FIMAT HONG KONG LTD v. TUBIANA FREDERIC ANTOINE AND OTHERS

HCA 268/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 268 OF 2006

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J U D G M E N T

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Background:

1.  These proceedings arise following the departure of Mr Tubiana and Mr Heidelberg from the employment of Fimat HK to Link Securities HK. 

2.  Fimat HK has issued a writ seeking an injunction against Mr Tubiana and Mr Heidelberg enforcing post termination restrictions in their contracts of employment.  Fimat HK further seek an injunction against Link Securities HK, restraining them from employing Mr Tubiana and Mr Heidelberg in circumstances in breach of the contracts of employment.  An interlocutory injunction is now sought pending trial of the writ for permanent injunctions.

3.  I bear in mind that the evidence at this stage is necessarily incomplete, and that it would be wrong to try now to resolve conflicts of evidence.  The facts that I state are those that are not in dispute.

The Parties:

4.  Fimat HK is an international equity broker, as is Link Securities HK.  Fimat HK operates as a brokerage in listed shares, financial derivative contracts such as interest rate, bond and currency, equity swap, options, forward swaps as well as commodity contracts.  Fimat HK is a part of the Fimat Group, the headquarters of which is Fimat International Banque S.A. based in Paris France.

5.  Fimat HK has been in business for over 12 years in Hong Kong.  Fimat HK conducts business on all major stock exchanges by electronic trading systems and by telephone.  Mr Philippe Eme, the Deputy Managing Director, and Head of Sales and Marketing, Asia, for Fimat HK, says that Fimat HK’s main business line is in the execution, broking, and clearing of transactions conducted on those exchanges and also brokerage of “Over The Counter Equity Derivatives”, (OTC), i.e. brokerage of non-listed financial products and instruments.  He says further that such transactions are conducted on these exchanges via offices in the world’s leading financial markets including Hong Kong, Tokyo, London, Paris and New York.  The particular markets with which these proceedings are concerned are the Hong Kong, Korean, Taiwanese and Indian stock exchanges.  The injunction is sought in relation to specified varieties of financial instruments.

6.  Link Securities HK began trading in Hong Kong in October 2005, and while a direct competitor of Fimat HK, it operates only in one of the markets covered by Fimat HK, that of professional equities, (shares/stock and shares/stock derivatives).  Link Securities HK is part of the Link Group, the parent company of which is based in London and New York.  Mr Charles Davies, CEO of Link Securities HK says that the Link Group employs more than 100 equity derivatives brokers, of whom nine, including Mr Tubiana and Mr Heidelberg, are employed by Link HK.

7.  There is a dispute as to precisely how to measure the size of an international equity broker, but that dispute need not be resolved now.  There are different ways of measuring the size of such companies.  The affidavits as they stand do not presently compare like with like, and it is not always clear whether figures given refer to the Hong Kong company, or to an international group.  It is sufficient to say that both are substantial players in the international equity brokerage system.

The contracts of employment:

8.  As is common in this industry both Mr Tubiana and Mr Heidelberg were employed on contracts which contained post-termination restrictions.  The relevant restrictions are conveniently called non-solicitation, non-dealing, and non-competition restrictions.  These are contained in para 7(b), (c) and (d) respectively of their contracts, and are in all relevant respects identical.  The contracts provide:

Post-termination obligations

(b)   You shall not for a period of 12 months after the termination of your employment (without the previous consent in writing of the Company) and whether on your own account or for any other person, firm or company directly or indirectly in connection with any business similar to or in competition with the business of the Company solicit or endeavour to entice away from the Company any person, firm or company (a) who or which in the 2 years prior to the end of your employment shall have been a customer of or in the habit of dealing with the Company and (b) with whom or which you had personal dealings in the course of your employment in the 2 years prior to the end of your employment.

(c)    You shall not for a period of 12 months after the termination of your employment (without the previous consent in writing of the Company) and whether on your own account or for any other person, firm or company directly or indirectly in connection with any business similar to or in competition with the business of the Company do any business with, accept orders from or have any business dealings with any person, firm or company (a) who or which in the 2 years prior to the end of your employment shall have been a customer of or in the habit of dealing with the Company and (b) with whom or which you had personal dealings in the course of your employment in the 2 years prior to the end of your employment.

(d)     You shall not for a period of 12 months after the termination of your employment and within the Hong Kong (without the previous consent in writing of the Company) directly or indirectly be engaged, concerned or interested, (whether as principal, servant, agent, consultant or otherwise) in any trade or business which is in competition with any trade or business being carried on by the Company at the end of your employment or during a period of 2 years prior to the end of your employment and with which you were concerned in the course of your employment.

