Court examines when companies can reclaim bonuses after early contract termination
A District Court in Hong Kong recently addressed a dispute over an insurance agency termination that involved both a standard Agent's Agreement and an Incentive for Recruitment (IR) Agreement, which spelled out financial incentives and their repayment.
The IR Agreement was a contract specifically designed for managers that detailed monetary incentives, including a Monthly Allowance of HK$1,046,000 and a Sign-On Bonus of HK$784,500.
These amounts would only become permanently vested with the agent after meeting specified performance conditions and service durations.
The case explored whether growing personal tax liabilities could affect an agent's suitability to continue in their role, and whether verbal promises made during recruitment could override written agreement terms.
The relationship began when the agent, who had worked in insurance since 1993 and held an MBA, joined the company in November 2016. He first signed a standard Agent's Agreement, followed by the IR Agreement for Managers in December 2016.
Both agreements contained matching 14-day termination notice provisions. The judgment noted: "Under clause 7.2 of the IR Agreement, the IR Agreement will be terminated immediately without notice upon the termination of the Agent's Agreement."
During recruitment, the agent disclosed existing tax liabilities from three claims totalling HK$939,169. In response, the company structured his Sign-On Bonus payments in three phases as a protective measure.
The situation changed significantly in June 2018 when the company received an Inland Revenue Department notice showing the agent's tax debt had grown to HK$1,407,516.87. By February 2019, this amount had increased to HK$1,613,229.87.
The Hong Kong Federation of Insurers' Best Practice Guide emphasised: "Insurance agents are required to be fit and proper persons. The matters taken into consideration in determining a person's fitness and properness include, inter alia, his competence, capability, honesty, integrity, reputation and financial soundness."
Despite earning over HK$4.2 million during his employment, the agent paid only HK$135,000 toward his tax obligations. The company's head of tied agency testified that in seven years, they had never received such a tax notice for any other agent.
The agent claimed company representatives had promised their "cooperation between the parties was intended to be a long term cooperation and would not be terminated lightly." However, the court found no evidence supporting these alleged verbal assurances.
The judgment emphasised: "If there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement."
The court distinguished this case from employment contracts, noting: "The Agreements in question do not involve an employment contract and there is no special relationship involving mutual trust and confidence between a principal insurance company and its agent."
The decision determined that while standard earnings under the Agent's Agreement weren't subject to repayment, the special incentives under the IR Agreement could be recovered based on termination timing.
The judgment concluded: "The structures of the Agreements in this case are different to the employment contract... amounts under the Agent's Agreement were not subject to a clawback. It was only the Monthly Allowance and Sign-On Bonus paid under the IR Agreement that were subject to the clawback."
The court ordered repayment of the outstanding sums plus interest at 9.5% per annum, finding the termination was justified given concerns about the agent's growing tax liabilities and their impact on his fitness for the role.
