BGC CAPITAL MARKETS (HONG KONG) LTD v. JAMES PRIEST AND ANOTHER

HCA 2214/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2214 OF 2006

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J U D G M E N T

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1.  What sparked this action into life was the decision made by the defendants, Messrs Priest and Yu, to tender their resignations and leave the employ of the plaintiff, BGC HK, and forthwith join the ranks of a competitor called Nittan Capital Asia Limited.

2.  It is said of that that they were in actual or prospective breach of their contracts in two ways; the first, by not complying with the agreed timetable for notice and departure, and the second, the threat that they would not observe restrictive covenants in their contracts with BGC HK.

3.  By its writ BGC HK sues inter alia for injunctions to enforce these restrictive covenants.  Upon the filing of its writ it applied ex parte for interim injunctions in a modified form; these were granted and are on foot.  This is the restored return date in respect of those interim injunctions.

Background

4.  The BGC Group of Companies operate worldwide in all the major financial centres.  The member companies engage in the brokerage of financial instruments between banks.  BGC HK is the member company based in Hong Kong.

5.  The defendants until they left were part of a team or desk called the Asia Emerging Markets FX Options Desk, so named because that was the product they specialized in.  The team comprised five brokers and an assistant, headed by one Christopher Butcher.  Messrs Butcher, Yu and Priest were based in Hong Kong.  The other two brokers were based in the BGC member company in Singapore.

6.  Messrs Yu and Priest had been employed for a number of years by BGC HK and it is said of them that they were senior brokers and amongst the top revenue producers in BGC HK.  This was reflected in the remuneration packages each was paid for the year prior to their departures; in the region of US$300,000 each.

7.  In overall charge of FX Options brokerage in the region is one Patrick Jelfs.  Mr Jelfs is based in Tokyo.

8.  The Nittan Group of Companies is also an inter-bank broker, founded in Japan.  It is said of it that up until recently it has not run an FX Options Desk; thus in this field it has not competed with BGC; it is the threat that that might change which has brought on this action.

The Contracts of Employment

9.  Those of Messrs Priest and Yu are in all material respects identical.  Both were parties to contracts that were renewed to run for three years from 1 January 2005.  And both contained restrictive covenants.  I repeat these in full:

“15.2     Without the written prior consent of the Company and whether alone or with others, directly or indirectly for your own benefit or the benefit of any person or organisation you shall not during your employment or for a period of 6 months after its termination (unless you seek agreement by prior written consent of the Company to join a customer of the Company)

15.2.1    solicit or entice away any client or counterparty of the Desk (or any desk to which you are moved in accordance with your employment contract or these terms and conditions) of the Company or any Associated Company (whether a company or an individual) with which or whom you have had material and/or regular dealings in the course of your duties or, where this provision would apply after your employment ends, any time during the twelve (12) months prior to its termination.

15.2.2    in competition with the Restricted Business, seek to procure orders from, deal or carry on business with, or transact business with, any client or counterparty of the Desk (or any desk to which you are moved in accordance with your employment contract or these terms and conditions) of the Company or any Associated Company (whether a company or an individual) with which or whom you have had material and/or regular dealings in the course of your duties or, where this provision would apply after your employment ends, any time during the twelve (12) months prior to its termination.

15.2.3    engage the services of, render services to or become interested in (as owner, stockholder, partner, lender or other investor, director, officer, employee, consultant or otherwise) any business activity that is in competition with the Restricted Business.

15.3       ‘Restricted Business’ shall mean the business or any part of the business and which in either or both case(s):

15.3.1    is carried on by the Company or any Associated Company at the date of termination of your employment;

15.3.2    was carried on by the Company or any Associated Company at any time during your employment or, where the relevant provision would apply after your employment ends, any time during the twelve months immediately preceding the date of its termination; or

15.3.3    is to your knowledge to be carried on by the Company or any Associated Company at any time during the twelve (12) months immediately following the date of termination of your employment.

and which you were materially concerned with/worked for or had management responsibility for (or had substantial confidential information regarding) in either case at any time during your employment or, where the relevant provision would apply after your employment ends, any time during the period of twelve (12) months immediately prior to the date of its termination.”

