EASTFORD (CHINA) LTD v. CHEUNG CHI HUNG AND ANOTHER

HCA 241/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 241 OF 2004

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J U D G M E N T

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1.  This is a claim for damages arising out of an alleged breach by a former employee of restraint in trade provisions in his employment contract.

2.  The plaintiff (Eastford) is a property agency company carrying on business from premises in Yee Fung Garden, which is in or near Yuen Long’s Town Centre.  Its primary activity is the sale or renting of village houses within the Districts of Yuen Long and Tuen Mun.  In the usual way its workforce comprises a sales staff who are paid a basic salary and commission on sales or tenancies achieved.

3.  As at October 2003 two of such staff were the 1^st defendant (Mr Cheung) and the 2^nd defendant (Ms Chan).  Both were bound by an employment contract and a restraint in trade provision as follows:

“14.  Within 12 months of cessation of employment, the employee should not work as a property agent or engage in any related work in the same Working Area.”

Working Area is defined as the Yuen Long and Tuen Mun Districts.

4.  Clause 12 is also pertinent.  It reads:

“12.  Confidentiality: cannot divulge the company’s internal information (including properties, client information and sales record etc).”

5.  It is Eastford’s case that, of their own accord and without notice, in early October 2003 both defendants left Eastford’s employ along with other members of the workforce, and together incorporated a new property agency called Primacy Properties Limited (Primacy).  By late November Primacy was staffed and occupying premises also in Yee Fung Garden, Yuen Long, no more than 150 metres from Eastford’s office.  The defendants together held 30% of Primacy’s shares, and Ms Chan was appointed a director.

6.  Eastford alleges that both defendants solicited business and business orders from customers of Eastford, and enticed some of Eastford’s staff away from Eastford, in breach of express or implied terms of their employment contracts, causing a significant reduction of Eastford’s income.

7.  There being no response to letters before action, Eastford filed this writ in February 2004.  In the statement of claim Eastford prayed for injunctions restraining the defendants from enticing employees away from Eastford and from engaging in real estate sales within the Working Area until 7 October 2004 (being one year after their alleged departure from Eastford) and damages.

8.  Having filed its writ Eastford pursued and was granted in February 2004 an interlocutory injunction against both defendants on terms prayed for in its claim until judgment or, if earlier, 7 October 2004.  The plaintiff was required to fortify its position by payment into court the sum of $250,000 and did so.

9.  Prior to trial the action against Ms Chan was stayed upon terms of a settlement reached.  Since then she has played no further part.

10.  Meanwhile, the restraint period having since expired, this is the trial of Eastford’s claim against Mr Cheung for damages, alternatively an enquiry into damages, arising from loss occasioned by his unlawful conduct.

11.  At the outset Mr Cheung representing Eastford told me that the claim was being advanced solely arising from the breach of contract — the restraint provision in clause 14.  Alleged breaches of fidelity and fiduciary duties owed Eastford prayed for were not to be pursued.

12.  The defence pleaded was that Mr Cheung’s contract of employment was no longer in existence and that there was an alternative arrangement in place.

13.  Wong Chun Hing and Pang Kwan Wai being directors of Eastford, the defence is pleaded at paragraphs 7 and 8 in the following way:

“7.  On or about 9^th October 2003, Wong Chun Hing and Pang Kwan Wai informed the 1^st Defendant and other employees that their employment would be changed to part time bases and the terms of the employment letters would be cancelled.  The 1^st Defendant and the other employees were informed that they would have no basic salary and they could receive a flat rate of 40% of the commission right each property transaction.

8.  Since then, it was commonly understood between the parties that the Employment Contracts were ceased to have any effect binding on the Plaintiff and the 1^st Defendant.”

14.  It was then pleaded that such revised terms of employment that came into force after 9 October came to an end on 24 October when Mr Cheung and others on the staff were told to pack up and leave.

15.  The allegations of soliciting business from customers of Eastford and enticing staff away from Eastford are denied, and Eastford is put to strict proof of these claims and consequential loss.

16.  What is not pleaded is that the terms of the restraint imposed were unreasonably wide and thus unenforceable.  Furthermore, Miss Lee representing Mr Cheung accepted that if the contract relied on by Eastford was found to be extant, Mr Cheung by his conduct was in breach.  She stood firm on the proposition that there was no contract and thus no disobedience of it; further, there was no enticement of staff and no poaching of business.

The Issues

(1)  Was the contract of employment current when Mr Cheung left Eastford’s employ?

