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DCCJ 680 /2010
IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
CIVIL ACTION NO 680 OF 2010
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BETWEEN
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UNION KNOPF (HK) LIMITED |
Plaintiff |
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and
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MARCEL SOSSNOWSKI |
1st Defendant |
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FRAMELESS ASIA PACIFIC LIMITED |
2nd Defendant |
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| Before : Deputy District Judge R Lai in Court |
| Dates of Hearing : 8 - 12 April and 14 May 2013 |
| Date of Judgment: 20 November 2013 |
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JUDGMENT
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Introduction
1. The plaintiff was incorporated in Hong Kong on 26 May 1999. Its business is and was design and sale of clothing fasteners (eg buttons) and other accessories. It is and was at the material times a subsidiary of Union Knopf GmbH (“UKG”), a company based in Germany. UKG had subsidiaries in various countries (together the “Group”).
2. The 1st defendant started his employment with UKG in August 2000. He started as an apprentice and was a sales merchandiser when he was transferred to Hong Kong in April 2004 to work for the plaintiff. He was appointed the managing director of the plaintiff from 1 July 2005 until 31 May 2008 when he left the plaintiff’s employment upon his resignation. He was appointed as a director of the plaintiff on 5 January 2006. He also resigned from the directorship of the plaintiff on 1 June 2008.
3. The 1st defendant tendered his resignation on 28 November 2007 and left the plaintiff’s service on 31 May 2008. The 2nd defendant was incorporated on 6 May 2008 and was engaged in business similar to that of the plaintiff. The 1st defendant was the sole registered shareholder and sole director of the 2nd defendant when the 2nd defendant was incorporated.
4. The plaintiff claimed against the 1st defendant for breach of fiduciary duties and breach of express and implied terms of the employment agreement between the parties including restrictive covenants and duty of confidence.
5. The plaintiff claimed against the 2nd defendant for dishonestly and/or knowingly misappropriated the plaintiff’s confidential information and trade secrets by procuring the 1st defendant to do so; or being the vehicle used by the 1st defendant for the purpose of misappropriating the plaintiff’s confidential information and trade secrets. The plaintiff also claimed against the 2nd defendant for knowingly employed and/or engaged the 1st defendant who was bound by the restrictive covenants and implied terms of his employment agreement with the plaintiff and the fiduciary duties owed to the plaintiff; and/or dishonestly and/or knowingly assisted the 1st defendant in his breach of the aforesaid restrictive covenants, implied terms and fiduciary duties.
6. In the Re-Re-Amended Statement of Claim (the “SOC”), the plaintiff claimed against the 1st defendant for:-
(a) damages or equitable compensation for breach of fiduciary duties;
(b) alternatively an account of the 1st defendant’s profits earned thereby and/or resulting therefrom, and payment of the sum found due;
(c) further or alternatively, a declaration that the 1st defendant held such profits on constructive trust for the plaintiff; and
(d) all necessary accounts and inquiries including where necessary all tracing orders and consequential directions.
7. The plaintiff claimed against the 2nd defendant for:-
(a) damages;
(b) alternatively, a declaration that the 2nd defendant held its profits as constructive trustee for the plaintiff;
(c) further or alternatively, an account of all the profits made by the 2nd defendant, whether as a result of the 1st defendant’s breach of contract and fiduciary duties or otherwise, and payment over of all sums found due; and
(d) all necessary accounts and inquiries including where necessary all tracing orders and consequential directions.
8. The plaintiff also claimed interest and costs against both defendants.
9. It could be seen that some remedies claimed by the plaintiff were alternative and some were cumulative. I had on 12 April 2013 directed the plaintiff to elect between the alternative remedies not later than the closing submissions. By a letter dated 30 April 2013, the plaintiff made the following elections:
(1) in respect of breach of confidence by misusing information relating to the silicon snap-button [ie one of the plaintiffs’ products], the plaintiff elected for damages; and
(2) in respect of all other breaches of fiduciary duty and/or confidence, the plaintiff elected for an account of profits.
10. When the 1st defendant was appointed as managing director of the plaintiff, he had signed an employment agreement dated 1 July 2005 (the “Employment Agreement”) with the plaintiff (pp 214 – 257 of bundle E1-2). The Employment Agreement contained the following clauses which were relevant to this claim:-
(1) ““Group” means the Company [the plaintiff] and such other companies which are or may become the holding company, the subsidiary, associated companies or related companies of the Company from time to time (whether inside or outside Hong Kong) and “Group Company” means any of them.” (clause 1.1)
(2) “The Employee [the 1st defendant] undertakes with the Company that during the term of this Agreement the Employee shall use his best endeavours to carry out his duties hereunder and to protect, promote and act in the best interests of the Company.” (clause 4.2)
(3) “The Employee shall devote the whole of his time, attention and abilities during normal business hours and at such times as the Company or his duties may reasonably require to the business and affairs of the Company and any Group Company for which he is required to perform duties.” (clause 4.3)
(4) “The Employee shall not without the written prior consent of the Company be engaged or interested either directly or indirectly in any capacity in any trade business or occupation whatsoever other than the business of the Company.” (clause 4.5)
(5) “The Employee shall not, except as authorized or required by his duties, divulge to any person, persons or company any of the trade secret, secret or confidential operations, processes or dealings or any information concerning the organization, business, finances, transactions or affairs of the Company or any of the Group Company or any of their customers which may come to his knowledge during his employment hereunder and shall keep with complete secrecy all confidential information entrusted to him and shall not use or attempt to use any such information in any manner which may injure or cause loss either to the Company or any of the Group Companies. Such obligations shall cease to apply to information or knowledge which have come into the public domain.” (clause 13.2)
(6) “The Employee shall not at any time during the continuance of his employment hereunder or for a period of 12 months thereafter in any country or place where any member of the Group has carried on business, carry on, or be employed, concerned or interested, directly or indirectly whether as shareholder (other than as a shareholder of issued shares or debentures of any company listed on any recognised stock exchange for investment purposes), director, employee, partner or agent and whether alone or jointly with any other person in any business in competition with or in opposition to any business of any member of the Group. The restraint of trade herein applies solely to any business activities or involvement of the parties herein within the Asian market. In consideration of the Employee agreeing to the obligation in this Clause 13.5 above, the Company shall pay the Employee 50% of his last monthly remuneration as financial compensation each month in arrears during the 12 months’ period.” (clause 13.5)
(7) “Should the Employee has any income or remuneration derived from employment or other occupation during the 12 months period, then the amount of financial compensation which the Company agrees to pay in Clause 13.5 shall be deducted by the amount of such income or remuneration. Any kind of unemployment benefit received by the Employee shall also be deemed to be deducted from the aforesaid compensation. The Employee agrees to notify the Company of his earnings during the 12 months’ period upon request by the Company.” (clause 13.6)
(8) “Any violation of the Employee’s non-competition obligations in the above Clause 13.5 shall:
(a) release the Company from further payment of financial compensation stipulated in Clause 13.5; and
(b) render the Employee liable to reimburse the Company for the amount of financial compensation already paid in accordance with Clause 13.5.” (clause 13.7)
(9) “The Employee shall not at any time during the continuance of his employment hereunder or for a period of 12 months thereafter either on his own account or for any other person, firm or company solicit, interfere with or endeavor to entice away from the Company or any of the Group Companies any person, firm or company who at any time during or at the date of the termination of the employment were customers of or in the habit of dealing with the Company or any of the Group Companies.” (clause 13.8)
(10) “The Employee acknowledges that any breach of his obligations in this Clause 13 would place the Company at a serious disadvantage and would cause immeasurable (financial and other) damage to the Company, and the Company expressly reserves the right to engage proceedings against the Employee in reparation for the financial damage actually suffered by the Company.” (clause 13.10)
(11) “While the restrictions contained in Clause 13.2 above are considered by the parties to be reasonable in all the circumstances, it is recognised that undertakings or restrictions of the nature in question may fail for technical reasons unforeseen. Accordingly if any such undertakings or restrictions shall be adjudged to be void as going beyond what is reasonable for the protection of the interests of the Company, but would be valid if part of the wordings thereof were deleted or the period (if any) thereof were reduced or area dealt with thereby were reduced in scope, the said undertakings or restriction shall apply with such modifications as may be necessary to make it valid and effective. In the event that any court or tribunal of competent jurisdiction shall hold any undertakings or restrictions wholly unenforceable by reason of the breath of such scope or otherwise, the parties agree that such determination shall not in any way prejudice the Company’s right to any remedies provided herein which may be granted by any other breaches of such undertakings or restrictions.” (clause 14.1)
11. The plaintiff claimed that the 1st defendant was in breach of the Employment Agreement and/or the fiduciary duties owed to the plaintiff. The plaintiff relied on the following matters to substantiate its claims:-
(1) the 1st defendant competed with and/or took preparatory steps for competing with the plaintiff or establishing a business competing with the plaintiff (ie the 2nd defendant) during his employment with the plaintiff;
(2) the 1st defendant made or copied a list of the plaintiff’s customers and/or the contacts of the staff, representatives and officers of the plaintiff’s customers (ie an email dated 9 May 2008) for use by the 2nd defendant and/or himself during and/or after his employment with the plaintiff;
(3) the 1st defendant solicited or enticed away the plaintiff’s employee (ie Ms Janice Tong (“Ms Tong”)) to leave the employment of the plaintiff and to join the 2nd defendant;
(4) the 1st defendant carried on business in competition with the plaintiff and solicited or enticed away the plaintiff’s customers (ie Adidas, Puma, Esprit, S.Oliver, Brax Fashion, Marc O’ Polo and Escada) during the continuance of his employment and/or the period of 12 months after the termination of his employment on 31 May 2008;
(5) the 1st defendant solicited or enticed away the plaintiff’s suppliers and manufacturers (ie Wing Sun Metal Products Limited, Standard Metal Manufactory, Wing Hing Buttons And Buckles Limited, Ngar Dwong Electroplating Factory, Master Mate Investment Limited, Pro-Tech Profit Industrial Co Ltd, Ta I Button Co, Ltd, 盈豐制衣手袋配件有限公司, 盈豐五金制品廠and Yee Fung Hong Limited) during the continuance of his employment and/or the period of 12 months after the termination of his employment on 31 May 2008;
(6) the 1st defendant used, divulged and/or copied the secret recipe of the plaintiff for making some plating colours provided by the plaintiff to its suppliers and manufacturers; and
(7) the 1st defendant used, divulged and/or copied the production method, formula and manufacturing process of the silicon snap-button.
12. It could be seen that the plaintiff’s claims were built on three areas, namely (1) competing with the employer during employment; (2) using of confidential information or trade secrets of the employer; and (3) breaching of restrictive covenants after employment. I shall deal with the legal principles in these three areas of law before I go into individual claim of the plaintiff against the 1st defendant. After I have dealt with the plaintiff’s claims against the 1st defendant, I shall then deal with the plaintiff’s claims against the 2nd defendant.
Non-competition with the employer during employment
13. It is long established that an employee owes a duty of good faith and fidelity to his employer during the subsistence of the employment. Even if there are no express terms to that effect in the employment contract, the court will imply such duty into the contract. (See Robb v Green [1895] 2 QB 315) An employee is in breach of his duty of good faith and fidelity to his employer if he competes with his employer during the employment. The learned author of Employee Competition: Covenants, Confidentiality, and Garden Leave by Paul Goulding QC (2nd ed), 2011 had the following comments to make in para 2.144:-
“The first and most common incident of contractual duty of good faith is that it will almost invariably be breached where an employee is engaged in competition with his employer in time during which he is contracted to work for his employer.”
14. A fiduciary owes to his beneficiary the duty not to place himself in a position where his or anyone else’s interests would or may conflict with duties owed to the beneficiary (the Non-Conflict Duty) and not to make a profit from his position (the Not to Profit Duty). (See Kao Lee & Yip v Koo Hoi Yan & Ors [2003] 3 HKLRD 296) Ma J (as he then was) pointed out in para 47 of his judgment in the Kao Lee & Yip case that:-
“47. These duties are critical in any fiduciary relationship. They have been described as “inflexible” (by Lord Herschell in Bray v Ford [1896] AC 44 at p 51) and “fundamental” (by Lord Upjohn in Phipps v Boardman [1967] 2 AC 46 at p 123)”
15. It has also long been recognized that a director owed fiduciary duties to the company. Ma J had no doubt that employer and employee relationship was fiduciary relationship giving rise to fiduciary duties. (See para 39 of the judgment) A fiduciary will certainly be in breach of the Non-Conflict Duty if he competes with the beneficiary during the subsistence of the fiduciary relationship. In respect of how far an employee who had served a notice of termination was permitted to make arrangements for his future, Ma J had stated the following principles in para 57 of his judgment in the Kao Lee & Yip case:-
(1) A fiduciary would not be able to use the time during which he was meant to be working for the beneficiary to be working for his own and anyone’s else’s interests. In other words, he should not use “company” time other than for “company” purposes.
(2) Generally, a fiduciary was entitled to use his spare time for whatever activities he chose to indulge in, as long as these were not inconsistent with the fiduciary duties he owed to the beneficiary or in direct competition with the beneficiary’s interests.
(3) The making of arrangements in his spare time during a person’s employment to compete with the employer after termination of employment did not necessarily involve a breach of duty. To suggest otherwise would amount to an unjustifiable restriction on a person’s freedom to work. It was, however, a question of degree.
(4) It would not be a breach of duty for the fiduciary merely to evince an intention to leave and set up in competition with the beneficiary. The taking of some preparatory steps was permissible.
(5) It would in every case a question of fact and degree whether or not in taking preparatory steps for his future whilst still in a fiduciary relationship, a fiduciary would be found to have been in breach. What was or was not permissible in some cases might not apply to all situations. Ultimately, they were fact sensitive and involved matters of degree. The circumstances of each case would vary.
16. A fiduciary is entitled to take some preparatory steps for his future occupation even during the time he is still in the employment of the beneficiary, but he must not overstep the mark of what is acceptable. (See para 118 of the judgment of Ma J) The same applies to the duty of good faith and fidelity owed as an employee.
17. To apply the above principles to this case, the 1st defendant would be in breach of his duty of good faith or fidelity and fiduciary duties if he entered into actual competition with the plaintiff when he was still under the plaintiff’s employment. However, he would be allowed to take acceptable preparatory steps for future competition with the plaintiff after his employment ceased.
Use of confidential information and trade secrets
18. In Faccenda Chicken Ltd v Fowler [1984] ICR 589, Goulding J classified information acquired during employment into the following three categories:-
(1) information which was trivial, or accessible from public sources (“Class 1”);
(2) information which was confidential, either because the employee was expressly told so, or because of its character, but which once learned necessarily remained in the employee’s head and became part of his own skill and knowledge applied in the course of his employer’s business (“Class 2”); and
(3) specific trade secrets (“Class 3”).
19. There is no prohibition against use of Class 1 information by the employee, whether during or after employment.
20. So long as the employment continues, the employee cannot use or disclose Class 2 information without infidelity or breach of contract. When the employment has ceased, the employee can use his full skill and knowledge for his own benefit in competition with his former employer unless there is an enforceable express contractual provision restraining the employee from competing with his former employer after the termination of the employment.
21. An employee cannot lawfully use his employer’s trade secrets for anyone’s benefit even after he ceases to be employed by that employer. This term is implied in all employment contracts.
22. In determining whether any item of information is a trade secret and protected by the implied term after termination of employment, all the circumstances will be taken into account and in particular the following factors will be considered:-
(1) The nature of the employment – If the employment is in a capacity where confidential material is habitually handled, this may impose a high obligation of confidentiality because employee could be expected to realize the confidential nature of the information.
(2) The nature of the information itself – The information is only protected if it can properly be classified as a trade secret or material which is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret.
(3) Whether the employer impresses on the employee the confidentiality of the information. The attitude of the employer towards the information provides evidence which may assist in determining whether or not the information can properly be regarded as a trade secret.
(4) Whether the relevant information can be easily isolated from other information which the employee is free to use or disclose.
23. To put the above principles into context of this case means that the 1st defendant was prohibited from using Class 2 information for his own purposes and from divulging it to third parties during his employment. He was however permitted to use it after he left the plaintiff’s employment insofar as the information had become part of his skill or knowledge. The 1st defendant was not permitted to use Class 3 information for his own purposes or to divulge it, whether during or after the employment even though it might have become part of his own skill or knowledge.
Restrictive covenants after employment
24. A restrictive covenant restraining post-employment activities and work of an employee, also known as restraint of trade clause, will be unlawful unless the employer can justify it as being reasonable, in the interests of both the parties and of the public. In TFS Derivatives Ltd v Morgan [2005] IRLR 246 Cox J stipulated at 251-252 a three-stage process to assess the reasonableness of such covenants. First, the court had to decide what the covenant meant when properly construed. Secondly, the court would consider whether the employer had shown on the evidence that it had legitimate business interests requiring protection in relation to the employee’s employment. Thirdly, the covenant had to be shown to be no wider than was reasonably necessary for the protection of those interests.
