shall be guilty of an offence under subsection (1) or (2).

(5) For the purposes of subsection (4) permission shall:--

(a) be given before the advantage is offered, solicited or accepted; or,

(b) in any case where an advantage has been offered or accepted reasonably without prior permission, be applied for and given as soon as reasonably possible after such offer or acceptance,

and for such permission to be effective for the purposes of subsection (4), the principal shall, before giving such permission, have regard to the circumstances in which it is sought.

….

19. In any proceedings for an offence under this Ordinance, it shall not be a defence to show that any such advantage as is mentioned in this Ordinance is customary in any profession, trade, vocation or calling.”

77.  Mr. Barlow’s argument is that illegality arises from the payment of fees by Skandia to Clearwater whenever Mr. Hobbins purchased a Skandia ILAS product.  Mr. Barlow submits that the payments violated PBO s.9(2), that is, Skandia without lawful authority or reasonable excuse rewarded Clearwater for introducing Mr. Hobbins (Clearwater’s principal) as a Skandia ILAS product client.

78.  I am not persuaded by the submission. 

79.  In my view, there is “lawful authority” (consisting of a long line of judicial pronouncements stretching from the 19th century to the present) for the commercial practice that an insurance broker acts as an agent of the insured and not of the insurance company.  As a result of that line of judicial pronouncements, it has long been settled at common law that commission paid to an insurance broker by an insurer does not constitute an illegal secret profit unless it is in excess of what is normally paid within the insurance market. 

80.  See Colinvaux’s Law of Insurance (9th ed.), para. 15-033 and Goo and Merkin (eds.), Insurance Law and Practice in Hong Kong (2003), para. 20-28. See also Baring v. Stanton (1876) 3 Ch D 502 (at 504-6 (James LJ), 506-7 (Mellish LJ)); Great Western Insurance Co of New York v. Cunliffe (1874) 9 LR Ch App 525 (at 535 (James LJ), 539-40 (Mellish LJ)); Lord Norreys v. Hodgson (1897) 13 TLR 421 (CA); N v. Rotterdamse Assurantiekas v. Golding Stewart Wrightson Ltd. (CA) (unrep.) (p.2 Lloyd LJ); Roberts v. Plaisted [1989] 1 Lloyds Rep 341 (CA) (at 345 (Purchas LJ)); Pryke at 614 (Waller J); Carvill America Incorporated v. Camperdown UK Ltd. [2005] 2 Lloyds Rep 457 (CA) (at 466 (Clarke LJ)); Absalom v. TCRU Ltd. [2006] 2 Lloyds Rep 129 (CA) (at 131 (Longmore LJ)).

81.  Here there is no evidence whatsoever that the commission or fees which Clearwater received from Skandia or any other insurer (Zurich, Generali, Aviva) was otherwise than that normally paid in the insurance market.       

82.  By PBO s.19 the mere fact that a practice is customary within a trade will not constitute a defence to an offence under s.9.  But in the present case there is more than just a customary practice within the insurance brokerage industry.  That is because the practice has been validated by over a century of judicial authority.

83.  Mr. Barlow observes that the common law position in England and Australia in relation to commission paid by insurers to insurance brokers has recently been overtaken by legislation.  He points, for instance, to Policy Statement 10/6: Distribution of Retail Investments published by the Financial Services Authority in the UK and the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 in Australia, both of which will come into effect in 2012. 

84.  Mr. Barlow suggests that, whatever might have been the position at English common law prior to the recent UK legislation banning payment of commissions by insurers to insurance brokers, such common law would have ceased to apply to Hong Kong with the enactment of the PBO in 1971.

85.  Mr. Barlow lays stress on the enactment of PBO s.19 in 1971.  PBO s.19 (Mr. Barlow says) did not appear in the Prevention of Corruption Ordinance (Cap.215) (PCO) which the PBO replaced.  Nor did s.19 appear in the English Prevention of Corruption Act 1906 (upon which the PCO was modeled).  With the promulgation of PBO s.19 the Hong Kong legislature (Mr. Barlow says) early on signalled an intention to ban the practice of insurers paying commission to brokers.  That intention is only now (Mr. Barlow submits) being mirrored by the UK and Australian legislation just cited.

86.  However, if the Hong Kong legislature in 1971 truly meant to overturn a commercial practice then sanctioned by nearly a century of case law, one would have expected it to have said so explicitly. One would not expect the legislature to overturn a long line of case law in a highly oblique and casual manner through the enactment of s.19. 

