FORTIS INSURANCE COMPANY (ASIA) LTD v. LAM HAU WAH INNEO

HCA 1840/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1840 OF 2009

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BETWEEN

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REASONS  FOR  JUDGMENT

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INTRODUCTION

1.  On 11 December 2009 Master Kwang entered summary judgment in favour of the plaintiff on its claim against the defendant in this action.

2.  The defendant appealed against that summary judgment.

3.  At the conclusion of the hearing of the defendant’s appeal, I dismissed the appeal stating that I would hand down my reasons on a later date and these are my reasons. These are also my reasons for dismissing the defendant’s application by summons dated 2 March 2010 for leave to file further evidence.

BACKGROUND

4.  The plaintiff is an insurer formerly known as Top Glory Insurance Company (Bermuda) Limited and then Pacific Century Insurance Company Limited.

5.  The defendant was the plaintiff’s insurance agent from 21 February 1994 until his agency was terminated with effect from 10 June 2009.

6.  During the period of this agency, the plaintiff and the defendant entered into six agreements, namely:-

(1)  a Manager’s Financing Agreement dated 2 January 1996;

(2)  a Manager’s Financing Agreement dated 1 June 1998;

(3)  a Loan Agreement dated 26 April 1999;

(4)  a Loan Agreement dated 20 December 2004;

(5)  a 1^stLoan Agreement dated 15 December 2008; and

(6)  a 2^ndLoan Agreement dated 15 December 2008.

7.  The plaintiff maintains that these agreements were loan agreements and that it was an express term of each that the defendant would repay any amounts outstanding under them, including interest, if the defendant’s agency contracts were terminated for any reason.

8.  The plaintiff claims that, notwithstanding the termination of the defendant’s agency with the plaintiff, the defendant has failed to repay the amounts outstanding under the loan agreements.

9.  The plaintiff issued its writ in this action on 26 August 2009. The defendant gave notice to defend on 8 September 2009. The plaintiff filed its Statement of Claim on 9 September 2009 and then, on 16 September 2009, issued a summons for summary judgment under RHC O.14.

10.  On 11 December 2009, Master Kwang ordered that summary judgment be entered for the plaintiff against the defendant for a total sum of HK$31,023,588.48 and interest.

11.  At the hearing of the summary judgment application before the master, the defendant admitted liability under two of the loan agreements, namely items (4) and (5) above, referred to as the 2004 Loan and the 1^st 2008 Loan.

THE APPLICATION TO ADDUCE FURTHER EVIDENCE

12.  By a summons dated to March 2010, the defendant sought leave to file and serve a further, third, affirmation in this action in support of his appeal against the summary judgment.

13.  The purpose of that further affirmation was to explain why he was not able to obtain affidavit evidence from certain persons referred to in his first affirmation and also from another individual in a similar position to those persons.

14.  In my judgment, the application to adduce further evidence was without any merit and, for the following reasons, I dismissed the application for leave to file and serve the defendant’s third affirmation.

15.  Since the introduction of the Civil Justice Reform, the rules now provide that no further evidence, other than evidence as to matters which occurred after the date on which the judgment, order or decision was given or made, may be received on the hearing of an appeal under RHC O.58, except on special grounds: see RHC O.58 r.1(5).

16.  The phrase “special grounds” is the same expression as in RHC O. 59 r.10(2) and requires the conditions laid down in Ladd v. Marshall [1954] 1 WLR 1489 to be satisfied.

17.  It is quite clear, in my opinion, that the evidence proposed to be adduced in the defendant’s third affirmation is evidence which could previously have been obtained with reasonable due diligence, so that the first condition laid down in Ladd v. Marshall is not satisfied. No reason is given by the defendant for why he could not have contacted the individuals in question prior to the hearing of the summary judgment application before the Master.

18.  In any event, I do not consider that the new evidence is such that, if accepted, it would probably have an important influence on the outcome of the case, though it need not be decisive. All that the defendant says the various individuals have stated is that they would tell the truth and give all necessary information if subpoenaed to give evidence at trial. The defendant does not state the substance of the evidence any of the individuals would give and it is, therefore, simply not possible to conclude that the second condition in Ladd v. Marshall is satisfied.

THE APPLICABLE PRINCIPLES

19.  There was no dispute between the parties as to the applicable principles on an O.14 application. Unless there is some preliminary or technical objection to the plaintiff’s claim, the burden is on the defendant to show that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial of the claim: RHC O.14 r. 3(1).

20.  The court has to determine two questions, namely whether what the defendant says is believable and, secondly, if it is, whether what the defendant says amounts to an arguable defence in law.

21.  As to the first question, the test is whether the defendant’s assertions are believable, not whether they are to be believed: Re Safe Rich Industries Ltd, unreported, CACV 81/1994, 3 November 1994, citing Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 at 158G-H.

