XCHRX FORTUNE REALTY CO. LTD. v. CHAN HIU YEUNG DICK

HCA1582/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1582 OF 2001

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REASONS FOR DECISION

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1. This is an inter partes application by the plaintiff for interim injunction to enforce the terms of a restraint covenant under an employment contract and to restrain the defendant from using the plaintiff's information in his new employment. At the conclusion of the hearing, I granted the injunction sought. My reasons appear below.

Background

2. The plaintiff carries on the business as an estate agent and operates 41 branches throughout Hong Kong. The branches are grouped into seven districts. The defendant joined the plaintiff in March 1996 as an assistant supervisor. In about May 1997, he was promoted to be an area manager of the Ma On Shan district. Since July 1997, he was posted to the plaintiff's Bayshore Towers Branch in Ma On Shan. On 31 January 2000, he was promoted to be the district manager, supervising five branches in the Ma On Shan district. The defendant left the plaintiff's employment on 8 March 2001.

3. When the defendant joined the plaintiff, he had signed a letter of employment dated 2 March 1996 ("Letter of Employment") which contains the following provision :

"After Termination :

For a period of 6 months next following such termination, the employee shall not be employed by any person, or directly or indirectly on his own account or as partner or director of any other person, transact or carry on any estate agent business in respect of the sales and purchase or leasing of residential properties in Ma On Shan area."

("the 1st Covenant").

4. The 1st Covenant was repeated in the letter dated 28 July 1997 transferring the defendant to the Bayshore Tower Branch. On 1 February 2000, the defendant entered into a Profit Sharing Agreement with the plaintiff ("the Profit Sharing Agreement"). Clause 5.1 provides that the Profit Sharing Agreement forms part of the employment contract between the parties. Clause 6(a) further provides that :

"6. After Termination of Employment

On the termination of the employee's employment hereunder howsoever occasioned:

a) The Employee shall not directly or indirectly on his own account or as agent partner director or employee of any other person, including a limited company:

i) for the period of 6 months next following such termination solicit or transact real estate business in respect of the sale and purchase or leasing of properties in any part of Hong Kong, Kowloon and the New Territories from or with any of the persons who had been within the period of 6 months immediately preceding the date of such termination customers of The Company.

ii) for the period of 6 months next following such termination within Hong Kong, Kowloon and the New Territories engage or be interested or concerned whether directly or indirectly in those activities (other activities not being subject to this prohibition) of any business of the kind carried on by The Company and which competes therewith, which activities concern acting as estate agent in business transactions of the types and in the areas handled by the zone or zones in The Company to which The Employee was assigned during the period of 6 months immediately preceding the date of the termination of his employment with The Company.

b) ....

c) ...."

("the 2nd Covenant).

5. It is common ground that after he left the plaintiff's employment, the defendant joined Centaline Property Agency Limited ("Centaline"), one of the leading estate agents in Hong Kong and a keen competitor of the plaintiff. Since 23 March 2001, the defendant worked in the Sunshine City Branch of Centaline, which is in the Ma On Shan district.

6. On 7 April 2001, the plaintiff commenced these proceedings against the defendant claiming for an injunction to restrain him from acting in breach of the 1st Covenant and also for damages for breach of contract and of the 1st Covenant in particular. The defendant had filed a Defence and a Counterclaim claiming for outstanding commission payment, salary in arrears and payment for annual leave. The Reply and Defence to Counterclaim had also been served. On 24 April 2001, the plaintiff took out the present application for interim injunction.

The issues

7. The present application raises four issues :

(1) What are the relevant principles to be adopted? In particular, whether the strength of the plaintiff's case should be considered;

(2) whether the 1st Covenant had been replaced or superseded by the 2nd Covenant;

(3) whether the 1st Covenant is an unreasonable restraint of trade so that it is unenforceable; and

(4) whether the plaintiff has repudiated the employment contract with the defendant and, if so, whether this will prevent the plaintiff from relying on the 1st Covenant.

I shall deal with them in turns.