87.  There is no hint in Hong Kong Hansard that what Mr. Barlow suggests is what LegCo actually had in mind.  On the contrary, Hansard for 21 October 1970 (the date of the 2nd reading of the Prevention of Bribery Bill 1970) records (at p.136) that LegCo envisaged the future PBO s.9 to be “substantially the same” as the then existing PCO s.4 which it would be replacing.  The same Hansard merely recites (at p.140) the content of the future PBO s.19 without particular observation. 

88.  In summary, given that bare legislative history of the PCO and in light of the established line of judicial authority to which I have referred, I am unable to read the PCO as Mr. Barlow suggests.  I am unable to conclude that Skandia committed an illegal act under the PBO. 

89.  The practice of insurers paying commission to insurance brokers may or may not be unsound.  It ought possibly to be strictly regulated or even prohibited altogether.  I express no view on the matter. That is a question of policy best left to the legislature, not the Court, to tackle.

C.      Issue 3: Was Clearwater in breach of its fiduciary, common law or statutory duty to Mr. Hobbins?

90.  An agent is a fiduciary.  Accordingly, equity imposes on the agent the obligation to make disclosure of commission or fees earned from third parties in connection with the agent’s handling of a principal’s business. 

91.  Here, Clearwater informed Mr. Hobbins on numerous occasions that it was not charging Mr. Hobbins anything for its services.  Clearwater unequivocally stated in its client agreements in relation to each ILAS product sold to Mr Hobbins that it would be earning commission from such of Mr. Hobbins’ business as Clearwater placed with insurers (including Skandia). 

92.  As far as disclosure is concerned, the only question then is whether what Clearwater disclosed to Mr. Hobbins was sufficient to discharge its obligation as fiduciary.  Mr. Barlow contends that the disclosure was insufficient, because Clearwater did not disclose the amounts which it would be receiving from insurers (including Skandia) until asked to do so by Mr. Hobbins in 2009.

93.  In support Mr. Barlow cites a passage from the judgment of Cory J (L’Heureux-Dube, Gonthier and Iacobucci JJ concurring) in R v. Kelly (1992) 73 CCC (3d) 385.  In that case, the Supreme Court of Canada was considering whether an agent (Kelly) had breached s.426(1) of the Canadian Criminal Code.  That is in similar terms to PBO s.9.  It makes it an offence for a person “corruptly … to accept … any regard … as consideration for doing … any act relating to the affairs or business of his principal…”

94.  Kelly offered financial planning services.  He charged his clients a fee for his services.  Kelly recommended the purchase of Multi Use Residential Building (MURB) units developed by Qualico to clients. Qualico rewarded Kelly with commission for selling its MURBs. In his defence, Kelly pointed to the Offering Memoranda for the MURBs.  The Memoranda were "lengthy, somewhat complicated booklets" which contained “two one-line references to ‘Issuing and Sales Costs’ for the [MURB] projects”. According to Kelly, his clients ought to have inferred from the two references that Kelly would be receiving commission.

95.  Cory J said this (at 403-5):-

“What then is the extent of disclosure that is required of an agent? To put it another way, what degree of non-disclosure is the Crown required to provide in orde to establish the guilt of an agent under s.426? ....

Once again a consideration of the aim of s.426 may be of assistance in determining the requisite standard of disclosure. The policy motivating the prohibition of secret commissions is the protection of vulnerable principals and the preservation of the integrity of the agency relationship. A requirement that disclosure of a commission be made by the agent promotes the objective of this section. Indeed, disclosure is essential to alert the principal to the existence of conflict of interest situations. In the absence of disclosure, the principal has no way of knowing if the agent is truly acting in the principal’s best interests and cannot determine whether the advice of the agent should be accepted.

If the object of the section is to be attained, then adequate and timely disclosure must be required of the agent. A general and vague disclosure that the agent is receiving commissions will not meet the objective of this section. The agent must disclose the nature of the benefit which is being received, the amount of that benefit calculated to the best of the agent’s ability and the source of the benefit. It may not be possible for the agent to be exact as to the amount of commission which will be received. It will suffice if a reasonable effort is made to alert the principal as to the approximate amount and source of commission to be received. Obviously, the principal will be influenced by the amount of benefit the agent is receiving. The greater the benefit to the agent, the greater the agent’s conflict of interest, and commensurately the greater the risk for the principal. The disclosure must be timely in the sense that the principal must be made aware of the benefit as soon as possible. Certainly the disclosure must be made at the point when the reward may influence the agent in relation to the principal’s affairs. It is essential then that the agent clearly disclose to the principal as promptly as possible the source and amount or approximate amount of the benefit.

