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Wisdom Newsletter – Shipping (Issue 33)

Shipping

Bright Shipping Limited (P) v Changhong Group (HK) Limited (D) [2019] HKCA 1062, CACV No. 102 of 2019

 Background

On 6 January 2018, there was a collision between D’s cargo vessel “CF CRYSTAL” and P’s tanker “SANCHI” on the high seas but within the exclusive economic zones (“EEZs”) of the PRC, South Korea and Japan.

On 9 January 2018, D commenced inter-ship proceedings against P in the Shanghai Maritime Court (“SMC”) and applied to establish in the SMC 2 limitation funds, one for personal injury and one for property. At the same time, P commenced an in personam action against D in Hong Kong for collision liability and quantum because D is a Hong Kong incorporated company with a registered office in Hong Kong.

Against the above background that D made an application for staying P’s proceedings in Hong Kong on the ground of forum non conveniens (“FNC”).

 Held

Applying the Spiliada principles, it was accepted that Hong Kong was not the natural forum for the inter-ship litigation. The dispute concerns whether D was able to establish that SMC was clearly and distinctly more appropriate than Hong Kong as the forum for the trial of the inter-ship action. Two main arguments were advanced by D.

D first argued that the trial judge had made no reference to the national laws relating the exercise of the sovereignty of the PRC over the EEZ. However, the CA rejected the argument on the grounds that (1) the location of the collision lied within the EEZs of the PRC, Japan and Korea and (2) a state’s rights over EEZ under UNCLOS do not apply to navigation activity.

D also argued that lis alibi pendens (related proceedings abroad) was a material factor for the consideration of FNC. As expected, the CA held that the constitution of limitation funds by D in the SMC pursuant to the PRC Maritime Code is not a legal bar to bringing proceedings in Hong Kong because the PRC is not a state party to the Convention on Limitation of Liability for Maritime Claims, 1976 (“LLMC”). Also, the SMC’s inter-ship proceedings have not gone beyond the initial stage and P had not accepted service of the same.

The argument that D could bear liabilities up to 2 separate limits if the Hong Kong proceedings were not stayed did not assist D at all. The CA explained that a ship owner who has already paid a claim has a well-established right to take into account the sum he previously paid in the distribution of the limitation funds. Accordingly, D’s concern that it would be burdened with liability up to 2 separate limits was misplaced.

The CA, in its obiter, found that the significant difference in tonnage limitation between the PRC and Hong Kong (the relevant monetary limit in Hong Kong is roughly 3.6 times of that in the PRC because the Hong Kong limit takes into account the loss of value due to inflation) will deprive P of a legitimate juridical advantage and substantial justice will not be achieved in the SMC if a stay of the Hong Kong proceedings is granted. Such deprivation could be unjust to P and could be capable of being a decisive factor in refusing a stay.

 Comments

The Spiliada principles are settled law on FNC and involve an exercise of discretion. The court aims at finding out a forum which is suitable for the interests of all the parties and for the ends of justice. This is different from the Australian approach.

It can be seen from this case that the treatment of mainland Chinese courts has no material difference from other foreign courts. The quality of justice in mainland courts is not a factor to be taken into consideration. The logistic issues of witnesses play little importance.

Not surprisingly, the CA considered that while some weight was given, it was nothing unusual about limitation and liability actions taking place in different jurisdictions. In fact, even under Article 13 of the LLMC, it only bars a person having made a claim against the fund from attaching the assets of a person by or on behalf of whom the fund has constituted but P did not make such a claim. It is expected that the court is more inclined to stay if a fund is set up in a state party to the LLMC.

The CA reaffirmed the principle that it may only interfere with the exercise of a judge’s discretion in limited circumstances. It is therefore important to prepare well when FNC is argued before the judge of the 1st instance.

All in all, this action is a fair illustration of the “One Country, Two Systems” principle.

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Wisdom Newsletter – Insurance (Issue 32)

Insurance

Good Faith and Valid Reasons in Claw Back Provisions

FWD Life Insurance Co (Bermuda) Ltd v Poon Cindy [2019] 3 HKLRD 455, [2019] 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.

 Fact

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 [2014] 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.

Comments 

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 [1985] 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!