LINE ANALYTICS LIFE SCIENCES LTD. v. LINE ANALYTICS LTD. AND ANOTHER

HCA 3046/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3046 OF 2002

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J U D G M E N T

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1. On an application made by the plaintiff ex parte on notice Yam J. made an order on 19th December 2002 that :

“ (1) The 1st defendant be restrained from soliciting or accepting business, directly or indirectly whether by its servants, agents or otherwise howsoever, including electronic means, from any of the businesses listed in the Schedule hereto and from otherwise participating, assisting or being concerned in any way with any business competing with the business of the plaintiff.

(2) The 2nd defendant be restrained from soliciting or accepting business, directly or indirectly, by any means howsoever including electronic means either on his own account or for any firm, company or organization which has dealt with the plaintiff until the return date, 27th December 2002 at 10 a.m."

2. The ex parte order was continued by Deputy Judge To on 27th December 2002 pending determination of the plaintiff's inter partes summons.

3. The application before me is for the continuation of the ex parte order of Yam J. as continued by Deputy Judge To. The plaintiff seeks a continuation of the order against the 1st defendant until trial or until further order and against the 2nd defendant until trial or further order or until 23rd July 2003 if the trial has not taken place by that date.

4. At the outset of the hearing before me I was informed that the 1st defendant did not object to the order being continued against it. Accordingly, I made an order that the ex parte order of Yam J. made against the 1st defendant be continued against it until trial or further order with costs in the cause.

5. What was left to be dealt with was the application against the 2nd defendant.

6. The background facts are that the plaintiff is a wholly owned subsidiary of HDH Holdings Ltd. ("HDH"). The plaintiff, 1st defendant and HDH are companies incorporated in Hong Kong. At all material times the 2nd defendant was a director of the 1st defendant and it is said by the plaintiff that the 2nd defendant was in de facto control of the 1st defendant.

7. At all material times the 1st defendant carried on the business of supplying life science, diagnostic equipment and related products ("the products") in Hong Kong and the Mainland. The plaintiff carried on business in healthcare, medical supply and services in Hong Kong and the Mainland. By an agreement dated 20th July 2000 and made between the plaintiff, the 1st defendant and HDH, the plaintiff acquired the obligations and benefits of 34 agency and distributorship agreements from the 1st defendant for the consideration of HK$1 and the covenants provided by the plaintiff and HDH ("the Acquisition Agreement"). The 34 agents and distributors are identified in Schedule II to the Acquisition Agreement.

8. The 1st defendant covenanted, inter alia, not to engage in a competing enterprise unless with the prior written consent of the plaintiff (cl. 3.6(e)).

9. On the same day the 2nd defendant entered into a consultancy agreement with the plaintiff whereby he agreed to provide services to the plaintiff for a term of 3 years for HK$65,000 per month plus benefits ("the Consultancy Agreement"). It is accepted that the 2nd defendant was at all material times experienced and well versed with the marketing and sales of the products in Hong Kong and the Mainland. The evidence shows that he has over 40 years experience in the scientific industry engaged in distributing and advising on scientific laboratory instruments, clinical diagnostics and analytical reagents to governments, universities, hospitals and research institutes in Hong Kong and the Mainland. The plaintiff engaged him as a consultant and the Consultancy Agreement dated 20 July 2002 was entered into. It was also envisaged that the 2nd defendant would be appointed a director of the plaintiff. He was subsequently appointed a director of the plaintiff.

10. The plaintiff alleges that the 1st defendant was in breach of the Acquisition Agreement and that the 2nd defendant was in breach of the Consultancy Agreement. The detailed allegations are set out in the amended statement of claim.

11. By letter dated 23rd July 2002 from the plaintiff to the 2nd defendant the plaintiff gave notice pursuant to cl. 10.3(a) of the Consultancy Agreement to terminate the same with immediate effect. By cl. 10.3(a) either party to the Consultancy Agreement could terminate the agreement forthwith by notice in writing to the other party if that other party commits any serious or persistent breach of any of its or his obligations under the Consultancy Agreement. The 2nd defendant was also asked to resign as a director of the plaintiff. There has been no termination of the Acquisition Agreement.

12. The 1st defendant denies that it has been in breach of the Acquisition Agreement. The 1st defendant also counterclaims for sums owing to it by the plaintiff and for the return of documents and records of the 1st defendant and for damages.

13. The 2nd defendant also denies that he was in breach of the Consultancy Agreement. By a separate action HCA 3836 of 2002 the 2nd defendant as plaintiff commenced proceedings against the plaintiff herein as defendant alleging that it was in breach of the Consultancy Agreement and claiming damages for breach. The plaintiff herein has filed and served a defence and a counterclaim to that action.