The applicable principles

8. The plaintiff's argument is that the principles in American Cyanamid Co v. Ethicon Ltd [1975] AC 796 should be applied to the present application such that the court needs only be satisfied that there is a serious question to be tried. The defendant on the other hand argues that this is an appropriate case for the court to go further to consider the plaintiff's prospects of succeeding at the trial in view of the fact that the six months period under the 1st Covenant will most probably expire before the trial comes on.

9. I accept that, generally speaking, the principles of the American Cyanamid case are applicable to cases of interlocutory injunctions in restraint of trade in as much as they apply to other cases of interlocutory injunction : Lawrence David Ltd v. Ashton [1991] 1 All ER 385. In the present case, however, it is plain that the six months period of restraint will have expired before the action is tried. This being the case, the granting or refusal of the interlocutory injunction will effectively dispose of the action in that it is very probable that the parties may not proceed further with the case after the interlocutory stage. In such circumstances, it is proper that the court should have regard to the prospects of the plaintiff succeeding in the action : NWL Ltd v. Woods [1979] 1 WLR 1294, Lansing Linde Ltd v. Kerr [1991] 1 All ER 418. 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 : Lansing Linde Ltd v. Kerr at p.258c. It is with these principles in mind that I now turn to deal with the other issues raised, which go to the strength or otherwise of the plaintiff's claim.

The relevant covenant

10. The plaintiff's claim is founded on the 1st Covenant. In opposing the present application, the defendant argues that the 1st Covenant has been replaced or superseded by the 2nd Covenant, which is broader in terms.

11. It is true that, overall speaking, that the 2nd Covenant is wider than the 1st Covenant in terms of the geographical limits and the activities restrained, but that does not necessarily lead to the conclusion that the 2nd Covenant had superseded the 1st Covenant. There is, in the first place, nothing in the Profit Sharing Agreement to the effect that it is to override or supersede the existing employment contract between the parties. On the contrary, clause 5.1 of the Profit Sharing Agreement stipulates that it forms part of the employment contract between the parties. Secondly, the 1st and 2nd Covenants are not necessarily incompatible with each other. For one thing, it appears that the 1st Covenant, by referring to "such termination", is intended to govern the types of termination set out in the Letter of Employment, namely termination by the plaintiff on account of the defendant's breach of the covenants set out in the Letter of Employment or by either party giving notice of termination. The 2nd Covenant, on the other hand, refers to termination "howsoever occasioned". It will therefore apply to other forms of termination, for example, termination by the defendant on account of the plaintiff's breach. Further as Mr Wong for the plaintiff rightly pointed out, the 2nd Covenant is in some respects narrower than the 1st Covenant. Clause 6(a)(i), for instance, only relates to customers who were the plaintiff's customers within the six months before termination. Clause 6(a)(ii) is confined to business in competition with the plaintiff. The two covenants are therefore capable of co-existence and can be seen as complementing each other.

12. Even if I were to agree with the defendant that because the 2nd Covenant is wider and broader in its terms and scope, it will have the effect of precluding the existence of the 1st Covenant, it does not necessarily follow that the 1st Covenant had been superseded and cannot be relied upon by the plaintiff. Putting the defendant's case at its highest, the Profit Sharing Agreement amounts to a variation of the employment contract subsisting between the parties as at 1 February 2000. It is the defendant's contention that the 2nd Covenant is an unreasonable restraint of trade so that it is unenforceable. It is not in dispute that a restraint of trade clause which is unreasonable is unenforceable in a court of law and is thereby considered void : Megul Steamship Company v. McGregor Gow & Co. [1892] AC 25 at p.39. Where an agreement to vary a contract fails to take effect, then the parties remain to be governed by the original contract. Hence if the 2nd Covenant is unenforceable and therefore void, then the parties' position remains to be governed by the 1st Covenant. It will not, as the defendant contends, have the effect of discharging the 1st Covenant. The plaintiff thus stands a good chance of resisting the agreement that the 2nd Covenant had superseded and discharged the 1st Covenant.

Reasonableness of the 1st Covenant

13. The defendant also argues the 1st Covenant is an unreasonable restraint and should not be enforced. In my view, the 1st Covenant is in no way a wide covenant. On the contrary, it is fairly limited in scope in that :

(1) the period of restraint is only for six months;

(2) the geographical limit is confined to Ma On Shan district; and

(3) the activities restrained are limited to sale and purchase and leasing of residential properties.