(2)  If so, can Eastford establish loss attributable to Mr Cheung’s breach of the restraint in trade provision; in particular, by his enticing staff to join Primacy, and unlawfully soliciting business?

17.  The wrongful conduct going to an alleged breach of contract, it follows that if I find there was no existing contract and restraint in trade provision there can have been no breach and no liability on the part of Mr Cheung.

Background

18.  Until October 2003 the majority shareholder, director and the person effectively in control of Eastford was a woman called Chong Po Tuen.  Then it was that Mr Wong, the minority shareholder, bought her out and she resigned from the Board and left the company.  The transfer was completed on 8 October and she left a few days later.  Mr Pang replaced her on the Board. 

19.  Mr Cheung meanwhile had joined the workforce of Eastford in November 2002 as a probationer.  In March 2003 he and Eastford committed to the employment contract.  By its terms he was to be paid a monthly salary of $5,000 and commission on such sales or rentals that he achieved, ranging from 28% to 35% of what Eastford was paid, depending on volume.  Termination was to be on 7 days written notice.  This arrangement was in force up to 9 October 2003. 

20.  What happened on that date, which was one day after Madam Chong’s departure, and thereafter, is in material dispute.

21.  What is not disputed is the coming into existence of Primacy Properties Limited.  It was incorporated on 31 October 2003.  There were six subscribers who signed the memorandum of association, dated 25 October 2003.  Four of them until a date in October — either 9 October or 24 October depending on how I find — had been on Eastford’s payroll.

22.  Calvin Choi the former manager subscribed for six shares; that is 30%.  Mr Cheung took four; 20%.  Miss Chan the other defendant took two; To Hung Fai took two; 10% each.  The shareholders who had not emerged from Eastford were Wong Hing Yue and Tam Fung.  Wong took four shares.  It was said of him that he is the son of Madam Chong.  Tam Fung took two.  He was said to be a relative of Madam Chong.  They got the remaining 30%.

23.  The premises to be occupied by Primacy, also in Yee Fung Garden, were decorated and set up, and Primacy began business following an opening ceremony on 25 November 2003.  It was said that Madam Chong owned or had an interest in these premises.

24.  Mr Choi took up the position of manager in Primacy, the role he had played in Eastford.  Others including both defendants became property agents.

25.  Prior to the opening, by agreement made on 13 November Eastford sold to Primacy what is described in the short document evidencing the sale as “a set of real estate customer’s information”, for which the consideration was $23,000.  What this amounted to is a point of conjecture.  Mr Wong says it was non-confidential information, gleaned from newspaper advertisements of sales of realty in the area.  He signed for Eastford; Mr Choi for Primacy.

26.  In January 2004 Mr Cheung filed a claim against Eastford in the Labour Tribunal for commission and other moneys due amounting to $15,832.

27.  In early February this was settled at $10,000.  Of note is that the amount claimed by Mr Cheung did not include payment in lieu of notice, whilst the settlement provided for Eastford not suing for payment in lieu of notice, giving a pointer as to who may have terminated the employment without notice.

28.  Meanwhile, by letters before action of 17 December 2003 and 3 February 2004 solicitors representing Eastford wrote to Mr Cheung alleging breach of his employment contract; in particular, the restraint in trade.  There was no response.

29.  Mr Cheung left the employ of Primacy in early February 2004 in compliance with the interlocutory injunction made at that time.  Then he joined a property agency outside the designated Working Area.  He returned to work for Primacy Property Agency Limited, a successor to Primacy, after expiry of the injunction in October 2004, and is so employed to date.

30.  That which needs to be resolved are the circumstances surrounding the departure of Mr Cheung and others of the workforce and the role thereafter played by Mr Cheung.

31.  I come to deal with these matters next.

The Evidence

32.  Mr Wong said that on 9 October 2003 there was a mass departure of the Eastford sales team, including both defendants, To Hung Fai, Liu Sai Lun and Yan Yiu Chong.  Mr Choi the manager also left.  There was no notice, whether in writing or otherwise, and no forewarning.  Shortly after that he came to learn that Primacy had been incorporated and was poised to open its doors in competition. 

33.  He said that given the proximity in time of this walk out and Madam Chong’s sale of her shares and departure, he had cause to suspect the events were connected.  In fact there is an action still pending in which Madam Chong and he are the litigating parties.

34.  However concerned at this sudden depletion of his workforce he may have been, he nevertheless sold customer information evidenced by the contract of 13 November to the new competitor, negotiating the terms with his former manager and now manager of Primacy Mr Choi.  And he sent flowers and a message of goodwill which were displayed at the opening ceremony.  He claimed not to have known about Mr Cheung’s position in Primacy until after that ceremony in late November.