14. On the evidence before me the matters giving rise to this application by the plaintiff for an interlocutory injunction took place after the plaintiff commenced these proceedings. In early December 2002 the plaintiff's attention was drawn to an e-mail that the 1st defendant had sent to one of the 34 suppliers listed in Schedule II to the Acquisition Agreement, namely, BTX-Geotronics. This is exhibited as "GWHC-5" to the 1st affirmation of Mr. Cautherly of the plaintiff. It seeks to inform the supplier that the 1st defendant was back on line. It also stated that :

“ If you are in need of any assistance in marketing or distribution in Hong Kong or Mainland China, our experienced Consultancy partner BioSepCo Asia may be able to help."

It also gave an e-mail contact address and stated that the 2nd defendant and the team wished them a Merry Christmas and Joyful New Year.

15. The supplier BTX-Geotronics informed the plaintiff that it was confused by the e-mail that they had received. As a result of what they had learnt from the said supplier the plaintiff applied for and obtained the order of Yam J. made ex parte on notice on 19th December 2002. The order made against the 2nd defendant was based on the plaintiff's cause of action for the 2nd defendant's breach of the non-solicitation clause in the Consultancy Agreement.

16. The non-solicitation clause is contained in cl. 8.1 of the Consultancy Agreement ("the non-solicitation clause"). It provided that :

“ During the term of this Agreement and as a separate agreement that for a period of one (1) year after termination of this Agreement the [2nd defendant] will not either on his own account or for any firm, company or organization other than [the plaintiff]:-

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(c) solicit or accept business from any other person, firm, company or organization which has dealt with [the plaintiff] save and except with the consent of the Board".

17. Mr. Beresford, counsel for the defendants, submitted that the order obtained ex parte on notice was much wider than the non-solicitation clause in that the 2nd defendant was restrained from soliciting or accepting business, directly or indirectly, "either on his own account or for any firm, company or organization which has dealt with the plaintiff." (emphasis added). It is apparent that the restriction is wider than the non-solicitation clause. Mr. Harris, counsel for the plaintiff, accepts that something has gone wrong in the drafting of the relief obtained. He does not seek a continuation of the order in the same terms but in the terms of the non-solicitation clause. It seems to me that the Court can, of course, continue an injunction in a more limited form than the ex parte order if it came to the view that interlocutory relief should be granted to the plaintiff. I do not see this as a fatal objection to the continuation of the order in a more limited form.

18. The fundamental objection to the continuation of the order taken by Mr. Beresford is that if an interlocutory injunction is granted that will effectively be determinative of the rights of the parties in relation to the non-solicitation clause. The non-solicitation clause is for a one year term from termination of the Consultancy Agreement and the one year period will expire on 23rd July 2003. The evidence shows that it will not be possible to have a trial of this action before that date even if dates are immediately fixed. The action is, however, nowhere near ready for trial as pleadings have not yet closed. There has not yet been any discovery. In my view there can be no doubt that if an interlocutory injunction is granted that will effectively be determinative of the rights of the parties in relation to the non-solicitation clause.

19. In Lansing Linde Ltd v. Kerr [1991] 1 WLR 251 it was held, inter alia, that in determining whether or not, on the balance of convenience, to grant an interlocutory injunction the judge below had properly taken account of the plaintiff's prospects of success in the substantive trial having regard to the fact that it would not be possible to hold a trial before the period for which the plaintiff claimed to be entitled to an injunction had expired, or substantially expired, and that in those circumstances it was not enough to decide merely that there was a serious issue to be tried. The restrictive covenant in that case was also for a period of one year after termination.

20. The matter was succinctly put by Staughton L.J. at pg 258 where he said:

“ If it will not be possible to hold a trial before the period for which the plaintiff claims to be entitled to an injunction has expired, or substantially expired, it seems to me that justice requires some consideration as to whether the plaintiff would be likely to succeed at a trial. In those circumstances it is not enough to decide merely that there is a serious issue to be tried."

And at the same page, he also said :

“ So if an injunction had been granted by the judge, or is now granted, the likely effect would be to decide the dispute against the defendant for good and all. In those circumstances justice requires, in my opinion, some assessment of the merits and more than merely a serious issue to be tried."

21. Mr. Harris submitted that there will have to be a trial of this action even if an interlocutory injunction is granted. For that reason he submitted that the situation was different from Lansing Linde and that the plaintiff need only show that there was a serious question to be tried before turning to the balance of convenience. I accept that there will have to be a trial of the action even if an interlocutory injunction is granted. But that will be on all the other issues raised on the pleadings and not in respect of the non-solicitation clause. The cause of action for breach of the non-solicitation clause was added by way of an amendment to the statement of claim. If the interlocutory injunction is continued it will effectively be determinative of that cause of action as the period of the restraint will have expired by the time of trial. I am unable to accept Mr. Harris' submission that all that the plaintiff has to show is a serious issue to be tried on its cause of action on the non-solicitation clause.

