HUSKY INJECTION MOLDING SYSTEMS CHINA LTD. v. LAU KWONG FAT AND ANOTHER

HCA1937/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1937 OF 2002

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J U D G M E N T

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1. I have before me an application for interlocutory injunction issued by the plaintiff against the previously employed by the 1st and 2nd defendants. The 1st and 2nd defendants being plaintiffLtd. It is a company . The plaintiff is Husky Injection Molding Systems China incorporated in Hong Kong and is part of a very large group of companies under the name of Husky Groupcompany by the name of . The head of that group, or the top parent company, is a Husky Injection Molding Systems Ltdhereinafter refer to the . For ease of convenience, I will parent company as Husky Torontoin this way is because the . The reason for my so referring to head company is a company incorporated in Toronto, Canada.

2. The business of the plaintiff company is to effect within the Greater China area (covering Hong Kong, Macau, China and Taiwan) the servicing, maintenance and supplying of spare parts of what have been called in this case injection molding machines manufactured, and sold by one or other of the companies in the Husky Group. I have no concrete information at the hearing as to the large number of companies comprising within that Husky Group or their exact identities.

3. The employment of the 1st defendant started with the plaintiff in 1994 and stopped on 5 March 2001 when he left. He started as a junior field service engineer, then was promoted to be a service engineer in 1997, and then promoted to a service manager in 2000. His job requires him to have dealings with customers in the four areas comprised in the Greater China Region as well as with suppliers of spare parts.

4. The 2nd defendant was employed by the plaintiff from September 1994 to 16 March 2001. He started as a warehouse clerk, then was promoted to be a spare parts sales co-ordinator. The 2nd defendant therefore was really only involved in the spare parts side of the business and perhaps had more dealings with the suppliers, but it seems from the evidence that his involvement with the customers are not as extensive as that of the 1st defendant.

5. The departure of the 1st and 2nd defendants from the plaintiff coincided with two other more junior employees working under the 1st and 2nd defendants who also departed at the same time. They all seemed to then start working in a new venture business under the name of Everfinest Services Ltd. The plaintiff eventually found out that the 1st and 2nd defendants, under their new business, had been doing business with the customers and suppliers of the plaintiff and therefore, eventually, these proceedings had been issued and the interlocutory injunction was launched.

6. The basis of the claim of the plaintiff against the 1st and 2nd defendants is under the two respective contracts signed by the 1st and 2nd defendants, not with the plaintiff but with Husky Toronto. The document in question, "Employee Agreement" ("the Agreement"), can be found in the bundle at pages 43 to 44 for the 1st defendant and 45 to 46 for the 2nd defendant. They are dated 1996 and therefore they were signed some time after both of them had started working for the plaintiff. As I understand it, there was no contractual service agreement signed between the two defendants and the plaintiff.

7. This Agreement, which is now being relied upon, signed by the two defendants, is an elaborate document and would seem to be a boiler-plate document supplied by the head office of the Husky Group, perhaps to the plaintiff, and purports to restrain or prohibit the employees from various activities, both during and after employment. In broad outline, it seeks to restrain four different kinds of activities :

(1) the breach of confidential information which is widely defined (clause 3);

(2) the taking away of employees of Husky (clause 4);

(3) the taking away of customers or soliciting customers of Husky (clause 5); and

(4) the soliciting of suppliers of Husky (also clause 5).

8. What is however of vital importance is the wide definition of Husky, because "Husky" is defined in the Agreement as being the parent company, that is, Husky Injection Molding Systems Ltd and its subsidiaries and affiliates. So, it is a very unusual document, in that, it purports to restrict activities not only in relation to the employer but in relation to the employer's associates in that large Husky Group. This will have some relevance when I come to consider the nature of the case that has been made against the defendants.

9. The case that was originally mounted by the plaintiff against the defendants in relation to those same four areas that I have outlined, namely, breach of confidential information, restraint against soliciting employees, restraint against soliciting customers and restraint against soliciting suppliers. But because of the lapse of time from determination of employment upon the departure of the defendants to the hearing today, it is obvious to the plaintiff that no sensible purpose could be served by pursuing the injunction against soliciting fellow employees -- time elapsed has spent the force of the ability of the defendants to induce fellow employees to leave, so injunction against solicitation of employees is no longer pursued.

10. What is pursued is the injunction in relation to confidential information. At the end of the hearing, Mr Carolan, counsel for the plaintiff, informed the court that he does not formally concede the point about confidential information injunction but he could see the force of argument against that relief being granted. I will deal with this point first to put it out of the way before I go on to consider the main dispute between the parties.

