UNION GAIN LTD v. CHU WILTON LUCAS

DCCJ 2383/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2383 OF 2013

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D E C I S I O N

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1. By summons dated 13 August 2013, the plaintiff seeks an interlocutory injunction against the defendant to restrain him from, until 31 March 2014, engaging in the provision of hair services or other services similar to that provided by the plaintiff within a radius of 1/2 mile from “Hip Hair Culture”, a salon operated by the plaintiff, located on the 1^st Floor of No. 62 Granville Road, Tsim Sha Tsui, Kowloon.

Background

2. On 1 September 2009, the plaintiff and the defendant entered into an employment contract (“the Employment Contract”), whereunder the plaintiff employed the defendant as a hair stylist. 

3. On 1 February 2013, the defendant served a notice of termination.  It was agreed that the last day of employment of the defendant would be 31 March 2013. On 23 March 2013, the plaintiff and the defendant signed a letter of release to release both parties’ obligations under the Employment Contract.

4. On 31 March 2013, the defendant joined “i Hair Nails” at Shop 209, iSquare, 63 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong. 

5. As can be ascertained from the Statement of Claim, the plaintiff relies on the alleged breach of clause 9(a)(iii) of the Employment Contract as its only cause of action.  The Employment Contract in fact contains various restraint of trade clauses, including the following:

“9(a) ... the Employee covenants that he will not without the prior written consent of the Company (such consent to be withheld only in so far as may be reasonably necessary to protect the legitimate interests of the Company) after the termination of this agreement for whatever reason ...:

(i) for a period of One (1) year, whether on his own account or as shareholder, partner, director, agent, servant or consultant or otherwise for any other person canvass, solicit, approach or cause to be canvassed, solicited, approached any client for whom the Employee provided Services during the One (1) year period prior to the said termination with a view to providing services to those clients;

(ii) for a period of One (1) year, whether on his own account or as shareholder, partner, director, agent, servant or consultant or otherwise for any other person provide services or cause services to be provided to any client for whom the Employee provided Services during the One (1) year prior to the said termination;

(iii) for a period of One (1) year, whether on his own account or as shareholder, partner, director, agent, servant or consultant or otherwise for any other person, be engaged in the provision of Services within a radius of Half (1/2)  mile of the Premises or such other business premises of the Company (as to be determined by the Company at its absolute discretion) pursuant to clause 4 above where the Employee habitually worded [sic] six (6) months prior to the said termination or the Premises in the case of termination as a result of a breach of Clause 1 above.”

6. By clause 2 of the Employment Contract, “Services” mean hair services and such other services as requested by the customers of the plaintiff.

7. Since this is an interlocutory application, the court cannot resolve factual disputes. Further, bearing in mind that the relevant covenant in the Employment Contract will expire on 31 March 2014, I agree with Mr Gary Lam, counsel for the defendant, that it is unlikely that the trial of the action can take place before that date. In the circumstances, the usual American Cyanamid test has to be applied with a rider that the court should have a greater regard to the plaintiff’s prospect of success [see:  Midland Business Management Ltd v Lo Man Kui [2011] 1 HKLRD 470, at paragraphs 6 and 7]. 

Legal principles in relation to restrictive covenants

8. The defendant does not dispute that he has joined “i Hair Nails”.  The primary argument of Mr Gary Lam is that clause 9(a)(iii) relied upon by the plaintiff is unenforceable. 

9. In this regard, Lam J (as he then was) in the Midland Business Management case, Supra, at paragraphs 9 and 10 has set out the relevant legal principles:

(1) No employer is entitled to make use of a restrictive covenant to protect himself against competition per se.  A covenant against competition per se is not reasonable and accordingly void.

(2) An employer is not entitled to prevent his ex-employee from using the skill and knowledge in his trade and profession which he learnt in the course of his employment.

(3) Nor is he entitled to prevent his ex-employee from using in the service of some person other than the employer the general knowledge the employee has acquired of the employer’s scheme of organisation and methods of business.