22. In my judgment the test laid down in Lansing Linde is applicable. I accept Mr. Beresford's submission that applying the Lansing Linde test one of the factors to be taken into account in the balance of convenience is whether the plaintiff has succeeded in showing that it is more likely than not that he would succeed at trial. (see also para. 13.32 Brearley and Bloch 'Employment Covenants and Confidential Information : Law, Practice and Technique 2nd Edn.)

23. It is necessary to consider the non-solicitation clause. This is set out above at para. 16.

24. It is well settled that a covenantee seeking to uphold the validity and enforceability of a covenant in restraint of trade must show that the covenant is both reasonable in the interest of the contracting parties and reasonable in the interests of the public. This was re-affirmed in Office Angels Ltd v. Rainer-Thomas and O'Connor [1991] 1 IRLR 214 at pg 217, para. 21.

25. Mr. Harris submitted that the 2nd defendant was not in an employer and employee relationship. He relied on the Acquisition Agreement and submitted that it was more akin to a vendor purchasing the goodwill of a business, although he said that he was referring to goodwill in a loose sense. He relied also on the Consultancy Agreement. Cl. 11 provided that nothing in the agreement should constitute or be construed as, inter alia, an employment relationship between the plaintiff and the 2nd defendant. By cl. 2.3 e) it was also agreed that the 2nd defendant would act in the capacity of an independent contractor with respect to the plaintiff.

26. I agree with Mr. Beresford, however, that one must look at the substance of the Consultancy Agreement and not the form. In essence, the 2nd defendant agreed that in consideration of a wage or salary he would provide his own work and skill in the performance of management services. His remuneration was a monthly fee together with accommodation allowance and benefits (cl. 5.1). The plaintiff also agreed to reimburse him for all business expenses incurred (cl. 5.2) and to pay a monthly sum towards his existing insurance policy which, I was informed, was a life insurance policy (cl. 5.3). There was also to be payment of an incentive bonus and an option scheme (cl. 5.4). The plaintiff would provide office space, staff and all pertinent data and information (cl. 3.1). The 2nd defendant was permitted to perform other business provided, however, the Board of the plaintiff was informed of the time taken in this respect and the nature of the activities (cl. 2.4). He was also subjected to a non-competition clause during the term of the agreement (cl. 6.1). He also had to conform to all reasonable directions given by the plaintiff (cl. 2.3 c). It is not necessary to go through all the clauses but it seems to me that it is more probable than not that the relationship was more like an employer and employee relationship.

27. There is no merit in any suggestion that the situation of the plaintiff was akin to a vendor of a goodwill of a business. It is important to bear in mind that what the plaintiff acquired under the Acquisition Agreement were the obligations and benefits under the agency and distributorship agreements that the 1st defendant had with the 34 suppliers as identified (cl. 2.1). It did not acquire all the business of the 1st defendant or the goodwill of the 1st defendant. It only acquired the obligations and benefits under the contracts.

28. It is important to consider what is the legitimate interest of the plaintiff to be protected by the non-solicitation clause. Mr. Harris submitted that the plaintiff was seeking to protect the business goodwill, albeit used in a loose sense, which the 2nd defendant through the 1st defendant had sold to the plaintiff. This is misconceived. That was not what was transferred to the plaintiff. By the Acquisition Agreement the 1st defendant transferred to the plaintiff the benefits and obligations of the 34 agency and distributorships agreement. These were contracts with suppliers. That was all that was sold. There is no question of any goodwill or other business or any other contracts that the 1st defendant may have had with other suppliers not listed in Schedule II to the Acquisition Agreement. There is no reference at all to goodwill. There was no assignment of any confidential customer base or the transfer of the 1st defendant's entire contracts with other suppliers. I accept Mr. Beresford's submission that the legitimate interest that the plaintiff is entitled to protect is the beneficial interest in the contracts and not anything else. It is significant that there is no allegation anywhere that the 2nd defendant has procured the breach of any of those contracts.

29. For the non-solicitation clause to be treated as reasonable in the interest of the plaintiff it must afford no more than adequate protection for the benefit of the plaintiff (see Office Angels Ltd. at page 217 para. 25). The non-solicitation clause is, in my view, much wider than is needed to protect the legitimate interest of the plaintiff.

30. It must be remembered that the 2nd defendant himself personally had dealings with the 34 suppliers before the Acquisition Agreement and the Consultancy agreement were entered into. The non-solicitation clause prohibits him from soliciting or accepting business from any person, firm company or organization which has dealt with the plaintiff save and with the consent of the Board. This would include those persons, firms, companies or organizations that the 2nd defendant has not himself dealt with during the term of the Consultancy Agreement. This would include customers who purchased the products and not merely suppliers. This would also include those who have dealt with the plaintiff, whether as a customer or as a supplier, even after the termination of the Consultancy Agreement. The non-solicitation clause is much wider than is necessary to protect the plaintiff's legitimate interest.