35.  He further said that the mass exodus of staff caused a dramatic reduction in commissions earned by Eastford.  Up to September 2003 these averaged $300,000 per month.  In November they dropped to $40,000.

36.  He blamed both defendants for taking Eastford’s customers with them.  On these matters, he stated in his witness statement:

“16.  On the other hand, the Plaintiff used to have a lot of home-sellers who left their home keys to the Plaintiff so that if prospective buyer was interested, inspection of premises could be more readily taken place.  I discovered since the D1 and D2 joined Primacy, they and other employees of Primacy, caused the existing home-sellers of the Plaintiff, who already placed their keys to the safe custody of the Plaintiff, to retrieve their keys from the Plaintiff, so that the business of the Plaintiff was crippled.  About 15 sets of keys were retrieved by those home-sellers.

17.   Each sales agent of the Plaintiff was asked to record down the details of their activities including customers and properties information.  I discovered that 6 notebooks which contained details of the customers of the Plaintiff were missing after the departure of D1 and D2. In those circumstances, I reported to the Yuen Long Police Station under report number 04004348.

In addition, D1 and D2 also spread the rumors that the Plaintiff was financially unsound around the neighbourhood, which I found distasteful and untrue.  They obviously did that out of bad faith or hope to get an unfair head start over the Plaintiff by taking away the customers of the Plaintiff.  All in all, as a result of the injurious acts done by the D1 and D2, the Plaintiff suffered a net loss of over $100,000 per month since October 2003.”

37.  In anticipation of the counter proposition that he had sold the information he now claimed had been wrongfully taken, he said that what was sold was general information on properties marketed in Yuen Long and Tuen Mun and freely available, not customer details, which he described as the lifeblood of the property agency for which he had paid a lot of money to Madam Chong to acquire.

38.  He did not in his witness statement allege the defendants or either of them had “enticed away” any of the other agents, but from the witness box was taken to this pleading.  He said he knew this had happened because To Hung Fai later told him, and he believed what he said.

39.  He said that of the 15 keys retrieved by property owners, he knew it was orchestrated by the defendants, because he learned from colleagues that former employees of Eastford surnamed ‘Chan’ and ‘Cheung’ were spreading rumours that Eastford was financially unsound and were likely to close down.

40.  Shown some examples of data retrieved from Primacy’s computers and produced he claimed some of these examples contained information beyond that which he had sold to Choi and was thus detail wrongfully taken from Eastford.

41.  To Hung Fai was also called to give evidence by the plaintiff.  Shown his witness statement he declined to produce it as his evidence without amendment and additions.  Some of these changes represented a significant change of heart.

42.  At first he stated that it was not true that his employment became part-time in October 2003.  From the witness box he said that it was; that he was to lose his basic salary but would get 40% on all business achieved. 

43.  He said that the idea to form a rival property agency emerged in early October 2003 when Choi told him and other of the agents, including the defendants, that there would shortly be a change in ownership of Eastford.  Following that there was a meeting with Madam Chong, at which she pressed them to pursue this course.  She said that she would personally front the start-up capital.  She said that rental expenses would be minimal because the new company could use premises she and Tam Fung Lam owed.

44.  He said that he could not participate because he had no money; in the end he was allocated 10% of the shares.  In his witness statement he said that his initial hesitation was finally overborne by continuous persuasion of the defendants.  From the witness box he said that was not so; there was no persuasion and he agreed to join of his own free will.

45.  In his witness statement he stated:

“8.  … I was finally convinced and decided to leave Eastford with them and started a new property agency together.

9.  The six of us left the employment of Eastford on or about the 9^th October 2003, without giving any notice to the management of Eastford.  Later on, during the same month, due to some uncompleted transactions with some prospective customer whom I had been dealing with in early October while I was still at Eastford, I asked Wong if I could complete said transactions using the name of Eastford and proposed a 40% share in the commission arising from them. Wong agreed to my proposal, of course without knowing my involvement in Primacy.  D1 and D2 did not have similar arrangement with Eastford.”

46.  From the witness box he said there was a meeting after 9 October with Messrs Wong and Pang at a nearly café.  Revised terms were discussed.  These were that there would be no basic salary, the commission would be enhanced to 40% and the agents would be free to choose between bringing any new business back to Eastford or taking it elsewhere.  He said some accepted, others did not.

