KAO, LEE & YIP v. DONALD KOO HOI YAN and Others

IN THE COURT OF APPEAL

1994, No. 20
(Civil)

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J U D G M E N T

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Godfrey, J.A. (giving the judgment of the court):

1. This is an appeal from an order of Mayo, J. made on 21 January 1994, whereby the judge refused to grant the plaintiffs, solicitors and former partners of the first defendant Donald Koo ("Koo"), an interlocutory injunction to prevent him, until the trial of the action, from acting in breach of various restraints imposed on him by a partnership deed of 16 December 1988 ("the 1988 deed"). The judge's view was that the plaintiffs had no reasonable prospect of success in upholding these restraints at trial.

2. The parties, the main issue between them in the action being the validity or otherwise of these restraints, very sensibly agreed before us (after some prodding) that this court should decide this issue as if this appeal were an appeal from a final determination of the issue by the court below in favour of Koo. At the conclusion of the argument on 27 July 1994, we intimated that we would determine the issue in favour of Koo, and that we would give our reasons for doing so at a later date. This we now do. (The remaining issues between the parties await resolution in the future.)

3. We note at the outset of this judgment that the plaintiffs sue in the style or firm name of "Kao, Lee & Yip". Under Order 81, rule 1 of the Rules of the Supreme Court, any 2 or more persons claiming to be entitled as partners in respect of a cause of action and carrying on business within the jurisdiction may sue in the name of the firm of which they were partners at the time when the cause of action accrued. (Under Order 81, rule 2, any defendant to any action brought by partners in the name of a firm may serve on the plaintiffs or their solicitor a notice requiring them or him forthwith to furnish the defendant with a written statement of the names and places of residence of all the persons who were partners of the firm at the time when the cause of action accrued; when that is done, the proceedings continue in the name of the firm, but with the same consequences as would have ensued if the persons whose names had been so declared had been named as plaintiffs in the writ. In the present case, no one, so far as this court is aware, has sought or made any such disclosure as is contemplated by Order 81, rule 2.)

4. It appears to be common ground that Koo began acting in the manner of which the plaintiffs complain on 1 October 1993; so that is the date on which the plaintiffs' cause of action (if any) accrued. At that date, the partners in the firm practising as "Kao, Lee & Yip" appear to have been (1) Emmanuel Kao ("Kao"); (2) Yip Wan Tak ("Yip"); and (3) Alexa Cheung Lam ("Lam"). So, Kao, Yip and Lam are, or are to be treated as, the plaintiffs in the action; all three of them have presumably authorised it, and all three of them are jointly and severally liable for any costs which may be awarded against the plaintiffs.

5. We recall that in English (and Hong Kong) law a "firm" as such has no existence; partners carry on business, both as principals and its agents for each other, within the scope of the partnership business; the firm name is a mere expression, not a legal entity, although for convenience Order 81 permits partners to sue or be sued in that name: see, to this effect, Sadler v. Whitman [1910] 1 KB 868, per Farwell L.J. at p. 889. Because English law does not recognise the existence of a "firm" as distinct from the members of it, a partner cannot sue or be sued by his "firm", either before or after he ceases to be a partner: see Meyer & Co. v. Faber (2) [1923] 2 Ch. 421, per Warrington L.J. at p. 439. Order 81, although it enables the firm name to be used in actions between partners, does not in any way "alter the substantive law": see per Lord-Sterndale MR, in the same case, at p. 435.

6. We draw attention to all this because, at times during the argument, it appeared that the plaintiffs in the action, having used the style or firm name of "Kao, Lee & Yip" in which to sue the defendants, were under the mistaken impression that the "firm" did indeed have some separate existence independent of its partners from time to time, and in particular on 1 October 1993, the date when the cause of action (if any) accrued; for example, on the first page of their skeleton argument, the plaintiffs inaccurately describe "the plaintiff" as "the firm itself".

7. The history of the matter is as follows.

8. In March 1981, three solicitors, Kao, Yip and one Mabel Lee, commenced practice in partnership as solicitors under the style or firm name of "Kao, Lee & Yip".

9. On 22 November 1984, by which date Mabel Lee had ceased to be a partner in the firm, Kao and Yip employed Koo as an assistant solicitor.

10. On 1 July 1985, under a deed dated 29 June 1985, Kao and Yip took Koo into partnership with them on terms which we need not detail here (because they were substantially repeated in the 1988 deed) which placed Koo very much in a subordinate position in relation to Kao and Yip.

