DCCJ 5853/2018
[2019] HKDC 515
IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
CIVIL ACTION NO. 5853 OF 2018
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BETWEEN:
STUDIO FITNESS GLOBAL LIMITED
1st Plaintiff
STUDIO FITNESS LIMITED
2nd Plaintiff
and
M&M SPORTS AND
1st Defendant
ELITE SPORTS LIMITED
2nd Defendant
MICHAEL MELLY
3rd Defendant
MICHAEL MATTHIEU THOUVENOT
4th Defendant
Coram:
His Honour Judge Harold Leong in Chambers
Date of Hearing:
28 March 2019
Date of Decision:
15 April 2019
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DECISION
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1. This is the 1st and 2nd plaintiffs’ application for an interlocutory injunction based on a trade restraint contractual clause concerning the business of running of a fitness gymnasium.
2. The 1st plaintiff is a company incorporated in Seychelles around 1 March 2018 and allegedly holds the franchise of “Studio Fitness” and its sole director is Mr. Justin Wills. The 2nd plaintiff is a company incorporated in Hong Kong around 17 June 2017 with two directors, one of whom is also Mr. Wills. It was the franchisee of “Studio Fitness” in Hong Kong and itself in turn entered a franchise agreement (the “SFL Agreement”) with the 1st defendant. The SFL Agreement contained a post-termination restriction clause (the “SFL restriction clause”).
3. On the day that the 1st plaintiff was incorporated, it also entered into a franchise agreement with the 1st defendant (the “SFG Agreement”). The SFG Agreement also contained a post-termination restriction clause (the “SFG restriction clause”)
4. According to the plaintiffs’ case, the intention was for SFG to provide the “business structure” to the 1st defendant and for SFL to provide on-site implementation, consultation and training, including the transfer of 50 existing gym members to the 1st defendant’s gym. There were therefore 2 co-existing franchise agreements.
5. The defendants’ case was that SFG Agreement superseded SFL Agreement.
6. According to the plaintiffs, the 1st defendant did not pay certain payments as specified in both the SFG and SFL Agreements. As a result, the 1st plaintiff terminated the SFG Agreement on 5 October 2018 and the 2nd plaintiff terminated the SFL Agreement on 30 November 2018.
7. According to the 1st defendant, it was the plaintiffs which breached the agreements in the first place by failing to “assist the franchisee to establish and efficiently operate the business...” (from the email correspondence of the parties, page 180 of the Hearing Bundle). The 1st defendant alleged that the plaintiffs had been interrupting the running of the gym on many occasions and then unilaterally terminated the agreements.
8. In any case, it is not in dispute that the 1st defendant transferred the gym business and assets to the 2nd defendant on 30 December 2018. The gym was no longer under the name of “Studio Fitness” and all items bearing the mark had been returned.
9. The plaintiffs alleged that this transfer was not genuine and was a “Phoenix company scheme” and, in accordance with the SFG restriction clause and the SFL restriction clause, sought an interlocutory injunction to restrain both defendants “from being directly or indirectly engaged, concerned or interested in a business similar to
(a) the business of the 1st plaintiff operating within a radius of 10km from any premises of the plaintiffs in Hong Kong for a period of 1 year from 30 November 2018; and
(b) the business of the 2nd plaintiff operating within a radius of 500km from any premises of the plaintiffs in Hong Kong for a period of 2 years from 15 October 2018.”
The legal principle
10. The legal principle is trite and need not be repeated in details here: the tests are, firstly, that there is a serious question to be tried and secondly, that the balance of convenience lies in favour of granting an injunction (MBM Metal Works Hong Kong Ltd v Jonathan Derek Nichols , HCA 2936/2018, [2019] HKCFI 52 )
11. As for the first test, the overreaching principle is whether the plaintiff has prospects of success which, in substance and reality, exist. The hurdle is thus not very steep. Such prospects are to be investigated to in a limited extent and the court is not to embark on a mini-trial on the affidavits.
12. There has been much arguments by the parties on the validity, reasonableness and enforceability of both restriction clauses under the circumstances of this case (including the relative bargaining power of the parties).
13. However, as discussed above, the court is not to embark on a mini-trial on the affidavits and should not be making any determination on such issues. Considering both parties’ cases as briefly stated above, I agree with Ms. Prisca Cheung, Counsel for the plaintiffs, that the plaintiffs’ prospect of success on enforcing either of the restriction clauses exist, thus the “not very steep hurdle” of the first test is satisfied.