11. The confidential information, defined in clause 1, is a very comprehensive list. Clause 1 reads :

"I acknowledge and agree that Husky has the exclusive right to all knowledge and information relating to the business of Husky including all plans, research, finances, engineering, manufacturing, designing, patents, trade marks, industrial designs, trade secrets, employees, customers, suppliers, and other persons with whom Husky carries on business and the particulars of their respective business dealings with Husky (collectively called the 'Confidential Information')."

That is a very long and comprehensive list of the components of confidential information, and when you couple that with the definition of "Husky" being not only the parent company but all the companies within the Group which can number into fifties, hundreds, I do not know, one can see the huge scope of that confidential information which sought to be protected. I think both in my analysis in the judgments of BSC Building Materials Supply Co. Ltd v. Cheung Chi Hung Michael [1998] 2 HKC 425 as well as Faccenda Chicken Ltd v. Fowler and Others [1985] 1CA 117, it clearly emerges that in relation to confidential information, the court requires a very high standard of special protection necessary to the employers' interest (only the employers' interest) and that they need to be of a confidential nature before there is even a fair run for that kind of restraint.

12. I have no doubt, having regard to the scope of that wide definition of "confidential information" and the lack of any particular materials supplied to me about the particularisation of special nature of confidential information required to be protected, that this is a head of claim that has no chance of survival at the trial of the case. It is much too wide, much too ambitious and I believe, that this is a head of claims that will have no chance at the trial and therefore there is no good prima facie case for interlocutory injunction to be granted in relation to that head of claims.

13. The main battle ground between the parties at the hearing is in relation to solicitation of customers and solicitation of suppliers. A number of defences have been raised at the hearing. It will not be necessary for me to go through all of them. I will single out just a few for consideration because it seems to me that, on the consideration of those important ones, the court is given a clear picture that it is not an appropriate case where interlocutory injunction should be granted.

14. I first start with the simple and the most obvious one, and it is the question of delay. The defendants left in March 2001. The proceedings for interlocutory injunction were not launched until, I think, 3 or 4 June 2002, a lapse of 15 months at least. That 15 months is a long lapse whereby the defendants would be well launched on their way in terms of the business that is now sought to be curtailed by the plaintiff. The plaintiff, even on its own evidence, had knowledge of what had been called torn documents found outside the premises of the defendants as early as, or as late as -- whichever way you would like to call it --end January 2002. There was at least a lapse of four months from that knowledge to the launch of the interlocutory application. We are of course now in July 2002, but that is through no fault of the plaintiff because this case had gone through so some many judges' hands. But be that as it may, it seems to me that the long delay is a major stumping-block towards the exercise of discretion in favour of granting an interlocutory injunction.

15. The evidence, in relation to the strength of the plaintiff's case, suggests that the contract being relied upon is not a contract signed by the plaintiff with the defendants at the beginning of their contract of their service, but was signed by the defendants on a boiler-plate form of the parent company two years into their contracts. There is no consideration referred to in the Agreement for the defendants to sign their contract. They took on a liability with no stated benefit to them at all. As far as I am concerned, it seems to me that it is reasonably clear that there is no consideration given and that this is not an enforceable contract.

16. Mr Carolan asked me to reserve the final verdict against the plaintiff on this score and said that there may be some hope at the trial, that some evidence may be adduced or that the law has moved on and the new principle that is stated in, or discussed in, the Chitty on Contract might be adopted. I have my serious skepticism about this. Suffice it to say that the plaintiff has an up-hill case on the ability to rely on that contract.

17. However, the shortcomings of the plaintiff's case does not stop there. The evidence in relation to solicitation of the customers is (with one exception) simply not there. There is evidence of dealings between the defendants and the customers of the plaintiff but that does not mean solicitation. At the most, one can say the evidence is too weak and, if at the worse, there is simply no evidence.

18. So far as evidence in relation to the solicitation of the suppliers is concerned, having regard to the wording of clause 5 in relation to that aspect which reads as follows :

"For a period of three years from the date of cessation of my employment with Husky, I will not directly and indirectly solicit business away from any customers or suppliers of Husky. In this clause 'business' means business of any kind in which I am engaged during my employment and 'customers' and 'suppliers' means customers and suppliers of Husky with whom I dealt during my employment."

It is accepted by Mr Carolan that a proper reading of clause 5 in relation to suppliers would mean that it is aimed at preventing the employee from soliciting the suppliers to stop supplying to the plaintiff, rather than a meaning of the clause that the employee is prevented from soliciting the suppliers to supply spare parts to the employee. This being the case of the nature of the restraint, there is simply no evidence that the defendants have any way persuaded, or try to persuade, the suppliers not to supply to the plaintiff. This is of course very different from a case of the defendants persuading the suppliers to supply to the defendants.