25. As Reyes J stated in Cantor Fitzgerald Europe & Anor v Jason Jon Boyer & Ors (unrep., HCA 1160/2011, HCA 41/2012, HCA 42/2012, HCA 43/2012 & HCA 44/2012, 29 February 2012) at para 77:-
“The law will enforce a restrictive covenant where the covenant is no wider than is reasonably necessary to protect the legitimate business interests of an employer. What is reasonably necessary is a question of fact to be assessed in light of all circumstances, including the work which the employee undertook while working for the employer.”
26. The burden is on the employer to show to the satisfaction of the court that the covenant is no wider than is necessary to protect its legitimate business interests in terms of extent of activities restricted and geographical area covered as well as duration of restraint.
27. Mr Recorder Shieh SC had set out the law on enforceability of restrictive covenants in an employment contract in Degreeasia Limited t/a Hong Kong Institute of Continuing Education v Paules Lee Siu Yuk and Ors (unrep, HCA 1686/2006, 25 June 2010) as follows:-
“32. The basic rule is that covenants in restraint of trade are unenforceable unless they can be shown to be reasonable in the interests of the parties and in the public interest (see Bridge v Deacons [1984] 1 AC 705 at 713A-B per Lord Fraser of Tullybelton). It is trite that the burden of demonstrating the reasonableness of a covenant is on the party seeking to enforce it, in this case Degreeasia.
33. The law on enforceability of restrictive covenants in an employment contract is later conveniently summarized in Office Angels Ltd v Rainer-Thomas and O’Connor [1991] IRLR 214. They are as follows:-
(1) If the court is to uphold the validity of any covenant in restraint of trade, the covenantee must show that the covenant is both reasonable in the interests of the contracting parties and reasonable in the interests of the public; (see for example Herbert Morris Ltd v Saxelby [1916] AC 688 at p707 per Lord Parker of Waddington).
(2) A distinction is, however, to be drawn between (a) a covenant against competition entered into by a vendor with the purchaser of the goodwill of a business, which will be upheld as necessary to protect the subject-matter of the sale, provided that it is confined to the area within which competition on the part of the vendor would be likely to injure the purchaser in the enjoyment of the goodwill he has brought, and (b) a covenant between master and servant designed to prevent competition by the servant with the master after the termination of his contract of service: (see for example Kores Manufacturing Co Ltd v Kolok Manufacturing Ltd [1959] Ch 109 at p 118 per Jenkins LJ).
(3) In the case of contracts between master and servant, covenants against competition are never as such upheld by the court. As Lord Parker put it in Herbert Morris Ltd v Saxelby (supra) at p 709:-
“I cannot find any case in which a covenant against competition by a servant or apprentice has, as such, ever been upheld by the Court. Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employers’ trade connection or utilize information confidentially obtained.”
(4) The subject-matter in respect of which an employer may legitimately claim protection from an employee by a covenant in restraint of trade was further identified by Lord Wilberforce in Stenhouse Ltd v Phillips [1974] AC 391 (at p.400) as follows:-
“The employers’ claim for protection must be based upon the identification of some advantage or assets inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.”
(5) If the court is to uphold restrictions which a covenant imposes upon the freedom of action of the servant after he had left the service of the master, the master must satisfy the court that the restrictions are no greater than are reasonably necessary for the protection of the master in his business: (see Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 at p 742 per Lord Moulton). As Lord Parker stressed in Herbert Morris Ltd v Saxelby (supra) at p 707, for any covenant in restraint of trade to be treated as reasonable in the interests of the parties ‘it must afford no more than adequate protection to the benefit of the party in whose favour it is imposed’ [Lord Parker’s emphasis].”
28. The restraint of trade clauses in the Employment Agreement concerning us in this case were clauses 13.5 and 13.8. Clause 13.5 was a non-competition clause and clause 13.8 was a non-solicitation clause. Both clauses covered the time when the 1st defendant was under the plaintiff’s employment and also a period of 12 months after the 1st defendant left the plaintiff’s employment (the “Restraint Period”).
29. Each of the aforesaid two clauses will be considered separately. It is for the plaintiff to satisfy the court that the restrictions stipulated in these clauses are reasonably necessary to protect its legitimate business interests.
30. If any of the restrictive covenants cannot be shown by the plaintiff to be reasonable, it will be struck down and will not be enforced unless the offending parts can be severed by applying the “blue pencil”. The court cannot and will not re-write the covenant by substituting what in its view would be a “reasonable” restriction as to time, geographical location or types of work.
31. As Cox J stated in the TFS Derivatives Ltd case [2005] IRLR 246 at 252 that:-
“If a restrictive covenant applying after employment has terminated is held to be unreasonable, then it is void and unenforceable. The court cannot read down such a clause in an effort to render it reasonable and enforceable. In certain circumstances, however, if only a discrete phrase within a particular covenant is held to be unreasonable, individual words or phrases may be ‘blue-pencilled’ or severed, provided that what is left makes independent sense without the need to modify the wording and that the sense of the contract is not changed.”
Claims against the 1st defendant
32. The 1st defendant had signed the Employment Agreement with the plaintiff. He was bound by the express and implied contractual terms of the Employment Agreement. As an employee, he owed his employer, the plaintiff, a duty of fidelity and good faith. As a director and the managing director of the plaintiff, he owed fiduciary duties to the plaintiff.
33. I shall first deal with each of the allegations made by the plaintiff against the 1st defendant to determine whether the 1st defendant had committed the alleged breaches of the Employment Agreement and/or duty of fidelity or good faith and/or fiduciary duties. If so, whether the 2nd defendant was also liable to the plaintiff for the 1st defendant’s such breaches.
34. The plaintiff’s claims against the 1st defendant could be divided into two parts. The first part was claims in relation to matters occurred when the 1st defendant was still under the plaintiff’s employment (ie prior to 1 June 2008) (the “Pre-Termination Claims”). The second part was claims in relation to matters occurred after the 1st defendant ceased to be employed by the plaintiff (ie from 1 June 2008 and onwards) (the “Post-Termination Claims”).
35. For the Pre-Termination Claims, the plaintiff claimed that the 1st defendant had breached clauses 13.2, 13.5 and 13.8 of the Employment Agreement. The plaintiff also claimed that the 1st defendant had breached his duty of good faith or fidelity and fiduciary duties to the plaintiff.
36. For the Post-Termination Claims, the plaintiff claimed that the 1st defendant had breached clauses 13.5 and 13.8 of the Employment Agreement. The plaintiff also claimed that the 1st defendant had breached his duty of confidentiality.
Pre-Termination Claims
37. The plaintiff’s complaints against the 1st defendant under this part included setting up the 2nd defendant to compete with the plaintiff; compiling an email containing confidential information, ie contacting emails of staff of the plaintiff’s customers, for the 2nd defendant’s use; and enticing the plaintiff’s employee, ie Ms Tong, away from the plaintiff’s employment. The plaintiff also claimed that the 1st defendant had during the continuance of his employment carried on business in competition with the plaintiff and solicited or enticed away the plaintiff’s customers, suppliers and manufacturers.
38. I do not think that the defendants seriously disputed that the 2nd defendant’s business was in competition with that of the plaintiff. The defendants’ pleaded case was that the plaintiff’s business was selling buttons, fasteners and furniture handles designed by UKG and the 2nd defendant’s business was design and supply of apparel fastenings, including buttons, to clothing manufacturers. (See paras 2(2)(b) and 8A(2) of the Re-Amended Defence) The defendants did not dispute that the 2nd defendant participated in the same trade fairs with the plaintiff. In fact, the defendants complained that the plaintiff had tried to exclude the 2nd defendant from one of these trade fairs.
39. The plaintiff’s case was that setting up the 2nd defendant to compete with the plaintiff was breach of clause 13.5 of the Employment Agreement. Compiling an email containing confidential information of the plaintiff for the 2nd defendant’s use was in breach of clause 13.2 of the Employment Agreement. Enticing Miss Tong away from the plaintiff’s employment was in breach of clause 13.8 of the Employment Agreement. Soliciting or enticing away the plaintiff’s customers, suppliers and manufacturers was also in breach of clause 13.8.
40. The plaintiff also said that all the aforesaid acts of the 1st defendant were in breach of the 1st defendant’s duty of good faith or fidelity and fiduciary duties to the plaintiff.
Setting up of the 2nd defendant
41. There were no disputes that the 1st defendant applied for incorporation of the 2nd defendant on about 29 April 2008 and the 2nd defendant was incorporated on 6 May 2008 when the 1st defendant was still under the plaintiff’s employment. The 1st defendant was the sole director and registered shareholder of the 2nd defendant when the 2nd defendant was incorporated. The 1st defendant said that he held 50% of the shares of the 2nd defendant as trustee for a Mr Harald Alexander Bergel (“Mr Bergel”) who was also appointed a director of the 2nd defendant in May 2011.
42. Mr Bergel was a sale agent of the Group for South Germany who had resigned in about May/June 2007, ie a few months before the 1st defendant tendered his resignation in November 2007.
43. The defendants’ case was that the 2nd defendant was dormant until after the 1st defendant had left the plaintiff’s employment. The 1st defendant submitted copy tenancy agreement for the 2nd defendant’s office premises to show that the 2nd defendant did not have an office until 16 June 2008 (pp 2886-2889 of bundle E12). The 1st defendant said that he had left Hong Kong on 1 June 2008 for Bali until 14 June 2008. He produced extract of his passport to show his travelling records (p 2890 of bundle E12).
44. The 1st defendant said that he had no plan to set up the 2nd defendant until April 2008 when Mr Bergel contacted him by phone and discussed with him to set up a new business together. He testified at the trial that he had no specific career plan when he tendered his resignation in November 2007. He was interested in changing his field. He began to look for a job sometime before April 2008. He was thinking of pursuing a career in trade show management. At that time he was looking for a job with a monthly salary of about HK$30,000 to HK$50,000 per month. The 1st defendant did not say that he had actually made any job applications.
45. The 1st defendant was earning about HK$120,000 per month when he tendered his resignation. He had been on a smooth career path since he joined UKG in 2000 as an apprentice. He was promoted to sales merchandiser in 2002. He was transferred to Hong Kong in 2004 as an assistant to the executive board of the plaintiff and appointed the managing director of the plaintiff in 2005. He had been doing very well with the plaintiff by growing it from a company of 10 odd staff with annual revenue of about US$2 million to US$3 million into a company of considerable size. He was the top person of the plaintiff in Hong Kong heading a company of 46 staff with an annual turnover of about US$10 million when he tendered his resignation (pp 284-288 of bundle E2). There were no suggestions that the 1st defendant had any disagreement with Mr Martin Rolf Dolleschel (“Mr Dolleschel”), the managing director of UKG and one of the founding directors of the plaintiff to whom the 1st defendant reported to. The evidence was that Mr Dolleschel spent hours trying to persuade the 1st defendant to stay with the plaintiff without success when Mr Dolleschel received the 1st defendant’s resignation. It would not be a light decision for the 1st defendant to resign from such a position.
46. The 1st defendant impressed me as a mature and prudent young man. He handled changes with caution. He described himself as someone who would check the risks before taking up any challenges. He had visited Hong Kong before he agreed to transfer to work in Hong Kong for the plaintiff. When he was cross-examined, he said that he was looking for a kind of position where he could meet people and communicate with people. He agreed that he would not be able to apply for a director post and would consider the post of a manager with a monthly salary of about HK$30,000 to HK$50,000, ie about 24% to 42% of what he had been earning at the plaintiff. The evidence of the 1st defendant was that he gave up such secured and well-paid position with nothing specific in mind. This was quite different from his previous approach to changes.
47. The 1st defendant said that he intended to stay and work in Hong Kong after he left the plaintiff’s employment. The 1st defendant was allowed to stay in Hong Kong on a working visa to work for the plaintiff. After he terminated his employment with the plaintiff, he would require a new working visa to continue to stay and work in Hong Kong. To do that he needed to secure a fresh employment with another employer. In such circumstances, it is surprising to find that the 1st defendant would tender his resignation before he had secured another employment. It is even more surprising to find that the 1st defendant had made no applications for any jobs from December 2007 to April 2008 when his working visa would become invalid in two months’ time.
48. The 1st defendant had not called Mr Bergel to give evidence and to be cross-examined on the 1st defendant’s version of story that the idea of setting up the 2nd defendant did not emerge until April 2008.
49. I agree with the following observations of Mr Suen, counsel for the plaintiff, set out in para 13(6) of his closing submission:-
“The 1st Defendant was emphatic in maintaining that, from the date of resignation up to April 2008, it was his clear determination to do something new and look for a job in a new field, such as trade show management (even though, allegedly, he had no idea at all on the work, nor the level of salary being offered). It is inherently improbable and illogical for the 1st Defendant to suddenly make a 180 degree turn and pursue the plan of setting up a business in the same field as the Plaintiff, only after a few telephone calls with Mr Bergel in April 2008. This is especially so given the astounding speed with which the 1st Defendant set the wheels in motion by applying to incorporate the 2nd Defendant on 29 April 2008.” (Emphasis added by Mr Suen)
50. I find the 1st defendant’s evidence on the setting up of the 2nd defendant simply incredible. I do not accept his evidence. In any event, whether the 1st defendant planned to set up the 2nd defendant in November 2007 or only in April 2008 did not change the facts the 2nd defendant was set up when the 1st defendant was still under the plaintiff’s employment and that the 2nd defendant was engaged in business similar to that of the plaintiff. They were in competition. The futile attempt of the 1st defendant to water down the culpability of the setting up of the 2nd defendant only served to discredit his evidence.
51. I find that the 1st defendant set up the 2nd defendant with Mr Bergel with a view to engage in business in competition with the plaintiff.
52. Mr McLeish, counsel for the defendants, relied on Balston Ltd v Headline Filters Ltd FSR[1990] 385 and the Kao Lee & Yip case to submit that a director and employee was not in breach of fiduciary or contractual duty owed to the company of which he was a director and employee if he acquired a company with a view to future competition so long as there was no actual competitive activity before he ceased to be the director and employee of the first company.
53. No evidence had been adduced to show that the 2nd defendant had transacted any business before the 1st defendant left the plaintiff’s employment. I accept that the 2nd defendant had not commenced business when the 1st defendant was still under the plaintiff’s employment. The 1st defendant was not in breach of clause 13.5 of the Employment Agreement when he was still under the plaintiff’s employment.
54. I also agree that the mere fact that the 1st defendant had acquired the 2nd defendant with a view to future competition was not a breach of his duty of good faith or fidelity and fiduciary duties to the plaintiff. However, as set out below, the 1st defendant did not merely acquire the 2nd defendant. He also took other substantial preparatory steps to get the 2nd defendant ready for competition with the plaintiff.
55. As stated by Ma J in the Kao Lee Yip case [2003] 3 HKLRD 296 in para 118 at 334:-
“a fiduciary is entitled to take some preparatory steps for his future occupation even during the time he is still in partnership with or in the employment of the beneficiary, but he must not overstep the mark of what is acceptable.”
56. Taking all acts discussed below of the 1st defendant together, I am of the view that the 1st defendant did “overstep the mark of what is acceptable” and was in breach of his duty of good faith or fidelity and fiduciary duties to the plaintiff. I shall deal with the various acts of the 1st defendant which I consider, when put together, overstepping the mark.
The 9 May 2008 email
57. There were no disputes that on 9 May 2008, the 1st defendant compiled a list of email addresses of the staff, representatives and officers of the customers of the plaintiff (the “List”) and sent the List to his email account at the plaintiff (pp 304-305 of bundle E2). The List comprised of 157 email addresses of staff of the plaintiff’s customers.
58. The plaintiff’s case was that the 1st defendant prepared the List for use of the 2nd defendant in breach of clause 13.2 of the Employment Agreement and in breach of his duty of good faith or fidelity and fiduciary duties to the plaintiff.
59. The 1st defendant’s case was that the List was prepared for the purpose of the plaintiff, ie to facilitate his successor, Mr Marc Friedrich (“Mr Friedrich”), to send notices to customers by bulk email to inform the customers of change of managing director of the plaintiff. The 1st defendant further contended that the information contained in the List was not confidential information.
60. For reasons set out below, I find that the List was prepared by the 1st defendant for use of the 2nd defendant to compete with the plaintiff and that the information contained in the List was confidential information.
Purpose of preparing the List
61. In his witness statement dated 22 March 2011, the 1st defendant tendered the following explanation:
“13. I confirm that on or about 9th May 2008 I compiled a list of email addresses of various contacts for the Plaintiff’s customers. I did so for the Plaintiff’s purposes in the circumstances I describe below.
14. I had been informed that my successor would be a Mr Marc Friedrich (“Mr Friedrich”). Mr Dolleschel requested that I hand over my duties to Mr Friedrich. He also asked me to inform the Plaintiff’s suppliers that Mr Friedrich would take over my duties but said he and Mr Friedrich would themselves inform the Plaintiff’s customers of this.
15. Acting on what I had been informed and requested to do, on or about 9th May 2008, I prepared a list of email addresses of various contacts for the Plaintiff’s customers for Mr Friedrich to refer to when he took over my duties. I sent the list to my work email address at the Plaintiff, i.e. marcel@unionknopf.com.hk, so that it would be ready for Mr Friedrich’s use in the Inbox of the same email account. I sent the list to the inbox of my work email address as a convenient place to keep it pending Mr Friedrich’s arrival on or about 19th May 2008.