14. The second test, however, is more important in the circumstances of this case.
15. The SFG restriction clause would be valid until 30 November 2019 and the SFL restriction clause would be valid until 15 October 2020. Thus an interlocutory injunction granted on the basis of such clauses would effectively dispose of the action because both clauses would likely expire before the action can be tried.
16. The plaintiffs argued that allowing the 2nd defendant to continue with the gym business would “cause irreparable damage and prejudice to the brand name and image of “Studio Fitness”” .
17. However, the 2nd defendant is not operating under the name of “Studio Fitness” and it is not carrying any items with the mark or logo of “Studio Fitness”. If the 2nd defendant is alleged to be operating with any alleged “trade secrets” of “Studio Fitness” (whatever they are), I cannot see how this cannot be compensated by damages or other remedies at the trial.
18. The 2nd defendant alleged that the plaintiffs are no longer operating a gym but Mr. Wills alleged that the 2nd plaintiff “conduct group classes and private training sessions at various locations in Hong Kong….outside the confines of a gym...”
19. It does not appear to be the plaintiffs’ case that the reason for an injunction was that the gym business of the 2nd defendant might compete with the “group classes and private training” of the 2nd plaintiff. Mr. Wills did not give evidence that the 2nd defendant was now operating (or had concrete plans for establishing) a gym business on fixed premises in the “traditional” sense. Ms. Cheung submitted that the 2nd plaintiff was conducting classes with the trainer bringing in equipment to certain (and changeable) locations which, as I understand, appeared to be different from a traditional gym on a fixed address with permanent on-site staff, fixed installations of exercise equipment, with toilet, locker and shower facilities etc.
20. This may be relevant because the restriction clauses specified that “the Franchisee shall not…engaged…in a business similar to the Business which operated within a radius of…from any premises in Hong Kong…which the Business is being carried out by any franchisee…or by the Franchisor itself…”
21. The court is clearly not in a position to assess at this stage whether the activities that the 2nd plaintiff is conducting at present should be considered “the Business” and whether the 2nd defendant’s current gym business is “similar” as defined in the agreements, and the court should not, in any case, be conducting a mini-trial on affidavit evidence on such issues. Suffice to say that if there is any advantage to be gained by the 2nd defendant’s business over the 2nd plaintiff’s, this can also be readily compensated by damages and other remedies at the trial.
22. On the other hand, if the court is to grant an interlocutory injunction based on the SFL restriction clause, this might require the 2nd defendant to either vacate the current premises and move to a remote location 10km away from Sheung Wan and Hung Hom, or to temporarily suspend its gym business until 30 November 2019 whilst, presumably, the 2nd defendant would still be obliged to continue to pay rent, overheads and staff salaries etc.
23. Either way, the injunction would likely cause substantial financial loss if not the end of business for the 2nd defendant.
24. Of course, granting an interlocutory injunction based on the SFG restriction clause’s 500km restriction zone would effectively be the end of the 2nd defendant’s gym business in Hong Kong.
25. I also note that the plaintiffs only indicated that they were “happy to give an undertaking in damages” for the first time through the submission of Ms. Cheung. However, there was no evidence put forward to show how the plaintiffs, an offshore limited company in Seychelles and a Hong Kong limited company, have any means to do so.
26. The test of balance of convenience lies in answering the question: “Which side might suffer greater harm with the court granting or refusing the injunction if the court gets it wrong at this stage?”
27. Given the above considerations, I would agree with Mr. Vincent Lung, Counsel for the 2nd defendant, that the balance of convenience must lie in refusing to grant such interlocutory injunctions: it was his client that greater harm would be done if the court got it wrong at this stage.
Order
28. The plaintiffs’ Summons dated 7 January 2019 (except paragraphs 1 and 2 thereof which have been dealt with by Order of His Honour Judge Kent Yee dated 11 January 2019) be dismissed.
29. The costs of and occasioned by the Summons 7 January 2019 (except paragraphs 1 and 2 thereof) be to the 2nd defendant to be taxed if not agreed with certificate for Counsel.
(Harold Leong)
District Judge
Ms Prisca Cheung, instructed by Oldham, Li & Nie, for the 1st and 2nd plaintiffs
Mr Vincent Lung leading Ms Alice Lau, instructed by Wan Yeung Hau & Co, for the 2nd defendant