Good Faith and Valid Reasons in Claw Back Provisions
FWD Life Insurance Co (Bermuda) Ltd v Poon Cindy  3 HKLRD 455,  HKCA 697, Court of Appeal Civil Appeal No 181 of 2015 Lam V-P, Cheung and Chu JJA 24 June 2019
This was an appeal by the defendant against the judgment of Deputy Judge Tony Poon concerning whether the defendant’s employment had been wrongfully terminated by the plaintiff-employer.
The Defendant, Cindy Poon (“Cindy”) was engaged by the Plaintiff, FWD Life Insurance Co (Bermuda) Ltd (“FWD”) as an Agency Director. An individual Agent’s Agreement (“iAA”); and an Agency Management Agreement (“AMA”) were signed for such engagement.
Upon the engagement, FWD paid Cindy a sum of $492,000 by way of Signing Fee (“SF”) and another sum of $492,000 by way of advanced payment of Performance Bonus (“PB”). Further, from March to August 2008, FWD paid Cindy a total sum of $328,002, a by way of Monthly Special Bonus (“MSB”) calculated at $54,667 per month. These payments were made under the terms of a Letter of Offer of 6 March 2008 issued by FWD in favour of Cindy except that the PB were paid in advance at the request of CIndy. According to those terms, these sums were repayable to FWD if Cindy’s engagement was terminated within 30 months (for SF and MSB) or 12 months (for PB) from the date of her contract.
What happened next?
Cindy’s engagement was terminated by FWD within 12 months on 24 September 2008. Notice of termination was given in accordance with Clause 7.2 of the IAA which reads:
“7.2 Subject to any subsequent agreement to the contrary, this Agreement may be terminated by either party by giving to the other party a notice of termination in writing to such effect and the notice period, unless with the consent of the other party, shall not be less than six (6) days.”
A provision to similar effect can be found in the AMA at Clause 7:
“7. Either party shall be entitled to terminate this Agreement without any reasons being given thereof, by giving to the other six (6) days’ written notice of its intention to terminate the same.”
It followed that FWD demanded the repayment of SF, PB and MSB from Cindy.
Judgment in the First Instance
FWD commenced proceedings against Cindy for repayment of SF, PB and MSB in the total amount of $1,312,00 pursuant to terms provided in the IAA, AMA and the Letter of Offer. FWD’s case on the cause of termination was that Cindy had failed to meet performance target set for Agency Director.
Cindy said that she had been wrongfully terminated. According to her, the 2nd Third Party Danny Chan had been receiving a commission (called override) in respect of Cindy’s management earning. However, he could not continue to do so after he failed to meet the performance for promotion to Agency Director because an Agency Director could not be a downline agent of an Agency Manager. The only way to maintain his entitlement to the override from Cindy’s earning was to demote Cindy from Agency Director to Agency Manager. But Cindy refused to accept the proposed demotion. As a result, Cindy claimed that she was terminated by FWD wrongfully.
Deputy High Court Judge Tony Poon (as he then was) made the findings that the cause of the termination of Cindy was her refusal to accept a demotion. However, he gave judgment in favour of FWD and held that FWD was not in breach of the IAA or the Letter of Offer in exercising its power of termination. FWD was therefore entitled to recover the Total Sum of $1,312,002 plus interests from Cindy.
Appeal in CACV 181/2015
Subsequently, Cindy obtained leave to rely on appeal on the argument that FWD’s power to terminate her employment or demote her was subject to an implied term of good faith and rationality (“Good Faith and Rationality Implied Term”).
Held: Allowing Cindy’s appeal and remitting the case to the Judge for consideration.
I. Good Faith and Rationality Implied Term
Lord Sumption set out the general rule in British Telecommunications plc v Telefónica O2 UK Ltd  Bus LR 765 as follows:
“ As a general rule, the scope of a contractual discretion will depend on the nature of the discretion and the construction of the language conferring it. But it is well established that in the absence of very clear language to the contrary, a contractual discretion must be exercised in good faith and not arbitrarily or capriciously …. This will normally mean that it must be exercised consistently with its contractual purpose ….”
In view that the most relevant authorities in a similar context had not been decided when the trial took place and the Good Faith and Rationality Implied Term was not put forward during trial, the Court of Appeal took the view that it would not be just to deprive Cindy of the chance to rely on this implied term. Although further evidence might be adduced, it could not be said at this stage that Cindy’s case based on this implied term was unarguable.
It was thus held by CA that the question of whether the Good Faith and Rationality Implied Term could have arisen would be remitted to the Judge.
II. Valid Reason Implied Term
During the hearing in the First Instance, Cindy had argued that there was an implied term to the IAA that it would not be terminated without valid reasons and an implied term to the Letter of Offer that she would not be demoted from the position as Agency Director without any valid reasons (“Valid Reason Implied Term”).
The trial Judge did not give much consideration to the Valid Reason Implied Term against demotion since Cindy did not actually accept the demotion. He so held notwithstanding he was aware of the nexus of the proposed demotion and the termination.
The Court of Appeal was of the view that the Judge’s ruling on the Valid Reason Implied Term was erroneous. As mentioned above, the trial Judge had already made the findings that the cause of the termination of Cindy was her refusal to accept a demotion. It would thus be logical to deduce that if there was indeed a Valid Reason Implied Term for demotion, it would be relevant in establishing the Valid Reason Implied Term for termination since the termination was based upon her refusal to accept demotion.
It was thus held by CA that the question of whether the Valid Reason Implied Term could have arisen would be remitted to the Judge.
Where life insurers or in fact any employers faced with the need for them to invoke the claw back provision provided in the agreements with contractual discretion, it would be advisable for them to adopt a rational approach concerning the termination with good faith.
Then what by means of being “rational”? The classic definition was given by Lord Diplock when summarising the grounds of judicial review in Council of Civil Service Unions v Minister for the Civil Service  AC 374, 410: “By ‘irrationality’ I mean what can by now be succinctly referred to as ‘Wednesbury unreasonableness’. … It applies to a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.”
In practical terms, the employers are also advised to offer some proper explanation, such as not meeting certain performance standard or breach of certain employment terms, to the employees concerned when they are to invoke the claw back provisions by way of termination.
Let’s wait and see for the result of any re-trial by the Judge. But bearing in mind of the cost implications of a full-blown re-trial, as it might well be the case that the parties would settle!