16. I understand the Plaintiff alleges in its Amended Reply that it created an email account for Mr Friedrich on 9th May 2008. I have no knowledge of whether this was done or not. Certainly, I was not informed of this. As far as I was aware, no work email account had been created for Mr. Friedrich at this time, which is why I sent the email contract [sic] list I had prepared to the Inbox of my work email account at the plaintiff.
17. I prepared the e-mail contact list in advance in order to have it ready when Mr Friedrich joined the Plaintiff. I did this in advance because the time between Mr Friedrich starting and me leaving was going to be short and I would have to pass a lot of information and hand over all my duties to him during that short period of time. In fact, Mr Friedrich and I shared a computer from the time he arrived, 19th May 2008, until I left on 31st May 2008. During this period, Mr Friedrich had full access to my work e-mail account, which was left open on the computer at all times. This meant he could access the e-mail contact list at any time from 19th May 2008 onwards.”
62. In his witness statement, the 1st defendant’s evidence was that he had prepared the List, sent it to his email address at the plaintiff and left it in the Inbox of his email account at the plaintiff for the use of his successor. The 1st defendant changed his evidence discreetly in his supplemental witness statement filed on 10 April 2013, ie the 3rd day of the trial, in the disguise of explaining his access to his email account via the Outlook and the World Client. He stated in para 5(d) of his aforesaid supplemental witness statement that:-
“(d) As mentioned in my First Witness Statement, Mr Friedrich and I shared a computer from the time he arrived on 19 May 2008 until my last working day with UKHK [the plaintiff]. During this period, Mr Friedrich had full access to the emails sent to and from the marcel@unionknopf.com.hk email account via Outlook and World Client which were both left open on my work computer. Accordingly, as I informed him at the time, in order to use the email addresses listed in the 9 May email to find the emails sent from any of them to the marcel@unionknopf.com.hk account or the emails sent to any of them from the marcel@unionknopf.com.hk account he needed to search in both Outlook and World Client.” (Emphasis added)
63. At the trial, the 1st defendant even said that he had actually discussed the List with Mr Friedrich. This was very different from what he had stated in his first witness statement. If this was true, he should have stated that in his first witness statement bearing in mind that he had devoted a section of his first witness statement to this issue entitled “E-mail Contact List of the Plaintiff’s Customers”. I do not accept his changed evidence and find that the 1st defendant had not told Mr Friedrich about the List.
64. When he testified at the trial, the 1st defendant repeatedly emphasized that he was only responsible for dealing with and soliciting orders from Asian brands and not European brands which were dealt with by UKG. However, most if not all of the email addresses on the List were email addresses of the plaintiff’s European customers. Mr Suen submitted that only 4 email addresses (out of 157) were of Asian brands customers. If what the 1st defendant had said was true, as Mr Suen submitted, there would be no need for Mr Friedrich to liaise with the European customers and the 1st defendant should have provided a list of email addresses of the plaintiff’s Asian customers, instead of European customers, to Mr Friedrich.
65. To fortify his version of story, the 1st defendant stated in his witness statement that Mr Friedrich shared a computer with him from the time Mr Friedrich arrived (ie 19 May 2008) until the 1st defendant left (ie 31 May 2008). However, this was contrary by documentary evidence which showed that the plaintiff had purchased a new computer for Mr Friedrich before the arrival of Mr Friedrich (pp 2897-2899 of bundle E12). The payment cheque for the purchase of the new computer dated 9 May 2008 was signed by the 1st defendant. The plaintiff’s witness Mr Lam Kan Choi Gabriel (“Mr Lam”) said at the trial that payment for the computer was made on the date of its delivery to the plaintiff.
66. Mr Lam testified that Mr Friedrich had been using the new computer from day one of his arrival. The 1st defendant admitted in his supplemental witness statement dated 10 April 2013 that he suggested purchasing a new computer for Mr Friedrich but he maintained that Mr Friedrich shared his work computer and did not use the new computer before 31 May 2008.
67. If Mr Friedrich would not need to use the new computer upon his arrival, I see no reason for the plaintiff to place order for the new computer on 30 April 2008 and pay for the same on 9 May 2008. There were also no reasons why Mr Friedrich did not use the new computer when the same was there upon his arrival. I prefer the evidence of Mr Lam to that of the 1st defendant and find that Mr Friedrich had been working on his new computer upon his arrival.
68. I accept that Mr Friedrich had access to the 1st defendant’s computer and the 1st defendant’s email account as Mr Friedrich would also need to retrieve previous emails between the 1st defendant and the plaintiff’s customers.
69. Mr Lam further stated that he had installed Mr Friedrich’s new business email address at the plaintiff on the new computer and Mr Friedrich had been using the said email address from day one of his arrival. The 1st defendant stated in his said supplemental witness statement that he had no knowledge that Mr Friedrich was assigned the work email account to explain why he had not sent the List to Mr Friedrich by email.
70. Mr Friedrich was to take over the duties of the 1st defendant. According to the 1st defendant’s evidence, he received 50 to 100 emails a day at the plaintiff. It could be seen that email was a significant means of communication for the managing director of the plaintiff. I shall expect that the 1st defendant would ensure that an email account was created for Mr Friedrich upon his arrival to facilitate Mr Friedrich to take over the 1st defendant’s duties. I do not accept that the 1st defendant would have no knowledge of the work email account of Mr Friedrich. I also do not accept the 1st defendant’s explanation for not sending the List to Mr Friedrich by email.
71. The 1st defendant explained that he had kept his emails with two email hosting services, namely the Microsoft Outlook and the World Client. He said that the Outlook was not working properly on his work computer and he used the World Client to receive and send almost all his work emails (including the List) towards the end of his employment with the plaintiff. Mr McLeish submitted in para 49 of his closing submission that:-
“In particular, they confirm that MS’s [the 1st defendant’s] successor, Friedrich, would have been able to access the 9 May Email (on the World Client service) using the password for the marcel@unionknopf.com.hk email address that (on MS’s uncontradicted evidence) MS provided to Friedrich to enable Friedrich to send a “bulk email” to the email addresses listed therein in order to notify the contacts (whose email addresses were listed therein) that he (Friedrich) had taken over from MS in position of “Managing Director”.”
72. According to the 1st defendant’s first witness statement, Mr Friedrich was left to discover the List, which contained no headings, from the enormous database of emails kept at the World Client (accumulating at a rate of 50 to 100 emails a day according to the 1st defendant) and to figure out what to do with the List. This is quite improbable.
73. The List only listed email addresses of various staff of some of the plaintiff’s customers. Mr Suen rightly pointed out that the List did not set out the full title, position and department of the respective staff. It was not intelligible to Mr Friedrich, who the 1st defendant agreed was new to the button business. In contrast, the List was intelligible to the 1st defendant as he would have known the positions, titles and departments of the people on the List through his previous dealings with the customers.
74. I find that the List was not prepared for the purpose of the plaintiff as alleged by the 1st defendant. It was prepared to facilitate the 2nd defendant to get into contact with the relevant purchasing staff of these customers of the plaintiff. I agree with Mr McLeish that there was no evidence to show that the 1st defendant had copied the List onto a storage device or forwarded to any other email address. However, it might not be easy to check whether a particular document had been copied to a removable storage device and I am of the view that printing of a copy of the List would serve the defendants’ purpose.
Was the information on the List confidential information?
75. The plaintiff’s case was that the List was in effect a list of the plaintiff’s customers. It was confidential information. An employee who copied confidential information of his employer for his own use after the termination of his employment breached his duty of good faith to the employer. Mr Suen relied on Gilman Engineering Ltd v Ho Shek On Simon [1986] HKC 523 when Liu J stated at 531-2 that:
“A list of customers has always been jealously guarded by the courts. Any surreptitious copying, physically or even by making a conscious mental note, for unauthorized personal use has invariably been disapproved by the courts. That is because a list of customers is often, and can readily be shown to have been, compiled with much effort in the strictest confidence, see Robb v Green [1985] 2 QB 315; Coral Index Ltd v Regent Index Ltd [1970] RPC 147; United Sterling Corp Ltd v Felton and Mannion [1974] RPC 162, 172, line 20; an Australian case Metrans Pty Ltd v Courtney-Smith [1983] 1 IPR 185, 187.”
76. The 1st defendant said that the email addresses concerned could easily be obtained by various means. Mr McLeish submitted that the List did not contain a list of customers. It was simply a collection of company email addresses of such individuals comprising their names and the email address extensions of the companies concerned. They could hardly be claimed to be confidential. Mr McLeish further submitted that the customers concerned were well-known companies/brands that had multi-suppliers. They made no secret of (and had every reason to make known) the identity and contact details of their staff, representatives and officers engaged in sourcing and manufacturing. He relied on Charter Sense Limited v Ng Kin Yan also known as Patrick Ng Kin Yan (unrep, HCA 2082/2011, Deputy High Court Judge Lok, 13 March 2012, HCMP 1036/2012, 5 July 2012, CA) to submit that not all customer list was confidential.
77. Mr Suen submitted that the fact that information such as the names and addresses of the customers might be obtained through directories and other public records was irrelevant. The list as a whole, compiled by the employer through engagement in business for a significant period of time, was of undeniable real value to anyone in the business. He referred to the judgment of Hawkins J in Robb v Green [1895] 2 QB 1 at 18-19 which stated as follows:-
“There is one other contention of the defendant’s counsel I must refer to. He contends that the order-book of the plaintiff contained no more information than might be acquired by reference to directories and such-like publications; and, moreover, he says that the defendant’s master, in seeking to advance his own business, before the defendant made the copy of the order-book, had published circulars or pamphlets containing the names of many of the customers who had sent him favourable testimonials, so that the defendant had when he made the list complained of materials at his command without making use of his master’s book. This to a considerable extent may be true, but it is not so altogether. The order-book contains collected together the names and addresses of purchasers of pheasants’ eggs spread over the length and breadth of England, Wales, and Scotland. No directory would give this information in this collection; and though, of course, the testimonials would give similar information as to many of the names in the order-book, there are many names in the order-book which do not appear among the testimonials. The names of all the customers are collected together in the order-book in a manner not to be found in any other book or paper to which the defendant had access. To him, therefore, the possession of a copy of the order-book would be peculiarly valuable. He would be saved the expense and delay of searches, such as would be necessary to enable him to compile such a list for himself. Practically, to bring all those names together, even though singly each may appear in some directory or other, would be almost impossible; and it would obviously be much more difficult to ascertain whether they would be likely customers for pheasants’ eggs. By making a copy of the order-book the defendant was able to canvass at once each of his master’s customers without trouble or expense; and the conversation with Mr. Barclay shews that he looked upon the list in that light. The collection together of these names and addresses in his order-book was the property of the plaintiff.”
78. In Roger Bullivant Ltd v Ellis [1987] FSR 172, the English Court of Appeal held that the customer card index of the employer was confidential information which could not be used by the employee for his own purposes. May LJ stated at 181 that:-
“The value of the card index to Mr. Ellis and the other defendants was that it contained a ready and finite compilation of the names and addresses of those who had brought or might bring business to the plaintiffs and who might bring business to them. Most of the cards carried the name or names of particular individuals to be contacted.”
79. The same principles apply to this case. The list of contact details of customers contained in the List had been built up through years of business of the plaintiff. Acquisition of the List allowed the defendants to know clearly and specifically which customers and their representatives had brought and might bring business to the 2nd defendant. The fact that such information might be available in the public domain did not make it less confidential as considerable time, cost and efforts would be required for the defendants to compile such a list from publicly available information.
80. The Charter Sense Limited case referred to by Mr McLeish related to a specialized segment of printing industry, namely financial research report, with only two market players in Hong Kong and no more than 50 active clients within the industry. The learned judge found that “given the previous experience of the defendant in the trade prior to working for the plaintiff, the defendant should have had no difficulty in identifying the contact persons of each individual institution and to obtain the contact details. Further, as these institutions have no reason to withhold information about the contact persons responsible for FRP [financial research report] printing jobs, I would imagine even someone who is not in the trade can obtain the contact details with a few telephone calls.” (See para 16 the judgment of Deputy High Court Judge Lok) When the Court of Appeal considering the application for leave to appeal in the Charter Sense Limited case, Fok JA (as he then was), when delivering judgment of the Court of Appeal, did not say that customer contact list was not confidential information. The Court of Appeal was of the view that a client contact list might contain or constitute confidential information but only on the fact of that case, the learned judge concluded it was not.
81. However, in this case we were dealing with a market with many more potential customers. Some of them were multi-national corporations with many different people responsible for purchasing different materials required for their garments. In the Charter Sense Limited case, there were no more than 50 active clients within the trade. In the List, the 1st defendant had included 45 email addresses of a single client of the plaintiff (ie Esprit). To indentify 45 relevant people in a single corporation responsible for purchasing only buttons would require much more time and effort than making a few telephone calls. This case is very different from the Charter Sense Limited case.
82. I find that the information contained in the List was confidential information.
83. In Robb v Green, the defendant, while in the employment of the plaintiff as his servant, copied from his master’s book a list of the plaintiff’s customers with their addresses, with the intention of using that list, when he had left the plaintiff’s service, in order to set up a rival business and to induce the plaintiff’s customers to transfer their custom to him. The English Court of Appeal upheld the rulings of Hawkins J. Lord Esher MR was of the view that the judge was perfectly justified in holding that such conduct was a breach of the trust reposed in the defendant as the servant of the plaintiff in his business and that in a contract of service the court had to imply a stipulation that the servant would act with good faith towards his master and the judge was also right in holding that there was a breach of that implied contract in that case. ([1895] 2 QB 315 at 316-317)
84. The conduct of the 1st defendant in this case was similar to that of the defendant in Robb v Green. I find that the 1st defendant had breached clause 13.2 of the Employment Agreement and his duty of good faith or fidelity and fiduciary duties to the plaintiff.
Employment of Ms Janice Tong
85. Ms Tong was employed by the plaintiff to do product development and design. There were no disputes that Ms Tong tendered her resignation on 19 May 2008. She left the plaintiff’s employment on 21 June 2008 and started to work for the 2nd defendant on about 23 June 2008, 22 June 2008 being a Sunday. In other words, Ms Tong started her employment with the 2nd defendant immediately after she left the employment of the plaintiff.
86. The plaintiff’s case was that the 1st defendant solicited and enticed Ms Tong to leave the employment of the plaintiff and join the 2nd defendant when the 1st defendant was still under the employment of the plaintiff.
87. The 1st defendant’s case was that he did not know the reasons for Ms Tong’s resignation. Ms Tong first phoned him for a reference letter in June 2008 after he had already left the plaintiff’s employment. He told Ms Tong that he was setting up a business. In a subsequent telephone conversation Ms Tong asked the 1st defendant whether there would be a position in the 2nd defendant for her. After the 1st defendant discussed with Mr Bergel, the 2nd defendant employed Ms Tong.
88. The 1st defendant said that before Ms Tong called him, he did not intend that the 2nd defendant would employ any staff as the 2nd defendant would not need any staff in the beginning when it was working on its designs and the 2nd defendant did not have sufficient financial resources to do so at that time. He considered employing Ms Tong only after Ms Tong raised it with him.
89. Ms Tong tendered her resignation on 19 May 2008. In her resignation letter sent to Ms Bianca Chai (“Ms Chai”), the general manager of the plaintiff, Ms Tong had asked for a reference letter. (p 306 of bundle E2) Why Ms Tong would require another reference letter from the 1st defendant who no longer held any position in the plaintiff? If Ms Tong considered a letter from the managing director of the plaintiff would be useful for her future employment, she should have approached the 1st defendant when the 1st defendant was still holding the position of managing director of the plaintiff. It makes a whole lot of difference to have a reference letter from a managing director and from an ex-managing director. Ms Tong should know the imminent departure of the 1st defendant as the successor of the 1st defendant had arrived at the plaintiff on the very day when Ms Tong tendered her resignation. I do not accept the 1st defendant’s explanation that he was away from the office a lot prior to leaving the plaintiff as it would not take long for Ms Tong to make such request to him or Ms Tong could contact him through his mobile as she allegedly did in June 2008.
90. Ms Tong was not dismissed by the plaintiff. If Ms Tong was eager to have another employment immediately after she left the plaintiff’s employment, she would have secured another job before she tendered her resignation. If she would like to take a break after her employment with the plaintiff, she would not have offered herself for employment with the 1st defendant’s new business even before she started the break. The evidence adduced showed that she in fact took no break at all before she started her employment with the 2nd defendant.
91. The 1st defendant also tried to play down the role of Ms Tong as a designer. When he testified at the trial, he tried to paint Ms Tong as a sourcing staff employed by the plaintiff to buy samples in Shamshuipo because she could speak Cantonese. In para 32 of his witness statement dated 22 March 2011, he stated that:-
“32. I would add that when Ms Tong was working for the Plaintiff her main duties involved sourcing products. She did some design work for the Plaintiff but it was usually restricted to adding customer logos to the drawings of the parent company’s products. She did not design products from scratch. This was done by the Plaintiff’s parent company in Germany.”