31. Furthermore, the restriction in the non-solicitation clause is not limited geographically. It is a worldwide restriction. This cannot, in my view, be justified. The 34 agency and distributorship agreements were for the sale of the products in Hong Kong and the Mainland. Yet the restriction would prohibit the 2nd defendant from dealing with any of the persons, firms, companies or organizations which have dealt with the plaintiff for markets other than Hong Kong and the Mainland.

32. The cases of Gilford Motor Co. Ltd. v. Home [1933] 1 Ch 935 and BSC Building Materials Supply Co. Ltd. v. Cheung Chi Hung Michael [1998] 2 HKC 425 relied on by Mr. Harris are distinguishable on their facts and do not assist the plaintiff.

33. In my judgment the prospects of success on the claim for breach of the non-solicitation clause are overwhelmingly in favour of the 2nd defendant. The plaintiff has failed to show that it is more likely than not that he would succeed at trial in establishing that the non-solicitation clause is valid and enforceable. The plaintiff has failed to show that it is more likely than not that he would succeed at trial on his claim for breach of the non-solicitation clause.

34. As regards the other factors in the balance of convenience, the plaintiff says that damages would not be an adequate remedy if an interlocutory injunction is not granted against the 2nd defendant. The 2nd defendant would be free to deal with the 34 suppliers and, because of his vast experience in the field, business would be diverted from the plaintiff to the 2nd defendant. It was submitted that the loss of such business is the loss of a long-term relationship which may extend over many years and relate to the distribution of a variety of present and future products. I seriously doubt that the extent of the damage to the plaintiff will be as alleged. The period of the non-solicitation clause is due to expire on 23 July 2003 which is only five months away. After that date there is no prohibition whatsoever against the 2nd defendant to do the acts complained of. I accept that because of his experience in the field the 2nd defendant may well be able to persuade some of the 34 suppliers to deal with him. If that were to happen the plaintiff would be in a position to know what business has been diverted to the 2nd defendant during the next five months. Mr. Beresford accepts that this will be discoverable. Although I seriously doubt the extent of damage to the plaintiff as alleged, I accept that damages may not be an adequate remedy for the plaintiff.

35. On the question of whether damages would be an adequate remedy for the 2nd defendant if the injunction were continued, Mr. Beresford rightly takes the point that there is no evidence before the Court as to whether or not the plaintiff would be able to honour its cross-undertaking in damages. There should be some evidence to show that a plaintiff seeking an interlocutory injunction is in a position of honour its cross-undertaking in damages. The fact that the plaintiff is a wholly owned subsidiary of HDH and that turnover figures of the plaintiff have been provided do not assist it in this regard. However, if the Court were minded to continue the injunction then there may well be some fortification ordered for the cross-undertaking in damages. The lack of evidence as to the plaintiff's means to honour its cross-undertaking in damages would not by itself be a sufficient reason to refuse to continue the injunction. However, I am persuaded that if the injunction were continued, damages may well not be an adequate remedy also for the 2nd defendant. The evidence shows that he would be free to deal with at least 16 suppliers who are not listed in Schedule II to the Consultancy Agreement in the next five months. If an injunction were granted he would not be free to deal with the 34 suppliers listed in Schedule II or any person, firm, company or organization that has dealt with the plaintiff even after termination of the Consultancy Agreement. That effectively and realistically would seriously hamper the 2nd defendant from successfully re-establishing his business during the next five months particularly when he is 64 years of age. It seems to me that damages would not be an adequate remedy for him.

36. In my view the balance of convenience is in favour of the 2nd defendant. The prospects of success at trial on the claim for breach of the non-solicitation clause tip the scale heavily in favour of the 2nd defendant.

37. In the circumstances, I am not satisfied that the interlocutory injunction should be continued.

38. In view of my decision it is not necessary for me to deal with the other objections raised by Mr. Beresford to the continuation of the injunction. It is also not necessary for me to make any finding on the alternative submission that the plaintiff was in repudiatory breach of the Consultancy Agreement resulting in the 2nd defendant being discharged from the obligations of the non-solicitation clause. The plaintiff's case is that the 2nd defendant was in repudiatory breach of its obligations under the Consultancy Agreement. The 2nd defendant's case is that it was the plaintiff who was in repudiatory breach. Whether the plaintiff or the 2nd defendant was in repudiatory breach can only be resolved at trial when the disputed facts are fully investigated.

39. I dismiss the plaintiff's application and I discharge the order of Yam J. made on 19th December 2002 as continued by Deputy Judge To on 27th December 2002. I also make an order nisi that the costs of the application as well as the costs that were reserved on 19th and 27th December 2002 are to be costs to the 2nd defendant to be paid by the plaintiff.