By these terms thus Messrs Priest and Yu were bound not to solicit any former customer, or deal with any former customer of BGC HK, or compete in the field of Asia Emerging Markets with BGC HK during their contracts or for six months after the termination of their contracts.  And there was incorporated also an acknowledgment of the reasonableness of these covenants:

“15.4   You acknowledge that:

15.4.1    the restrictions set out above are reasonable and necessary for the protection of the legitimate interests of the Company and/or any Associated Company and that, having regard to those interests, these restrictions do not work unreasonably on you;

15.4.2    the restrictions shall apply in relation to all clients and counterparties in respect of whom they are expressed to apply notwithstanding that such clients and counterparties may have been introduced to the Company or any Associated Company by you (or any person under your control) before or during your (or his/her) employment with the Company or any Associated Company;

15.4.3    Any and all of your relationships from time to time with clients of the Company and/or any Associated Company are the property of the Company and/or its Associated Company.”

The AEM FX Options Desk Resigns

10.  On 1 September 2006 the Hong Kong based team members, headed by Mr Butcher and including Messrs Priest and Yu, each handed in their resignation letters.  Those of Messrs Priest and Yu served to give three months notice from 1 September 2006.  As it happened the two team members of the Desk based in Singapore did likewise.

11.  Shortly afterwards all of the above disclosed that they were leaving to join Nittan.

12.  Then it was that shortly before the end of September Messrs Priest and Yu tendered letters and cheques in lieu of notice, announcing that they would not resume work following the public holiday of 2 October, for they were committed to start at Nittan on 3 October.  Effectively thus, by payment in lieu, they purported to bring forward their termination dates to 30 September.

13.  BGC HK at first chose not to accept the validity of this purported termination as contravening the timetable for notice and termination as set out in the contracts.  However, accepting the reality that their employees would not be returning, they sought their undertakings to abide by their restrictive covenants.

14.  When these did not materialize, the action was begun on 4 October.

The Interim Injunction Application

15.  The application before me is in the following terms:

“1.     The 1^st and 2^nd Defendants each be restrained for six months, or until after the hearing of proceedings HCA No. 2214 of 2006, whichever shall occur first, from doing any of the following without the prior written consent of the Plaintiff:

(a)   soliciting or enticing away any client or counterparty of the Plaintiff’s Emerging Markets FX Options Desk (the ‘Desk’) with which or whom that Defendant has had material and/or regular dealings in the period twelve months prior to 20 October 2006;

(b)   in competition with the part of the Asian Emerging Markets FX Options business carried on by the Plaintiff in which that Defendant was materially concerned at any time in the twelve months prior to 20 October 2006, seeking to procure orders from, deal or carry on business with, or transact business with, any client or counterparty of the Desk with which or whom that Defendant has had material and/or regular dealings any time in the period twelve months prior to 20 October 2006; and

(c)    rendering services as an employee, partner, officer, consultant or otherwise to any business activity that is in competition with the Asian Emerging Markets FX Options business carried on by the Plaintiff in which that Defendant was materially concerned at any time in the twelve months prior to 20 October 2006, otherwise than as an employee of the Plaintiff.

2.    Such further or other relief as the Court considers appropriate.

3.    Costs be to the Plaintiff in any event.”

16.  It is apparent from the reading that the particular restraints at 1(a) and (b) follow the restrictions imposed on the employees at paras. 15.2.1 and 15.2.2 of the contracts of employment; that is, of non-soliciting and non-dealing.  That at 1(c) is a written-down version of the non-competing restraint at 15.2.3.

17.  The date referred to, that is 20 October 2006, emerged in this way:  BGC HK having originally treated the notices of 1 September as invalid and that Messrs Priest and Yu were in repudiatory breach of their contracts, decided on 20 October to accept that repudiation.  Thus from the standpoint of BGC HK 20 October 2006 signals the date of termination of the contracts.