It is only if the disclosure is both adequate and timely that the agency relationship would be protected.  With this knowledge, the principal would then be able to determine whether, and to what extent, to rely upon the advice given by the agent.  It would be preferable if the disclosure were made in writing.”

96.  Cory J then observed that Kelly had only made a “vague and general” disclosure of the commission which he was receiving.  Although there was reference in the Memoranda to “Issuing and Sales Costs,” there was “no specific reference to the fact that it was [Kelly] who was to receive these costs as commission”.  Kelly’s appeal was thus dismissed.

97.  McLachlin J concurred with the result.  But she did not entirely agree with Cory J on the requisite extent of disclosure.  She said (at 410-11):-

“I agree with Cory J that the extent of disclosure required depends on the purpose which the disclosure requirement is intended to further. I agree with Cory J as well that ‘disclosure is essential to alert the principal to the existence of conflict of interest situations’ … It is to the avoidance of conflicts of interest and the consequent danger that the agent may not act exclusively in the best interests of his or her principals that the disclosure requirement is directed. The amount of the commission is purely secondary. A large commission might tempt one agent; a small one might suffice for another. Moreover, a requirement that the amount of the commission be disclosed poses practical difficulties of calculations, as Cory J recognizes. These are exacerbated if disclosure is to be made either simultaneously with acceptance of the commission, or, as would be practically necessary under my reasoning, in advance.

In my view, all that is required by the criminal law is that if an agent is contemplating taking a commission from a third party with respect to a transaction with his principal, then the agent must disclose the fact that he will receive the commission to the principal, specifically advising the principal of the transaction to which the commission will relate.  Such a communication will put the principal on notice that the agent is in a potential conflict of interest.  It will then be open to the principal to decline to enter the transaction, to ask for further details or amounts, or to take such other steps as he or she may choose.  The objective of the section will be achieved, and the question as to whether the agent’s conduct is criminal will not hang on arguments over whether the agent has made a ‘reasonable effort’ to state the amount of the commission to the ‘best of [his or her] ability’ ‘in all the circumstances of the particular case’.  I add that it cannot be enough to state at the beginning of a relationship that commission may from time to time be taken. The offence relates to a particular taking, and so, it follows, must disclosure.”

98.  In differing from the majority view expressed by Cory J, McLachlin J was conscious that the provisions of the Criminal Code should be construed in a way which was “clear and certain”.  Where an accused might only become aware subsequently (as a result of the determination of the Court) whether particular conduct was or was not “adequate disclosure in all the circumstances,” McLachlin J thought that the Court would be imposing an “after-the-fact standard” which was “too vague to meet the requirements of the criminal law”.

99.  In this case, I have already held there to be no offence under PBO s.9 (roughly equivalent to s.426(1) of the Canadian Criminal Code).  Nonetheless, the present case involves a question of civil, not criminal, liability.  There remains the question whether, as a matter of civil law, in evaluating the degree of disclosure required of an agent in Clearwater’s position, I should follow the approach of Cory J or McLachlin J.

100.  It may be that as a general principle the views expressed by Cory J should govern the relationship between fiduciaries, so that agents should usually make as full a disclosure as possible (including as to the amount of commission receivable from third parties) in all the circumstances of a case.  See also Hurstanger Ltd. v Wilson [2007] 1 WLR 2351.

101.  Nonetheless, I do not need to decide that point definitively for the purposes of this case.  I do not need to do so, because in determining the requisite standard of disclosure in the present situation I cannot ignore the century of judicial authority, dealing specifically with the insurance brokers, to which I have already referred. 

102.  The common law has long accepted the practice of an insurance broker receiving commission from an insurer, provided (as here) those commissions do not exceed the usual market rate.  That principle must be the starting point of any analysis in the circumstances of this case.  Here Clearwater disclosed the fact that it would be remunerated (and only remunerated) by way of commissions and other fees received from insurers (such as Skandia).  That (it seems to me) should be regarded as a minimum good practice for insurance brokers.  As McLachlin J pointed out, having been alerted by such disclosure as was made here, a principal (such as Mr. Hobbins) can readily ask the insurance broker (such as Clearwater) for further and better particulars of the commission to be received and then decide accordingly whether to proceed with a transaction.

