XCHRX Rever (Ama) Salon Ltd. v. Kung Wai For, Danny and Others

HCA 10399/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10399 OF 2000

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J U D G M E N T

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Parties

1. The Plaintiff has been carrying on the business of providing hairstyling services to customers since 1983. Previously, it traded under the name "Rever Hairstyling Salons". In January 2000, after certain change in its shareholding, it began to trade under the present time "Hair by M2K". Currently, it maintains 2 salons. One is at Shop G113, Marco Polo Hotel, Canton Road, Kowloon ("the Salon"). The other is at the Prince Hotel further down Canton Road. The present proceedings only concern the Salon.

2. The 1st to 8th defendants were at the material times the plaintiff's employees working at the Salon. The 1st to 7th defendants were hairstylists of different seniority and titles whereas the 8th defendant was the assistant manageress. The 8th defendant resigned on 27 October 2000. Towards the end of November 2000, the 1st to 7th defendants also resigned. After their resignation, the defendants began to work for the 9th defendant at its salon just opposite the Salon in the same hotel ("the New Salon"). The business there commenced on or about 11 December 2000. The 8th defendant is also one of the 9th defendant's shareholders.

Restraint of trade covenants

3. The employment contracts of 1st to 7th defendants with the plaintiff contain the same restraint of trade covenants. Clause 6(a) of the general conditions of employment provides, inter alia, that after termination of the employment, the employee shall not without the plaintiff's prior written consent:

"(i) for a period of one year, whether on his own account or as shareholder, partner, director, agent, servant or consultant or otherwise for any other Person canvass, solicit, approach, or cause to be canvassed, solicited, approached any Client for whom the Employee provided Services during the [one] year period prior to the said termination with a view to providing Services to those Clients; and

(ii) for a period of one year, whether on his own account or as shareholder, partner, director, agent, servant or consultant or otherwise for any other Person provide Service or cause Services to be provided to any Client for whom the Employee provided Services during the [one] year period prior to the said termination; and

(iii) for a period of one year, whether on his own account or as shareholder, partner, director, agent, servant or consultant or otherwise for any other Person, be engaged in the provision of the Services within a radius of 1 mile of the premises of the Company where the Employee habitually worked one year prior to the said termination where such premises were on Hong Kong Island and within a radius of 3/4 mile of the premises of the Company where the Employee habitually worked one year on Kowloon prior to the said termination; and where the such premises were on Kowloon; and

(iv) for a period of one year, solicit or entice away or do anything to solicit entice away from the Company any Person employed by the Company in the provision of the Services at the date of such termination or engage appoint or enter into partnership with or cause to be engaged or appointed in any business which provides services similar to the Services any Person who the Employee so solicits or entices away from the Company or any Person who is employed by the Company in the provision of the Services within 3 months prior to or after the said termination."

4. The 8th defendant is also subject to a shorter but not necessarily narrower restrictive covenant. Clause 12 of her employment contract provides:

"After the termination of employment, [the 8th defendant] will not associate or take up employment in a hairdressing salon with any former [staff of the plaintiff] who has worked in the same branch within four months prior to [her] departure or work in a salon located within a radius of one mile of [her] place of work. This condition is valid for a period of 12 months."

Ex-parte injunction and the applications

5. The plaintiff considers the 1st to 8th defendants have acted in breach of the restrictive covenants by working at the New Salon. The 8th and 9th defendants are guilty of procuring the 1st to 7th defendants to breach their employment contracts. On 9 December 2000, that is, just two days before the New Salon opened for business, the plaintiff obtained an ex-parte injunction. The injunction against the 1st to 7th defendants is couched in the following terms:

"(1) 1st to 7th defendants be restrained from:

(i) approaching or soliciting customers or to provide hairstyling services to customer for a period of one year after termination of their employment with the plaintiff;

(ii) providing hairstyling service with a radius of 3/4 miles of [the Salon] for a period of one year after termination of their employment with the plaintiff;

(iii) soliciting or enticing away or doing anything to solicit or entice away from the salon any Person employed by the salon in the provisions of the Services as the date of such termination or to engaged appoint or enter in partnership with or cause to be engaged or appointed in any business which provides services similar to the services any Person who the Employee so solicits or entices away from the [Salon] of any Person who is employed the by the [Salon] in the provision of the Services within 3 months prior to or after the said Termination, for a period of one year after termination of their employment with the plaintiff"

6. Compared with Clause 6(a), paragraph 1(i) is much wider than Clause 6(a)(i) and (ii) in the meaning of "customers". Paragraph 1(i) refers to customers at large whereas Clause 6(a)(i) and (ii) restrict customers to those the employee had provided services.