11. In September 1986, Koo ceased to be a partner in the firm; he went off to work in-house for the Bank of China, and one Pauline Li ("Li") took his place.

12. On 30 July 1988, Lam became a partner in the firm.

13. On 16 December 1988, Kao, Yip, Li, Lam and Koo entered into the 1988 deed under which Koo, with effect from 1 January 1989, rejoined the firm (now consisting of Kao, Yip, Li, Lam and himself) bringing the Bank of China with him as a new client, as all parties had intended that he should. Koo was not asked to make nor did he make any contribution to the capital of the firm; nor has he made any such contribution since; indeed, he has never been given, or shown, any partnership accounts.

14. The 1988 deed, like the deed of 1 July 1985, placed Koo (and Li and Lam) in a position distinctly inferior to that of Kao and Yip in the relationship thereby constituted. Kao and Yip (called in the deed "the founding partners") each took a share of net distributable profits 3 1/2 times greater than the share of each of the other three (called in the deed "the equity partners", though this seems to us something of a misnomer). The "founding partners" were given the exclusive right to choose the partnership name and the partnership premises; to set aside up to 50% of the total profits of the partnership in any financial year for distribution among such partner or partners, and in such proportion as they might in their absolute discretion determine (subject to certain provisos); to increase or reduce (within certain limits) the share of profits of any of "the equity partners"; to determine the accounting and financial policy and basis of the partnership; to manage and conduct the affairs of the partnership; to admit new partners without the consent of other partners; and so on. Not only that. "Equity partners" can be summarily ousted by the "founding partners" for cause, but not vice versa; "founding partners" can oust an "equity partner" by 12 months' notice, but not vice versa; "equity partners" (but not "founding partners") are restricted from engaging in any other trade or business; "equity partners" (but not "founding partners") are restricted to 4 weeks annual holiday; "equity partners" are not entitled to determine the partnership as between all other partners by notice (as are the "founding partners"); and "equity partners" are bound to buy his share of capital and goodwill on the death or retirement of a "founding partner" (without any corresponding obligation on the part of a "founding partner").

15. We should perhaps mention that we do not detail these disparities by way of criticism of the "founding partners". The reason why we draw attention to the one-sided nature of the arrangements as between the "founding partners" and the "equity partners" is that this is, in our judgment, material to the resolution of the question to which we shall shortly turn, namely whether the restraints imposed on Koo by the 1988 deed are to be treated as enforceable against him.

16. The restraints to which we refer are contained in clause 16 of the deed. Clause 16 is in the following terms:

"16 (a)

The partnership as between an Equity Partner and the other Partners shall be determined by the death of such Partner, or upon the expiry of not less than 12 months' notice of determination given in writing by the Founding Partners to such Partner or by such Partner to the Founding Partners such notice to expire on the last day of a calendar month.

(b)

Upon any Partner ("the outgoing partner") ceasing to be a partner of the partnership for any cause whatsoever, the outgoing partner shall not for the space of 5 years from the date of such cessation directly or indirectly:- (i) solicit legal business from, or do any work or act normally done by solicitors, for any person or firm or corporation who or which shall have been a client of the partnership (which expression includes the partnership practice of Kao, Lee & Yip being carried on before the commencement date) within a period of 3 years immediately preceding the date of such cessation PROVIDED always that the foregoing restrictions shall not apply to anything at any time done by the outgoing partner professionally for himself or for any member of his family or for the personal representatives or trustees of any such member; (ii) employ or engage any person who shall have been an employee of the partnership (which expression includes the partnership practice of Kao, Lee & Yip carried on before the commencement date) within a period of 3 years immediately preceding the date of such cessation."

17. As Mr. Michael Thomas Q.C., for Koo, pointed out in the course of the argument, although all partners appear to be bound by the clause 16(b) restrictions, the "founding partners", so long as they act together, can always ensure that those restrictions are not enforced against them by determining the partnership status of all "equity partners" by a clause 16(a) notice, leaving the "founding partners" as the only surviving partners able to enforce clause 16(b).

18. Before further examining the effect of clause 16, we will complete the narrative.

19. In July 1992, Li ceased to be a partner.

20. On 30 December 1992, Koo, having become dissatisfied with his position in the firm, gave notice to the other partners of his intention to withdraw from the partnership. He proposed to return to work in-house for the Bank of China (which, since he joined it, had put a lot of business in the way of the firm). Subsequently, it appeared that the Bank of China wanted Koo to start on 1 October 1993; and the other partners agreed in effect to treat his notice as having (validly) been given for 30 September 1993 instead of 30 December 1993.

