In a recent judgment handed down in February 2025¹, the High Court reaffirmed that the implied term of good faith and anti-recoupment principles are not confined to employer/employee relationships, but also equally apply to principal/agent relationships.

In this case, the agent was engaged by an insurance company to sell insurance. In July 2020, they signed an agent's agreement and a memorandum on special income for the agent. The agent received a sign-on bonus of HK$359,694 and monthly special income totalling HK$299,745 as part of her remuneration package.

The insurer terminated her contract on 1 April 2022, citing failure to meet production and persistency requirements as the reason for the termination. The termination letter demanded repayment of the sign-on bonus and special income, amounting to HK$777,424.66, including contractual interest.

The agent contested the termination, arguing that it was wrongful and that the insurer had breached an implied term of good faith in exercising its termination rights. Additionally, the agent claimed that a representation was made by the insurer's senior management, assuring her that repayment of the money would only be required if she joined a competing insurance company within two years, which she did not.

The agent refused to pay the sums demanded and the insurer commenced bankruptcy proceedings against her. She contested the proceedings on the basis that a bona fide dispute existed, regarding the propriety of the insurer's reliance on the contract maintenance requirements to terminate the agreement.

The agent argued she had not received any prior complaints or warnings, and the sudden imposition of stringent requirements raised questions about the insurer's motives in terminating her contract. The evidence also suggested that the insurer's actions might have been motivated by financial difficulties and an attempt to claw back sums from terminated agents.

Highlighting the implied term that "the power to terminate the [agent] must be exercised by the [insurer] in good faith and not for arbitrary, capricious, perverse, or irrational reasons," referred to as the "Anti-Recoupment Term", the court acknowledged that the insurer owed the agent a duty to exercise its right to terminate in good faith. In addition, the court clarified that the existence of an entire agreement clause in the agreement does not exclude the implication of the anti-recoupment term.

Scrutinising the specific clause under which the termination was executed, the court underscored the importance of clear and fair contractual terms, as the memorandum clauses outlining the persistency and production requirements were central to the dispute.

The court also considered how the pandemic and related social distancing measures affected the agent's ability to meet these requirements and the insurer's financial difficulties leading to mass termination of agents.

Thus, the insurer's petition to bankrupt the agent was unsuccessful.

This case followed a string of cases² reaffirming implication of the anti-recoupment term and requirement for good faith in principal/agent relationships. These principles traditionally had their roots in employer/employee relationships but have since been equally adopted in principal/agent relationships.

In light of the rise of the gig economy and the popularity of organisations engaging independent contractors to provide services rather than full-time employees, organisations should be mindful that the principles of fairness and demand for reasonable conduct will equally be required for contractors, as they are for employees.

1. Re: Lau Ka Yan [2025] HKCFI 759.
2. Re Shing Pui Keung (HCB 686 of 2017), So Sheung Hin Ben v. Chubb Life Insurance Co Ltd [2018] HKCA 209 and FWD Life Insurance Company (Bermuda) Ltd v. Poon Cindy [2019] 3 HKLRD 455.