92. However, the 1st defendant admitted in his witness statement that the post title of Ms Tong when she was employed by the 2nd defendant was “designer” although he kept on saying that Ms Tong carried out a number of different duties and did not do much on the design side of the business.
93. According to the organization chart of the plaintiff prior to the 1st defendant’s departure, Ms Tong was the only person in the plaintiff to deal with design and sourcing (p 288 of bundle E2). I can see the validity of Mr Suen’s submission made in para 29(7) of his closing submission that:-
“Against all these, the benign suggestion that Ms Tong suddenly decided to resign from the Plaintiff (right before the 1st Defendant left the Plaintiff) and then by chance learnt about the 2nd Defendant and decided to join it (right after her employment with the Plaintiff terminated), is too good to be true. It is hardly convincing to suggest that this was a mere coincidence, a chance encounter. The truth is that Ms Tong was the only person in charge of design & sourcing of the Plaintiff [E2/288]. Such role is critical and essential to the 2nd Defendant in June 2008, when (on the defence case) the Defendants were busy coming up with designs and collection boards. Ms Tong, Mr Bergel and the 1st Defendant were the perfect match for setting up the 2nd Defendant’s business.” (Emphasis added by Mr Suen)
94. I find the version of story put forward by the 1st defendant improbable. The improbabilities could be explained by Ms Tong. However, the defendants chose not to call Ms Tong to testify at the trial to deal with the plaintiff’s accusations despite the facts that Ms Tong was still under the employment of the 2nd defendant and was available to give evidence at the trial.
95. The Court of Appeal in Li Sau Keung v Maxcredit Engineering Ltd & Anor [2004] 1 HKC 434 referring to the judgment of Newton and Norris JJ in O’Donnell v Reichard [1975] VR 916 held that where a person without explanation failed to call as a witness a person who he might reasonably be expected to call, it was open to the court to infer that that person’s evidence would not have helped that party’s case. If the court drew that inference, then it might properly take it into account against the party in question in deciding whether to accept any particular evidence, which had in fact been given, either for or against that party, and which related to a matter with respect to which the person not called as a witness could have spoken.
96. Evidence was adduced to show that Ms Tong tendered her resignation without specific reasons within two weeks after the 1st defendant set up the 2nd defendant and within two weeks before the 1st defendant left the plaintiff’s employment. Evidence also showed that Ms Tong started working for the 2nd defendant immediately after she left the employment of the plaintiff. Evidence showed that the principal activities of the 2nd defendant prior to December 2008 were designing its collection boards and Ms Tong was the person in the plaintiff dealing with design and sourcing. I am of the view that the plaintiff had raised a case to answer on the matter in question, ie whether the 1st defendant during his employment with the plaintiff had solicited and enticed Ms Tong away from the plaintiff’s employment. It was reasonable to expect the 1st defendant to call Ms Tong to testify to the court to substantiate the 1st defendant’s case on Ms Tong’s employment by the 2nd defendant. Yet, the 1st defendant failed to call Ms Tong to give evidence at the trial. I am of the further view that in this case, the court is entitled to draw adverse inference against the defendants on their failure to call Ms Tong to give evidence at the trial.
97. I do not accept the 1st defendant’s evidence and find that he had solicited and enticed Ms Tong away to join the 2nd defendant when the 1st defendant was still under the plaintiff’s employment.
98. The 1st defendant was in breach of his duty of good faith in approaching Ms Tong and offering employment to her with the 2nd defendant. (See the Balston Limited case and Marshall v Industrial Systems & Control Ltd [1992] IRLR 294) Subject to the discussion on clause 13.8 of the Employment Agreement below, this was also in breach of clause 13.8 and the 1st defendant’s fiduciary duties to the plaintiff.
Other Pre-Termination Non-Solicitation Claims
99. The plaintiff pleaded that the 1st defendant had solicited and enticed away the plaintiff’s customers, suppliers and manufacturers since early April 2008 during the continuance of his employment with the plaintiff. (See paras 12C and 12D of the SOC) No evidence had been adduced to substantiate this aspect of the plaintiff’s pleaded case.
100. Although the plaintiff had not expressly abandoned its claims in this respect, Mr Suen did not press on the plaintiff’s claims in this respect in his closing submission. Mr Suen in the section of “Summary of Plaintiff’s Contention on Evidence” in his closing submission summarized the plaintiff’s contention in this respect in para 10(5) as follows:-
“The 1st Defendant, through the 2nd Defendant, commenced business in competition with the Plaintiff and solicited/interfered with the Plaintiff’s customers within 12 months from 31 May 2008.” (Emphasis added)
101. The plaintiff did not contend that the 2nd defendant had commenced business during the 1st defendant’s employment with the plaintiff. I find that the plaintiff had failed to prove that the 1st defendant had solicited and enticed away the plaintiff’s customers, suppliers or manufacturers during the continuance of his employment with the plaintiff.
Findings on liabilities on Pre-Termination Claims
102. I find that the 1st defendant was in breach his fiduciary duties towards the plaintiff by setting up the 2nd defendant with a view to compete with the plaintiff, preparing the List to be used by the 2nd defendant to compete with the plaintiff and to solicit and entice away the service of Ms Tong.
103. The 1st defendant’s act of preparing the List for the use of the 2nd defendant was also in breach of clause 13.2 of the Employment Agreement.
104. The 1st defendant’s act of soliciting the service of Ms Tong was also in breach of clause 13.8 of the Employment Agreement if such clause is enforceable in the form as stipulated in the Employment Agreement.
105. However, the plaintiff failed to prove that the 1st defendant had solicited and enticed away the plaintiff’s customers, suppliers or manufacturers during the continuance of his employment with the plaintiff.
Post-Termination Claims
106. The plaintiff’s case was that after the 1st defendant ceased to be employed by the plaintiff, he was still subject to the restrictive covenants set out in clauses 13.5 and 13.8 of the Employment Agreement and the duty of confidentiality in respect of the plaintiff’s trade secrets.
107. The plaintiff claimed that the 1st defendant was in breach of clause 13.5 in engaging in the 2nd defendant to compete with the plaintiff during the Restraint Period. The 1st defendant was further in breach of clause 13.8 in soliciting custom and supplies from the plaintiff’s customers and suppliers respectively during the Restraint Period.
108. The plaintiff contended that the production method, formula and manufacturing process of the silicon snap-button was trade secret of the plaintiff and the 1st defendant was in breach of his duty of confidentiality in using, divulging and/or copying the plaintiff’s aforesaid trade secret to produce silicon snap-button for sale by the 2nd defendant. The plaintiff also claimed that the 1st defendant had used, divulged and/or copied the secret recipe of the plaintiff for making some plating colours provided by the plaintiff to its suppliers and manufacturers which was also trade secret of the plaintiff.
109. The defendants’ case was that the restraint of trade clauses in the Employment Agreement were not valid or enforceable and clause 13.8 of the Employment Agreement did not cover the plaintiff’s suppliers. Alternatively, the defendants argued that the court should refuse the plaintiff’s request for equitable relief because of the plaintiff’s conduct. The defendants also denied the plaintiff’s trade secret claims in respect of the silicon snap-button and the recipe for making plating colours.
Enforceability of the restraint of trade clauses
110. I have set out in para 27 above the law on enforceability of restraint of trade clauses as summarized by Mr Recorder Shieh SC in the Degreeasis Limited case. I do not propose to repeat myself here.
111. As stated by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company [1894] AC 535 HL at 565 that:-
“The pubic have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and, indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.”
112. Not all covenants against competition must be struck down. There are exceptions. As Lord Ashbourne explained in the Nordenfelt case at 558 that:-
“the inquiry as to the validity of all covenants in restraint of trade must, I am disposed to think, now ultimately turn upon whether they are reasonable, and whether they exceed what is necessary for the fair protection of the covenantees.”
113. If the court is to uphold the validity of any covenant in restraint of trade, the employer must show that it has legitimate business interests justified to be protected by a restraint of trade clause and the restrictions are no greater than are reasonably necessary for the protection of its legitimate business interests.
Did the plaintiff have legitimate business interests to protect?
114. The plaintiff’s case was that it had trade secrets, confidential information and customer connection which were legitimate business interests required protection by the restraint of trade clauses.
115. The plaintiff said that as the managing director of the plaintiff, the 1st defendant had access to the plaintiff’s trade secrets and confidential information including customer details, requirements/needs/preferences of customers, pricing matters, product development details, details of manufacturers/suppliers and accounting details.
116. The plaintiff pleaded that prior to the termination of his employment, the 1st defendant was the one who was in charge of the whole operation of the plaintiff. The plaintiff pleaded in para 7 of the SOC that 1st defendant had the following duties:-
“(a) building up the Plaintiff as a Hong Kong arm of Union Knopf GmbH;
(b) reporting to Union Knopf GmbH from time to time;
(c) taking care of customers of the Plaintiff, mainly garment makers in Asia;
(d) taking care of key customers of Union Knopf GmbH in Hong Kong and/or the Plaintiff, including, inter alia, ESPRIT, PUMA and ADIDAS;
(e) attending and/or holding sales meeting with customers including presentation of collections of the Plaintiff and/or Union Knopf GmbH;
(f) doing all price calculations and negotiations with customers;
(g) organizing and/or holding exhibitions in Hong Kong, China, Vietnam, France and Germany;
(h) securing orders from customers;
(i) liaising with suppliers of the Plaintiff;
(j) negotiating terms and prices and entering into contracts with suppliers;
(k) overseeing quality assurance and production of suppliers;
(l) providing technical training to staff of the Plaintiff;
(m) overseeing internal management of the Plaintiff;
(n) controlling finance and budget of the Plaintiff.”
117. Mr Dolleschel said that the 1st defendant was the most senior and trusted officer of the plaintiff in charge of the whole operation of the plaintiff. He was in control of all the business and affairs of the plaintiff and had access to all the highly sensitive and confidential information of the plaintiff including sensitive record and data concerning key customers, price calculations, product development, key suppliers, accounts and staff. The 1st defendant was responsible for preparing quarterly reports on business and affairs of the plaintiff which contained information on the financial situation and profits of the plaintiff, the sales to major customers of the plaintiff in detailed figures and breakdown, the profit and loss account, the balance sheet and the organizational chart of the plaintiff. The 1st defendant would also receive and had access to the monthly turnover reports for the Group.
118. Mr Suen submitted that the plaintiff possessed trade secrets and confidential information, distinct from the general knowledge of the 1st defendant. They included customer details, requirements/needs/preferences of customers, pricing matters, product development details, details of manufacturers/suppliers, accounting and staff details. The 1st defendant as the most senior employee of the plaintiff had access to the aforesaid trade secrets and confidential information. The 1st defendant, as managing director of the plaintiff, had also built up and maintained close relationships with the plaintiff’s customers. These were legitimate business interests warranted protection by restrictive covenants.
119. Mr McLeish submitted that the companies that the plaintiff supplied did not actually make the purchasing decisions. They were made by the brands based in Europe. For these main customers, the customer connections were in the hands of the UKG sales staff and sale agents in Europe. The 1st defendant only contacted with the customers’ European-based staff on the back of introductions by the UKG sales staff at the trade fairs in Europe. With respect, I do not accept the aforesaid submission of Mr McLeish. If all the plaintiff’s purchasing orders from the European brands were secured through UKG, it would not be necessary for the plaintiff to participate in the trade fairs in Europe. The List prepared by the 1st defendant before he left the employment of the plaintiff suggested that the plaintiff had extensive contacts with the purchasing staff or representatives of these European brands.
120. The 1st defendant’s case was that although he was named the managing director of the plaintiff, Mr Dolleschel was the actual person in control of the plaintiff. He had to obtain Mr Dolleschel’s approval on all business decisions except decisions on minor issues. He was also under the supervision of Mr Hans-Joachim Salder (“Mr Salder”), who was the plaintiff’s managing director when the 1st defendant first arrived at Hong Kong. Mr Salder was appointed by the plaintiff as consultant during the 1st defendant’s tenure as managing director overseeing the 1st defendant’s works.
121. In para 10(2) of the Re-Amended Defence, the defendants pleaded that the 1st defendant’s duties only included:-
“(a) control of the Plaintiff’s finances and development of the Plaintiff’s business;
(b) oversight of promotion of the sale of the Plaintiff’s goods, including by means of the Plaintiff’s participation in trade fairs held in various places such as Hong Kong, the Mainland, Vietnam, France amd Germany;
(c) soliciting orders from the Plaintiff’s customers, which included the manufacturers and/or licence holders of the clothing brands marketed under the brand names of Esprit, Puma and Adidas;
(d) negotiating and agreeing with the Plaintiff’s customers the terms under which the Plaintiff would supply goods to them, subject to the approval of Mr Dolleschel (or a sales manager of the parent company) in the case of the Plaintiff’s key customers, including those referred to in the preceding sub-paragraph herein;
(e) negotiating and agreeing the terms under which the Plaintiff engaged suppliers;
(f) oversight of quality control of goods supplied to the Plaintiff; and
(g) oversight of the Plaintiff’s internal management, including oversight of the provision of training to the Plaintiff’s staff.”
122. I do not accept the 1st defendant’s contention that he was only a “greenhorn” and was only the managing director of the plaintiff in name but not in substance. The 1st defendant confirmed in para 6 of his witness statement dated 22 March 2011 that his main duties during the time when he was employed as a director of the plaintiff were as pleaded in the Re-Amended Defence as aforesaid. These duties were by no means insignificant duties in a commercial organization.
123. The 1st defendant agreed that he had authority to negotiate prices with the customers provided that the profit margin was not reduced to below 50% when the usual profit margin of the plaintiff’s products was about 100% or even higher. This showed that the 1st defendant had substantial autonomy and authority, albeit with limitation up to certain extent, in conducting business of the plaintiff. It also showed that the 1st defendant had information on price calculation of the plaintiff as well as the profit margin of the plaintiff for the goods sold by the plaintiff. Such information was confidential business information required protection from being known to competitors.
124. From the organization chart of the plaintiff (p 288 of bundle E2), it could be seen that the 1st defendant occupied the top position in the hierarchy. Before the 1st defendant left the plaintiff, he was heading a company of 46 staff with annual turnover of about US$10 million.
125. The 1st defendant tried to impress the court that Mr Salder and Mr Dolleschel were persons actually in charge of the plaintiff. Mr Salder would come to Hong Kong only once a quarter for about two weeks. He could oversee and supervise the operations of the plaintiff in board and general sense. It would not be probable for him to attend to all management decisions of the plaintiff. Mr Dolleschel was based in Germany. He only came to Hong Kong once a year. Although the 1st defendant would send weekly purchase order report to Mr Dolleschel by fax and Mr Dolleschel had regular contacts with the 1st defendant over the phone (about once a week), I do not accept that this would make Mr Dolleschel instead of the 1st defendant the actual person controlling the daily operations and management of the plaintiff.
126. The Employment Agreement had in clause 6 stipulated the following matters which the 1st defendant had to obtain prior written approval of the plaintiff’s shareholders:-
“(a) sale and shutdown of the Company [the plaintiff] or essential parts of the Company as well as the giving up of essential fields of activity;
(b) the setting up of subsidiaries;
(c) foundation, acquisition or sale of other companies or participation of the Company in other enterprises;
(d) acquisition, sale and mortgage on property and real estate or other similar interests or committing to enter into any such transactions;
(e) carrying out of structural operation and purchase of capital equipment of any kind where the necessary expenditure exceeds the amount of USD10,000.00;
(f) signing, modification or cancellation of tenancy agreements, indentures of lease or leasing arrangements with a contractual period of more than 24 months or a monthly commitment of more than USD1,000.00;
(g) utilization or granting of a credit or the lodging of security bonds of any kind (not including the opening of commercial credits within the ordinary course of business with regard to customers and/or suppliers of the Company);
(h) entering into a guaranty of any kind;
(i) employing or terminating the employment of any employee with an annual income exceeding US$25,000.00;
(j) allowance of pension obligations of any kind for which the company incurs liabilities exceeding the statutory and customary contributions to social security;
(k) conferring and cancellation of proxies and powers of attorney;
(l) sale of patents, raw material formulas (especially those of Durohorn and PSW-Horn formulas) as well as design patents;
(m) appointment of commercial agents and salesmen.”
127. Despite such provisions, it was not the 1st defendant’s case that he did obtain such prior written approvals when he was managing the plaintiff. In fact, no such prior written approval had been produced as evidence to the court in this proceeding. There were no disputes that the board of directors of the plaintiff only held board meetings to approve the audited accounts and dividend payments. Mr McLeish submitted that: “As a matter of fact, however, shareholder control over MS [the 1st defendant] was exercised by Mr Dolleschel mainly through regular telephone calls.” (See para 24 of Mr McLeish’s closing submission) It could be seen that clause 6 of the Employment Agreement was implemented in a loose way. I accept that the 1st defendant would discuss with and consult Mr Dolleschel on business and management of the plaintiff. However, this does not mean that the 1st defendant’s role was insignificant.
128. No matter how and by whom business decisions of the plaintiff were made, they were implemented by the 1st defendant. The 1st defendant agreed that he was the only executive director managing the plaintiff’s business. I have no doubt that the 1st defendant had access to all information of the plaintiff including business and financial information which would be detrimental to the plaintiff if such information was passed on to a competitor of the plaintiff.