21. However, it appears that in mid-July 1993 the Bank of China informed Koo that it had abandoned the idea of employing him in-house. What it wanted instead were the services of what Koo describes in his evidence as "a friendly outside law firm". In these circumstances, Koo decided, with the support of the Bank of China, to form a new firm, to commence practice on or about 1 October 1993. The Bank of China had become an important client of the old firm and the relationship between Koo and his partners (when the latter realised what was happening) rapidly deteriorated. On 1 October 1993, Koo did set up in practice, taking the other defendants, members of his department or team at his old firm, with him. (It is further alleged that he took with him various items from his old firm's offices which he was not entitled to remove; but this court is not concerned with that matter.)

22. On 2 October 1993, the writ in this action was issued; it contained originally no claim in relation to the restraints imposed on Koo by the 1988 deed, but, on 20 October 1993, the writ was amended so as to do so.

23. On 4 December 1993, the summons for interlocutory relief, the subject of the judgment under appeal, was issued. As we have said, on 21 January 1994 Mayo, J. dismissed that summons; and on 27 July 1994 we determined in favour of Koo the issue between the parties as to the enforceability of the restraints imposed on him by clause 16.

24. Clause 16 imposes, or purports to impose, two restraints on the parties to the 1988 deed.

25. The first restraint (imposed by clause 16(b)(i)), is aimed against any poaching of the clients of the firm (the "client restraint"); the second, imposed by clause 16(b)(ii), is aimed against any poaching of the employees (the "employee restraint"). It is common ground that these restraints are unenforceable unless shown (by the plaintiffs) to have gone no further than was reasonably necessary at the time for the protection of some legitimate interest of the plaintiffs. Even if the restraints went no further than that, they are unenforceable if shown (by the defendants) to be against the public interest.

26. We will take first (to get it out of the way) the employee restraint. There may be room for two views about such restraints. One is that they are justifiable; an employer has a legitimate interest in maintaining a stable, trained workforce; this is the view taken, for example, by Leggatt L.J. (with whom Russell L.J. agreed), in Ingham v. ABC Contract Services Ltd. 12 November 1993, an unreported decision of the (English) Court of Appeal. The other is that they are unjustifiable; although the goodwill of a business does in a sense depend on its staff, that does not make the staff an asset of the business, like apples and pears or other stock-in-trade: this was the view expressed by Dillon L.J. (with whom Nolan L.J. agreed), in Hanover Insurance Brokers Ltd v. Schapiro, 12 August 1993, an (earlier) unreported decision of the (English) Court of Appeal. Whether these views are reconcilable (as to which we express no opinion) we need not pause to consider; because in both those cases the restraint was one against solicitation or enticement of employees, whereas, in our case, it is not. It is a restraint against employment of former employees of the firm under any circumstances. As such, we think it is on any view a naked restraint against legitimate competition; it limits quite unjustifiably the extent to which the person subject to the restraint can legitimately compete in the labour market against those seeking to enforce it against him. We consider an agreement of this nature as contrary to the public interest, as did Lloyd-Jacob J. in the case of the agreement under consideration in Kores Manufacturing Co. v. Kolok [1957] 1 WLR 1012. (This approach to the Kores case was endorsed in Esso Petroleum Co. Ltd. v. Harper's Garage (South Port) Ltd [1968] AC 209, per Lord Reid at p. 300 and per Lord Hodson at p. 319.)

27. We hold accordingly that the employee restraint in our case is unenforceable as being against the public interest, however reasonable it may have been from the point of view of the parties to the 1988 deed. A restraint framed as is the employee restraint in this case goes much further than is necessary to protect the employer against the improper solicitation or enticement of his workforce; it has the effect of preventing any member of the workforce from going to work for a former partner even the absence of any such solicitation or enticement.