47.  Asked to explain his involvement he said there were two transactions in the pipeline on 9 October and these needed to be completed.

48.  He said that around 24 October he recorded that the defendants and others were ordered out of the premises by Messrs Wong and Pang.

49.  In his witness statement he stated:

“10. … On various occasions since the commencement of Primacy the defendants, as they had kept without Eastford’s knowledge and authorization certain information acquired at Eastford during their employment there, had negotiated and solicited and successfully obtained business from some of the existing customers of Eastford.”

50.  From the witness box he said:

“That was a guess.  Now I have seen the agreement.”

That was the agreement made between Eastford (Wong) and Primacy (Choi) for the sale of customer information; dated 13 November 2003.

51.  And on the proposition that the defendants or Mr Cheung alone had gone to some effort to persuade others to join Primacy he pulled back.  He said:

“It may not be.  It is only possible.”

52.  I come now to the evidence of Mr Cheung the defendant.

53.  His account of what happened on 9 October emerged from his witness statement, as follows:

“3.  On or about 9^th October 2003, my employment would be changed to part-time bases and the terms of the employment letters would be cancelled.  I was informed that I would have no basic salary and change the employment term.

4.  On or about 9^th October 2003, Wong Chun Hing and Pang Kwan Wai informed me and other employees that our employment would be changed to part time bases and the terms of the employment letters would be cancelled.  I and the other employees were informed that we would have no basic salary and we could receive a flat rate of 40% of the commission right for each property transaction.

5.  Since then, it was commonly understood between the parties that the Employment Contracts were ceased to have any effect binding on the Plaintiff and me and replaced by a new oral employment agreement.”

And then, what happened next:

“6.  On 24^th October 2003, my employment was terminated unreasonably and without compensation.  On or around 24^th October 2003, Wong Chun Hing informed me and other employees to leave the Plaintiff without payment.”

And after that:

“7.  After I had been dismissed by the Plaintiff, I formed Primacy Properties Limited (‘Primacy’) with other ex-employees of the Plaintiff who were also dismissed by the Plaintiff.  Primacy was registered in the Company Registry on 31^st October 2003.  After Primacy had been formed, I and my colleagues invited the Plaintiff to come to the opening ceremony on 25^th November 2003 and the Plaintiff sent a gift to Primacy.”

54.  He denied having enticed away from Eastford any of its former staff, or to having solicited customers for their business, or to having done anything to effect Eastford’s revenue.

55.  From the witness box he said that the meeting of 9 October was called by Messrs Wong and Pang.  Six of the staff attended, being the two defendants, Choi, To, Liu and Yan.  They were told that consequent upon Eastford’s restructure, there were to be changes in their employment as follows: there was to be no basic salary, no fixed working hours, and the agents would be free to take their business to other agencies, operating thus as freelance agents.  He expressed to have been very surprised at this proposal, but felt he had no alterative but to accept.

56.  Then it was on 24 October he was called up by Mr Wong and told to pack his things.  The other five were told to do likewise.  And so they did, and left.

57.  He denied having spread around that Eastford was financially unsound.  He pointed out that there was no identification of those who ‘shopped’ him or the customers solicited.

58.  And there was no enticing, by him or anyone else, of others to leave Eastford.

59.  Of the setting up of Primacy it was Mr Choi’s idea but not developed before 24 October, being the date they were all told to leave Eastford.

60.  As for the information relating to properties for sale retrieved from Primacy’s computers; he said this came from the data Mr Choi told him that he had bought from Mr Wong, by the agreement of 13 November.

61.  He said in cross-examination that he was not aware that freelance trading was illegal; that it was common in real estate.

62.  Asked to explain why he did not respond to the letters before action that he was in breach of an employment contract which, on his account, no longer existed, he said he was told it would cost him to respond and he had no money.

Analysis

63.  I am satisfied on the evidence that on 9 October there was no unilateral election made by those controlling Eastford to terminate the contracts of its workforce and put them into a so-called freelance situation for all sorts of reasons.  Those having most significance include:

(a)  no self-respecting property agency would, immediately upon the purchase of its controlling interest for substantial consideration, put its workforce into an unstable, uncertain position which would likely lead to their departure en masse;

(b)  there was no benefit offered by such arrangement, and no justification for it;

(c)  conversely, the cancellation of the restraint in trade provision of the former contracts of employment would have been potentially damaging to the plaintiff;

(d)    such a proposition could have put the licence holders in breach of section 14(1)(d) of the Estate Agents (Licensing) Regulations, which states that no licence holder should carry an estate agency business under a business name or at a place of business other than the one specified in a statement of particulars of business granted to him;