129. I find that the 1st defendant had overall responsibility for the corporate governance of the plaintiff. He sat in the board of directors of the plaintiff and took decisions about the general management of the plaintiff as a company. He was the only director of the plaintiff stationed in Hong Kong.
130. The 1st defendant repeatedly emphasized, when he was testifying at the trial, that he did not liaise with the European customers of the plaintiff nor solicit business from their designated manufacturers or licence holders. He said that all he did was to “make them comfortable”. This directly contradicted his pleaded case as set out in paras 10(2)(c) and (d) of the Re-Amended Defence which pleaded that the 1st defendant’s duties included “soliciting orders from the Plaintiff’s customers” and “negotiating and agreeing with the Plaintiff’s customers the terms under which the Plaintiff would supply goods to them”. This also contradicted his evidence put forward in his witness statement when he admitted that his main duties as a director of the plaintiff included “seeking orders for goods from the Plaintiff’s customers” and “negotiating with and agreeing terms of sales with the Plaintiff’s customers”. (see para 6 of the 1st defendant’s witness statement dated 22 March 2011) I do not accept the 1st defendant’s explanation that “soliciting orders” and “seeking orders” were the same as “making them comfortable”. The 1st defendant was simply too eager to belittle himself.
131. I am satisfied that the plaintiff had legitimate business interests to protect by imposing restraint of trade clauses on the 1st defendant.
Was clause 13.5 of the Employment Agreement enforceable?
132. Clause 13.5 was a non-competition clause. It consisted of the following elements:-
(1) restraint period: 12 months after termination of employment;
(2) restricted area: in any country or place where any member of the Group has carried on business;
(3) restricted activities: be employed, concerned or interested, directly or indirectly whether as shareholder (other than listed companies for investment), director, employee, partner or agent and whether alone or jointly with any other person;
(4) restricted business: any business in competition with or in opposition to any business of any member of the Group within the Asian market.
133. Mr McLeish submitted that clause 13.5 of the Employment Agreement was not reasonable in the interests of the parties or in the interests of the Hong Kong public and stood to be struck down accordingly.
134. He submitted that clause 13.5 prohibited the 1st defendant from involving in any business in competition with the business of any member of the “Group” irrespective of whether such business was the same business in which the plaintiff engaged when the 1st defendant was its employee and the term “Group” was defined broadly in the Employment Agreement to include, in effect, any company in the group of companies headed by UKG. Mr McLeish said that according to Mr Dolleschel’s evidence, UKG had over 750 employees and various production units and subsidiaries all over the world. They did not only do button and fastener business but also produced and sold door handles. He submitted that the plaintiff had no legitimate interest to protect in the way of confidential information or customer connections in relation to the 1st defendant’s employment by imposing a restriction of such breadth on the 1st defendant.
135. Clause 13.5 restricted the restraint to apply solely to business activities or involvement of the group companies of UKG within the Asian market. Mr McLeish submitted that the “Asian market” was not a small geographic area. It included (but not limited to) Hong Kong, Macau, the PRC Mainland, India, Pakistan, Bangladesh, Sri Lanka, Nepal, Indonesia, the Philippines, Korea, Japan, Vietnam, Laos, Cambodia, Malaysia, Singapore, Turkey and the Asian part of Russia. He further submitted that the group companies of UKG were free to enter into any lawful business they might choose to engage in and the restraint could go far beyond the button/fastener business. He cited the example of the business of organizing trade fair.
136. Mr Suen submitted in his oral opening that the restrictions had to be understood in context of the Group only did button and fastener business. Mr McLeish submitted that if the plaintiff only wished to exclude the 1st defendant from the button/fastener business only, it should have expressly stated in clause 13.5.
137. As point out by Sir Christopher Slade in the Office Angels Ltd case [1991] IRLR 214 at 221 that:-
“A covenant which prohibits wholly the carrying on of business by a former employee in a specified area for a specified time will always be approached with caution by the court, since it amounts to a covenant against competition.”
138. Under clause 13.5, the 1st defendant might not during the Restraint Period carry out any of the restricted activities in the restricted business in the restricted area.
139. The plaintiff had to show that each of the Restraint Period, the restricted activities, the restricted business and the restricted area was reasonable for protection of its legitimate business interests before the court would enforce clause 13.5 against the 1st defendant.
140. The Restraint Period was for 12 months. As observed by Reyes J in para 98 of his judgment in the Cantor Fitzgerald case that: “Case law itself thus supports the view that, typically, the Courts treat a 12-month duration for a non-solicitation covenant as prima facie too long.” Unless there were cogent evidence justifying a period of 12 months, a restraint of such duration would not be upheld by the court.
141. Mr Dolleschel in his witness statement stated that if an experienced and senior staff member like the 1st defendant left the plaintiff, substantial time would be needed to train a new employee and to let him/her rebuild connection with the existing customers. Hence there was need for a restrictive covenant against competition for a reasonable period. He further stated that the period of restraint, namely 12 months, was reasonable having regard to the fact that the 1st defendant was a director of the plaintiff and in his position of managing director played a prominent and senior managerial role in the plaintiff with extensive responsibilities.
142. Mr Eberhard Wilhelm Ganns (“Mr Ganns”), the managing director of the plaintiff as at the date of the trial, testified at the trial that after he was employed to work as the managing director of the plaintiff, he had spent eight months in Germany receiving training before he started working in Hong Kong.
143. The 1st defendant was the managing director of the plaintiff at the material times. He had access to all financial and business information of the plaintiff. The evidence of Mr Ganns supported the contention that it would take about 12 months for the 1st defendant’s successor to learn the trade and to build up his connection with the customers. I accept that a restraint period of 12 months for a person occupying such senior position (in fact the most senior position) in the plaintiff was reasonably necessary to protect the plaintiff’s legitimate business interests.
144. Mr Dolleschel’s evidence was that the Group had over 750 employees and had production units and subsidiaries all over the world. This means the restricted area would cover the whole world. This cannot be reasonable. Mr Dolleschel stated in para 28(6) of his witness statement that:-
“(6) There is an express limit on the geographical location for the restraint to the country or place in which the Group has carried on business, and there is a further express limit on the location of the restricted activities to within the Asian market.”
145. Even if the qualification of “Asian market” also applied to define the restricted area, Mr McLeish had pointed out that it still covered an enormous area. Mr Suen submitted that the Group only had subsidiaries in two places in Asia, namely Shanghai and Hong Kong. However, the restriction was not confined to places where the Group companies had their offices but covered places where they had “business activities or involvement” which extended far beyond the physical offices of the Group companies. I see no justification to restrict the 1st defendant to work in places where the plaintiff had not had business there. I am of the view that the restricted area is unreasonably wide.
146. The restricted activities are activities which one will expect to be covered by a restraint of trade clause which I accept is reasonable.
147. The restricted business covered any business of any member of the Group conducted in the Asian market. It was not restricted to business conducted by the plaintiff. It did not confine to business conducted when the 1st defendant was employed by the Group. It covered new business which any member of the Group might develop during the Restraint Period. In such case, the boundary of restricted business was indefinitely wide and was uncertain until the end of the Restraint Period. I see no justification for the plaintiff imposing such wide restriction on the 1st defendant.
148. I am of the view that the following comments of Lord Moulton made in Mason v Provident Clothing And Supply Company Limited [1913] AC 724 at 745 are equally applicable to clause 13.5 of the Employment Agreement:-
“It is difficult to construe with any certainty words which are so intentionally wide and general. I doubt whether a covenant that is so intentionally unreasonable merits even the benefit of the general rule of construction that a Court should, if possible, construe language so as to give a reasonable meaning to the document. But however we construe it, the covenant is out of all measure wider than anything that can reasonably be required for the protection of the respondents in their business, and therefore the covenant is void in law and will not be enforced by the Courts.”
149. In the premise, I find that the restrictions imposed by clause 13.5 of the Employment Agreement in terms of area and business covered were not reasonable in the circumstances of this case. I am not allowed to apply the “blue pencil” to amend the words “any member of the Group” to become “the Company” or to insert words to the effect of confining the restricted business to business activities conducted by the plaintiff during the 1st defendant’s employment with the plaintiff. Clause 13.5 cannot be saved by a “blue pencil”. I find that clause 13.5 is not enforceable against the 1st defendant.
150. The 1st defendant said that the plaintiff had not paid him the consideration stipulated in clause 13.5 ie 50% of his last monthly remuneration. Mr McLeish submitted that there was a total failure of consideration. Alternatively, the plaintiff had repudiated the agreement and the 1st defendant was released from the restrictions imposed by clause 13.5.
151. I have found that clause 13.5 was unreasonable and would not be enforced by this court. Accordingly, it is not necessary for me to rule on this argument of Mr McLeish. However, if I were wrong in finding clause 13.5 unreasonable, for reasons set out below, I do not accept Mr McLeish’s aforesaid contention on total failure of consideration or repudiation.
152. Clause 13.5 was part and parcel of the Employment Agreement, the consideration for the Employment Agreement supported the validity of the whole agreement including individual clause in the agreement. As pointed out by Cox J in the TFS Derivatives Ltd case [2005] IRLR 246 at 256 “whether the individual employee is being paid [for the restrictions imposed] is relevant only to the question of whether the terms are reasonable between the parties.” The post-termination restrictions were part of the consideration for the defendant’s substantial remuneration during his employment. Failure to make the payment set out in clause 13.5 was not a situation of total failure of consideration. Payment of the sum stipulated was not even a condition precedent for the 1st defendant’s obligations under clause 13.5. The plaintiff’s failure to pay might entitle the 1st defendant to claim against the plaintiff for the payment but would not release the 1st defendant from his contractual obligation. It is not the pleaded case of the defendants that the 1st defendant had accepted a repudiatory breach of clause 13.5 by the plaintiff. The 1st defendant’s evidence was that he had never requested the plaintiff to pay him the payment stipulated in clause 13.5. The 1st defendant had never purported to accept any alleged repudiation by the plaintiff during the Restraint Period.
Had the 1st defendant breached clause 13.5 of the Employment Agreement?
153. If I were wrong in holding that clause 13.5 was unenforceable, I would find that the 1st defendant had breached this clause. The 2nd defendant was in the same trade of the plaintiff. It was not disputed that they participated in the same trade fairs. The 1st defendant agreed that the 2nd defendant took possession of its office premises on 16 June 2008. He then undertook the development of the 2nd defendant’s products and ordered samples for the 2nd defendant’s first collection in July and August 2008. The 2nd defendant started to show its first collection to its customers in December 2008.
154. Mr McLeish submitted that during the Restraint Period, the 2nd defendant was a start-up business and was not in real sense “competing” with the plaintiff or other companies of the Group. He relied on the Cantor Fitzgerald case to submit that the term “in competition” in clause 13.5 ought not be read as encompassing a business which was little more than a start-up when construed contra proferentem against the plaintiff.
155. Mr Dolleschel stated in his witness statement that:-
“36. In the latter part of 2008, the HK Company [the plaintiff] was informed by some of its customers that they were approached by the Defendant [the 1st defendant] under the head of “FRAMELESS ASIA PACIFIC LIMITED” (i.e. FAPL)[the 2nd defendant].
37. By the end of 2008 or beginning of 2009, some of the HK Company’s sales agents, including Mr. Ralf Steinweg (Sales Manager) and Mr. Marcel Hafer (Sales Representative), bumped into the Defendant [the 1st defendant], Mr Salder and Mr Harald Bergel (“Mr Bergel”) at the Head Office of ESPRIT in Ratingen, Germany, Mr Bergel was formerly engaged by the Group as sales agent for South Germany looking for ADIDAS and PUMA accounts. As a result, we realized for the first time that the Defendant, Mr Salder and Mr Bergel had joined force in establishing a competing business.”
156. I accept that the 2nd defendant was still in the start-up stage prior to December 2008 and was not in competition with the plaintiff. However, when the 2nd defendant armed with its first collection (which the 1st defendant had spent five months to prepare and consisted of about 30 collection boards) to approach customers (including customers of the plaintiff) in December 2008, the 2nd defendant was in actual competition with the plaintiff and the 1st defendant was in breach of clause 13.5 of the Employment Agreement if that clause was enforceable.
Was clause 13.8 of the Employment Agreement enforceable?
157. Clause 13.8 was a non-solicitation clause. It consisted of the following elements:-
(1) restraint period: 12 months after termination of employment;
(2) restricted activities: solicit, interfere with or endeavor to entice away from the plaintiff or any of the Group companies;
(3) restricted targets: any person, firm or company who at any time during or at the date of the termination of the employment were customers of or in the habit of dealing with the plaintiff or any of the Group companies.
158. In respect of the Restraint Period and the restricted activities, I accept that they were reasonable for the same reasons as for clause 13.5.
159. The restricted targets including the following groups of people:-
(1) customers of the plaintiff during the 1st defendant’s employment or at the date of the termination of his employment;
(2) customers of any of the Group companies during the 1st defendant’s employment or at the date of the termination of his employment;
(3) any person, firm or company who during the 1st defendant’s employment or at the date of the termination of his employment were in the habit of dealing with the plaintiff; and
(4) any person, firm or company who during the 1st defendant’s employment or at the date of the termination of his employment were in the habit of dealing with any of the Group companies.
160. I have pointed out in para 130 above that the 1st defendant’s duties in the plaintiff included soliciting and seeking orders from the plaintiff’s customers. It was not disputed that when the 1st defendant was employed by the plaintiff, he had attended the trade fairs in Europe participated by the plaintiff. The purpose for the plaintiff to participate in the trade fairs was to meet customers. I agree with the following submission of Mr Suen set out in para 44(2) of his closing submission:-
“The 1st Defendant made the surprising statement that employees of the Plaintiff would meet with European customers at these European fairs “only by chance”, when Union Knopf’s employees introduced them to the Plaintiff’s employees. It is inherently improbable and illogical for the Plaintiff to participate in such trade fairs without the objective of meeting European customers. The very nature of trade fairs is to increase exposure of their participants to customers in the region.”
161. I accept that by virtue of the 1st defendant’s position as the plaintiff’s managing director and his handling of the plaintiff’s customers, he would have personal knowledge and gained influence over the plaintiff’s customers as referred to by Lord Parker in the Herbert Morris case (see para 27 above) so that the customers might follow the 1st defendant to the 2nd defendant. It was reasonable to restrict the 1st defendant from soliciting, interfering with or enticing away from the plaintiff its customers.
162. However, I do not see how the 1st defendant would have “such personal knowledge of and influence over” the customers of the companies of the Group other than those of the plaintiff. If the 1st defendant knew any of these customers when he was working for UKG, it was pre-2004 relation when the 1st defendant was working only as an apprentice (from August 2000 to January 2002) or as a sales merchandiser (from January 2002 to April 2004). Such connection would not have created the sort of “personal knowledge and influence” referred to by Lord Parker justifying protection by a restrictive covenant. I also do not see how the 1st defendant would have “such personal knowledge of and influence over” person, firm or company who were in the habit of dealing with companies of the Group other than the plaintiff. Restricting the 1st defendant’s dealing with these people, firms or companies after he ceased employment with the plaintiff was wider than what required for the protection of the plaintiff’s legitimate business interests and was not enforceable.
163. Mr McLeish submitted that even with reduced scope of excluding the Group companies from clause 13.8, the restrictive covenants was still not reasonably required to protect the plaintiff’s interests in relation to customers or suppliers as the plaintiff’s customers would have multi-suppliers and the plaintiff’s suppliers would have multi-buyers being trading companies or garment manufacturers. He further submitted that the plaintiff had no exclusivity with its customers or suppliers and any other trading company was entirely free to deal with them. The fact that the plaintiff had no exclusivity with its customers or suppliers is neither here nor there. It does not mean that the plaintiff does not have legitimate business interests to be protected. Other trading companies can freely deal with the plaintiff’s customers and suppliers does not mean that the 1st defendant, having acquired confidential information of the plaintiff by virtue of his employment with the plaintiff, should also be allowed to freely deal with the plaintiff’s customers and suppliers.
164. Mr Suen submitted that restricting the 1st defendant to deal with person, firm or company who were in the habit of dealing with the plaintiff during the 1st defendant’s employment and at the date of termination of his employment covered the plaintiff’s suppliers and employees. He submitted that for the same grounds justifying non-solicitation from the plaintiff’s customers, such restriction was also reasonable. If such restrictions only covered the plaintiff’s suppliers of goods traded by the plaintiff and the plaintiff’s employees, it might arguably be reasonable. However, such description covered a much wider spectrum. It would cover the cleaning contractors providing cleaning services or suppliers supplying drinking waters or newspapers to the plaintiff’s office. I see no justification for prohibiting the 1st defendant to solicit services of these people to also provide similar services to the 2nd defendant. If the plaintiff only intended to restrict the 1st defendant’s dealings with suppliers of its trading goods and its employees, the plaintiff should have expressly said so in clause 13.8. The restriction by reference to “in the habit of dealing with the plaintiff” was unreasonably wide and was not enforceable.
