GUANGZHOU GREEN-ENHAN BIO-ENGINEERING CO LTD AND ANOTHER v. GREEN POWER HEALTH PRODUCTS INTERNATIONAL CO LTD AND OTHERS

HCA 4651/2002

HCA 2802/2003

HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEIOUS PROCEEDINGS NO. 74 OF 2004

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(The Consolidated Action)

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R U L I N G

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1.  By a summons dated 25 August 2004, the Defendants applied for leave to amend their Consolidated Defence and Counterclaim by adding the following paragraph,

“53A.   Further or alternatively, as a matter of Hong Kong law, Clause 3(7) of Agreements A, B and C and Clause 3(6) of Agreements D, E and F are void, invalid and/or unenforceable as being in unreasonable restraint of trade in that their scope in respect of territorial ambit and/or activities retrained is wider than is reasonably necessary for the protection of the Plaintiffs’ interests.”

I shall call the clauses (which are basically identical in terms) “the restrictive covenants”.

2.  The application was opposed by the Plaintiffs.  Submissions on the application were heard by this court on the 19^th day of this trial (which was originally scheduled for 15 days).  A number of cases were cited by leading counsel and the submissions took up the most of that day.  Since the point seems to be one of great significance and this court needs time to read the cases that were only given to the court in the course of submissions, ruling was reserved.  It was agreed between the parties that the trial could continue with the rest of the evidence in the meantime.

3.  I now give my ruling on the application.

4.  No doubt mindful of my ruling in respect of the earlier applications for leave to amend and to adduce additional evidence by the Defendants on 22 July 2004 (as to which see my Reasons for Ruling on 21 August 2004), Mr Chan SC (who was brought into this case by the defence shortly before the trial resumed on 30 August 2004) explained why this application was made at this late stage.

5.  Before this proposed amendment, the Defendants only challenged the legality of the restrictive covenants under PRC law, see Paragraph 53 of the Re-Amended Consolidated Defence and Counterclaim.  The challenge was by reference to反不正當競争法 and民法通則.  Expert evidence on PRC law were prepared by each side on that issue.  There was no plea whatsoever in respect of the illegality of these restrictive covenants under Hong Kong law due to restraint of trade.

6.  On 21 August 2004, I held that such expert evidence on PRC law was inadmissible due to the fact that the issue had been decided by the Intermediate People’s Court of Guangzhou [“the Intermediate Court”] (see my Reasons for Ruling on that application).

7.  Mr Chan said that the ruling of 21 August 2004 caused the defence to reflect on their position and after due consideration, it was decided that the application for leave to amend should be made to enable them to challenge the restrictive covenants under Hong Kong law.

8.  Mr Chan also told this court that the Defendants had previously been content with confining to a challenge against the restrictive covenants based on PRC law as both parties had prepared expert evidence in that regard.  He said the ruling of 21 August 2004 came as a surprise blow to the Defendants and they harboured some grievance with regard to that result as the court apparently shut out their challenge to the restrictive covenants.

9.  With respect, that is not an accurate analysis of the situation.  To start with, a challenge against the restrictive covenants based on PRC law could have been pleaded in parallel with a challenge under Hong Kong law.  They are not mutually exclusive.  It is a matter for the Defendants to decide as to the basis and extent to which they wish to challenge the restrictive covenants.  In the present case, they had the benefit of the advice of very able lawyers from the very beginning.  With such benefit, they decided to confine their challenge to one based on PRC law.  It has nothing to do with the stance taken by the Plaintiffs nor any decision or ruling emanated from this court.

10.  It must be noted that the challenge under PRC law in Paragraph 53 was first advanced in the Consolidated Defence and Counterclaim filed on 18 February 2004 and amended on 15 June 2004 by pleading the specific statutes relied upon.  It was not pleaded in the original Defence filed by the Defendants in High Court Action No.4651 of 2002 on 6 May 2003 nor was this issue raised anywhere in the affirmations filed on behalf of the defence to resist the application for interlocutory injunction.  This is significant because the Intermediate Court had already delivered its judgment on 1 January 2004.  The Defendants therefore made their decision as to the basis and extent to which they challenged the restrictive covenants with the full knowledge that the court in the PRC had upheld the validity of these restrictive covenants.  Despite that, they chose to confine their challenge by reference to PRC law.

11.  I appreciated that the Defendants had lodged an appeal against the decision of the Intermediate Court. However, for reasons already set out in my Reasons for Ruling on the exclusion of expert evidence, that does not give them any legitimate expectation that this court would prepare to consider the issues by hearing expert evidence.