18.  Messrs Priest and Yu contend that the notice was valid in terms of the Employment Ordinance (Cap.57) and with acceleration of the notice by payment in lieu, the termination date was 30 September 2006.

19.  Either way, with both sides now accepting that the contracts are over, the restrictions BGC HK seeks to hold the ex-employees to are post-contract, for six months.

20.  Whether the six months is to run from 30 September or 20 October it is apparent that it is most unlikely that the action will come to be tried before expiry of that amount of time.  Thus the interim injunction asked for, if granted, will be in effect the final one.

21.  With this in mind I turn now to recite the legal principles pertaining in applications of this sort.

Legal Principles

22.  This is an application for interlocutory injunctive relief, bringing thus into play the principles set out in the leading case of American Cyanamid Co.v Ethicon Ltd [1975] AC 396.  In the first place, the plaintiff’s claim must not be frivolous or vexatious and there must be a serious question to be tried.  Then the court has to consider whether if the plaintiff succeeds at trial it would be adequately compensated by damages for any loss caused by the refusal to grant an interlocutory injunction.  If damages would be an adequate remedy, and the defendants would be in a position to pay them, no injunction should be granted. If damages would not be an adequate remedy, the court should consider whether, if the injunction were granted, the defendants would be adequately compensated by the plaintiff’s undertaking as to damages.  If so, and the plaintiff would be in a position to pay them, there would be no ground to refuse the injunction.  Where there is doubt as to the adequacy of the respective remedies in damages the question of balance of convenience arises.

23.  In the normal course this requires in the first instance a positive response to the first question:  “Is there a serious question to be tried?”

24.  But in this case, there being a real prospect that the period that the injunction will run will have expired prior to trial, I am obliged to pay particular regard to the prospects of success at trial; see Lansing Linde Ltd v Kerr [1991] 1 All ER 418. 

25.  But as Chu J warned on the point in Fortune Realty Company Ltd v Chan Hui Yeung Dick (unreported), HCA 1582/2001, 24 May 2001 at para. 9:

“But it is to be noted that the court is not to embark upon a mini-trial on the affidavits.  All that is required is ‘some assessment’ of the plaintiff’s prospects of success and it is for the judge to control the extent of such assessment.”

On the facts of her case she concluded:

“21.       At this interlocutory stage, I need only form a tentative view on the evidence and the legal arguments.  Indeed I ought to be extremely slow to come to any firm conclusion on the merits of the case.  It is therefore sufficient for me to sum up by saying that not only has the plaintiff shown that there is a serious question to be tried, but it has also demonstrated that there is a reasonably good prospect of its succeeding at the trial.  In the circumstances, the injunction sought should be granted …”

26.  A restrictive covenant in a contract of employment which restrains the employee from undertaking certain activity post-contract is prima facie unenforceable. It becomes enforceable only if it is reasonable having regard to the interests of the parties concerned and of the general public.  It is said of the doctrine of restraint in trade that it:

“is one to be applied to factual situations with a broad and flexible rule of reason;”

per Lord Wilberforce in Esso Petroleum Co. Ltd v Harper’s Garage (Stowaport) Ltd [1968] AC 269 at p. 331.

27.  If a restraint in trade fails to pass the test of reasonableness then it will be struck down as void, unless the unreasonable aspect of it can be severed.  In effect, by severing parts of the restraint clause in 15.2.3, BGC HK is inviting just such a course.  I shall return to this.

28.  But this does not permit a rewriting of the restraint; so that if for example the time frame is regarded as unreasonably long or the geographic location unreasonably wide it all goes; there can be no reduction to a reasonable period or location.

The Applications

29.  In support of and in opposition to these applications, and in particular going to the all-important issue of reasonableness, I have before me affidavits made by Mr Jelfs for BGC HK and Messrs Butcher, Yu and Priest for the defendants.