19. On the basis of those facts, or lack of sufficient facts in support of the likely breach of that clause in relation to suppliers by the defendants, Ms Newall said, quite rightly in my view, that there is simply no proper case for the granting of interlocutory injunction in relation to the restraint in respect of suppliers. I agree.

20. Another plank relied upon by Ms Newall is that irrespective of the strength of the case for interlocutory injunction, if one looks at the restraint, at clause 5, it is simply too wide and for too long a period of restraint. I will first deal with the 2nd defendant's position. I have no doubt that for a person of the 2nd defendant's junior position, three years of restraint in relation to him is too long. His pay was $16,000, he was really a glorified clerk -- if one may call him that -- and I do not see how any court in this land is going to consider a three-year restraint for someone of his position to be reasonable. So, I think there is simply no chance of the plaintiff succeeding at the trial against the 2nd defendant on that restraint.

21. Against the 1st defendant, it is suggested that three years is plainly arguable as a period of restraint. I think there is a possibility that Mr Carolan may be right. But if one looks carefully at the clause, because it is a boiler-plate, it makes no distinction between the restraint in relation to customers and the restraint in relation to suppliers.

22. A restraint, in order to be reasonable, has to be of the minimum time required to protect the customers' connection, or the suppliers' connection, and as was described in the book of Brearley & Bloch on Employment Covenants and Confidential Information, 2nd edn, at paragraph 10.6, where it says :

"...... covenants designed to protect customer connection the question is what is the minimum time required to protect the customer connection. This will normally be the time which it would take a replacement employee to establish a relationship with the customers such that the influence of the ex-employee will have been removed......"

Basically you need the time so that you can replace the influence of the employee who has left by a new employee. I think for example for suppliers in this case, it will be a relatively short period. Of course one does not know all the facts of this case, but I will be very surprised that in relation to suppliers a period of three years can be established.

23. In relation to customers, of course, that is very different. It depends on the areas covered, the number of customers, the relation with customers, so on and so forth. But because this is a boiler-plate, again, it seems to suggest that no special consideration is given to design a period in order specially to protect just the interest of the employer, that is, the plaintiff, in relation to the customers, but it was simply a flat period stated in that boiler-plate document.

24. In the evidence itself, from the plaintiff, the plaintiff said they needed a year to replace the 1st defendant and that seems to me to be a good indication that one year will be in the right ball park figure. I suspect that at the end, three years would be held to be not enforceable. It seems to me therefore that, at the least, the plaintiff has a very weak case to go to trial, on the enforceability of the restraint in relation to the customers so far as the 1st defendant is concerned.

25. The other matter that was also relied upon by the counsel for the defendants is the questions of whether the damages being adequate remedy and the defendants' ability to pay those damages. This is a case where the plaintiff has come out with figures as the damages it says it has suffered. So, prima facie, that seems to indicate that damages is an adequate remedy. They have referred to, in the affidavit, damages of something like $275,000 as being for that period of time, I think, less than a year, where their business had gone down and that is the amount that they had suffered from the loss of profit. It is of course difficult in this case to say what may be the likely figure that the plaintiff will suffer as the result of the present injunction being denied.

26. One is however only talking about the present injunction being denied. One is not talking about the ability to pay damages in relation to the period of time covered from termination of employment possible injunction until the trial. I assume this is a case where it would take a few months before a trial will come on, what is relevant is the amount of damages that the plaintiff might suffer during that period. Having regard to the fact that this is at the tail end of a business that had been launched some one year ago, it is more a case of diminishing loss rather than an increasing loss. I suspect the loss is not likely to be in excess of, perhaps, half a million dollars. Doing the best I can, I think, on the material before me, there is no reason to believe that the defendants would not be good for that amount of money. After all, if the plaintiff is right, the defendants would have gained and done well from gaining those customers. So, I think this is again a pointer towards the exercise of discretion in favour of the defendants.

27. It seems to me that this is a case, unfortunate may be, because of the lapse of time, because of the defendants having gained the foot-hold that they should be allowed to continue what they are doing and the matter not be restored to the status quo ante, but the plaintiff be left to assess the damages, if they succeed, against the defendants. After all, if the plaintiff is right at the trial and they succeed completely, instead of having to assess the first period, that is, from the date of the departure in March 2001 up to now, the plaintiff would just have one period of loss to assess, that is, from the date of departure until the date of trial.

28. I therefore conclude that this is a case where an injunction should not be granted. I therefore dismiss the application and the costs of the application will be to the defendants.