THE DEFENDANT’S CASE

22.  The defendant joined Top Glory in 1994 on transferring from another insurance company where he had about 300 agents working under him and from whom he derived income by way of overriding commissions. When he joined Top Glory only about 80 of these agents moved with him and consequently his income from overriding commissions, also referred to as ex-Family Head benefits, declined dramatically.

23.  The defendant says that it was therefore agreed that he would be compensated on an ongoing basis for the loss of overriding commissions by means of payments that would be described as “loans” or “manager’s financing agreements”, but these were labels purely for Top Glory’s own accounting purposes.

THE TWO ADMITTED LOANS

24.  The defendant admits that the 2004 Loan and the 1^st2008 Loan were actually loans and that he is liable to repay the sums claimed in respect of them.

25.  The defendant says that these were loans in respect of each of which he was required to provide, and did provide, security in the form of an assignment of his life insurance policy.

THE FOUR DISPUTED LOANS

26.  The four disputed loans are items (1), (2), (3), and (6) above. (1) and (2) were collectively referred to as the MFAs, (3) was referred to as the 1999 Loan Agreement and (6) as the 2^nd2008 Loan.

27.  The defendant submits that it is common in the insurance agency industry for the loss of overriding commissions to be compensated by money payments, and for these to be described as loans even though it is agreed that they are not repayable.

28.  It is necessary to consider each of the disputed loans and what the defendant says about them in turn.

ARE THE DEFENDANT’S ASSERTIONS IN RESPECT OF THE FOUR DISPUTED LOANS BELIEVABLE?

The MFAs

29.  Pursuant to the MFAs, the plaintiff lent the defendant the respective sums of HK$1,897,092.05 and HK$1,500,000. As of the date of the termination of the defendant’s agency, the outstanding sum under the MFAs was HK$1,660,324 and HK$1,500,000 respectively, the defendant having been credited, in the period between April 2004 and April 2007, with the sum of HK$236,768.55.

30.  The defendant says in his affirmation that it was “verbally understood and agreed” that he would not have to repay the sums advanced to him under the MFAs.

31.  However, this is inconsistent with the express terms of the MFAs, both of which were signed by the defendant.

32.  As an experienced insurance agent, the defendant must have been aware of the significance of written contractual arrangements. Even if the plaintiff had its own reasons for wishing to record the payments to the defendant as loans for its own accounting purposes, prudent common sense would dictate that the defendant secure some written acknowledgement of the true nature of the transactions lest there be some dispute at a later date about the obligations arising from the MFAs he had signed. It was not suggested by the defendant that he had a need to record the payments to him as loans, so for his own purposes, the natural and sensible course would be to have some record of their true nature. Yet, there is none.

33.  The defendant’s case is also directly contradicted by a letter from the plaintiff (then Pacific Century Insurance) to the defendant dated 9 May 2007, which refers to the MFAs and the fact that the defendant owes the plaintiff a total sum of HK$3,160,324 as at 8 May 2007. The letter refers to a request by the defendant to write off the indebtedness and to the fact that the plaintiff agreed to extend the time for repayment of the indebtedness. It also refers to the plaintiff’s preparedness to write off the indebtedness in certain events, none of which have occurred. At the foot of the letter, the defendant signed to “confirm the Indebtedness contained herein and agree to and accept the matters, arrangements and all the terms and conditions as set out in this letter”.

34.  There is no explanation from the defendant as to why he signed this letter, notwithstanding that its terms are wholly inconsistent with the verbal understanding and agreement on which he relies. If the amounts advanced under the MFAs were not required to be repaid by the defendant, there would be no reason for the parties to enter into an arrangement for those advances to be written off.

35.  I would add that I was referred to a passage in the transcript of the hearing before the master in which counsel then appearing for the defendant proffered an explanation on instructions as to why the defendant signed this letter (and a similar letter in respect of the 1999 Loan Agreement, which I shall address below) but the explanation did not persuade me of the credibility of the defendant’s case.

36.  As regards the sum of HK$236,768.55 credited to the defendant against the sums advanced under the MFAs, which the plaintiff characterises as a repayment, the defendant’s evidence is that the sum was a notional bonus payable to him upon his achievement of certain production targets, with the intention of amortising, or bringing down, the sums shown in the plaintiff’s accounts as due from him. Again, this is an odd explanation for what on its face appears to be a straightforward repayment. If production targets were set for the defendant, there is no reason why any bonus payable to him upon meeting this target should be notional rather than actual. In any event, the arrangement requires the court to believe that this was yet a further fiction piled on the original fiction of the MFAs.