30.  Unsurprisingly they are not ad idem on the detail, but applying a broad-brush approach the following features emerge:

(a)     The Asia Emerging Markets FX Options Desk is a specialised one, requiring of the brokers particular skills and experience in dealing in local currencies as against those of G10 members;

(b)    On the plaintiff’s estimate there are only 20 to 30 experienced brokers in Asia; the defence estimates are 30 to 40.  On either count the pool is a limited one;

(c)     An essential ingredient in the viability of a desk such as the AEM Desk is a close relationship between individual brokers and those with whom they engage at the customer banks.  These relationships take time to forge.  The number of customers serviced by an individual broker may be limited, but the custom becomes highly recurrent;

(d)    By virtue of these relationships, a change in camp by a trader in a bank, or a broker in a brokerage, may well result in business being channelled away from the principals who might otherwise expect to profit from it.

31.  What emerges from this thumbnail sketch is that what the AEM Desk as a team would have built up over a period of time is a substantial goodwill in the shape of prospective, repeat order business by virtue of these trade connections, for their employer BGC HK.

The Restraints Sought

32.  There are three in all.  The first two can be taken together; non-solicitation and non-dealing.  The third is separate; it amounts to a restriction on competition.  I shall deal with that separately.

The Restraints not to Solicit or Deal

33.  Do the circumstances of this case allow me to find that the injunctions sought are reasonably necessary for the protection of BGC HK’s business?

34.  The starting point is that there is no law to prevent a former employee from taking with him on his departure prospective business that but for his departure would have stayed with the employer.  That is why clauses restraining post-contract conduct are seen as a necessary if not vital ingredient in the terms of employment of key, income-producing personnel.

35.  BGC HK’s contention is that given the valuable trade connections and goodwill built up over time by its senior, top-performing brokers, their departure to a competing brokerage having no previous involvement in the AEM market would without any restraint invite a wholesale departure of that goodwill to a competitor.  This can only be avoided if there is a cooling-off period built into the contract.

36.  Furthermore, it will take time for BGC HK to replace these key men; time needed for the replacement brokers to learn the specialised skills of operating at the AEM Desk and in particular to achieve the sort of relationship between broker and trader that will foster and maintain repeat order business.

37.  As for the standpoint of the defence:  Mr Harris SC has accepted on behalf of Messrs Priest and Yu the right for BGC HK to restrict for a time its former employees from soliciting business from its customers with whom the employees had an actual trade connection or from carrying on business with them of the sort conducted by BGC HK. 

38.  He takes no issue with their being no geographic constraints; presumably this is because, in practice, virtually all the business undertaken by the AEM Desk is conducted locally during local working hours.

39.  In fact Mr Harris has gone on to concede that were the restrictions imposed by clauses 15.2.1 and 15.2.2 limited to a period of four months rather than six they would be enforceable.

40.  That concession limits my task to answer the question; if four months is a reasonable time limit which will (a) diminish the influence of the departing defendants’ connections with BGC HK’s customers; and (b) give BGC HK sufficient time to locate, train up and bring to the appropriate level of competence and familiarity the brokers that are hired to replace them, is six months also reasonable, or not?

41.  Mr Harris made the point that properly construed the period of restraint is nine months, taking into account the three months’ notice.

42.  I do not accept there is this ad hoc extension.

43.  Were the defendants to have worked out their notice, that three months’ period would have been played out with their still being at their desks working for BGC HK as usual.  Effectively, the cooling-off period and the retraining of new recruits would not begin before their departure.  In any event, as happened here, an employee can pay in lieu of working out his notice.

44.  So, returning to the question; if four months is conceded as being a reasonable time frame does the addition of two more months turn reasonable into unacceptable?