12.  Mr Chan alluded to the lack of any plea of issue estoppel on the part of the Plaintiffs.  As explained in my Reasons for Ruling, the basis on which I made my order on 21 August 2004 was not issue estoppel.  The Defendants were given ample notice of the basis of the application as Mr Liao SC had filed his skeleton submissions on 12 July 2004 and the hearing did not take place until 21 August 2004.  If the Defendants felt that there were material pertinent to that application which might assist them, including the pleadings filed in the PRC action leading to the judgment of the Intermediate Court (Mr Chan faintly suggested that the Defendants were prejudiced in that regard), there were ample time for the Defendants to do so before the hearing.  Yet the Defendants did not file any evidence to resist that application.

13.  In any event, if the Defendants have any justifiable grievance in respect of my ruling on 21 August 2004, the proper course is rectify that by an appeal against that ruling after the trial had been completed.

14.  In the premises, I do not think my ruling on 21 August 2004 provided any excuse to the Defendants for this late application.

15.  Further, I am of the clear view that the proposed amendment is unarguable.  The restrictive covenant reads as follows,

“7)     在本合同書許可期限內及銷售權利終止后三年內，乙方均不得生產或代理或經銷其他廠家生產的相同或相近似產品以及仿冒或影射本合同書產品及產品名稱、外觀包裝設計相同或相近似的產品或系列產品。若有違約行為乙方愿向甲方賠償500萬港幣。”

16.  Mr Chan’s attack on the restrictive covenants was mainly directed towards the first part of the covenant that prohibit the 1^st Defendant from manufacturing, distributing or offering for sale similar products manufactured by other factories within a period of three years.  He submitted that it was clearly wider than what was necessary for the protection of the Plaintiffs’ legitimate interest.  I accept that is arguable.  Mr Chan did not advance any submission to suggest that the other parts of the covenants were wider than necessary for the protection of the legitimate interest of the Plaintiffs. 

17.  However, Mr Liao referred to Paragraph 41 of the Re-amended Consolidated Statement of Claim and submitted that the Plaintiffs did not need to rely on that part of the restrictive covenant.  Although prayer (2) seems to be wider, Mr Liao confirmed to this court that the Plaintiffs were prepared to narrow down their prayer to exclude the offensive part of the covenant from the scope of the injunction they sought.

18.  Hence, the key issue is whether the allegedly offensive part of the covenants could be severed from the rest in order to render them enforceable irrespective of the legality of the first part.

19.  Mr Chan relied mainly onthree authorities and argued that severance should not be permitted in the present case.  In Scully UK Ltd v Lee [1998] IRLR 259 at p.264 Para.31, Aldous LJ said,

“Severance of part of a covenant is only permissible in cases where the obligation to be severed is truly a separate obligation to that to be enforced. If the obligations are in any way interdependent as a matter of wording or meaning then severance will not be permitted.”

20.  I have no quarrel with that principle. The same principle has been stated in Treitel, The Law of Contract, 11^th Edn., p.507-509 and Chitty on Contracts, 29^th Edn., Paras.16-190 to 16-192.  It is clear that the blue pencil test is not conclusive in that even if a clause can be “blue pencilled” the court may still refuse to effect a severance.

21.  The question is applying that principle whether the clause in the present case is severable. In the consideration of this question, I bear in mind Mr Chan’s indication to this court that the Defendants proposed to call no additional evidence even if the amendment were allowed.  He said it is basically a point of law and whatever evidence the Plaintiffs chose to adduce on the amendment, he would probably find it unnecessary to challenge such evidence.  From the way Mr Chan argued the point, it seems to me that the Defendants regarded it as basically a question of construction to be resolved by reference to the wordings of the clause and the contract itself.

22.  Mr Chan further submitted that severance should only be permitted if the part to be severed is only of trivial importance, or merely technical.  He went on to submit that the first part of the restrictive covenants could not be regarded as trivial.  The parties had put it as the first part of the clause and, according to Mr Chan, that indicated the significance that the parties attached to the same. In this regard, Mr Chan relied on a dicta of Lord Moulton in Mason v Providential Clothing & Supply Co Ltd [1913] AC 724 at p.745 (cited by Aldous LJ in Para.31 of the judgment in Scully v Lee).  He also prayed in aid of Attwood v Lamont [1920] 3 KB 571.