9.  Both Mr Tubiana and Mr Heidelberg are French speakers.  Mr Tubiana has been working with Fimat Group since 1996, initially in Japan where he worked until 2000, then moving to work with Fimat HK for two to three months.  He then left Fimat HK, returning to Europe, rejoining Fimat’s Paris head office in 2003, and coming back to Fimat HK on 5 May 2004.  Mr Heidelberg was recruited to work for Fimat HK in June 2004, to replace a senior broker who had left.  It was important to Fimat HK that both Mr Tubiana and Mr Heidelberg were French speakers.

10.  Whilst employed by Fimat HK, Mr Tubiana and Mr Heidelberg were members of a team of brokers working on the Hong Kong office desk of the company, trading in a variety of financial products.  These products are primarily OTC products, although they also dealt with other products.  Mr Tubiana and Mr Heidelberg were specifically recruited as French speaking members of the desk as the customers they were expected to deal with, from large international banks and financial institutions, mostly dealt in the French language.  It may not be without significance that Link Securities HK have a significant number of SFC licence holders whose names appear to be French.

The resignation of Mr Tubiana and Mr Heidelberg:

11.  Until 6 December 2005, Fimat HK were apparently not aware of any dissatisfaction on the part of Mr Tubiana or Mr Heidelberg.  On 6 December 2005, both tendered their resignation by letter to Fimat HK.  Discussions took place between them and the management of Fimat HK, in the course of which both were informed that their bonus for the 2005 year would be in the order of HK$1 million each.  At that time Mr Tubiana was on a salary of HK$80,000 per month, plus bonus, and Mr Heidelberg was on a salary of HK$75,000 per month plus bonus.  Notwithstanding the indication of a substantial bonus both Mr Tubiana and Mr Heidelberg were determined to leave Fimat HK.  Both sought from Fimat HK a release from the notice period contained in their contracts of employment, (one month), but that was declined.

12.  Their employment formally terminated pursuant to the notice they had given, on 6 January 2005, after which both attended at the Link Securities HK office.  Between that day and 27 January 2006, Mr Tubiana and Mr Heidelberg received training from Link Securities HK.  By 13 January 2006, (application having been made to the SFC prior to their departure from Fimat HK), Mr Tubiana and Mr Heidelberg were licensed by the SFC as registered brokers with Link Securities HK.

13.  The precise date upon which each began trading at Link Securities HK is irrelevant for the purpose of this application.  There is no doubt that by the time of the issue of the writ and the summons for interlocutory relief, both were trading actively as brokers at Link Securities HK, apparently in direct contravention of the terms of the post termination restrictions in their contracts with Fimat HK.

14.  There is no doubt, and it was not disputed by Mr Tubiana and Mr Heidelberg or Link Securities HK, that in negotiating their new contracts with Link Securities HK prior to their resignation from Fimat HK, both Mr Tubiana and Mr Heidelberg were in breach of their duty of fidelity to Fimat HK.  Equally, there is no doubt that Link Securities HK, in recruiting Mr Tubiana and Mr Heidelberg in the manner they did, were procuring a breach of contract on the part of Mr Tubiana and Mr Heidelberg.  Mr Whitehead SC, cautions me, correctly, that the focus of these proceedings is upon the enforceability of the contractual provisions in restraint of trade, an issue which stands alone, the resolution of which is not in any way affected by the fact that Mr Tubiana and Mr Heidelberg may be in breach of contract with Fimat HK.

The requirement on Fimat HK to replace Mr Tubiana and Mr Heidelberg:

15.  There is no doubt that Fimat HK will have to replace Mr Tubiana and Mr Heidelberg.  At the time of their departure they were described as valued members of the Fimat HK desk, each earning a significant salary and with the promise of a very substantial bonus.  The extent of the bonus offered, albeit on their resignation, is by itself an indication that they were highly valued by Fimat HK.

16.  At the trial there will be an issue as to whether they fall within the description of a “senior broker”, as that expression was used in TSF Derivatives Ltd v Morgan [2005] IRLR 246, [2004] EWHC 3181 QB, at para 14.  It is certainly arguable, on the basis of the salaries they were paid at the time of departure, when those salaries are compared with those in Morgan, that they were then senior brokers.  But the evidence is not such that this issue may be resolved now.

17.  Mr Tubiana and Mr Heidelberg were two members of a total of seven staff members working on the Hong Kong trading desk.  Mr Eme described them as “important members” of the team.  It is not clear from his affidavit whether all of its trading desk members are registered brokers.  What is clear is that the loss of two registered brokers from a team of seven must be significant.  There can be no suggestion that there is no need to replace Mr Tubiana and Mr Heidelberg.

