Introduction

In FWD Life Insurance Company (Bermuda) Ltd v Poon Cindy [2019] HKCA 697, the plaintiff employer, FWD Life Insurance Co (Bermuda) Ltd (“Employer”) engaged the defendant employee, Cindy Poon (“Ms Poon”), as an Agency Director in March 2008. A few months later, the Employer terminated Ms Poon’s employment and claimed from Ms Poon for repayment of several bonuses paid to her. At first instance, the Court of First Instance (“CFI”) ruled in favour of the Employer. At the appeal, however, the Court of Appeal (“CA”) allowed Ms Poon to rely on the implied term of good faith and rationality, set aside the CFI’s judgment and remitted the case to the CFI for determination of the issue if the good faith and rationality implied term could have arisen on the facts of the case.

Background

Upon her engagement, the Employer gave Ms Poon a letter of offer (“Letter of Offer”) and she signed an Individual Agent’s Agreement (“IAA”) and an Agency Management Agreement (“AMA”).

Pursuant to the Letter of Offer, the Employer made the following 3 payments to Ms Poon:

1. upon her engagement, the Employer paid Ms Poon a Signing Fee of $492,000 (“SF”) and an advanced payment of Performance Bonus of $492,000 (“PB”); and
2. from March to August 2008, the Employer paid Ms Poon a Monthly Special Bonus of $54,667 per month, i.e. a total sum of $328,002 (“MSB”) (the SF, PB and MSB are collectively referred to as the “Three Sums”).

The Letter of Offer provided that the Three Sums were repayable to the Employer if Ms Poon’s engagement was terminated within 30 ‍months (for SF and MSB) or 12 ‍months (for PB) from the date of her contract.

The IAA and AMA provided that either party might terminate the agreements by giving a minimum of 6 days’ notice in writing.

On 18 September 2008, the Employer terminated Ms Poon’s employment by giving her 6 days’ notice.

The CFI’s judgment

The Employer claimed against Ms Poon for the repayment of the Three Sums. According to the Employer, the cause of termination was that Ms Poon failed to meet performance target set for Agency Director.

Ms Poon claimed that the Employer had wrongfully terminated her employment. According to Ms Poon, the 2^nd Third Party, Mr Danny Chan (“Mr Chan”), who was in the position of Agency Manager, had been receiving a commission (called “override”) in respect of Ms Poon’s management earning. Normally, an Agency Director (i.e. Ms Poon’s position) could not be a downline agent of an Agency Manager. Between March and August 2008, Mr Chan was able to receive the override of Ms Poon due to a special arrangement. However, Mr Chan could not continue to do so after he failed to meet the performance requirement for promotion as an Agency Director. The only way for Mr Chan to maintain his entitlement to the override from Ms Poon’s earning was to demote Ms Poon from Agency Director to Agency Manager. Ms Poon refused to accept the proposed demotion and, as a result, the Employer terminated her employment.

The CFI took the view that the cause of the termination of Ms Poon was her refusal to accept the demotion. However, the CFI held that the Employer was not in breach of the IAA or the Letter of Offer in exercising its power of termination. The Employer was therefore entitled to recover the Three Sums plus interests from Ms Poon.

Ms Poon’s appeal

Ms Poon appealed against the CFI’s decision and at the hearing of the appeal, she relied on a further implied term of good faith and rationality (“Good Faith and Rationality Implied Term”) that was not argued at trial in the first instance, which comprised of the following:

1. the power to terminate the IAA would be exercised in good faith and would not be exercised for arbitrary, capricious, perverse or irrational reasons; and
2. the power to demote Ms Poon from her position as Agency Director would be exercised in good faith and would not be exercised for arbitrary, capricious, perverse or irrational reasons.

The CA allowed Ms Poon’s appeal and remitted the issue of whether the Good Faith and Rationality Implied Term could have arisen on the facts of the case to the CFI for determination.

The relevant legal principles

The CA quoted the general rule on the exercise of contractual discretion set out by the UK Supreme Court in British Telecommunications plc v Telefónica O2 UK Ltd [2014] Bus LR 765: 

“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 …” (emphasis added)

In Hong Kong, this principle has been applied in the context of the exercise of the power to terminate an employment contract. In Tadjudin Sunny v Bank of America CACV 12/2015, where an employee claimed for loss of performance bonus due to the exercise by the employer of the power to terminate on 1 month’s notice, the CA held that:

“In all, a power or discretion given to a party to a contract which on its face is unqualified is generally to be read as being subject to an implied requirement that it can only be exercised in good faith, rationally and for a proper purpose, and not arbitrarily or capriciously or in a manner which is not bona fide. Such restrictions are implied in order to give effect to the reasonable expectations of the parties to the contract.” (emphasis added)

In So Sheung Hin Ben v Chubb Life Insurance [2018] 5 HKC 47, the principle was subsequently applied by the CA to a claw-back claim of performance bonus and allowances by an insurance company against an agent. The CA held that it was reasonably arguable that there was an implied term that the power of termination had to be exercised in good faith and set aside the statutory demand made by the insurance company accordingly.

The CA’s judgment

In the present case, given that the most relevant authorities in a similar context (Tadjudin Sunny v Bank of America and So Sheung Hin Ben v Chubb Life Insurance) had not been decided when the trial took place and the Good Faith and Rationality Implied Term was not put forward during trial, the CA accepted that the parties and the CFI did not address the Good Faith and Rationality Implied Term. The CA was of the view that it would not be just to deprive Ms Poon the chance to rely on the Good Faith and Rationality Implied Term in the present case. As a matter of fairness, the Employer should also be allowed to adduce further evidence relating to the Good Faith and Rationality Implied Term.

Therefore, the CA remitted the issue of whether the Good Faith and Rationality Implied Term could have arisen on the facts of the present case to the CFI for determination.

Key takeaways

In its judgment, having considered the relevant authorities, the CA affirmed the development of common law on good faith and rationality implied term in the context of contractual discretion in employment contracts in Hong Kong. Regardless of the outcome of the re-trial, the case itself would contribute to the development of the relevant legal principles.

Employers should be mindful of the implied term in the employment contract to act in good faith, rationally and for a proper purpose, and not arbitrarily or capriciously or in a manner that is not bona fide when exercising their contractual discretion under the employment contract, for example, in exercising its power to demote an employee or to terminate the employment of an employee. Employers should be careful in exercising such contractual discretion as an employee may be able to challenge the exercise of such discretion if it is exercised in bad faith or irrationally.