165. I am of the view that the restrictions imposed by clause 13.8 in respect of the customers of the plaintiff during the 1st defendant’s employment and at the date of termination of his employment was reasonably necessary to protect the plaintiff’s legitimate business interests. Applying the “blue pencil” to cross out the words “or any of the Group Companies” and the words “or in the habit of dealing with” from clause 13.8 will make the restrictions reasonable in the circumstances of this case without affecting the meaning of the part remaining.
166. The “blue-pencilled” clause 13.8 will read as follows:-
“The Employee shall not at any time during the continuance of his employment hereunder or for a period of 12 months thereafter either on his own account or for any other person, firm or company solicit, interfere with or endeavor to entice away from the Company any person, firm or company who at any time during or at the date of the termination of the employment were customers of the Company.”
167. I find that this is an appropriate case for applying the “blue pencil” to delete the offending phrases in clause 13.8 leaving a reasonable covenant which can be enforced which I do.
Did clause 13.8 of the Employment Agreement cover suppliers of the plaintiff?
168. If I were wrong in deleting the phrase “or in the habit of dealing with” from clause 13.8, I have to consider the plaintiff’s claims against the 1st defendant for approaching its suppliers during the Restraint Period.
169. The plaintiff’s case was that the 1st defendant was prohibited from approaching the plaintiff’s suppliers for supply of goods during the Restraint Period under clause 13.8 which covered “any person, firm or company who at any time during or at the date of termination of the employment were in the habit of dealing with” the plaintiff or other companies of the Group.
170. The 1st defendant’s case was that clause 13.8 did not cover the plaintiff’s suppliers. Mr McLeish submitted that insofar as the plaintiff might contend that the reference in clause 13.8 to any person, firm or company in the habit of dealing with the plaintiff encompassed suppliers and manufacturers of the plaintiff, the contra proferentem principle of construction was against it. The plaintiff could easily have referred expressly to “suppliers and manufacturers” in clause 13.8 as it did for “customers”. The plaintiff chose not to do so with the consequence that the clause ought to be construed as not encompassing “supplier and manufacturers”.
171. I agree that if clause 13.8 expressly referred to “suppliers and manufacturers”, it would cover all suppliers and manufacturers of the plaintiff and the other companies of the Group. The fact that clause 13.8 did not expressly refer to “suppliers and manufacturers” did not mean that “suppliers and manufacturers” were excluded from the clause. The effect of clause 13.8 was that not all “suppliers and manufacturers” of the plaintiff were included but only those “in the habit of dealing with the plaintiff” were included. The 1st defendant was prohibited by clause 13.8 from soliciting supplies from suppliers and manufacturers who were in the habit of dealing with the plaintiff but the 1st defendant was free to approach suppliers and manufacturers who were not in the habit of dealing with the plaintiff. Which suppliers or manufacturers were in the habit of dealing with the plaintiff, if in dispute, was a factual matter to be determined in accordance with evidence adduced before the court.
172. Mr Dolleschel stated in para 64 of his witness statement that the suppliers named in the SOC were customarily employed by the plaintiff for manufacturing its products. This part of his evidence was not challenged by the defendants. I accept that if the phrase “in the habit of dealing with the plaintiff” was not crossed out by the “blue pencil”, clause 13.8 would cover the aforesaid suppliers.
Had the 1st defendant breached clause 13.8 of the Employment Agreement?
173. The pleaded case of the plaintiff on the 1st defendant solicited or enticed away the plaintiff’s customers during the Restraint Period was that:-
(1) The plaintiff had once received a spreadsheet from Esprit showing the items the 2nd defendant was nominated for by beginning of 2010. (para 12C(b) of the SOC)
(2) There were various buttons which were developed by the plaintiff and/or the Group for its customers but at the end such customers did not place orders with the plaintiff. (para 12C(c) of the SOC)
(3) The 2nd Defendant used collection boards as promotional materials for soliciting business from customers. Many of the parts or products among the collection boards of the 2nd Defendant were the same or substantially similar to the parts or products produced and/or supplied by the Plaintiff. (para 12C(d) of the SOC)
(4) Invoices, proforma invoices and emails disclosed by the 2nd defendant evidenced that the 2nd defendant had engaged in business with the pre-existing customers of the plaintiff. (para 12C(e) of the SOC)
174. The plaintiff relied on a spreadsheet from Esprit for 2010 orders to ask the court to infer that the 2nd defendant had approached Esprit latest by the first quarter of 2009. The plaintiff said that its business cycle was 18 months and the 1st defendant said that the 2nd defendant’s business cycle was 6 months. No evidence from Esprit had been adduced by the plaintiff to show when the 2nd defendant approached it. I do not accept that the orders placed by Esprit to the 2nd defendant in 2010, ie more than 7 months after the Restraint Period, proved that the 1st defendant was in breach clause 13.8.
175. The facts that the plaintiff failed to secure purchase orders from its customers after having developed some buttons for the customers was not evidence proving that the 1st defendant was in breach of clause 13.8. There were many reasons for that; just to name a few: the customers might have changed their design, they might have changed their production plans, they might not be satisfied with the plaintiff’s products, they might not be satisfied with the plaintiff’s services, or they might not be happy with the plaintiff’s prices etc. To conclude that the plaintiff’s failure to secure purchase orders was because the customers were enticed away by the 2nd defendant was mere speculation.
176. Mr Ganns in his witness statement stated that he had inspected various colour photographs of the collection boards of the 2nd defendant and he discovered that many of the parts or products among the collection boards of the 2nd defendant were the same or substantially similar to the parts or products produced and/or supplied by the plaintiff.
177. By a letter dated 21 March 2013 from the plaintiff’s solicitors to the defendants’ solicitors, the plaintiff identified 12 colour photographs of the 2nd defendant’s collection boards said to have contained identical or similar parts or products of the plaintiff.
178. The 1st defendant denied that the 2nd defendant had copied any items of the plaintiff. The 1st defendant stated that items supplied by the 2nd defendant were either developed from its own designs or offered by its suppliers or manufacturers. In his supplemental witness statement dated 6 January 2013, the 1st defendant stated that many buttons were common in the market and were offered by multiple suppliers/manufacturers. He further stated that the scope of variation in basic design of buttons was relatively limited.
179. Mr Ganns had testified at the trial when he had the opportunities to inspect and compare physically the aforesaid similar or identical parts or products supplied by the 2nd defendant to those supplied by the plaintiff. He agreed that in fact there were differences between them and some differences were substantial.
180. Evidence adduced showed that the 2nd defendant had solicited business from the plaintiff’s customers and did get business from some of the plaintiff’s customers. The plaintiff had prepared tables setting out particulars of documents disclosed by the 2nd defendant. The tables were annexed as “Appendix 5” to the witness statement of Mr Ganns. Mr Ganns in his witness statement stated that it was clear from the tables that the 2nd defendant had issued quotations, invoices and proforma invoices to the plaintiff’s customers. This part of his evidence was not challenged by the defendants. The 1st defendant stated in his supplemental witness statement dated 6 January 2013 that both defendants had not denied that the 2nd defendant had engaged in the same business as the plaintiff and supplied to the plaintiff’s customers. However, the 1st defendant denied that the defendants had ever solicited away from the plaintiff any of its customers. The 1st defendant stated that it was common for apparel companies in Hong Kong to have more than one supplier for the same product at any one time. He said that Esprit might have 10 different suppliers of polyester buttons for womenswear and another 10 suppliers for menswear buckles.
181. Mr McLeish submitted that the plaintiff had no exclusivity with these customers who had multi-suppliers. In such case the 2nd defendant had not enticed away these customers from the plaintiff.
182. I find that the 2nd defendant had approached the plaintiff’s customers during the Restraint Period to solicit business.
183. The 1st defendant was prohibited from soliciting business from the plaintiff’s customers during the Restraint Period by clause 13.8. I do not agree that the defendant had to “solicit away” the customers from the plaintiff before he would have breached clause 13.8. Both “solicit” and “entice away” were covered by clause 13.8. The act of the 1st defendant to solicit business from these customers for the 2nd defendant was in breach of clause 13.8. Whether the 1st defendant’s wrongful act had caused the plaintiff losing any business would go to quantum and was a separate matter.
184. The 1st defendant did not dispute that the 2nd defendant had obtained supplies from the plaintiff’s suppliers but denied that the 2nd defendant had “solicited or enticed away” the plaintiff’s suppliers and manufacturers. As in the case of the plaintiff’s customers, it was not necessary for the 2nd defendant to “solicit away” the suppliers from the plaintiff before the restrictions imposed by clause 13.8 was breached. I am of the view that soliciting supplies from the plaintiff’s suppliers would do. If I were wrong to “blue-pencil” clause 13.8 to cross out the words “in the habit of dealing with”, I would find that the 1st defendant had breached clause 13.8 in respect of the dealings between the 2nd defendant and the plaintiff’s suppliers.
185. In the premise, I find that the 1st defendant had breached the “blue-pencilled” clause 13.8 of the Employment Agreement by soliciting business from the plaintiff’s customers during the Restraint Period and is liable to the plaintiff’s claim to that extent.
Silicon snap-button claim
186. The plaintiff’s case was that the silicon snap-button was a product developed by UKG specifically for its customer Brax Fashion. In September 2009, UKG learned from its group company at Wuppertal that the 2nd defendant sent samples of silicon snap-button to Brax Fashion and made an offer to supply such button to Brax Fashion at a lower price. The group companies of UKG including the plaintiff had to reduce their selling price for the silicon snap-button in order to keep the custom of Brax Fashion. They suffered loss accordingly.
187. The plaintiff claimed that the production method, formula and manufacturing process of the silicon snap-button was a trade secret which the 1st defendant was prohibited from using even after he had left the plaintiff’s employment. The plaintiff claimed that the 1st defendant breached his duty of confidentiality by using, divulging or copying the production method, formula and manufacturing process of the silicon snap-button. However, no particulars of this secret method, formula or process had been pleaded. The only evidence relied on by the plaintiff to justify that the production method, formula or process of the silicon snap button was a trade secret was an email dated 29 April 2010 from Mr Alexander Rieks, managing director of the Shanghai subsidiary of the Group, to Ms Chai of the plaintiff. The relevant parts of the aforesaid email read as follows (p 395-2 of bundle E2):-
“Concerning the snap-button we just talked about, where we definitely know that Frameless [the 2nd defendant] offered our own development to the customer for whom we developed this item, the details are as following:-
It was not just a Nylon – snap button, the cap part is made of Silicon. Therefore the production method is a bit special and more uncommon. The Silicon is not manufactured by injection in a mould like PA or PU, which is a very common method in general everywhere in China. The silicon is manufactured in a way that a certain amount of the soft silicon-mass is inserted in a mould (in this case by hand) and processed under pressure in a pressing machine. A pre-produced core of zinc – alloy has to be inserted in this mould before. Due to the pressure and temperature in this process the Silicon is hard enough and durable in its shape afterwards.”
188. The defendants did not agree that the manufacturing process of the snap button amounted to a trade secret. The 1st defendant said that the manufacturing method was known to many Chinese manufacturers. He also did not agree that the soft silicon-mass was inserted in a mould by hand.
189. The plaintiff had not called Mr Rieks or its manufacturer to give evidence at the trial to justify its claim that the production method, formula or process of the silicon snap-button was a trade secret. Mr Dolleschel, when he testified at the trial, was unable to tell any special features in the manufacturing process of the silicon snap-button which might amount to a trade secret or possess a quality of confidentiality equivalent to a trade secret. I find that the plaintiff failed to prove that the production method, formula or process of the silicon snap-button was a trade secret of the plaintiff.
190. Furthermore, the 1st defendant’s case was that in early September 2009, the 2nd defendant received an enquiry from Brax Fashion for supply of a particular type of snap button. Brax Fasion gave a sample of the snap button to the 2nd defendant and the 1st defendant sent it to the 2nd defendant’s supplier factory in China. The Chinese factory produced samples of the snap button which were passed on to Brax Fashion.
191. At the trial the 1st defendant said that the samples concerned were produced by Shenzhen Pro-Tech Profit Industrial Co Ltd which was also the manufacturer of the silicon snap-buttons for the plaintiff. The 1st defendant said that there were other manufacturers in China which could also produce silicon snap-button.
192. Mr Suen submitted that it was clear that the 1st defendant knew which manufacturer possessed the production method, formula and manufacturing process of the silicon snap-button and requested that manufacturer to produce the same buttons for the 2nd defendant.
193. The plaintiff had not adduced any evidence to prove that the 1st defendant had “used, divulged and/or copied the production method, formula and manufacturing process” of the plaintiff’s silicon snap-button. What the plaintiff had proved was that the 2nd defendant had submitted samples of silicon snap-button to Brax Fashion. The defendants did not need to use, divulge or copy the production method, formula and manufacturing process of the plaintiff’s silicon snap-button to come up with the samples. The 1st defendant’s evidence was that he obtained the samples from a Chinese factory supplier which the plaintiff said was also the plaintiff’s supplier of the silicon snap-button. No evidence was adduced by the plaintiff to rebut the 1st defendant’s evidence. As the factory concerned was also the plaintiff’s supplier of the silicon snap-button, it was not surprising that it could produce samples of silicon snap-button of the same quality. I am satisfied that the 1st defendant learned about which factory could produce silicon snap-button during his employment with the plaintiff.
194. In E. Worsley & Co Ltd v Cooper [1939] 1 All E.R. 290, it was held that the defendant was entitled, after he had ceased to be employed, to make use of his knowledge of the source of the paper supplied to his previous employer. Morton J used the following illustration at 308 to explain his view:-
“Suppose that a particular customer says: “I want a paper which is exactly the same as the paper sold by the plaintiffs under the name of Maxine.” Mr Cooper [the defendant in that case], owing to his knowledge of the plaintiffs’ business, knows how Maxine is made, and knows where it comes from, and he is able to say confidently: “Yes, I can supply you with the same paper as Maxine”. Is he doing an actionable wrong in replying that he can do so? In my opinion, he is not. I cannot see why, knowing the answer to the question, he should not answer it truthfully, and thereby no doubt get the advantage of an order.”
195. The learned editors of the E. Worsley & Co Ltd case had inserted the following “Editorial Note” at 291:-
“A further point in the case is that, where, for their own purposes, distributors of goods do not willingly disclose the name of the manufacturer of the goods, the fact that such names are kept secret does not make the knowledge of them a trade secret in the sense in which that term has been used in the case dealing with the disclosure of trade secrets.”
196. As in the E. Worsley & Co Ltd case, no evidence had been adduced the show that the plaintiff had ever given any express instructions to the 1st defendant that the identity of the manufacturer of the silicon snap-button was to be treated as confidential. I am of the view that the identity of the plaintiff’s manufacturer of the silicon snap-button might well be “confidential” in the sense that it would have been a breach of the duty of good faith for the 1st defendant, while his employment with the plaintiff subsisted, to have used it for his own purposes or to have disclosed it to a competitor of the plaintiff. However, it did not amount to a trade secret.
197. I accept the 1st defendant’s evidence and find that the 1st defendant had not “used, divulged and/or copied the production method, formula and manufacturing process” of the plaintiff’s silicon snap-button. The samples sent by the 2nd defendant to Brax Fashion were provided to the 2nd defendant by a Chinese factory which was also the plaintiff’s supplier of the silicon snap-button. I find that the 1st defendant acquired the knowledge of which factory could produce the silicon snap-button during his employment with the plaintiff. It was the experience and general knowledge acquired by him as part of his job during his employment. It was not confidential information or trade secret. As stated by Litton VP (as he then was) in Kishimoto Sangyo Co Ltd & Anor v Oba & Ors [1996] 2 HKC 260 at 279I:-
“A man is entitled to use his own accumulated knowledge skill and experience for his own profit. He is equally entitled to cultivate his own commercial relationships, with suppliers, customers and anyone else, without attracting the disapproval of equity.”
198. In approaching the Chinese factory for samples of the silicon snap-button, the 1st defendant was only applying his business knowledge acquired during his previous employment to operate his own business. The act complained of occurred more than 12 months after the 1st defendant had left the plaintiff’s employment. There were no questions that it was in breach of the restraint of trade covenants in the Employment Agreement. The only issue was whether the 1st defendant had breached his duty of confidentiality on trade secret which survived after the 1st defendant left the plaintiff’s employment. As I have found that such information was not a trade secret, I do not see any breach of confidentiality on the part of the 1st defendant. The plaintiff has no claim against the defendant for the silicon snap-button.
Recipe for making plating colours
199. The plaintiff’s claims in relation to recipe for making some plating colours were obscure.
200. In para 7A(d) of the SOC, the plaintiff pleaded “the secret recipe for making some plating colours provided by the plaintiff to its suppliers and manufactures” as one of “the plaintiff’s trade secret or information which is of a sufficiently high degree of confidentiality so as to amount to trade secret or otherwise possess a quality of confidentiality equivalent to trade secret.”
201. In paras 7B and 10(a) of the SOC, the plaintiff pleaded that the aforesaid recipe was confidential because of its character and/or the 1st defendant was expressly so informed and that the use and disclosure of the recipe while he remained in the employment of the plaintiff were governed by the implied duty of good faith or fidelity.