I also have no difficulty agreeing with the submission that the plaintiff has a legitimate business interests to protect. Information relating to identities of customers, properties available for sale and letting and the asking prices of such properties are vital assets of any real estate agency. Similarly the preservation of a stable workforce is also of paramount importance to a business like that of the plaintiff, which relies heavily on personal contacts between the agents and the customers as well as on the cultivation and maintenance of good customer relationship.

14. The defendant has sought to argue that there is little or no evidence as to the defendant having enticed the plaintiff's customers and employees. In my view that is not relevant to whether the covenant is reasonable. The strength or otherwise of the evidence is relevant only as to whether the defendant has acted in breach of the 1st Covenant. The reasonableness or otherwise of a restraint covenant is to be judged as at the time of the making of the contract : per Simon Brown LJ in Rock Refrigeration Ltd v. Jones [1997] 1 All ER 1 at 8c. I consider that the plaintiff does have a good case in this regard.

Repudiation

15. The thrust of the defendant's pleaded defence is that the employment contract had been repudiated by the plaintiff and that the defendant, in acceptance of such repudiation, terminated the employment orally on 8 March 2001. The defendant further argues that the termination has released the defendant from the 1st Covenant. The defendant relies on three matters as contending that the plaintiff had repudiated the contract. Firstly, it is said that the plaintiff had failed to pay to the defendant a 10% commission on the sale of properties developed by Henderson Real Estate Agency Limited and Sino Real Estate Agency Limited within 15 days from the receipt of the commission by the plaintiff or at all. Secondly, the defendant says that the plaintiff failed to pay to him and his subordinates special bonus in relation to the development called Baycrest before the Chinese New Year in 2001. Thirdly, the defendant relies on the plaintiff's late payment of cash rebates to its customers. For the last two matters, the defendant contends that these amount to breach of the implied term that the plaintiff should not act to destroy the relationship of confidence and trust between employer and employee.

16. There is no dispute that the defendant was entitled to the 10% commission and that the defendant and his subordinates were entitled to receive a special bonus on the Baycrest development. The payment of cash rebates by the plaintiff to its customers is also not in issue. What are in dispute is the method of computation of the 10% commission and the time for payments of these commission, bonus and cash rebates. It is to be borne in mind that the defendant bears the burden of making good this allegation of repudiation. In this regard, there are considerable difficulties in the defendant's case as it now stands.

17. In relation to the 10% commission payment, the evidence is unclear as to what the defendant's case on the method for computation is. It is also unclear as to the basis for the 15 days' time limit for effecting payment. The defendant has pleaded in the defence, and stated in his affirmation that the commission should be paid within 15 days from the receipt of the commission by the plaintiff, but there is no indication as to whether this is as a result of an express or implied term of the employment contract. It is however plain that there is no such provision in the Letter of Employment or the 1997 letter of appointment or the Profit Sharing Agreement. The plaintiff, on the other hand, refers to the method of calculating commission under the Profit Sharing Agreement as illustrating that it was not possible or practicable to have a 15 days' time limit for effecting commission payment. The defendant then filed a supplementary affirmation to deal with the Profit Sharing Agreement. Yet it was only in the course of Mr Chan's submissions that it became apparent that the defendant's case is that the 10% commission payment was not governed by the Profit Sharing Agreement. Despite that, it remains unclear as to the method of computation contended by the defendant and also the basis relied upon for saying that payment had to be made within 15 days.

18. As for the special bonus, the defendant's complaint is only that the payment was late. The defendant's case is that it was payable before Chinese New Year on about 20 January 2001 but was only paid on 6 February 2001, a delay of less than three weeks. Again, it is unclear from the pleading and the affirmation as to the legal basis for the averment that it should be paid before Chinese New Year. The ambiguity is fatal as far as this part of the defence goes since the complaint is late payment and not non-payment.