7. The injunction against the 8th defendant is more or less a reproduction of Clause 12. She, together with the 9th defendant, is further restrained from procuring the plaintiff's employees at the Salon to breach the terms of their employment contracts with the plaintiff.

8. The return date fell on 15 December. The defendants wished to discharge the injunction there and then. The plaintiff wanted to continue the injunction. Chu J varied the injunction by replacing paragraph 1(i) by a new paragraph which is a substantial reproduction of Clause 6(a)(i). She did not give any injunction in terms of Clause 6(a)(ii) presumably because paragraph 1(ii) would be sufficient for present purposes. She then adjourned the matter to 19 December because of the urgency involved. In the event the matter comes before me.

9. Mr. Ng, counsel for the defendants, seeks to discharge the injunction immediately without considering its merits because of material non-disclosure and misrepresentation on the part of the plaintiff when making the ex-parte application. In any event, the injunction should be discharged on merits or on balance of convenience. Mr. Chow, counsel for the plaintiff who did not appear at the ex-parte application, submits that the plaintiff had made a full disclosure or alternatively if there was any non-disclosure, it was neither material nor intentional. He submits that the court should either continue the injunction or grant a new one afresh on merits and on balance of convenience.

Material non-disclosure

10. It is trite law that an applicant for an ex-parte injunction has to make a full and frank disclosure of all material facts. The applicant must proceed with the highest good faith. The fact that the court is asked to grant relief without the person against whom the relief is sought having the opportunity to be heard makes it imperative that the applicant should make full and rank disclosure of all material facts: R v Kensington Income Tax Commissioner exp Princess Edmond de Polignac [1917] 1 KB 486 at 514, LJ per Scrutton LJ.

11. The court was not concerned with whether the matters not disclosed would, if they had been disclosed, have caused it to refuse to grant the ex parte order; and the test was whether the court should have these matters in the weighing scales: Citibank NA v Express Ship Management Services Ltd [1987] HKLR 1184, CA at 1190D.

12. Materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers: see Rex v Kensington Income Tax Commissioners, per Lord Cozens-Hardy MR at p 504, citing Dalgish v Jarvie (1850) 2 Mac & G 231, 238, and Browne-Wilkinson J in Thermax Ltd v Schott Industrial Glass Ltd [1981] FSR 289, 295.

13. The applicant must make a full and frank disclosure of all relevant matters, including those against his application. For it is difficult for a judge upon an ex parte injunction at short notice to grasp all relevant points: O'Regan & Ors v Iambic Productions Ltd [1989] NLJ 1378.

14. The duty to disclose could not simply be fulfilled by exhibiting voluminous documents covering the points to the supporting affidavit but without making any distinct reference to the points in the body of the affidavit itself or when addressing the judge at the often short hearing: Standard Chartered Securities Ltd. v Lai Arthur [1993] 1 HKC 375 at 381 C to G.

15. With these legal principles in mind, I now turn to the evidence. Mr. Ng submits that there was material non-disclosure in five aspects and in some of them there was in fact misrepresentation. I will deal with them in turn.

(1) Relating to Clause 6

16. It is, I believe, the common practice in ex-parte interlocutory applications involving restraint of trade to set out in full the relevant restrict covenants. Here, Ms. Malski of the plaintiff in her 1st affidavit ("Malski's 1st affidavit"), purported to quote in paragraph 8 thereof Clause 6 in the following terms:

"(1) employee is prohibited from approaching or soliciting customers or to provide similar services to customer for a period of one year after termination of the employment.

(2) employee is prohibited for a period of one year to provide similar services within a radius of 3/4 miles of the Salon where he habitually worked.

(3) for a period of one year, solicit or entice away or do anything solicit entice away from the Company any Person employed by the Company in the provisions of the Services at the date of such termination or to engaged appoint or enter in partnership with or cause to be engaged or appointed in any business which provides services similar to the services any Person who the Employee so solicits or entices away from the Company or any Person who is employed by the Company in the provision of the Services within 3 months prior to or after the said Termination."