The time to replace a broker:

18.  In his affidavit, dealing with the issue of the replacement of Mr Tubiana and Mr Heidelberg, Mr Eme said that it took time to locate and recruit good quality, experienced brokers as replacements, or to train able but inexperienced brokers, and, in both situations, to familiarise them with the local markets.  It was necessary to bear in mind, he said, post termination restrictions on persons recruited from other companies.  His evidence was that:

“To lawfully recruit, employ, licence and train a broker to be able to start performing the job will take at least 5-8 months and potentially longer.  Only at that stage can the employee even really start to create a replacement connection with the client, but is still likely to be learning the job and becoming familiar with local markets.” 

In a subsequent affidavit he said:

“…in general the earliest an expatriate employee can realistically be recruited and start work is about three months.  This is even without any long notice period, or post termination restriction being applicable.”

He said that two possible candidates have been located but are unlikely to be able to join Fimat HK for approximately 2 months

19.  By way of comparison, it is Mr Tubiana’s evidence, accepted by Mr Eme, that it took 3 months between first contact from Hong Kong with Mr Tubiana, who was then with Fimat HK in Paris, and his commencement of work in Hong Kong.  Relevant factors include SFC registration and immigration requirements.  In this latter respect the evidence of Mr Davies, CEO of Link securities, that immigration visas can be secured for brokers within as little as two weeks has not been disputed by Mr Eme.

20.  The direct and crucial dispute between the parties is the length of time that it takes to replace an employee.  Mr Eme in his evidence says “5-8 months and potentially longer”.  Mr Davies says “8 weeks/14 weeks depending on the individual”.

21.  The post termination restriction in Fimat HK contracts is 12 months.  The post termination restriction period in Link Securities HK contracts is eight weeks following the termination date.  However if an employee gives notice of termination, 12 weeks notice is required, and Link Securities HK has the right during this period to place the employee on “garden leave”, during the period of notice, in which case the employee will not be required to continue duties with Link Securities HK, but is not yet free from the contract to go to another employer.  The contract provides that the restriction period is reduced by any period of garden leave that immediately proceeds actual termination.

22.  The length of time that it would take to replace persons such as Mr Tubiana and Mr Heidelberg is directly relevant to the reasonableness of the length of the post termination restriction imposed by the contracts of employment.  I shall consider that matter in further detail when considering the submissions in opposition to interlocutory relief.

The relevant legal principles:

23.  There was no dispute at all between counsel as to the relevant legal principles in relation to interlocutory injunctions.  This is a case where it is necessary to apply American Cyanamid principles.  A post termination restriction in a contract is a covenant in restraint of trade. There was equally no dispute between counsel as to the appropriate principles to be applied in the consideration of such covenants.  The general rule is set out in Chitty on Contracts, 29^th Ed, Vol 1 para 16-075 in these terms:

“All covenants in restraint of trade are prima facie unenforceable at common law and are enforceable only if they are reasonable with reference to the interests of the parties concerned and of the public.  Unless the unreasonable part can be severed by the removal of either part or the whole of the covenant in question, its inclusion renders the covenant or the entire contract unenforceable.”

A serious question to be tried:

24.  In the context of covenants in restraint of trade, in order to determine whether there is a serious question to be tried, the court must first decide what the covenant means when properly construed.  There was no dispute between the parties in this respect as the post termination restrictions are not ambiguous, but plain in their meaning, and that the post termination restrictions constituted a covenant in restraint of trade.

25.  Next the court must consider whether the employer, Fimat HK, has shown on the evidence that it has legitimate business interests requiring protection in relation to the employee’s employment.  In this respect Mr Burns submitted that Fimat HK’s legitimate interest in protecting its customer connections and in protecting confidential information constituted appropriate interests justifying the post termination restraints.  It is clear from the most recent reported decision in England on restraints of trade, TSF Derivatives,that the submission is correct.  I am satisfied that there is a very strong argument that the evidence does establish that legitimate interest exists in Fimat HK.

26.  Mr Whitehead argued that what Fimat HK sought to protect could be described purely and simply as competition.  The business relationship between the employer and employee in TSF Derivatives is to all intents and purposes identical to that in the present case.  In that case the employee conceded that the employer, TSF Derivatives, had legitimate business interests that it was entitled to protect.  While not yet conceded in the present case, the argument that the post termination restrictions are not simply to protect against competition, but protect Fimat HK’s legitimate business interests, is strong and may well result in such a concession.