19. Turning to the cash rebates, the defendant's case is that the plaintiff's failure to observe the contractual obligations owed to its customers had placed the defendant in an impossible position in that he could not honestly defend the plaintiff against the complaints of the customers. The defendant argues that this in turn damaged the relationship of trust and confidence between employer and employee such that the plaintiff was in breach of the implied term of the employment contract. While I accept that it is implied in an employment contract that an employer should not do anything to destroy the relationship of trust and confidence, I have difficulty accepting that an employer, in failing or refusing to honour its payment obligations to its customers, will invariably be in breach of the said implied term. It seems to me that there is a quantum leap in this argument.

20. Even if it is a case of termination by repudiation, it is not unarguable that the 1st Covenant will survive the termination. It is common ground that it used to be thought that in the case of a termination by repudiatory breach, the parties will be released from all future obligations under the contract so that an employee who accepts the repudiation is discharged from the obligations under a restraint covenant : General Billposting Co. Ltd v. Atkinson [1909] AC 118(HL). The law of contract in this regard has since developed and more recent cases have held that provisions in contract may survive termination as a result of repudiatory breach : Heyman v. Darwins Ltd [1942] AC 356 and Photo Productions Ltd v. Securicor Transport Ltd [1980] AC 827. The proposition that a restraint covenant in an employment contract cannot survive termination as a result of repudiatory breach has therefore been subject to doubt : see Philips LJ's comment (obiter) in Rock Refrigeration Ltd v. Jones and Seward Refrigeration Ltd at pp.18g-20e. Mr Chan seeks to distinguish the cases of Heyman and Photo Productions Ltd on the basis that the clauses in the two cases concern responsibility for or resolution of disputes arising from breaches that had occurred at the time of termination whereas a restraint covenant involves a purely future obligation : Brearley & Bloch, Employment Covenants and Confidential Information : Law, Practice and Technique, (2nd Edn.) para.8.22. Such a distinction, however, overlooks the fact an exemption clause, for instance, can also give rise to post-termination obligations. In my view, the law as to the effect of a restraint covenant upon termination of the employment contract by reason of a repudiatory breach is far form settled and clear-cut. On the contrary, it is arguable that the principle in General Billposting Co. Ltd should no longer be upheld having regard to the development since the Photo Productions Ltd case.

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 subject to fortification of the undertaking as to damages, a matter that I shall next deal with.

Fortification of undertaking as to damages

22. The defendant has made repeated attacks on the plaintiff's financial position both in the context of repudiation and in relation to the balance of convenience. The plaintiff denies the allegations that it is financially unsound, but has adduced no accounts or other material to demonstrate its financial strength. Nevertheless in the course of Mr Wong's reply submissions, an offer was made to fortify the undertaking by making a payment into court. Previously, the plaintiff has offered in the affirmation to provide fortification by way of a bank guarantee. Given the extent of the defendant's attack on the plaintiff's financial position, the lack of evidence on this aspect, and the possible loss that the defendant may suffer during the remaining three and a half months of the restraint period, I consider that it is an appropriate case to order fortification. A fair sum will be $350,000, which is approximately half of the defendant's aggregate earnings for the one year immediately preceding the termination of his employment with the plaintiff. This amount is to be paid into court within three days from the date of the order and be kept in an interest-bearing account.

Conclusion

23. The orders I made are as follows :

(1) The defendant, whether as employee, or directly or indirectly, or on his own account or as partner of director of any other person including but not limited to Centaline Property Agency Limited, be restrained from transacting or carrying on any estate agency business in respect of the sale and purchase and/or leasing of residential properties in the Ma On Shan region until judgment in this action or until further order but not after the expiration of six months period commencing from 8 March 2001.

(2) The defendant, whether acting himself or his servants or agents or any of them or otherwise howsoever be restrained from using directly or indirectly any information supplied by the plaintiff to the defendant during or in the course of the defendant's employment with the plaintiff concerning the residential properties available for sale and letting in Ma On Shan region until judgment in this action or until further order.

(3) The plaintiff to pay into court within three days of the date of this order the sum of $350,000 as fortification of its undertaking as to damages that may be suffered by the defendant as a result of the injunction granted herein.

(4) Costs of this application be in the cause.