17. Only sub-paragraph 3 is a correct quote of Clause 6(a)(iv). Not surprisingly, Mr. Ng complains about it. He further points out that the same purported quote appeared in the written skeleton submissions of the plaintiff's counsel used before the judge. The judge must have been misled as to the true ambit of the restrictive covenants in Clause 6 for the ex-parte injunction he granted followed substantially the purported quote. The result is the plaintiff obtained an injunction which is wider than what it might be entitled to under the employment contracts

18. Ms. Malski explained in her 2nd affidavit ("Malski's 2nd affidavit") that paragraph 8 was purported to be a summary of Clause 6. It was not intended to be a quote. She had failed to notice the quotation marks that gave rise to the impression of a quote when she considered her 1st affidavit. In any event, the contracts having been exhibited, the clauses were easily identifiable. Further, at the ex-parte hearing, counsel did refer the judge to Clause 6 although he did not read it out for his benefit. Relying on the above, Mr. Chow submits that there was no material non-disclosure or alternatively, the non-disclosure was not deliberate. He further submits that the practical effect of the injunction obtained would just be the same had Clause 6 been correctly reproduced in the supporting affidavit. Lastly, the mistake in paragraph 8 would only have worked against the plaintiff. It being a restrictive covenant, the wider its terms, the higher the burden the plaintiff had to discharge.

19. I have no doubt that paragraph 8 was intended to be a direct quote of Clause 6. It is apparent from the way the paragraph was drafted and how that was repeated in counsel's written skeleton submissions. If paragraph 8 is intended to be a summary, then at least sub-paragraph (1) is misleadingly wide. The inaccuracy in the purported summary could not have skipped Ms. Malski, a director, and the plaintiff's legal advises. The plaintiff so far has not explained either by way of affidavit or submission why Clause 6(a)(i) and (ii) were summarized in that way whereas Clauses 6(a)(iv) was faithfully reproduced. In my view, it is more than material non-disclosure. It is a misrepresentation on the true ambit of Clauses 6(a)(i) and (ii) and indeed a serious one. In the absence of any explanation, I am not prepared to accept that the mistake was as innocent as claimed.

20. I do not accept that the plaintiff could escape its duty to disclose by simply exhibiting the contracts to Malski's 1st affidavit or by merely referring the judge to Clause 6 without actually reading it out for his benefit. Obviously, the effect of the misrepresentation created by paragraph 8 and repeated by counsel's submissions had not been dispelled. Rather, it was perpetuated.

21. I reject counsel's no practical difference submission. There is ample difference. The ambit of the injunction before variation by Chu J was considerably wider. More importantly, the plaintiff does not enjoy what it claimed to have enjoyed under the relevant restrictive covenants. I also reject counsel's higher duty submission. If anything, the burden was self-inflicted. As the plaintiff simply did not enjoy the purported benefit, whether it had to satisfy a higher burden is neither here nor there.

(2) Relating to the plaintiff's reputation

22. Ms. Malski dealt with the plaintiff's reputation in paragraph 3 of her 1st affidavit:

"The [plaintiff] is a substantial company incorporated in Hong Kong since 1983 where business is to provide hairstyling services to customers. The [plaintiff] is well known and enjoys a high reputation in the trade of hairstyling. The [plaintiff] recently maintains a total of 3 salons in Hong Kong."

23. Mr. Ng makes 2 complaints. Firstly, the number of salons is clearly wrong. It should be 2 only. Secondly and more importantly, the plaintiff has failed to disclose its recent change in its trade name from "Rever Hairstyling Salons" to "Hair by M2K".

24. Ms. Malski in her 2nd affidavit explained that the mistake in number was merely typographical. She maintained that the plaintiff need not disclose the change in its trade name. The 1st to 8th defendants were all aware of the change at the time. Mr. Chow submits that the number of salons was not relied on to establish reputation, and that in any event the new name should be regarded as established in its own right now.

25. Assuming that it was a typing mistake, I do not accept that the number of salons was not relied on as part and parcel of the plaintiff's reputation. This is contrary to the impression paragraph 3 tried to convey. Further, in my view, the number of salons in the up-market hairstyling business certainly has a significant bearing on the reputation of its operator. Presumably, the more salons it operates, the more successful it is and hence the higher reputation it enjoys.

26. Contrary to the plaintiff's contention, the change in its trade name ought to have been disclosed. It is true that Ms. Malski did not say that the plaintiff had along been trading under one particular name. But the matter must be viewed in the round. When the plaintiff's name is considered together with paragraph 3, it is not unreasonable to form the impression that the plaintiff had been trading under the trade name "Rever" since 1983. The high reputation is derived from its trading under such a name for nearly 17 years. The name "Hair by M2K", on its face, suggests no resemblance or connection with "Rever". Reputation derived from trading under this name for slightly less than 1 year is quite another matter. Even assuming that the name "Hair by M2K" can be considered as established in its own right, the change in name is material in the court's weighing exercise and ought to have been disclosed. The failure to disclose is deliberate in the sense that the plaintiff did not consider the change material. To say the least, it is a bad error of judgment.