23.  With the greatest respect, I do not think the obiter of Lord Molton establishedany additional requirement for severance over and above those set out in Paragraphs 19 and 20 above. In paragraph 32 of his judgment in Scully v Lee, Aldous LJ referred to the judgment in Lucas v Mitchell [1974] 1 Ch 129 where the English Court of Appealclearly rejected such additional requirement even in the context of employment contract.  In that case, Russell LJ reviewed previous decisions including the dicta of Lord Moulton, Attwood v Lamont and Scorer v Seymour Jones [1966] 1 WLR 1419 andexplained at length at p.135 to 137 why there is no additional requirement. Professor Treitelalso adopted the same analysis at p.508-9 in his textbook.  

24.  In my judgment, that must be correct.  None of the other law lords in Mason v Providential Clothing & Supply Co Ltd mentioned this additional requirement.  Although reference was made to Mason in Attwood v Lamont, none of the judges referred to such additional requirement as averted to by Mr Chan.  The relevant criteria applied in Attwood can be found in the following dictum,

“I think, therefore, that it is still the law that a contract can be severed if the severed parts are independent of one another and can be severed without the severance affecting the meaning of the part remaining.” (per Lord Sterndale MR at p.577)

“I think it clear that if the severance of a part of the agreement gives it a meaning and object different in kind and not only in extent, the different parts of it cannot be said to be independent.” (per Lord Sterndale MR at p.578)

“The doctrine of severance has not, I think, gone further than to make it permissible in a case where the covenant is not really a single covenant but is in effect a combination of several distinct covenants.  In that case and where severance can be carried out without the addition or alteration of a word, it is permissible.  But in that case only.” (per Younger LJ at p.593)

These are the same as the principle set out in the judgment of Aldous LJ set out in Paragraph 19 above.

25.  Coming back to the clause in question, Mr Chan laid emphasis on the conjunctive expressions “以及” and “及” and contended that the whole clause constituted one covenant and one package or scheme to prevent the 1^st Defendants from competing with the Plaintiffs after the end of the distributorship.  He submitted that permitting severance in such circumstances would tantamount to rewriting the contract for the parties.

26.  On the other hand, Mr Liao submitted that the clause contained separate obligations which are not interdependent.  He contended that severance could easily be effected by deleting the allegedly offending part.

27.  On proper construction, the clause prohibited the 1^st Defendant from producing or distributing or offering for sale three different kinds of products,

(a)     the same or similar type of products produced by other manufacturers;

(b)    products which were an imitation of or passed off as the products of the FER Centre under the contract;

(c)     products bearing product names or packaging designs similar to those of the FER Centre under the contract. 

This is the construction Mr Chan contended for by reference to an analysis produced by Ms Tam.

28.  The three kinds of products were not interdependent on each other. The allegedly offending element is prohibition (a).  Deleting (a) from the clause would not affect the meaning or operation of (b) and (c).  It cannot be the parties’ intention that (b) and (c) must read together with (a) in construing what was being prohibited.

29.  Attwood v Lamont was a decision on the special facts of that case.  The Court of Appeal was of the view that on those facts, the covenant the court had to consider was a single covenant.  In the present case, given the stance taken by Mr Chan as set out in Paragraph 21 above, at least from the defence point of view, I am in as good a position to approach the question of construction as I would be after hearing all the evidence.  I consider the clause in issue is, in wordings and in substance, a clause containing a combination of different covenants.  I am therefore of the view that the criteria for severance can be satisfied.

30.  Mr Liao also referred to the prejudice that the Plaintiffs might suffer if the amendment is allowed.  He contended that the case would be further delay as the Plaintiffs would need to adduce substantial additional evidence to justify the first part of the clause given the nature of the defence case on severance.  Mr Chan said no amount of evidence could justify the first part of that clause.  I do not think it is appropriate for me to pre-empt the Plaintiffs from adducing additional evidence to meet the proposed amendment at this stage.  It would not be fair to the Plaintiffs if they were not given any reasonable opportunity to adduce whatever evidence that they think to be of assistance to their case on dealing with the new plea if the amendment were allowed.  The practical result is that the trial would be further delayed.  That delay, for reasons already given in my Reasons for Ruling of 21 August 2004, would cause prejudice to the Plaintiffs that could not be compensated by costs.

31.  Hence, applying the approach in dealing with late application for amendment set out in my Reasons for Ruling dated 21 August 2004, my conclusion is that the court should exercise its discretion by dismissing the application and I order accordingly.  There shall also be a cost order nisi that the Defendants shall bear the Plaintiffs’ costs on this application in any event.