37.  The defendant submits that it is inherently unlikely that the plaintiff would have been prepared to make a loan of HK$20 million in December 2008 (under the 2^nd2008 Loan) if the defendant was in default in repaying the amounts allegedly due under the MFAs and the 1999 Loan Agreement. It is submitted that the fact the plaintiff had not recouped these alleged debts out of commission due to the defendant, alternatively the fact that the plaintiff was prepared to lend HK$20 million when the alleged debts were still outstanding, supports the defendant’s case as to the true nature of these payments.

38.  In my opinion, this is a non-point since the defendant was not in default of amounts due under the MFAs as alleged. The sums due under the MFAs were payable on demand if the parties failed to agree on a mutually acceptable repayment schedule and no demand was made: see clause 4. Furthermore, the letter signed on 9 May 2007 in respect of the MFAs provided that the loans would be written off if certain conditions were satisfied. The defendant was never required to repay the loans because he remained the plaintiff’s agent. The same point applies to the 1999 Loan Agreement by virtue of the letter signed on 30 August 2004.

39.  In short, I have no hesitation in rejecting, as not believable, the defendant’s contention that he would not have to repay the sums advanced under the MFAs.

The 1999 Loan Agreement

40.  By the 1999 Loan Agreement, the plaintiff lent the defendant HK$1,692,000. As of the date of the termination of the defendant’s agency, the outstanding sum under this loan was HK$2,732,122.63, which includes interest of HK$1,040,122.63.

41.  The defendant says that this was not a loan but was an outright payment to compensate him for his loss of overriding commissions and that it was agreed with Mr Andrew Yang, the CEO of Top Glory, that the money was not to be repaid. He says it was understood and agreed that the loans need not be repaid and “were to be written off as soon as Top Glory became profitable”. The defendant says that there were five other agents who were paid compensation on a similar basis, one of whom was also involved with the defendant in the negotiations with Mr Yang.

42.  The defendant points to clause 2 of the agreement in which the plaintiff was authorised to deduct repayment instalments from commissions and compensation due to the defendant and from a Deferred Incentive Scheme in which the defendant participated. No such deductions were made and the defendant submits that this supports his case as to the true nature of the payment and that it was not intended to be a loan.

43.  However, the 1999 Loan Agreement was signed by the defendant and describes the payment made to him as a loan and expressly contains an agreement on his part to repay the loan and interest.

44.  Furthermore, the defendant signed a letter dated 13 August 2004 in which he confirmed the indebtedness under the 1999 Loan Agreement. As in the case of the 9 May 2007 letter in respect of the MFAs, there is no explanation from the defendant as to why he executed this letter. The 13 August 2004 letter provided for the sums advanced under the 1999 Loan Agreement to be written off if certain conditions were fulfilled. But, it will be remembered that the defendant’s case is that at the outset it was agreed that the amounts advanced under the 1999 Loan Agreement were to be written off as soon as Top Glory became profitable. If that is so, there would be no obvious reason to have to agree to write them off again.

45.  I do not consider the defendant’s asserted defence is capable of belief. As with the MFAs, it makes no sense for the defendant, as an experienced insurance agent, to have signed the 1999 Loan Agreement which purports, on its face, to record the making of a loan to him and to acknowledge a legal liability on his part to repay that loan without having some form of acknowledgement of the true arrangement. His explanation simply flies in the face of common sense.

46.  It is also relevant, in my opinion, to have regard to the fact that the 2004 Loan, one of the two admitted loans, is in very similar form to the 1999 Loan Agreement. I find it very difficult to believe that the defendant could have signed the 2004 Loan knowing that he was liable to repay the sum advanced under it without wondering whether it might be suggested by the plaintiff that the 1999 Loan Agreement gave rise, similarly, to an enforceable repayment obligation on his part. Yet there is no evidence of his having raised this question with the plaintiff or taking the obvious and sensible course of recording in writing the arrangement that he says was verbally understood and agreed.

47.  Furthermore, the 1999 Loan Agreement contained, as clause 6, an entire agreement clause in the following terms:-

“The terms and conditions herein contained constitute the entire agreement between the parties relating to the subject matter hereof and shall supersede all previous communications, oral or written, between the parties with respect to the subject matter hereof which are inconsistent with the provisions of this Agreement.”

48.  The plaintiff relies on this clause to argue that, even if the alleged oral agreement were true, the defendant cannot rely on it. On the other hand, Mr Clifford Smith SC, counsel for the defendant, submitted that extrinsic evidence was admissible, notwithstanding the entire agreement clause, to show the true nature of the underlying agreement.

49.  I do not need to resolve this issue since I do not consider the defendant’s asserted defence to be believable. However, regardless of the legal effect of the entire agreement clause, its presence in the 1999 Loan Agreement as a matter of fact makes it all the more improbable, if his asserted defence were true, that the defendant would have signed it and the subsequent letter dated 13 August 2004 without ensuring he had some form of written acknowledgement from the plaintiff that, in spite of the express terms of the 1999 Loan Agreement said to contain their entire agreement, the arrangement was not truly a loan.