103.  I bear in mind that, at common law, “[a] custom or usage which … gives [an agent] an interest at variance with his duty is prima facie unreasonable and will therefore be ineffective unless known of and consented to by the principal” (see Bowstead and Reynolds on Agency (19th ed.) at para.6-057).  But, in this case, Mr. Hobbins manifested his consent to such arrangement by signing the various client agreements with Clearwater in relation to the ILAS products purchased by him.

104.  To go beyond that and say that Clearwater should have disclosed more (specifically the quantum of commission it expected to receive) would be to impose a standard which would be at odds with case law on the prevailing commercial practice among insurance brokers.  That case law has been too well-established for the Court now to overturn it out of the blue.  If there is to be a change, that initiative has to be for the legislature to bring about.

105.  Note that, strictly, Kelly is distinguishable from the present case on its facts.  Kelly did not concern the specific situation of an insurance broker.  In Kelly, the agent was remunerated by fees received from both the client and a third party. But, despite receiving fees from its client, the agent made only an oblique disclosure that it was receiving commission from a third party.  It was necessary for the client to deduce from the obscure reference to "sales cost" in the MURB brochure that "sales cost" represented commission paid to the client’s agent by the third party. Thus, in actuality, there was no meaningful unequivocal disclosure (even of the fact that the agent would receive commission) in Kelly.   

106.  Therefore, in my view, there was no breach of Clearwater’s obligation as Mr. Hobbins’ agent to make adequate disclosure of the fact that it would be receiving commission from Skandia.

107.  Mr. Barlow suggested that, in its “greediness” to earn commission, Clearwater pushed Mr. Hobbins’ to buy ILAS products which were unsuited to Mr. Hobbins’ investment objectives.  But there is no evidence whatsoever to support that extreme contention.

108.  To begin with, Mr. Hobbins is far from being a babe in the woods in matters of financial investment.  Not only is he a highly respected and sophisticated businessman with numerous directorships, but he himself had previous dealings with financial advisors before engaging Clearwater.  While a client of Clearwater’s, Mr. Hobbins did not play a passive role.  He frequently met with Mr. Keating (67 times over 40 months) actively to discuss investments and investment strategies.  He took the initiative on several occasions to forward market information and newsletters to Mr. Keating and solicit the latter’s views on the material contained there.

109.  The evidence further suggests that Mr. Hobbins had a preference for leveraging investments, that is, borrowing on the security of current assets in order to obtain the liquidity with which to acquire further assets.  What he wanted by way of investment objectives was to consolidate his investments and secure long term capital growth. 

110.  By long term, I mean until Mr. Hobbins turned around 70. 

111.  There was some debate at trial as to whether Mr. Hobbins (who was in his 50s when he first engaged Clearwater) had ever expressed an intention to retire at 70.  Mr. Hobbins in his oral evidence queried whether he had expressed any firm view on the matter, since his actual retirement would depend on many factors (such as health) beyond his control.

112.  Mr. Keating’s recollection was that Mr. Hobbins had clearly stated an intention to retire at 70. 

113.  In my view, Mr. Keating’s recollection is the more reliable.  If anything, on this point, Mr. Hobbins struck me as quibbling.  Obviously, retirement (for that matter, the extent and quality of one’s life) depends on a range of factors beyond one’s control.  But one may nonetheless reasonably state an intention that, all things remaining equal, one hopes to keep working until 70 or so.

114.  There was also some debate at trial over the fact that, in application forms addressed to various insurers, it was wrongly declared that Mr. Hobbins was not making a concurrent application for other life insurance products (such as ILAS products) or had not replaced a life insurance policy in the last 12 months.  The forms were filled out by Mr. Keating on Mr. Hobbins’ behalf.  The allegation is that Mr. Keating wished to conceal the fact that Mr. Hobbins was buying several ILAS products so that Clearwater could go on earning commission without anyone (Skandia included) being put on inquiry. 

115.  Mr. Keating admitted at trial that, strictly, the declarations were wrong.  He defended what he had done by saying that as an IFA he was caught “in-between”.  One the one hand, the application form had to be filled out truthfully.  On the other hand, clients wanted their insurance brokers “to give them a degree of privacy”. 

116.  The declarations were required (Mr. Keating said) as an anti‑money laundering measure.  Insurers are wary of persons laundering illegal money by buying large numbers of ILAS products in a short space of time.  Insurers also wish to guard against (say) a terminally ill person buying large numbers of ILAS products in order to obtain a huge pay out for one’s next-of-kin upon the person’s demise.  Making a declaration would only have led (on Mr. Keating’s view) to unnecessary delay and questions for Mr. Keating’s client.  Since he knew that Mr. Hobbins “wasn’t going to die, or didn’t appear to have a terminal illness” and since (at least early on) Mr. Hobbins “hadn’t even invested any money,” Mr. Keating felt that it was acceptable to make the requisite declaration.  Failing to make the declaration would have meant that Mr. Hobbins would have to fill in more forms and answer more questions.