45.  This of course is not an exact science.  In the case Stenhouse Australia Ltd v Marshall William Davidson Phillips [1974] AC 391, a Privy Council decision delivered by Lord Wilberforce, he said at p.402:

“… The question is not how long the employee could be expected to enjoy, by virtue of his employment, competitive edge over others seeking the clients’ business.  It is, rather, what is a reasonable time during which the employer is entitled to protection against solicitation of clients with whom the employee had contact and influence during employment and who were not bound to the employer by contract or by stability of association. This question, secondly, their Lordships do not consider can advantageously form the subject of direct evidence.  It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer’s business, the nature of the employer’s interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not.  An opinion as to the reasonableness of elements of it, particularly of the time during which it is to run, can seldom be precise, and can only be formed on a broad and common sense view.  On this matter, while accepting much of the judge’s reasoning, their Lordships come to the conclusion that the restraint, regard being had to the field in which it was designed to operate, was reasonable and should be upheld.”

46.  It is of course incumbent on me not to come to a final conclusion but on the evidence disclosed adopt a commonsense and broad-brush approach.

47.  In that regard I pay heed to the specialised nature of the dealing undertaken by the AEM Desk, the small number of brokers engaged in this specialised field, the limited pool of brokers that may be hired to replace those that have departed, and the need not only to train up a new recruit but get him to a position of obtaining the trust and confidence of the banks’ traders.

48.  I also pay heed that what is reasonable as between the contracting parties is by reference to the intentions of the parties at the time they contracted; in both cases March 2005.  In that respect I am assisted by the terms of the acknowledgement at clause 15.4. 

49.  As Mr Harris pointed out and Mr Sussex SC representing BGC HK conceded, such an acknowledgement of reasonableness cannot convert an unreasonable restraint into an acceptable one.  And in some instances by virtue of unequal bargaining positions such acknowledgment would carry virtually no weight.

50.  But that cannot be said to be the case with Messrs Yu and Priest.  They are members of a small highly paid band of specialist brokers.  Their acknowledgement of reasonableness must inevitably go a long way to establishing that the restraints upon them post-contract are just that.

51.  In the circumstances of this case I find both the non-soliciting and dealing restraints to be reasonable and enforceable.

The Restraint not to Compete

52.  At the outset I rehearse the proposition that a clause in a contract of employment that denies an employee the right post-contract to compete with his former employer will, without more, be regarded as against public policy and void.  This is not challenged; I cite one of many authorities on the point, being Kao Lee & Yip v Donald Koo [1995] 1 HKLR 248, per Godfrey JA at p.253. 

53.  Mr Harris submitted that that is enough to warrant the clause being struck down.

54.  There is disagreement between counsel as to what the clause restricts.  Mr Harris contends that on a plain reading the clause would prevent Messrs Yu and Priest from undertaking any business at all that BGC HK was engaged in including a type of trading such as G10 trading; and trading which engages banks and traders quite outside the specialist confines of the AEM Desk with which they had no connection.  This must on any reading be unacceptable and void.  Thus the rewording of the restraint sought to be imposed in the injunction asked for is an attempt to write down the restriction to a level of restraint which is not so obviously unreasonable.  That he says amounts to a rewriting of the restraint which the law does not permit.

55.  Mr Sussex submits that that fails to put a proper construction on what is meant by Restricted Business, which is in fact limited substantially from a general definition to that business in which the employee was materially involved.  That business being at the desk of the Asia Emerging Markets FX Options, the use of that expression in the application for the injunction was to make use of a convenient shorthand.  I agree.  And I agree that the severance of the words “engage the services of”, “or become interested in” and “owner, stockholder, lender or other investor and director”, is a legitimate exercise of the right to sever.

56.  In such form, can BGC HK satisfy the test that it is not in unreasonable restraint of trade?

57.  In such form it still offends the principle that former employees should not be prevented from competing with their former employer, albeit using skills honed whilst on that payroll.  Mr Sussex seeks to justify the restraint because of the difficulty in policing obedience to the non-soliciting and non-dealing provisions that I have found to be reasonable.  And there is authority for this.