28. We turn to the "client restraint".

29. In our opinion, the client restraint, so far as the "equity partners" were concerned, went further than was reasonably necessary to protect the legitimate interests of the parties. The authorities in which similar restraints have been considered are legion, and infinitely various. They need not, and should not, any longer be labelled or categorised but should rather be treated as reflecting shades "on a continuous spectrum" (compare per Lord Wilberforce, in another context, in Liverpool City Council v. Irwin [1977] AC 239, at p. 254). At one end of the spectrum, the court takes a stricter and less favourable view of restrictions on competition than at the other end; but in every case it is the duty of the court first to ascertain what were the legitimate interests of the persons claiming the benefit of the restraint at the date when it was imposed and secondly to consider whether the restraint sought to be enforced went no further than was reasonably necessary for the purpose of protecting those interests. In the case of a restraint imposed on a partner, its position on the spectrum will depend on the nature of the legitimate interests sought to be protected by the restraint and the position in the firm of the partner against whom the restraint is sought to be imposed: we derive this proposition from Bridge v. Deacons [1984] 1 AC 705, per Lord Fraser of Tullybelton, at p. 714G. (This was a Hong Kong case in which the Privy Council considered, and in the particular circumstances of that case, declared enforceable, a restraint very similar in its terms to the one which we have to consider now.)

30. Koo's "position in the firm" (to quote Lord Fraser's words) when he rejoined it on 1 January 1989, bringing with him the Bank of China as a new client of the firm, was as we have indicated distinctly inferior to that of the "founding partners" (the other "equity partners", Li and Lam, were no better off than Koo). The effect of the 1988 deed was not to make Koo a full capital partner with a share in the business and assets, including the goodwill, of the partnership which was the position of Mr. Bridge in the case cited. There, apart from the matter of the precise share of profits of each partner, the partners were in a position of mutual equality. Here, the manifest subordination of the "equity partners" to the "founding partners" under the terms of the 1988 deed is in the view of this court fatal to the plaintiffs' attempt to rely on the case cited as determinative of the present case or even as analogous to it. In our case, the "equity partners" made no contribution to the capital of the firm and took no share in its goodwill. Further, although the client restraint in our case follows the form of that upheld in the case cited, care had there been taken to confine the restraint to acting as a solicitor "in the colony of Hong Kong". The evidence in our case is that the "founding partners" in proffering the 1988 deed for Koo's signature deliberately left out the words quoted in order to ensure that the restraint would have a world-wide operation (as indeed, on the face of it, it does). The reason was that the "founding partners" had aspirations at that stage to build up an international practice; that was not, in our opinion, a legitimate justification for so wide a restraint. Having regard to the position of Koo in the firm, and the world-wide restraint imposed on him, we are quite satisfied that this restraint went far further than was necessary to protect any legitimate interests of the plaintiffs. The 5-year long, world-wide restraint imposed on Koo is hardly if at all more justified than the restraint held to be "far too long", and so unenforceable, by this court in the case of Kao Lee & Yip v. Edwards, 5 October 1993, unreported, where the restraint was in identical terms but Mr. Edwards was merely an employee of the firm although described in his agreement with the firm as a "salaried partner". Koo's "position in the firm", as a (so-called) "equity partner", with unusually limited rights vis-a-vis the "founding partners", was very close on the spectrum, for present purposes, to that of Mr. Edwards, and miles away from that of the "full capital partner" Mr. Bridge in the case of Bridge v. Deacons, (cited above). We were much pressed by Mr. Charles Ching, Q.C., for the plaintiffs, with the argument that because all the partners were ex facie bound by the clause 16 restraints there was such mutuality here as would bring our case in line with Bridge v. Deacons, (cited above). That case does show that such mutuality is indeed "a most important consideration" (see at p. 716 D to 717 D). But it is not the paramount consideration; and in our view it is minimised here by two factors; (1) that the "equity partners" here have not the usual rights of partners to take part in the management and conduct of the affairs of the partnership and so on, but rather are placed in a manifestly subordinate position in relation to the "founding partners"; and (2) that the "mutuality" between the partners, even in relation to the clause 16 restraints, is in truth illusory, as we noted above which we recited the provisions of clause 16. It is true, as Mr. Ching, Q.C. emphasised, that there is mutuality as between the "equity partners" (including of course Lam) inter se; but since it is patently obvious that these restraints are really imposed for the benefit and protection of the "founding partners" his seems to us to make no difference. It was for these reasons that we announced, on 27 July 1994, our decision of the issue as to the validity of the client restraint and the employee restraint in favour of Koo.

31. We will adjourn any question of costs or otherwise which may arise as a result of this judgment to 9 September 1994, when the plaintiffs, as we have been informed, propose to apply to this court for leave to appeal to the Privy Council against our decision.