117.  Mr. Keating’s reasoning may have been faulty or misguided.  But I accept that what he said reflects what he was thinking at the time.  I find nothing duplicitous or under-hand or conspiratorial in what Mr. Keating did. Ironically, in a muddled way, Mr. Keating was seeking to assist Mr. Hobbins by forestalling Mr. Hobbins being subjected to further investigation and “red tape” by the relevant insurers. 

118.  In any event, I do not think that Mr. Hobbins can complain on this score.  Mr. Hobbins signed the declarations.  Mr. Hobbins says that he signed without reading, because he trusted Mr. Keating as IFA. But there is no evidence at all of duress or undue influence.  Absent some vitiating factor of that sort, it is an elementary principle of law that a person is bound by his or her signature.  Mr. Hobbins can only blame himself for signing the declarations without reading the same.              

119.  Consider now each ILAS product which Mr. Hobbins purchased on Clearwater’s advice.

120.  Mr. Keating recommended the MCA Policy because Mr. Hobbins’ expressed a desire to have a regular savings plan. The MCA Policy had a minimum commitment of 5 years.  Mr. Hobbins eventually committed himself for 12 years, but the Policy could be terminated without charge after 5 years.  The Policy could be liquidated earlier than 5 years, but subject to an early withdrawal charge. 

121.  In contrast, Mr. Hobbins’ existing CIB (purchased before Clearwater was engaged) was not an appropriate vehicle for regular savings because it was designed to take lump sum injections.  Each monthly payment to the CIB would be subject to a management charge. 

122.  Mr. Hobbins vacillated on the monthly amount to inject into the MCA Policy.  He eventually opted to save less than the amount which Mr. Keating recommended.  Mr. Hobbins in due course asked that the MCA Policy be funded from the CIB and later the EIB.  Mr. Keating recommended against this, because that would mean that Mr. Hobbins would not be saving regularly contrary to his stated objective.

123.  The EIB was incepted because money and property (such as shares) could be injected into the bond.  This was in contrast to the CIB into which only money could be injected.  Once injected into the EIB, cash could be raised from a lender (such as BOSI) on the security of assets injected into the bond. 

124.  All this was fully explained to Mr. Hobbins.  In particular, the EIB brochure and application form which Clearwater provided to Mr. Hobbins made it clear that title in the assets injected into the EIB would be transferred to Skandia.  By a Client Agreement dated 20 September 2006 Mr. Hobbins acknowledged that the EIB had been fully explained to him.

125.  Mr. Hobbins claims that he was not told that the IDS shares which he injected into the EIB would be “sold” to Skandia. According to Mr. Hobbins, all he was interested in was an arrangement whereby the shares would be held by a third party as custodian, much as Mr. Hobbins’ other IDS shares were held by Coutts as custodian.

126.  There seems to be a confusion of terminology. As far as I can see, the shares were not “sold” to Skandia in the sense that Mr. Hobbins lost the legal and equitable interest in the same.  Skandia acquired the legal title to the shares, while holding the beneficial interest in the shares on trust for Mr. Hobbins subject to the terms of the EIB.

127.  From a commercial standpoint, there can hardly have been anything surprising in such arrangement. A purpose of injecting the IDS shares into the EIB (not the only purpose) was to enable Mr. Hobbins to raise cash to subscribe to pre-IPO Trinity shares. The EIB was also used to obtain a loan to assist in the purchase of the Bali beachfront property.  In those circumstances, insofar as Skandia (or anyone else for that matter) would be lending money on the security of assets injected into the EIB, it is unremarkable that Skandia (or any other lender) should wish to hold the legal title to the relevant assets.  That would enable a lender, in the event of non-payment of monies loaned, more effectively to enforce security rights in respect of the assets.

128.  What Mr. Hobbins is now unhappy about is that assets once injected into the EIB may be locked in the bond for a minimum period.  They might be withdrawn prematurely before maturity, but subject to the payment of charges.  That may be a present inconvenience to Mr. Hobbins. But that does not mean that Mr. Keating’s advice was bad or ill-suited to Mr. Hobbins’ expressed investment needs.  In any case, Mr. Hobbins ought to have known from the EIB brochure and application form provided to him on what terms (including lock-in period) an injected asset would be held in an EIB.