(4) An employer is entitled to make use of a restrictive covenant to protect his legitimate interests such as his trade secrets and his trade connections. However, the restrictive covenant, to be valid, must afford no more than adequate protection to the party in whose favour it is imposed.  It must be reasonable not only in reference to the interests of the parties concerned, it must also be reasonable in reference to the interests of the public.

(5) The onus of proving the reasonableness of the restriction rests on the party who seeks to enforce the restriction.  The more onerous the restriction, the heavier the weight of the onus.

(6) Since the burden lies on the employer, it should have pleaded the same with full particulars including all facts and matters relied upon by it to assert that the covenant is enforceable.  A bare assertion of reasonableness is not enough.  It should plead the interests it relied upon and how such interests reasonably warrant a protection as wide as that embodied in the contract.

(7) If a plaintiff intends to put forward a case of severance, whether by way of alternative argument or primary argument, it should also be pleaded.

Discussion

10. It follows that the onus lies on the plaintiff to justify each and every element of clause 9(a)(iii) of the Employment Contract, namely:

(1) restriction of provision of the Services (as defined);

(2) restriction of provision of the Services within the radius of 1/2 mile of the premises; and

(3) restriction of provision of the Services for 1 year.

11. In the present case, there is simply nothing pleaded in the Statement of Claim to assert that the covenant in question is enforceable.  In terms of evidence, it appears that only paragraphs 18 to 20 of the Affirmation of Choi Yeung Wai Billy filed in support of the application attempt to justify clause 9(a)(iii) of the Employment Contract.  I note that the said paragraphs of Mr Choi’s Affirmation only contain very general and non-specific references to trade connections, goodwill and confidential information.  More importantly, Ms Fiona Nam, counsel for the plaintiff, has confirmed that such trade connections, goodwill and confidential information which the plaintiff seeks to protect under the covenant only relate to existing customers of the plaintiff.

12. In the circumstances, clause 9(a)(iii) is plainly unreasonably wide.  It extends beyond dealing with existing customers of the plaintiff  whom the defendant had served when he was employed by the plaintiff.  Actually, it extends beyond dealing with the customers of the plaintiff.  If clause 9(a)(iii) were enforceable, the defendant would be prohibited from serving new customers within the 1/2 mile radius, even though the plaintiff has no connection with such customers whatsoever.

13. There is simply no justification for such a wide-ranging clause, either in the Statement of Claim or in the evidence of the plaintiff.  At the hearing, Ms Nam suggested that such extensive protection is necessary on account of the difficulty in policing compliance with clauses 9(a)(i) and 9(a)(ii) of the Employment Contract.

14. In my view, proper evidence should have been adduced by the plaintiff to explain the alleged difficulty.  The allegation should not have been made from the Bar Table alone.

15. Moreover, at paragraph 23 of the Midland Business Management case, Supra, Lam J quoted with approval paragraph 49 of the judgment of the English Court of Appeal in the case of Thomas v Farr plc [2007] ICR 932, as follows:

“[49] Mr Nicholls submitted that it was unreasonable to prevent Mr Thomas from engaging in competition with Farr in any place where it had conducted business in the 12 months prior to termination. The clause would, for example, prevent him from competing with Farr for business not only from its existing clients, but also from those who used another broker or none. That would be a good point if, but only if, the confidential information which it was reasonably foreseeable that Mr Thomas would acquire during the course of his employment would be relevant only to existing clients...(Emphasis added).”

16. The last sentence of the quoted passage (highlighted by Lam J for emphasis), certainly assists the defendant in resisting the application.  In the context of the present case, Ms Nam has confirmed that the trade connections, goodwill and confidential information which the plaintiff seeks to protect would be relevant only to existing clients of the plaintiff.

17. For the reasons stated above, I do not think the plaintiff has a good prospect of success in upholding the validity of clause 9(a)(iii) at trial.  Accordingly, I dismiss the plaintiff’s summons.

18. For the sake of completeness, I should mention that, contrary to the further submissions of Mr Gary Lam, I would not have refused the plaintiff’s application on account of the delay alone. The relevant period being the period between late April 2013 and 13 August 2013.

(Discussion re costs)

19. I order that costs of the application be paid by the plaintiff to the defendant in any event, such costs to be taxed if not agreed (with certificate for counsel).