27. For the above reasons, I am satisfied that there is material non-disclosure on matters relating to the plaintiff's reputation.

(3) Relating to the plaintiff's financial loss

28. The plaintiff relies on exhibit "KCC-8" to Malski's 1st affidavit in connection with its monthly profits. Mr. Ng complains that it is only a record of the monthly turnover and income of the defendants. In this respect, I accept Mr. Chow's submission that the exhibit is stated to be records of the plaintiff's turnover and nothing more. The evidence of the plaintiff's monthly profit comes from Ms. Malski. After all, she is a director. I will therefore hold that there is no material non-disclosure here.

(4) Relating to the reasons of defendant's departure

29. Mr. Ng complains that Ms. Maliski's 1st affidavit generally paints the picture that the defendants conspire to take business away from the plaintiff when in fact the defendants chose to leave employment because of their dissatisfaction over the management. There is evidence that some of the defendant did instigate other employees of the plaintiff to work at the New Salon and ask some of the plaintiff's customers to patronize the New Salon. But I do not think that plaintiff's case is pitched as high as that complained of. In any event, I do not think the plaintiff need to suggest to the court the possible reasons the defendants might choose to rely on to justify their departure. After all, the termination of the employment itself is not wrongful. I therefore do not find material non-disclosure here.

(5) Financial strength of the defendants

30. Mr. Ng submits that the defendants are not without means. In this connection, he again refers to exhibit "KCC-8". I think the most Mr. Ng can make out of this exhibit is that it shows that the 1st defendant had earnings of slightly over $1 m for the past 13 months. Mr. Ng also complains that the plaintiff had failed to disclose the financial strength of the 9th defendant.

31. Mr. Chow submits that exhibit "KCC-8" only gives the defendants' income. It does not show their actual financial status. And there is no means for the plaintiff to verify their status. The financial loss suffered by the plaintiff is likely to be substantial. He refers to the significant drop in turnover in December since the defendants' departure. The loss is likely to be in the region of several hundred of thousands per month. It is therefore unlikely that the 1st to 8th defendants are likely to meet the loss out of their personal means. Despite the complaints, the defendants have not adduced any evidence on their financial worth.

32. In this respect, I agree with Mr. Chow and accept that there is no material non-disclosure.

Whether the ex-parte injunction should be discharged?

33. Mr. Ng submits that the injunction should be discharged immediately. The plaintiff has not shown any good or strong reasons to the contrary. Mr. Chow submits that the material non-disclosure was unintentional. The plaintiff has a very strong case against the defendants. Now that all the materials are before the court, the court should exercise discretion either to continue the injunction or do grant a fresh injunction. However, he recognizes that the discretion is sparingly exercised.

34. The plaintiff has failed in its duty to disclose on crucial matters relating to the true ambit of the relevant restrictive covenants and its reputation. Worse still, there was misrepresentation. I note that the matters relating to the restrictive covenants only concern to the 1st to 7th defendants but the matters relating to reputation concern all.

35. All these could have been easily avoided had the plaintiff chosen to give notice to the defendants of the ex-parte application. In fact, there is no reason why such notice should not been given. In November, the plaintiff had already threatened the 1st to 8th defendants with injunction proceedings should they work at the New Salon after resignation. According to Ms. Malski, in a meeting on 30 November she had also told the representative of the 9th defendant that the defendants were prohibited under the employment contracts to work at the New Salon. There was no absolute necessity to keep the defendants away from the ex-parte application. The plaintiff wanted to ambush on the defendants by getting the ex-parte injunction and did get it. But in the course of doing so, it had failed to proceed with the highest good faith accepted of it and had failed in its duty miserably.

36. In the circumstances, the court should be astute to ensure that the plaintiff be deprived of any advantage it might have derived by that breach of duty: per Donaldson LJ in Bank Mellat v Nikpour [1985] FSR 87 at 91. I will therefore discharge the injunction forthwith. I have also considered the question of granting a new injunction. But having regard to the above, I have decided against it. In light of my decision, it is not necessary to deal with the rest of counsel's submissions.

Costs

37. As to the question of costs, the defendants will have the costs of the application to discharge and any related costs reserved previously. In the event I discharge the injunction, Mr. Ng asks for certificate for two counsel for the hearing on the return date, such question has been reserved to me by Chu J. Having regard to all the circumstances especially the complexity and urgency involved, I am satisfied that the matter can be properly handled by Mr. Ng without the benefit of a leader. And in fact it has been so handled. I will therefore refuse this application.

Direction

38. This case certainly warrants a speedy trial. I will give parties liberty to apply for directions in this regard if they so desire.