129.  It is unclear on the evidence that Mr. Hobbins could have raised money in any other way from the IDS shares at the quantum and within the period which he had to achieve to purchase the Trinity shares and Bali property. 

130.  The evidence is that Mr. Hobbins believed (with the benefit of hindsight, it turns out wrongly) that the IDS shares would rise in value over time.  He may not have been averse to selling the same as a matter of general principle.  But, in all likelihood, given his belief, he was reluctant at the relevant time to do so.  Mr. Hobbins instead preferred to leverage the shares in order to obtain cash to buy the Trinity shares and Bali property.

131.  Mr. Hobbins vaguely referred at trial to the fact that he was able to raise cash from IDS shares held by Coutts.  But it is not evident on the material before me on what terms he did so.  It is also unclear whether he could have raised the same quantum within the appropriate time scale from Coutts.  On this, the evidence is that banks such as Coutts and BOSI are normally not prepared to lend money on single share portfolios (that is, a portfolio consisting of only a single company’s share in a large quantity).  Financial institutions are more willing to lend money on the security of an asset such as the EIB.  BOSI eventually did so.        

132.  The Zurich Vista was incepted to restructure mortgages for two of Mr. Hobbins’ UK properties.  The Generali Vision was incepted in order to pay the mortgage on a property that Mr. Hobbins purchased for his step-daughter.  The Aviva WPBs were incepted to improve Mr. Hobbins’ eventual pension payments.  In the case of each such investment, there is no evidence that the same was somehow inappropriate to Mr. Hobbins’ needs as expressed to Mr. Keating.

133.  Mr. Barlow finally alleges that there were breaches of duties owed to Mr. Hobbins under the ICO.  It follows from what I have already discussed that I do not see any way in which the same has been breached.

134.  In light of the above, I am unable to find that Clearwater breached any duty (whether owed at common law, in equity, or under statute) owed to Mr. Hobbins as agent.  I find no misrepresentation (whether innocent, negligent or fraudulent) by Clearwater to Mr. Hobbins as to the suitability of an ILAS product for his needs or as to the terms on which assets (such as the IDS shares) would be held by Skandia in an EIB.

D.      Issue (4): Is Skandia liable as principal for Clearwater’s breaches?

135.  Skandia was not Clearwater’s principal and Clearwater was not Skandia’s agent.  Further, Clearwater has not committed any breaches.  There is no basis for holding Skandia liable for alleged breaches by Clearwater.

E.      Issue (5): Are the ILAS contracts between Skandia and Mr. Hobbins void or unenforceable?

136.  There having been no misrepresentation by Clearwater and there being no illegality under the PBO, there is no basis for holding any ILAS contract void or unenforceable.

F.      Issue (6): is there an obligation on Clearwater to make restitution?

137.  There is, in consequence of my conclusions on Issues (1) to (5), no basis for ordering restitution.

IV.     CONCLUSION

138.  The action fails.  Mr. Hobbins’ claims against Skandia and Clearwater are dismissed.

139.  There will be an Order Nisi that Mr. Hobbins pay the costs of Skandia and Clearwater, such costs to be taxed on an indemnity basis if not agreed. 

140.  I propose to impose indemnity costs because throughout the entire proceedings accusations of fraud were levied against Skandia and Clearwater which ought never to have been made. 

141.  To my mind, the accusations of fraud were unsupported by the evidence.  But right to the last minute Mr. Hobbins’ counsel was accusing Mr. Keating personally of fraud and avarice in his dealings with Mr. Hobbins notwithstanding the obvious lack of evidence to that effect.  On the other hand, accusations of conspiracy between Skandia and Clearwater were maintained until the close of evidence.  The conspiracy claims were only dropped at that late stage. 

142.  Counsel are reminded of their paramount duty to the Court not to raise accusations of fraud unless there is a cogent evidential basis for such allegations.  If an apparently initially viable case of fraud proves in the course of trial to be unsustainable, it should be dropped at the earliest opportunity.  Regrettably in my view, counsel’s conduct at trial in relation to the handling of fraud allegations did not meet the standard which the Court expects. 

143.  There will be certificate for two counsel.

144.  A footnote: By letter dated 4 January 2012 Mr. Hobbins’ solicitors drew to my attention the fact that on 13 October 2011 the Hong Kong Federation of Insurers (HKFI) had issued a circular in relation to compliance with PBO s.9. I did not think the views expressed in the HKFI circular were relevant to my Judgment.  The parties’ cases having closed, I refused to hear further submissions on the matter.