58.  In Ng Kam Chun v Chan Wai Hing Janet (HCA 3036/1992, 9 February 1994, unreported) where a former employee of a real estate agency was restrained by a non-soliciting clause as well as a non-competing clause, Keith J said:

“… To the extent that it was necessary to protect confidential information, Mr Ng had already protected himself from her profiting from his confidential information or disclosing it to anyone else by clauses 11 and 12 of the written contract of employment.  However, such covenants are difficult, if not impossible, to police.  If Miss Chan dealt with his clients or accepted instructions in relation to properties which had been on his books contrary to a covenant to that effect, there is a good chance that Mr Ng would not have been any the wiser.  The same is true if she profited from his confidential information or disclosed it to anyone.  I am satisfied that the only real way to ensure that she would not deal with his clients or accept instructions for properties on his books, or profit from or disclose his confidential information, was to take her out of the market in Happy Valley completely for a short time.”

And Hoffman LJ said in Steiner (UK) Ltd v Spray (unreported) Court of Appeal 1 December 1993:

“In my judgment, the learned judge was right to treat such a covenant (i.e. a non-solicitation covenant) as inadequate in the circumstances of this particular trade (i.e. hairdresser).  A covenant against solicitation would be of very little use because it is well known that the customers will, in many cases, voluntarily follow their chosen hairdresser to the new establishment without there having to be any solicitation at all.  A covenant against dealing would I think, in practice, be almost impossible to enforce without mounting guard outside the new establishment to see if former customers were entering and seeing if their hair was going to be done by the Defendant rather than by some other hairdresser on the premises.”

59.  Mr Harris submits that each case must turn on its own facts and circumstances, and that in the cases I have cited the employees are or were a real estate agent and hairdresser.  Given the way hairdressing salons and real estate agencies are conducted, it may well be that the only sensible precaution is to take the former employee out of the action altogether.

60.  But in this instance the trades brokered by the defendants are inter-bank and perforce require full records, including a paper trail to satisfy stringent audit requirements.  And all telephone and other forms of communication going to a trade are recorded.  There should be no particular difficulty in obtaining discovery if a breach were suspected.

61.  Mr Sussex makes the point that the so-called paper trail is an internal, confidential one to which BGC HK would not have ready access.  There is no transaction that comes into the public arena.  There is no exchange.  A deal put together is not reflected in any market.  Proper records there may be, but BGC HK would not without proper cause have access to them.

62.  I accept the strength of this argument.

63.  But the reality of it is that the restraint is not being pursued to prevent competition, but to add clout to other restraints already allowed for being reasonable.

64.  There are other means of policing obedience to these restraints.  There is no suggestion that they will not be adhered to.  But if they are not, there are sanctions available, including contempt proceedings.

65.  I believe the differences between brokering inter-bank transactions and working as a real estate agent or hairdresser allow me to distinguish between this case and those cited above.

66.  On this occasion I find the weight associated with the acknowledgements of reasonableness at clause 15.4 to be not sufficient to change the outcome.

67.  Thus I find this the restraint of non-competing, as written-down, to be unreasonable and thus void.

Damages as an Adequate Remedy?

68.  I accept the proposition put by Mr Sussex, that if BGC HK were to succeed in damages after trial they would be almost impossible to quantify; an almost hopeless task because of imponderables.  And doubt as to the ability of the two defendants to meet any claim having been brought into question has not been challenged.  On the other hand, it is accepted that if the defendants do succeed at trial BGC HK will have the means to compensate them.

Conclusion

69.  BGC HK shall be entitled to the interim injunctions it asks for at 1(a) and (b).  As to the length in each case; I was not addressed on the validity of the notice given by Messrs Priest and Yu, and thus adopt the conservative approach that the same shall run until 31 March 2007 or further order, and the date 20 October 2006 shall be replaced by the date 30 September 2006.

70.  The application at 1(c) is dismissed.

71.  The costs order is nisi.  The defendants shall meet two thirds of the plaintiff’s costs including those reserved in any event.