The adequacy of damages; Fimat HK:

27.  Mr Burns submitted that damages would not be an adequate remedy should injunctive relief not be granted at this stage.  Should injunctive relief not be granted, Mr Tubiana and Mr Heidelberg will be free to continue employment with Link Securities HK, and to make such contact as they wish with those persons with whom they dealt whilst employed by Fimat HK.  On the evidence there were 19 banks, investment banks and financial institutions with whom they dealt.  Although the evidence establishes that their access to brokerage commission rates and settlement fees was limited, being only on a case-by-case basis for the particular products they dealt with, they have that information and would be free to use it in any new dealings with those 19 entities in their capacity as Link Securities HK employees.

28.  Mr Eme says that as transactions are of the result of a team effort, it would be difficult to determine subsequently which trades were undertaken by Mr Tubiana and Mr Heidelberg while at Link Securities HK that would otherwise have been in breach of the post termination restrictions.  While I have no doubt that Mr Whitehead is right in his submission that the brokers carefully track their trades to protect their bonus entitlement, that alone in my view is not sufficient to ensure that if Mr Tubiana and Mr Heidelberg were free to trade at Link Securities HK, and subsequently be found to be acting in breach of the post termination restrictions, the assessment of damages would be a simple matter.  It would necessarily be complex and difficult.

29.  The issue of the adequacy of damages was considered by Deputy Judge To in Axa China Region Insurance Co Ltd & Ors v Pacific Century Insurance Co Ltd  & Ors [2003] 3 HKC 1 at 45-49.  That was a case involving insurance agents, whose income is dependent upon commission, and who, like brokers in this case, may be expected to keep careful track of their transactions.  A number of difficulties of quantification of damages were identified, many of which are equally applicable to this case.

30.  Mr Whitehead contended that the evidence fell short of establishing any reduction in either broking activity or the level of revenue from customers dealt with by Mr Tubiana and Mr Heidelberg.  It is right that precise particulars are not yet forthcoming, but the clear inference to be drawn from the evidence as it stands is that it is inevitable that Mr Tubiana and Mr Heidelberg would seek to contact persons in the banks they have previously dealt with in order to attract their business to Link Securities HK.  Any such action must necessarily result in a loss of revenue to Fimat HK.

31.  The submission made by Mr Burns that Mr Tubiana and Mr Heidelberg may not be in a position to satisfy any award of damages was satisfactorily countered by Mr Whitehead’s statement on behalf of Link Securities HK that the company would meet any damages awarded against Mr Tubiana and Mr Heidelberg.

Adequacy of damages; Mr Tubiana and Mr Heidelberg:

32.  If the interlocutory restraint is granted a restriction will be placed upon Mr Tubiana and Mr Heidelberg in their ability to work.  I am satisfied however that they will not be entirely prevented from working, as the relief sought is limited in terms to specific markets, specific products in those markets, and specific customers.  Both are free, notwithstanding the restraint sought to deal in other markets and other products.

33.  That said, it would undoubtedly be an onerous restriction upon Mr Tubiana and Mr Heidelberg to take them entirely out of those specific markets and customers, and require them to rely upon a claim in damages, should the post termination restrictions be found to be unreasonable and consequently unenforceable.  There is no doubt as to the ability of Fimat HK to meet their undertaking in damages.  But damages, whilst compensating in money terms for the loss of income and bonus would not be adequate to compensate for the removal of a broker from the market in circumstances where that removal might well lead to the loss of significant business contacts that have been previously, legitimately, established.

34.  I conclude that damages would not be an adequate remedy for either Fimat HK or for Mr Tubiana and Mr Heidelberg.

The balance of convenience:

35.  It is accordingly necessary to consider the balance of convenience.  In this respect Mr Whitehead invited me to “bite the bullet” and to face and determine what will be the crucial issue in the trial, whether or not the term of 12 months in the post termination restrictions is reasonable.

36.  His submission was that having regard to the level and status in the broking world of Mr Tubiana and Mr Heidelberg, it was now so clear that a term of 12 months was unreasonable that on the balance of probabilities there was no prospect of success on the part of Fimat HK.  He placed strong emphasis on the decision in TFS Derivatives in which a contractual post termination restraint of six months, (in practical terms three months), was upheld.  His submission was that the broker in that case was so clearly more senior than Mr Tubiana and Mr Heidelberg, that on the balance of probabilities a post termination restraint of 12 months in relation to more junior brokers must inevitably fail.

