The Hong Kong Court of First Instance recently issued a decision concerning the interpretation of insurance agency contracts. Clawback provisions are typically found in the employment contracts of financial firms, such as investment banks and insurers. Employers often offer extra inducement payments to attract potential employees. A clawback provision in an employment contract is normally drafted along with the terms of the extra inducement payments and entitles the employer to a refund of the payments if the employee fails to fulfil the conditions required for remuneration of the payments. These payments are usually tied to the employee's sales or work performance, or are incentive for the employee to remain with a company for a specified period.
In AIA International Ltd v Lam Che Wah(1) the defendant became an agent of the plaintiff after signing a career representative's contract and an addendum to agency contract pursuant to a letter of understanding. The letter incorporated a number of clauses providing for the payment to the defendant of a signing fee, a monthly bonus and a product challenge bonus, as well as a clause stipulating that the defendant was liable to repay to the plaintiff the signing fee, monthly bonus and product challenge bonus if the defendant's service with the plaintiff was terminated for any reason within five years of the commencement date of the letter.
The defendant's employment was subsequently terminated during the third year after the commencement date of the letter pursuant to the termination clause under the contract. The plaintiff subsequently demanded a 60% refund of each signing fee, monthly bonus and product challenge bonus, based on the calculation set out in the letter.
The plaintiff's case was that termination under the contract fell within the scope of termination "for any reason" under the clawback provision and that consequently, the plaintiff was entitled to demand from the defendant the partial refund of the extra remuneration.
The defendant raised two issues at trial:
- On a proper construction of the letter, the clawback provision was not engaged.
- Alternatively, an implied term in the letter entitled the plaintiff to engage the clawback provision only if the defendant had failed to become an insurance agent or meet any of the minimum standards of performance set out in the contract.
The defendant argued that the plaintiff could terminate only on the grounds provided for in Clause 4 of the letter, which stated that the plaintiff was entitled to terminate if the defendant:
- did not become an agent of the plaintiff; or
- did not meet the minimum performance standards set out in the contract.
The defendant submitted that the clawback provision was triggered only when termination "for any reason" was in accordance with the grounds set out in Clause 4.
The court disagreed with the defendant's arguments on the construction of the letter in relation to termination under the contract. The court held that Clause 4 in the letter simply provided grounds for termination in addition to the grounds set out in the contract. The court referred to Marble Holdings Ltd v Yatin Development Ltd,(2) in which the court held that if words used are free from ambiguity and devoid of commercial absurdity, their natural and ordinary meaning will apply, unless the relevant circumstances demonstrate otherwise.
The defendant also contended that the signing fee was subject to clawback only if the defendant did not meet the validation requirement within the first two years of employment as per Clause 5(b) of the letter. The defendant contended that any clawback of the signing fee by serving a notice terminating the contract at any time – regardless of the defendant's performance – was devoid of business common sense.
The court examined the provisions surrounding the signing fee and determined that Clause 5(b) did not assist the defendant, as it concerned clawback of the signing fee in circumstances other than termination. The court referred to Arnold v Britton,(3) a UK decision which held that where the language is clear in a commercial agreement, this takes precedence over any interpretation that implies commercial common sense, and that parties should bear in mind the following factors when interpreting a written contract:
- The parties' intentions should be considered by reference to what a reasonable person having all the background knowledge would have understood them to be.
- Reliance on commercial common sense should not be invoked to undermine the importance of the natural language of the provision.
- Parties should not embark on a search for drafting ambiguities in order to depart from the natural meaning of the provisions in the contract. While commercial common sense is important, the parties should not be too quick to deny the natural meaning of a provision, simply because it seems ill conceived.
- Commercial common sense should not be invoked with the benefit of hindsight. When interpreting a contractual provision, one can take into account only facts or circumstances which existed at the time that the contract was formed, and which were known or readily available to both parties.
- The purpose of interpretation is to identify what the parties have agreed, not what the court thinks the parties should have agreed. It is not the function of the court when interpreting an agreement to relieve a party from the consequences of its imprudence or poor advice.
The defendant argued in the alternative that an implied term existed or should be implied into the letter which entitled the plaintiff to engage the clawback provision only if the defendant failed to become an insurance agent or meet any of the minimum performance standards set out in the contract.
The court did not agree with the defendant in respect of an implied term as to business efficacy and adopted the same rationale as in respect of the construction issue. No language in the contract indicated a certain reasonable expectation of the parties or an obvious inference by the parties for such an implied term to form part of the contract. Further, implying such a term would contradict the express term in Clause 12 of the letter and the court reiterated trite law that an implied term cannot contradict an express term of a contract.
All employment contracts (not only insurance employment contracts) should be construed in accordance with the parties' original intention and each case should therefore be decided on its own facts, merits and context. AIA International Ltd v Lam Che Wah provides further clarification in respect of the construction of termination and clawback provisions and how the court may approach interpretation of these types of clause. The provisions in written commercial contracts should be interpreted in accordance with their natural meaning before relying on any interpretation involving commercial common sense. Insurers and financial firms should explain clearly the meaning and effect of any provisions involving termination of employment and refund of remuneration so as to avoid disputes arising from misinterpretation, if termination or clawback of remuneration is contemplated or exercised by the employer.
For further information on this topic please contact Kevin Bowers or Adrian Sargent at Howse Williams Bowers by telephone (+852 2803 3648) or email (email@example.com or firstname.lastname@example.org). The Howse Williams Bowers website can be accessed at www.hwbhk.com.
(1)  HKCU 3001.
(2)  11 HKCFAR 222.
(3)  2 WLR 1593.
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