(e)  Mr Cheung’s version of events which was that he and the other staff members having been put on these new volatile terms were then told to summarily pack up and move out was given without explanation as to why that should be done and would have been a commercially disastrous move by the plaintiff;

(f)  Mr Cheung’s account that having been dismissed (on 24 October) he and his former colleagues then met and formed the view that they should incorporate Primacy and trade in competition, does not fit into the timetable required in the incorporation process, and the setting up of a business operation.  In particular, the memorandum of association was prepared, in the name of Primacy, and the shareholding allocated and signed for only one day later on 25 October, premises were found, secured and redecorated in time for an opening by 25 November, staff were in place and on 13 November Mr Choi had negotiated with and purchased from Mr Wong particulars of real estate available for sale.  Mr To’s account was a more realistic timetable; namely, that discussions were underway in early October;

(g)  had the defendant been terminated without notice on 24 October he would have been entitled to 7 days pay in lieu.  But in his LT application he made no claim for that.  On the other hand, the settlement achieved included an obligation by Eastford not to counterclaim for payment in lieu because of Mr Cheung’s failure to give notice, consistent with his having left without notice on 9 October;

(h)  Mr Cheung’s failure to protest that there was no longer extant a restraint in trade provision to prohibit his taking up with Primacy was not adequately explained;

(i)  To’s evidence from the witness box as compared with that of his witness statement rendered his account at least ambivalent and unreliable.

64.  Were there to have been a meeting with discussion concerning how the agents should be paid, I am sure that would have related to matters in the pipeline, as attested by To.  There could have been absolutely no reason for Mr Wong to cancel the employment contract and thereby part with the safeguard of the restraints in trade by which his sales force were bound.

65.  A much more compelling scenario and the finding of fact I come to is that the workforce on 9 October did announce en bloc that the employees were then leaving and proceeded to do just that.  That may well have been orchestrated by Madam Chong, to seize upon the opportunity to compete with the company whose shares she had recently sold with a workforce who had knowledge of that company’s current business.  Whether that in fact happened and, if it did, put her in breach is not a matter for this court.  Suffice to say that it did put Mr Cheung in breach of the restraint in trade provision of his contract when he chose to join Primacy.

The Consequences of Breach

66.  Eastford’s pleaded case and Mr Wong’s evidence is that Mr Cheung enticed away staff and solicited customers.

67.  Mr Cheung denied enticing staff away.  Mr To changed his account; from the witness box he said he was not persuaded or influenced by him; that he chose to join Primacy of his own free will. 

68.  It is of course right that those who left with the defendants did sign up with Primacy.  But just as consistent with the proposition that Mr Cheung played a driving role is the one that he was no more than a willing participant along with the others, persuaded by another that the venture would reap profits and rewards that were significantly better than staying on at Eastford.  Perhaps that other was Madam Chong, or Mr Choi, or both; certainly I do not find it proved that it was Mr Cheung.

69.  Did he solicit customers?

70.  Mr Wong’s version was that he was told former employees surnamed ‘Chan’ and ‘Cheung’ were said to have done so by colleagues in the trade.  He did not give their names, or otherwise condescend to particulars, or have any more direct support for this proposition.  Putting it at its highest this evidence was speculative and to my mind entirely without value.  The taking away of the 15 keys by their owners could have been for all sorts of reasons not connected with illegal activity by Mr Cheung. 

71.  Mr Wong adduced that the income of Eastford was drastically reduced.  But the loss of significant business and income for the months following the mass departure of the workforce would have been almost inevitable given that property agents with ongoing transactions to put together are the lifeblood of the agency they work for.  That does not mean that business, and income, found its way to Primacy, and if it did that Mr Cheung had been responsible for this by unlawful means.

The Result

72.  Mr Cheung was in breach of an extant provision in his employment contract with Eastford when he left without notice and took up with a competitor.  Eastford was justified in bringing its action and pursuing injunctive relief until 12 months after this unlawful conduct. 

73.  But it has failed to prove loss as a consequence; in particular, loss occasioned by Mr Cheung enticing away staff to follow him and soliciting Eastford’s business.  The claim for damages is dismissed. 

74.  Costs are nisi.  The plaintiff shall have its costs up to 24 October 2004 not already awarded.  Thereafter costs shall be to Mr Cheung. 

75.  Eastford shall be paid out the $250,000 together with any interest earned thereon.  The payment may be made to Eastford’s solicitors on the record.