202. In para 11(c) and (d) of the SOC, the plaintiff pleaded that the 1st defendant owed fiduciary duties to the plaintiff not to use and/or divulge the plaintiff’s trade secret (which included the recipe) beyond termination of his employment with the plaintiff and not to use for his own purposes and/or divulge the plaintiff’s confidential information (which included the recipe) to third parties during his employment except for the plaintiff and not to deliberately memorize or make copies of such information (which included the recipe) during employment for use after termination of employment.
203. After pleading the “secret recipe” being trade secret or confidential information amounted to trade secret and the 1st defendant’s duties in respect of the “secret recipe”, the plaintiff pleaded in the “Particulars” of para 12D of the SOC that:-
“[The plaintiff’s suppliers named in the Particulars of para 12D] have been trained and supervised by the Plaintiff and customarily used by the Plaintiff for manufacturing its products. Without being exhaustive, the Plaintiff had also provided these suppliers with the recipe for making some of the plating colours for its products. In the circumstances, by soliciting and enticing these suppliers to work for them, the Defendants were able to use and/or copy the designs of the Plaintiff, and to procure and source identical and similar products of the Plaintiff from the said supplier factories to engage in direct competition with the Plaintiff by undercutting, namely offering to customers of the Plaintiff identical and similar products of the Company [the plaintiff] at a price below the price offered by the Plaintiff.”
204. The plaintiff’s case was not that the 1st defendant had divulged or copied the plaintiff’s “secret recipe” but used it through obtaining supplies from the plaintiff’s suppliers.
205. As in the case of the silicon snap-button, the 1st defendant had learned about suppliers of buttons through his employment with the plaintiff. Such knowledge became part of his skill and knowledge. Furthermore, I do not accept that the identity of the plaintiff’s suppliers amounted to trade secret. The 1st defendant said that the plaintiff’s suppliers did not supply exclusively to the plaintiff. They would participate in trade shows and were accessible by everyone in the trade. No evidence had been adduced to show that the 1st defendant had deliberately memorized the plaintiff’s suppliers or make copies of their details during employment for use after termination of employment.
206. The plaintiff provided no particulars of the alleged “secret recipe”. Mr Suen referred to some database abstracts of UKG (pp 2835, 2842, 2849 and 2862 of bundle E12) as the plaintiff’s “secret recipe” for making plating colours. The plaintiff adduced no evidence to show that the 1st defendant had obtained any such database extracts from UKG and used or divulged or copied such instructions for use by the 2nd defendant. The 1st defendant’s evidence was that he had no access to UKG’s database when he worked for the plaintiff. The 1st defendant denied that any recipe for colour plating had been provided by the plaintiff to its suppliers or manufacturers. He stated in para 14 of his supplemental witness statement dated 6 January 2013 that:-
“I am able to say that during the whole time I worked for the Plaintiff it never provided any supplier or manufacturer with any “recipe” for colour plating, let alone one that could be described as secret. The way the Plaintiff obtained the plating colours it required was to specify to its suppliers the colours it wished to have by reference to a colour chart or a colour sample. It was then more or less a process of trial and error by the suppliers to produce colours that were acceptable to the Plaintiff by the use, as far as I am aware, of standard plating techniques.”
207. Other than producing copy of the aforesaid database abstracts of UKG, no evidence had been adduced to show that any information contained therein amounted to trade secret. The plaintiff also adduced no evidence to show that the 1st defendant had seen or obtained copy of the alleged “secret recipe” or that the “secret recipe” had been provided by the plaintiff to its suppliers.
208. Mr Suen did not press on with the plaintiff’s claims in this respect at his closing submission although he did not expressly abandon such claims.
209. I find that the plaintiff had failed to prove that the 1st defendant had used, divulged and/or copied the plaintiff’s recipe for making some plating colours. The plaintiff’s claims in this respect failed.
Findings of liabilities on the Post-Termination Claims
210. I find that clause 13.5 of the Employment Agreement was unreasonable and thus unenforceable.
211. I find that clause 13.8 of the Employment Agreement was reasonable and enforceable after applying the “blue-pencil” to cross out the offending parts. I also find that the 1st defendant was in breach of the “blue-pencilled” clause 13.8 in soliciting business for the 2nd defendant from the plaintiff’s customers from December 2008 to 31 May 2009.
212. I find that the plaintiff failed in its claims against the 1st defendant in respect of the silicon snap-button and its recipe for making some plating colours.
Claims against the 2nd defendant
213. The plaintiff had pleaded the following claims against the 2nd defendant:-
(1) the 2nd defendant dishonestly and/or knowingly misappropriated the plaintiff’s confidential and trade secrets by procuring the 1st defendant to do so; (para 12F of the SOC);
(2) the 2nd defendant was the vehicle used by the 1st defendant for the purpose of misappropriating the plaintiff’s confidential information and trade secrets (para 12F of the SOC);
(3) the 2nd defendant knowingly employed and/or engaged the 1st defendant who was bound by the restrictive covenants and implied terms in his contract of employment and the fiduciary duties owed to the plaintiff (para 12G of the SOC); and
(4) the 2nd defendant dishonestly and/or knowingly assisted in the breach of restrictive covenants, implied terms and/or fiduciary duties by the 1st defendant (para 12H of the SOC).
214. The plaintiff’s case was that the 2nd defendant was at all material times owned, controlled and/or managed by the 1st defendant. The personal knowledge of the 1st defendant became the imputed knowledge of the 2nd defendant. By virtue of the 1st defendant being the director of the 2nd defendant, the 2nd defendant well knew and/or ought to have known that the 1st defendant was acting in breach of contract and fiduciary duties. The 2nd defendant knowingly or recklessly assisted the 1st defendant to carry out the wrongful acts pleaded against the 1st defendant and knowingly or recklessly received or received the benefit of property and corporate opportunities rightfully belonging to and/or available to the plaintiff.
215. The plaintiff contended that the 2nd defendant held all its profits on trust or as constructive trustee for the plaintiff and was liable to account for all its profits to the plaintiff.
216. If a person dishonestly lends assistance to a breach of duty by another person (the wrongdoer) in a fiduciary relationship with the claimant, he is also liable to the claimant for dishonest assistance in breach of fiduciary duties by the wrongdoer. (See para 30-077 of Small’s Equity (32nd ed), 2010, at p 899).
217. The 1st defendant was the sole director and beneficial owner of 50% of the issued capital of 2nd defendant at the material times. The knowledge of the 1st defendant was imputed onto the 2nd defendant. I do not agree with Mr McLeish that the 1st defendant had to be the sole beneficial shareholder of the 2nd defendant before he could be the controlling mind and will of the 2nd defendant. “The authorities show clearly that different persons may for different purposes satisfy the requirements of being the company’s directing mind and will.” (per Hoffmann LJ in El Ajou v Dollar Land Holdings Plc and Anor [1994] 2 A11 ER 685 at 706 d-e). As pointed out by Lord Reid in Teso Supermarkets Ltd v Nattrass [1972] AC 153 at 171 F:-
“Normally the board of directors, the managing director and perhaps other superior officers of a company carry out the functions of management and speak and act as the company.”
218. The same applies to a Hong Kong company where the board of directors of a company is the daily operating mind of the company subject to the overriding control of the general meeting of the shareholders. The 1st defendant being the sole director of the 2nd defendant at the material times was the sole operating mind of the 2nd defendant. He was also the sole registered shareholder of the 2nd defendant and beneficial owner of 50% of the issued capital of the 2nd defendant. If the 1st defendant was not the sole controlling mind and will of the 2nd defendant, he was at least the directing mind or the major controlling mind and will of the 2nd defendant. I find that the 1st defendant’s control in the 2nd defendant was sufficient for the knowledge of the 1st defendant to be imputed onto the 2nd defendant to render the 2nd defendant answerable to the plaintiff’s claims herein.
219. Mr McLeish submitted that while the 1st defendant was still an employee and director of the plaintiff, the 2nd defendant was dormant and could not have dishonestly or knowingly assisted in the breaches of fiduciary duty by the 1st defendant. I agree that before the 1st defendant left the employment of the plaintiff, the 2nd defendant had not yet commenced business to compete with the plaintiff. However, I do not agree that the 2nd defendant was dormant at that time. The 2nd defendant had already begun its start-up preparation before the 1st defendant left the plaintiff’s employment. It had through the 1st defendant obtained the List and solicited the services of Ms Tong. The 2nd defendant knew that obtaining the List and soliciting the services of Ms Tong through the 1st defendant would cause the 1st defendant breaching the Employment Agreement, his duty of good faith or fidelity and his fiduciary duties to the plaintiff.
220. I find that the 2nd defendant had knowledge of the 1st defendant’s breach of the Employment Agreement and fiduciary duties. The 2nd defendant is liable to the plaintiff for dishonestly assisting the 1st defendant in his breach of duty of fidelity or good faith and fiduciary duties. Alternatively, the 2nd defendant was the vehicle used by the 1st defendant for the purpose of misappropriating the plaintiff’s confidential information. The 2nd defendant is required to compensate the plaintiff for losses following from its assistance to the 1st defendant or to account for profits which accrue to it as a result of its assistance to the 1st defendant. The plaintiff had elected for account of profits which it is entitled to.
221. In respect of the breach of the restraint of trade clauses, the plaintiff claimed that the 2nd defendant had induced the 1st defendant to breach the Employment Agreement and had dishonestly and/or knowing assisted the 1st defendant in the breach. Mr McLeish submitted that it was not the plaintiff’s pleaded case that the 2nd defendant had induced the 1st defendant to breach the Employment Agreement.
222. “Knowing to procure or, as it is often put, to induce a third party to break his contract to the damages of the other contracting party without reasonable justification or excuse is a tort.” (para 24-14 of Clerk & Lindsell on Torts (20th ed), 2010 at p1608) Although the plaintiff did not use the word “induce” in the SOC, it did plead in para 12G of the SOC that the 2nd defendant knowingly employed and/or engaged the 1st defendant who was bound by the restrictive covenants and implied terms in his contract of employment and fiduciary duties owed to the plaintiff. I accept that the plaintiff had pleaded its case of inducing breach of contract against the 2nd defendant.
223. The ingredients of the tort of inducing breach of contract following the decision of the House of Lords in OBG Ltd v Allan [2008] 1 AC 1 had been helpfully summarized by Morgan J in Aerostar Maintenance International Ltd and Anor v Wilson and Ors [2010] EWHC 2032 (Ch) at para 163 as follows:-
“first, there must be a contract, second, there must be a breach of that contract, thirdly, the conduct of the relevant Defendant must have been such as to procure or induce that breach, fourthly, the relevant Defendant must have known of the existence of the relevant term in the contract or turned a blind eye to the existence of such a term and, fifthly, the relevant Defendant must have actually realised that the conduct, which was being induced or procured, would result in a breach of the term.”
224. The existence of the Employment Agreement between the plaintiff and the 1st defendant was not in dispute in this case. I have found that the 1st defendant had breached clause 13.8 of the Employment Agreement. I have also found that the 1st defendant was the directing mind of the 2nd defendant. I am satisfied that the 2nd defendant had knowledge of clause 13.8. However, I am not satisfied that the 2nd defendant had induced or procured the 1st defendant to breach clause 13.8. The plaintiff’s case was that 1st defendant was the controlling mind and will of the 2nd defendant and the 2nd defendant was the vehicle used by the 1st defendant for the purpose of misappropriating the plaintiff’s confidential information and trade secrets. In such case, the 2nd defendant was only an agent of the 1st defendant. It would be the 1st defendant procuring the 2nd defendant to do certain things but not vice versa. An inducement giving rise to liability must contain some element of “pressure, persuasion or procuration” and a positive act of inducement or procurement is essential to the wrong. (See para 24-40 of Clerk & Lindsell on Torts at p1629 and the OGB Ltd case) I find that the 2nd defendant had not induced or procured the 1st defendant to breach the Employment Agreement. However, if I were wrong in finding that the 2nd defendant had not induced the 1st defendant to breach the Employment Agreement, I would find that the 2nd defendant realized that the conduct induced would result in the 1st defendant breaching clause 13.8.
225. As I have found clause 13.5 of the Employment Agreement unenforceable, the plaintiff has no claims against the 2nd defendant for inducing or procuring the 1st defendant to breach clause 13.5 in the Employment Agreement. (See para 24-21 of Clerk & Lindsell on Torts at p1615).
226. Mr McLeish submitted that dishonest and/or knowing assistance in alleged breaches of contract was not a recognized cause of action giving rise to any relief. Mr Suen produced no authority to support a cause of action for dishonest and/or knowing assistance in alleged breaches of contract. I agree to Mr McLeish’s aforesaid submission.
227. I find that the 2nd defendant is only answerable to the plaintiff for profits came into the hands of the 2nd defendant which the 1st defendant is required to account to the plaintiff for breach of duty of fidelity or good faith and fiduciary duties but not all its profits.
Remedies and quantum
228. I find the 1st defendant liable to the plaintiff for the following claims:-
(1) breach of duty of fidelity or good faith and fiduciary duties in preparing to compete with the plaintiff while the 1st defendant was still under the plaintiff’s employment;
(2) breach of duty of fidelity or good faith and fiduciary duties and clause 13.2 of the Employment Agreement in preparing, when he was still under the plaintiff’s employment, the List for use by the 2nd defendant;
(3) breach of duty of fidelity or good faith and fiduciary duties for enticing Ms Tong away from the plaintiff’s employment to join the 2nd defendant when the 1st defendant was still under the plaintiff’s employment. However, after applying the “blue pencil” to clause 13.8 of the Employment Agreement, this act of the 1st defendant would not be caught by the “blue-pencilled” clause 13.8; and
(4) breach of the “blue-pencilled” clause 13.8 by soliciting business from the plaintiff’s customers.
229. The plaintiff had elected for an account of profits for the pre-termination breach of fiduciary duty and confidence. The parties were not in dispute that breach of fiduciary duties could attract the equitable remedy of account of profits. A fiduciary is liable to account for a profit or benefit if it was obtained in circumstances where there was a conflict or possible conflict of interest and duty, or by reason of the fiduciary position or by reason of the fiduciary taking advantage of knowledge which he derived in consequence of his occupation of the fiduciary position.
230. The 1st defendant took impermissible preparatory steps for competition with the plaintiff when he was still under the plaintiff’s employment. This enabled the 2nd defendant to start-up its business quicker and easier. The 1st defendant had obtained benefit through this advantage to the 2nd defendant in circumstances where there was a conflict of interest and duty.
231. The 1st defendant prepared the List for use of the 2nd defendant and enticed Ms Tong away from the plaintiff to work for the 2nd defendant. These enabled the 2nd defendant to start the design of its collection quicker and to gain access to purchasing staff of potential customers directly. The 1st defendant had obtained benefit through such advantages to the 2nd defendant by reason of his position as director and managing director of the plaintiff and by reason of his taking the advantage of knowledge which he derived from his aforesaid positions held in the plaintiff. There was causal link between the 1st defendant’s breach of fiduciary duties and the profits made by him through the 2nd defendant. In the premise, the 1st defendant and the 2nd defendant are liable to account to the plaintiff for such profits.
232. I shall hear the parties’ submissions on directions to be given by the court for the account of profits exercise. The parties shall agree on the arrangements for the parties to make further submissions on this matter which can be by way of written submissions or oral hearing. The parties may apply to the court by joint letter for further directions if they can agree on the directions. Failing such agreement, the parties shall fix a short hearing before me with 30 minutes reserved to sort out the appropriate directions.
233. In respect of breach of the “blue-pencilled” clause 13.8 of the Employment Agreement, the plaintiff sought damages to be assessed by reference to an account of profits as in AG v Blake [2001] 1 A.C. 268 alternatively hypothetical bargain damages.
234. Breach of a restrictive covenant in an employment contract is a breach of contract. The primary remedy for a breach of contract is for damages. The general rule for assessing damages for breach of contract was stated by Parker B in Robinson v Harman [1848] 1 Exch 850 at 855:-
“The rule of common law is that where a party sustains a loss by reason of a breach of contract he is, so far as money can do so, to be placed in the same situation with respect to damages as if the contract had been performed.”
235. According to the general rule, the damages for the plaintiff in this case should be the net loss as the plaintiff could establish that it had suffered as a result of the 1st defendant’s breach of contract after taking into account the plaintiff’s duty to mitigate. However, the plaintiff sought to claim not compensatory damages but gain-based damages.
236. Mr McLeish submitted that the plaintiff was not entitled to seek equitable remedies against the defendants because of its own inequitable conduct. He relied on the maxim of “he who comes to equity must come with clear hands.” The inequitable conduct complained by the defendants was the plaintiff using its commercial muscle to exclude the 2nd defendant from the Munich Fabric Start trade fair in February 2009 and extracting undertakings from the plaintiff’s Chinese suppliers not to accept any orders or fulfill any delivery to the 2nd defendant.
237. I do not find that it is wrong on the part of the plaintiff to use its bargaining power in the commercial world to eliminate competitors. It is just a normal phenomenon in the commercial reality. With respect, I do not accept Mr McLeish’s aforesaid submission.