50.  I therefore have no hesitation in rejecting, as unbelievable, the defendant’s contention that he would not have to repay the sum advanced under the 1999 Loan Agreement.

The 2^nd 2008 Loan

51.  Pursuant to this loan agreement, the plaintiff lent the defendant HK$20,000,000, of which the sum of HK$17,507,793.87 was outstanding at the date of the termination of the defendant’s agency. After setting off certain commissions and other sums due from the plaintiff to the defendant, the total amount outstanding under the 2^nd2008 Loan is HK$12,567,866.47.

52.  The defendant says that, in September or October 2008, he needed money to finance property investments. He says he asked the plaintiff’s CEO, Mr Stuart Fraser, for a special loan of HK$30 million from the plaintiff. The defendant says Mr Fraser informed him that the plaintiff was unwilling to grant a loan for that amount but was prepared to pay about HK$41 million of which HK$36 million would be for the defendant’s overriding commissions for 2005 to 2007 and a further special payment of HK$5 million to be paid to him in mid-November 2008 and February 2009, but on condition that the defendant cease to be an agent and become a consultant of the plaintiff.

53.  The defendant says that he was not willing to become a consultant but offered to give up his overriding commissions for a lump sum of HK$30 million. In response, Mr Fraser counter-offered a payment of HK$20 million for the defendant’s overriding commissions and a loan of HK$10 million, to be secured by the defendant’s life insurance policy.

54.  Thus, the defendant says that the payment of HK$20 million under the 2^nd2008 Loan was in reality the price paid by the plaintiff for buying out the defendant’s overriding commissions and that it was verbally understood and agreed that the sum was not repayable in any circumstances.

55.  In my opinion, the defendant’s asserted defence in respect of the 2^nd2008 Loan is not capable of belief.

56.  First, it is entirely contradictory to the express terms of the 2^nd 2008 Loan, which expressly record an obligation on the part of the defendant to repay the sum as a loan.

57.  Secondly, I find it difficult to believe that the defendant would not have required some form of documentary evidence signed by the plaintiff to record the true basis of the transaction. Even assuming that the reason for structuring the payment as a loan was for the plaintiff’s accounting purposes, there is no obvious reason why the defendant would not, for his own purposes, have taken the common sense step of requiring the plaintiff to acknowledge in writing that the true basis of the arrangement recorded in the 2^nd2008 Loan was as a payment to him for his overriding commissions.

58.  Thirdly, the good sense in the defendant obtaining some form of written acknowledgement from the plaintiff as to the true nature of the transaction under the 2^nd2008 Loan is reinforced by the fact that the 1^st 2008 Loan, which the defendant admits was truly a loan, is in the same form and terms as the 2^nd2008 Loan.

59.  Finally, I find the defendant’s explanation of how the 2^nd 2008 Loan came about to be highly questionable. He says that Mr Fraser apparently initially offered to pay HK$41 million of which HK$36 million would be for the defendant’s overriding commission for 2005 to 2007. If that is so, it is very odd, to say the least, that the defendant would apparently relinquish his overriding commissions once and for all for the lesser sum of HK$20 million.

60.  Mr Smith SC submitted that it would be odd to split the total sum of HK$30 million into two separate loans under the 1^st2008 Loan and the 2^nd 2008 Loan, which were both dated the same date, if it was not the case that they were to be treated differently. The short answer to this point is that they were treated differently as to their repayment dates and I do not think the defendant’s case derives any support from the fact there were two separate agreements on the same date.

61.  The plaintiff also relied on clause 9 of the 2^nd2008 Loan which provided:-

“This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede all previous communications, understandings, or agreement between the parties hereto with respect to the subject matter hereof.”

62.  As in the case of the entire agreement clause in the 1999 Loan Agreement, I need not resolve whether, as a matter of law, the plaintiff is entitled to rely on this clause in the 2^nd2008 Loan. It suffices to say that I consider its presence in the 2^nd2008 Loan agreement as a further reason why, as a matter of practical common sense, it would have been natural to expect the defendant, if his asserted defence were true, to have obtained some form of written acknowledgement as to the true nature of the 2^nd2008 Loan if it was not in fact a loan but was instead compensation for the surrender of his overriding commissions.

63.  I therefore reject, as unbelievable, the defendant’s contention that he would not have to repay the sum advanced under the 2^nd2008 Loan.

DISPOSITION AND COSTS

64.  For the above reasons, I dismissed the defendant’s application to adduce further evidence and his appeal, in both cases with costs to the plaintiff, to be taxed, if not agreed.