37.  I am unable to say at the present time that it is more likely than not that the post termination restraints will be found to be unreasonable.  The matter is finely balanced.  In the first case the relevant status of the brokers has yet to be determined.  It is crucial that that be determined at the time the restraint was made because reasonable necessity is to be assessed from the perspective of reasonable persons in the position of the parties as at the date of the contract, having regard to the contractual provisions as a whole and to the factual matrix in which the contract would then realistically have been expected to apply: see TSF Derivatives para 38.  But it is also necessary to look at the restraint at the time enforcement is sought.

38.  While it is right that in TSF Derivatives a term of six months was upheld, there is nothing in the decision to indicate whether or not a term of 12 months would not have been upheld.  The decision is not an authority for the proposition that 12 months is too long.  I must have regard too, to the decision in Ho Wing-cheong (t/a Hong Leong Securities) & Ors v Margot & Anor [1991] 1 HKLR 245, when Godfrey J. said in relation to a post termination restraint:

“But I have no doubt that in Hong Kong in 1985 the plaintiffs did not need a restriction of three years to achieve their legitimate objects.  One year would have been ample to break the connection of Mr Margot with the plaintiff's clients ‘for a sufficient period to let the next man obtained the connection’: see Middleton v Brown (1878) 47 LJ (NS) 411 per Jessel MR at 413.”

Superficially at least, there are significant parallels on the factual circumstances in the present case and that of Margot.  That a post termination restriction of one year would have been upheld in that case something I cannot put aside at this stage of the proceedings.

39.  An important factor in determining the reasonableness of the restraint is the length of time that it will take to replace a departing employee.  I have dealt with the evidence as it stands in paras 15-17 above.  Even having regard to the guidance given by the authorities, that evidence falls a long way short of being sufficient for me to be able to determine now that Fimat HK have no reasonable prospect of success in supporting a 12 months restriction.

A speedy trial:

40.  Both parties sought a speedy trial.  Whether or not a speedy trial can be granted is a significant factor to be taken into account in the balance in determining whether or not an interlocutory injunction ought to issue.  In the present case I have consulted with the listing officer and a trial over a period of four days can be allocated commencing Tuesday 18 April 2006, a little under two months away.  In any terms that is a speedy trial.  The time, two months, between interlocutory restraint and trial is the same as in TSF Derivatives.

41.  Given that the relevant factors appear to be evenly balanced, and a speedy trial is available, I am of the view that the appropriate course is to preserve the status quo, which in this case is to give effect to the post termination restrictions on an interlocutory basis.

The “similar to” provision:

42.  It is clear from TFS Derivatives that were Fimat HK to succeed in upholding the restrictions, the present terms of the restrictions, including as they do the words “similar to” in the non-solicitation and non-dealing clauses, cl 7(b) & 7(c), by reason of the inclusion of those words, are too wide and are unreasonable.  It is open to the court where a discreet phrase within a particular covenant is held to be unreasonable, individual words or phrases may be severed provided that what is left makes independent sense without the need to modify the wording and the sense of the contract is not changed: see TFS Derivatives para 40.  For the same reasons as was decided in TSF Derivatives, I am satisfied that the words “similar to” can and ought to be severed from the clauses.

43.  There will accordingly be an order in terms of the plaintiff's summons, as amended at the hearing, save that:

(a)   in place of the expression “for a period of 12 months after 6 January 2006” where it appears in paragraphs 1, 2, 3 and 4, the words “until further order of the court” shall be substituted;

(b)   the words “similar to or” where they appear in paragraphs 1 & 2 shall be deleted;

(c)   there will be no order in terms of paragraph 4(3).

Speedy trial and timetable directions:

44.  The trial of the substantive matter is set down for a period of four days commencing on Tuesday 18 April 2006.  I make the following directions by way of timetable for preparation for the trial:

1. Fimat HK must file the statement of claim no later than 4.00 p.m. on Wednesday 1 March 2006;

2. Mr Tubiana, Mr Heidelberg and Link Securities HK must file their statements of defence no later than 4.00 p.m. on Wednesday 8 March 2006;

3. Fimat HK must file any reply to the statements of defence no later than 4.00 p.m. on Friday  10 March 2006;

4. The parties must exchange lists of documents by way of discovery no later than 4.00 p.m. on Wednesday 17 March 2006.  Inspection of documents must take place no later than 4.00 p.m. on Wednesday 24 March 2006;

5. Witness statements must be exchanged on or before 4.00 p.m. on Friday 7 April 2006.

6. Leave is reserved to apply.

45.  Should any party wish to apply in relation to these directions I will hear counsel or solicitors, in Chambers, at short notice.  The parties should bear in mind that I will be on leave from Monday 20 March 2006 until Thursday 13 April 2006, inclusive.  Leave is reserved to apply in respect of the terms of the order.  All questions of costs are reserved.