238. In clause 13.10 of the Employment Agreement, the plaintiff had expressly reserved the right to claim for financial damages actually suffered by the plaintiff for the 1st defendant’s breach of clause 13. Mr McLeish submitted that the natural and ordinary meaning of clause 13.10 and/or by virtue of the contra proferentum and/or expressio unius est esclusio alterius cannons of contruction, excluded claims for “profits based damages” or “hypothetical bargain damages”.
239. The short answer to Mr McLeish’s aforesaid contention was that in claiming “profits based damages” or “hypothetical bargain damages”, the plaintiff was not relying on clause 13.10. There was no ambiguity in clause 13.10. The principle of contra proferentum was inapplicable. Clause 13.10 only reserved the right of the plaintiff to claim actual loss. However, I do not read clause 13.10 as a provision purporting to deal with the whole area of remedy for breach of contract. I do not find the principle of expressio unius est esclusio alterius assists the plaintiff. I reject the aforesaid contention of Mr McLeish.
240. It was held in AG v Blake that in an exceptional case where the normal remedies of damages, specific performance and injunction were inadequate compensation for a breach of contract, the court could, if justice demanded it, grant the discretionary remedy of requiring the defendant to account to the plaintiff for the benefits received from the breach of contract. Lord Nicholls in his judgment at [2001] 1 AC 268 at 285 F-G stated that:-
“An account of profits will be appropriate only in exceptional circumstances. Normally the remedies of damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to a breach of contract. It will be only in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise.”
241. A main reason for the court to require the defendant in AG v Blake to account for profits was that the defendant in that case had breached his undertaking as to confidentiality which was closely akin to a fiduciary obligation where an account of profits was a standard remedy in the event of breach and such breach occurred in the special circumstances of the intelligence service. The nature of the 1st defendant’s breach of clause 13.8 of the Employment Agreement was not of that nature.
242. Furthermore, according to the evidence of Mr Dolleschel, the plaintiff was aware of the 1st defendant approaching the plaintiff’s customers in late 2008 and early 2009 which according to the evidence adduced at the trial was the time when the 1st defendant started breaching the “blue-pencilled” clause 13.8. Injunctive relief was available at that time to the plaintiff. It was the plaintiff’s own choice not to seek such relief. This is not a case where injunction was inadequate compensation.
243. This case was not concerned with a sensitive subject such as national security and the 1st defendant was not in the position of a fiduciary when he breached clause 13.8. The breaches, although deliberate, took place in a commercial context. Deliberate breaches of contract occurred frequently in the commercial world. Something more was needed to make the circumstances exceptional enough to justify ordering an account of profits, particularly where another remedy was available. As to exceptional circumstances justifying an order for account of profits, Lord Nicholls had provided a useful general guide in AG v Blake when he said that although not exhaustive the general guide “is whether the plaintiff had a legitimate interest in preventing the defendant’s profit making activity and, hence, in depriving him his profit.” ([2001] 1 AC 268 at 285H) I do not see the plaintiff having a legitimate interest in this case in preventing the 1st defendant’s profit making activity. The plaintiff only had a legitimate interest to protect its business interests. I also do not see why the normal remedy of damages was inadequate compensation for this case which is one of the usual cases of breaching the “non-solicitation after employment clause” in an employment contract.
244. Mr McLeish referred me to the following comments made by Lord Hobhouse in his dissenting judgment in AG v Blake [2001] 1 AC 268 at 299 D-E:-
“I must also sound a further note of warning that if some more extensive principle of awarding non-compensatory damages for breach of contract is to be introduced into our commercial law the consequences will be very far reaching and disruptive. I do not believe that such is the intention of your Lordships but if others are tempted to try to extend the decision of the present exceptional case to commercial situations so as to introduce restitutionary rights beyond those presently recognized by the law of restitution, such a step will require very careful consideration before it is acceded to.”
245. Mr Suen submitted that Lord Hobhouse referred to “commercial situations” but not “employment situations” and AG v Blake in fact involved an “employment situation”. Mr Suen’s aforesaid contention did not assist the plaintiff’s case as AG v Blake was decided on the ground that it was an exceptional case in an “employment situation”. The ruling of the English House of Lord was that whether in “commercial situations” or “employment situations”, account of profits would be available as a remedy for breach of contract claims only in exceptional circumstances.
246. Mr Suen also relied on Esso Petroleum Company Limited v Niad Limited [2001] All ER (D) 324 (Nov) to support the plaintiff’s claim for an account of profits. The Esso Petroleum case is different from the case before me. I only need to refer to the following summary stated by Mance LJ in Experience Hendrix LLC v PPX Enterprises Inc and another [2003] 1 All ER (Comm) 830 in para 31 at 841 on the Esso Petroleum case which would show the difference:-
“we were referred to Esso Petroleum Company Limited v Niad Limited [2001] All ER (D) 324 (Nov), where Sir Andrew Morritt V-C ordered an account of profits as a remedy for breach of a contractual scheme called ‘Pricewatch’ operated by Esso with its dealers. Dealers agreed to report competitors’ prices and to abide by prices set daily by Esso which were intended to match the competition. Dealers received financial support by Esso to assist them to do this. The defendant failed to maintain prices as agreed on four occasions, despite giving repeated assurances that he would do so. Damages were an inadequate remedy, since it was impossible for Esso to attribute lost sales to breach by one dealer. Yet the obligation to observe Pricewatch was fundamental to its operation, and failure to do so gave the lie to Esso’s advertising campaign to support it. Account was also taken of the defendant’s repetition of its breaches, and of Esso’s legitimate interest in preventing the defendant profiting. Sir Andrew Morritt V-C regarded an account of profits as particularly appropriate when the defendant had been receiving financial support from Esso to maintain Pricewatch.”
247. Mr Suen submitted in para 53 of his closing submission that:-
“In arriving at this conclusion [ie to grant an account of profits for breach of contract in the Esso Petroleum case], Morritt VC considered (at § 63) the following factors to be important: (i) damages is an inadequate remedy; (ii) the obligation breached was fundamental to the contractual scheme; (iii) the breaches were more extensive than the plaintiff had thought; and (iv) the plaintiff undoubtedly has a legitimate interest in preventing the defendant from profiting from its breach of obligation. It is respectfully submitted that these factors can clearly be found in the present case, given the extensive planning and preparatory steps which the 1st Defendant took to facilitate his extensive breaches of the restrictive covenants after the termination of his employment with the Plaintiff.”
248. With respect, other than that both cases are breach of contract cases, I see no resemblance between the Esso Petroleum case and the case before me. I do not see how the 1st defendant’s preparatory steps would make damages an inadequate remedy for his breach of restraint of trade clause and how these preparatory steps would make the obligations under the restraint of trade clause became fundamental to the Employment Agreement. I also do not see how these preparatory steps had made the breach of the restraint of trade clause more extensive than the plaintiff had thought or given the plaintiff a legitimate interest in preventing the 1st defendant from profiting from the breach of the restraint of trade clause. I am of the view that the Esso Petroleum case does not assist the plaintiff.
249. The plaintiff relied on the Experience Hendrix case to seek hypothetical bargain damages. Mr Suen in para 82 of his opening submission submitted that:-
“The following factors were identified by the English Court of Appeal in Experience Hendrix LLC v PPX Enterprises Inc [2003] 1 All ER (Comm) 830 to be relevant to the exercise of discretion to grant such damages:-
(1) Whether that the defendant did do the very thing it had contracted not to do;
(2) Whether the defendant “knew that it was doing something which it had contracted not to do”;
(3) Whether it was a “deliberate breach”; and
(4) Whether it was a “flagrant contravention” of the defendant’s obligation.”
250. With respect, I am of the view that Mr Suen had over-simplified the consideration for the court to award “hypothetical bargain damages”. The factors listed by Mr Suen are factors which one will expect to find in almost all breach of contract cases. If Mr Suen’s understanding of the Experience Hendrix case is accepted, then “hypothetical bargain damages” will be damages awarded routinely in breach of contract cases. This is not the case in this jurisdiction.
251. The Experience Hendrix case involved infringement of the plaintiff’s intellectual property right by the defendant. In that case, the defendants and the claimant (who was successor in title to the estate of a deceased musician) had settlement their previous proceedings relating to breaches of an agreement made between the musician and the defendants. The settlement agreement provided, inter alia, that the first defendant was entitled to license various masters of recordings, which were listed in schedule A to the agreement. At various times, and contrary to the terms of the settlement, the first defendant licensed various masters other than the schedule A masters. The claimant issued proceedings seeking, inter alia, an account of profit or damages in respect of the breaches. Mance LJ remarked in para 39 of the judgment [2003] 1 All ER (Comm) 803 at 843-844 that this case arose out of a particular background. His Lordship further stated in para 42 of the judgment at 845 that:-
“In the light of this background and in the light of the terms of the settlement agreement itself, I consider that any reasonable observer of the situation would conclude that, as a matter of practical justice, PPX [the 1st defendant] should make (at the least) reasonable payment for its use of masters in breach of the settlement agreement. The intention of the agreement is clear. Consent to extensions or renewals was only contemplated in the case of existing licences. Even then, if it was given at all, it would no doubt only be given on terms requiring payment of a royalty.”
252. His Lordship went on to conclude in para 43 of the judgment at 845 that:-
“It would in these circumstances be anomalous and unjust if PPX could, by simply breaching the agreement, avoid paying royalties or any sum, when they have to pay royalties in respect of Sch A masters and they would have expected that, even if consent to the extension or renewal of existing licences of non-Sch A masters was forthcoming at all, it would only be on terms as to payment of further royalties. As it is, this case is concerned with fresh licences of non-Sch A masters to different licencees, so that the incongruity of allowing PPX free user to its own profit is yet more obvious.”
253. Peter Gibson LJ stated in para 58 of the judgment in the Experience Hendrix case at 849 that:-
“In my judgment, because: (1) there has been a deliberate breach by PPX of its contractual obligations for its own reward, (2) the claimant would have difficulty in establishing financial loss therefrom, and (3) the claimant has a legitimate interest in preventing PPX’s profit-making activity carried out in breach of PPX’s contractual obligations, the present case is a suitable one (as envisaged by Lord Nicholls: [2000] 2 All ER (Comm) 487 at 498, [2001] 1 AC 268 at 283-284) in which damages for breach of contract may be measured by the benefits gained by the wrongdoer from the breach. To avoid injustice I would require PPX to make a reasonable payment in respect of the benefit it has gained.”
254. As pointed out above, the plaintiff in the case before me does not have a legitimate interest in preventing the 1st defendant’s profit-making activity. The plaintiff should be able to establish its financial loss if the 1st defendant’s breach of the restraint of trade clause had caused the plaintiff losing business from the customers concerned. I do not agree that this case is a suitable case for the court to award “hypothetical bargain damages”.
255. Mr Suen also referred me to Pell Frischmann Engineering Ltd v Bow Valley Iran Ltd and others [2011] 1 WLR 2370 when the Privy Council held that where a breach of contract could in principle have been restrained by injunction, “hypothetical bargain damages” could be awarded. In the Pell Frischmann case the defendant was found to have been in breach of the express terms of the confidentiality agreements as well as being in breach of an equitable obligation of confidence. Their Lordship agreed that previous cases on this topic of “hypothetical bargain damages” (also known as “Wortham Park damages” after the case of Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798) had established that this type of damages was readily awarded at common law for the invasion of rights to tangible moveable or immovable property and for patent infringement and breaches of other intellectual property rights of a proprietary character. Their Lordship noted that most of the recent cases were concerned with the invasion of property rights such as excessive user of a right of way. Their Lordship also noted that the breach of a restrictive covenant was also generally regarded as the invasion of a property right since a restrictive covenant was akin to a negative easement. (see para 48 of the judgment at p 2386)
256. Mr Suen referred to the view of the learned author of Employee Competition: Covenants, Confidentiality, and Garden Leave set out in para 11.65 to support his contention that gain-based damages should be available in this case. In the aforesaid paragraph, the learned author stated as follows:-
“As Lord Steyn observed in A-G v Blake in his colourful metaphor, the factors to be taken into account will need to be ‘hammered out on the anvil of concrete cases’. Inevitably, neither Peter Smith J’s decision nor the Privy Council’s decision in the Pell Frischmann case is going to be the last word in this complex area of development in remedies at common law. Nevertheless, this series of recent decisions is likely to be a source of considerable encouragement to employers faced with employees who have consciously chosen to break the terms of their restrictive covenants or other contractual terms (for example the duty to act in good faith) in circumstances where the employer may find it hard to produce cogent evidence establishing an actual and substantial loss of profits that has been caused by the wrongdoing of the employee.”
257. It could be seen that the learned author was expressing his personal view on future development in this area rather than stating the position of the current law. The current position was stated by the learned author in para 11.110 as follows:-
“There is, however, a marked reluctance on the part of the courts to go down the route of awarding an account as a remedy, whether in contract or in tort, as suggested by the House of Lords in the Blake case, and as is well illustrated by Forsythe-Grant v Allen. This case involved a tort claim in nuisance, in which the Court of Appeal not only concluded that the facts were not sufficiently exceptional, but also took care to emphasize that an account was very much to be regarded as an equitable remedy which required the claimant to show either an actual fiduciary obligation or a ‘quasi-fiduciary’ obligation, such as that owed by the person who has received confidential information. The same reluctance was also shown by the Court of Appeal – and the development of the hurdle of the requirement for exceptional circumstances – in Devenish Nutrition Ltd v Sanofi-Aventis SA (France).”
258. The general common law approach to misuse of property involved an award of a sum equivalent to the price or hire that a reasonable person would pay for such use, even if the owner would not himself have been using the property. The courts of equity had gone further and in some cases required the wrongdoer to yield up all his gains when there were infringements of property rights such as passing off, infringement of trademarks, copyrights and patents and breach of confidence. The case before me is not a case of breach of commercial contract involving intellectual property right as in the Experience Hendrix case or any property rights at all. The restrictive covenant concerning us is not in the nature of confidentiality agreements or equitable obligation of confidence as in the Pell Frischmann case.
259. This is a case of breach of restraint of trade clause in the context of an employment contract. It was not a restrictive covenant akin to a negative easement. The plaintiff had no exclusive rights to do business with its customers. The principle in dealing with this type of non-competition claim is to compensate the claimant for its loss instead of punishing the defendant by stripping it of its profits. Let us not forget the overriding principle that the damages are compensatory and not punitive. The imposition of the restrictive covenant was to protect the plaintiff’s legitimate business interests from being taken advantages by the defendant unfairly. The Pell Frischmann case does not assist the plaintiff.
260. If the breach of the restrictive covenant by the 1st defendant had not caused any loss to the plaintiff, the normal remedy of damages available to the plaintiff would be nominal damages. I see no special circumstances in this case justifying a departure from the general principle governing assessment of damages for breach of contract.
261. In the context of a claim for breach of a restrictive covenant, the plaintiff had to establish that its customers ceased to do business with it, reduced trading volume with it, or transferred purchase orders for it to the 2nd defendant. The plaintiff adduced no such evidence at the trial.
262. In such case, the plaintiff failed to prove that it had suffered any loss due to breach of clause 13.8 of the Employment Agreement by the 1st defendant. The plaintiff is entitled to nominal damages for its claim. (See Born Chief Co v George Tsai and Anor [1996] 2 HKLR 188) Accordingly, I order the 1st defendant to pay nominal damages of $100.00 to the plaintiff for his breach of the “blue-pencilled” clause 13.8.
Costs
263. There are two sets of costs which I have to deal with. One is the costs for the consent summons dated 10 April 2013 for the plaintiff to file and serve the witness statement of Mr Lam. The other is the costs for this Action.
264. The witness statement of Mr Lam was about the 1st defendant’s access to his email account via the Outlook and the World Client. The evidence related to the plaintiff’s claim relating to the email dated 9 May 2008. The 1st defendants had pleaded his case in respect of the said email in his Amended Defence filed on 30 September 2010. The plaintiff had filed its Amended Reply on 22 November 2010 to deal with the 1st defendant’s case. If the plaintiff considered that it was necessary to adduce Mr Lam’s evidence on the 1st defendant accessing his emails via the Outlook and the World Client in support of the plaintiff’s case or to rebut the defendants’ case, the plaintiff should have included the witness statement of Mr Lam when the parties exchange witness statement in March 2011. The plaintiff chose not to do that until the beginning of the trial after it had further amended its Statement of Claim on 23 March 2013. The plaintiff shall bear the costs for the application to file and serve Mr Lam’s witness statement. I make an order nisi that the plaintiff shall pay to the defendants the costs for the consent summons dated 10 April 2013. I assess such costs by summary assessment at $1,000.00, payable forthwith.
265. In respect of the costs for this Action, the plaintiff succeeded in some parts of its claims but failed in other parts. Each party should be entitled to part of its costs from the other side and at the same time liable to pay part of its opponent’s costs. In such case, I am of the view that a fair costs order is no order as to costs for this Action and I so order.
266. The above costs orders are orders nisi. Unless application is received within 14 days from any party to vary any of the aforesaid costs orders nisi, the same shall become absolute after 14 days from the date of this judgment.
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( R Lai ) |
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Deputy District Judge |
Mr Jenkin Suen, instructed by Marie Tsang, Dustin Chan & Co, for the plaintiff
Mr Robin McLeish, instructed by Simmons & Simmons, for the 1st and 2nd defendants
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