SEA WAVE HAIR DESING (W.T.S.) LTD v. CHOY KWONG YIU AND OTHERS

HEADNOTE

Contract - employment - restrictive covenant - infant

Practice - injunction - material non-disclosure - balance of convenience

No. A2743 of 1992

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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The Facts

1. The Plaintiff is an operator of hair salons. It has four branches. The branch in question here is      situate at 1st Floor, Imperial Building, Canton Road, Tsimshatsui.

2. By a written contract dated 4th March 1988 ("the 1st Contract"), the Plaintiff employed the 1st Defendant as a hair stylist. The 1st Defendant then was 20 1/2 years old. By a similar contract dated 4st October 1989 ("the 2nd Contract"), the Plaintiff employed the 2nd Defendant as a hair stylist. He was then 16 1/2 years old.

    Clause 17 of the 1st Contract reads as follows :-

    "within the period of one year after the termination of contract, the employee hereby agrees not to be a hair stylist either full time or part time in Hair Salon, Barber shop or beauthy centre where (sic) is being within one (sic) district of the following addrees.

    1/F., Imperial Building, 54-56 Canton road, TST, Kowloon."

    Clause 17 of the 2nd Contract reads as follows :-

    "within the period of one year after the termination of contract, the employee hereby agrees not to be a hair stylist either full time or part time in any hair salon, barber shop or beauty centre or directly or indirectly be connected with any business which involves both male and female hair dressing, beauty treatment, manicuring, pedicuring and other associated services similar to the business of the [Plaintiff] either as a proprietor, partner, director, employee or consultant to the said businesses within the radius of 1 mile from the branch, subsidiary company, agency or joint venture of the [Plaintiff] at which the [2nd Defendant] is last employed."

    There is a 3rd Defendant to this action but he is not contesting the Plaintiff.'s application for injunction.

3. The 1st and 2nd Defendants resigned from the Plaintiff's employment with effect from 17th and 16th March 1992 respectively. They immediately took up employment at a hair salon at Shop 6B, Energy Plaza, Granville Road, Tsimshatsui East. It is not in dispute that the Defendants' new place of work is within one mile radius of the Plaintiff's branch at Imperial Building.

4. The alleged proprietor of the new hair salon is the father of the 2nd Defendant.

5. By this action, the Plaintiff claims, inter alia, an injunction to restrain the Defendants from acting in breach of clause 17 of the respective employment contracts. An ex parte injunction order was obtained on 16th April 1992. This is the return date of the inter partes summons for the continuation of that ex parte injunction order.

6. Mr. Lin on behalf of the 1st and 2nd Defendants sought to discharge the ex parte injunction order on the ground of material non-disclosure. He also argued that an inter partes interlocutory injunction should not be granted in that there is no serious question to be tried and in any event, the balance of convenience is in favour of not granting the injunction.

Material Non-Disclosure

7. The material facts Mr. Lin argues that the Plaintiff had failed to disclose are :-

(a)     The fact that both the 1st and 2nd Defendants were infants at the time of the contracts;

(b)     The financial position of the Plaintiff;

(c)     The details as to the Plaintiff's branches, subsidiary companies, agencies and joint ventures.

8. I was not cited the case of Brink's Mat Ltd. V. Elcombe [1988] 1 W.L.R. 1350, C.A. which in my view set out succintly the established principles relating to the discharge of ex parte orders on the ground of material non-disclosure. The duty of a plaintiff or an ex parte applicant is to make full and frank disclosure of all material facts to the court. What is material is for the court to decide. At p. 1357C, Ralph Gibson L.J. said :-

"(6) Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application. The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or that its relevance was not perceived, is an important consideration but not decisive by reason of the duty on the applicant to make all proper inquiries and to give careful consideration to the case being presented.

(7) Finally, it 'is not for every omission that the injunction will be automatically discharged. A locus poenitentiae may sometimes be afforded :' per Lord Denning M.R. in Bank Mellat V. Nikpour [1985] F.S.R. 87, 90. The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms.

9. 'When the whole of the facts, including that of the original non-disclosure, are before [the court, it] may well grant ..... a second injunction if the original non disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed :' per Glidewell L.J. in Lloyds Bowmaker Ltd. V. Birtannia Arrow Holdings Plc.

10. There is no evidence here that the omission to disclose the respective age of the 1st and 2nd Defendants was intentional. The question is : is this a fact material to the weighing operation of the learned judge at the ex parte hearing.

11. In my view, the age of the Defendants is not a material fact even at the inter partes stage let alone the ex parte stage. It is accepted that the two contracts are merely voidable. These contracts were never avoided by the Defendants when they attained majority (see e.g. Cornwall V. Hawkins 41 L.J. (Ch) 435) or at all. The contracts were terminated.

12. Quite apart from the question whether it is possible to avoid a contract after it had come to an end, the contracts in question are prima facie beneficial to the Defendants. In Evans V. Ware (1892] 3 Ch. 503 where the plaintiff there was trying to restrain the infant defendant from being employed as a milk carrier within a radius of five miles for two years after leaving the former's employment, North J. said at p. 504 -

    "it is said that such a contract is not for the benefit of an infant who signs it. That argument is founded on a confusion of terms. It may be that such a contract is not so much for the benefit of the infant as a contract for employment would be without any restriction on his part; but that does not prevent a contract by which he gets employment, coupled with a bargain on his part that he will not compete after his service ceases, from being beneficial to the infant. I am of opinion that such a contract is very beneficial. The reason is that, if he is able to make such a bargain, he obtains the means of earning or continuing to earn his livelihood; he gets the employment which he would not otherwise obtain, or continue to have without being subject to the restriction."

13. Mr. Lin relies on Sir W.C. Leng & Co. Ltd. V. Andrews [1909] 1 Ch. 763, C.A. But that was a decision on the trial of the action. At p. 769, Cozens-Hardy M.R. said :-

    "It must be shown that the contract which he entered into with the plaintiff company was not merely a contract under which he improved himself in his business, under which he got a salary which I assume to have been adequate and reasonable, but it must be shown by the plaintiffs that it was a contract which contained clauses, and only clauses, that are usual and customary in an employment of this nature. I desire to adopt on this point the language of Lush J. in Leslie V. Fitzpatrick (3 Q.B.D. 229 at 232), where he says : 'If such provisions were at the time common to labour contracts, or were in the then condition of trade such as the master was reasonably justified in imposing as a just measure of protection to himself, and if the wages were a fair compensation for the services of the youth, the contract is binding, inasmuch as it was beneficial to him by securing to him permanent employment, and the means of maintaining himself. If on the other hand advantage was taken of him to exact conditions which are unusual and unreasonable, or to secure his services for wages which were unreasonably low and inadequate, the infant is not bound."'

14. There is evidence before me that the restrictive covenants here are quite common. But matters relating to trade practices and the like must be matters to be investigated at the trial. The fact that the Defendants were infants at the time of the 1st and 2nd Contracts is hence not a material fact even at this stage of the proceedings.

15. If I am wrong in my conclusion that the omission is not a material non-disclosure, there is still the question whether on the evidence before me now a fresh injunction order ought to be made. This is a question I shall return later.

16. The next material fact alleged to have been omitted is the financial position of the Plaintiff. I cannot accept this submission. The Plaintiff adduced evidence in Mr. Angus Lam's first affirmation that the Plaintiff had 4 branches in Hong Kong; that it spent substantial amount of money advertising for and expanding their business and clientele; and that the Plaintiff did not need to rely on experienced hair stylists to bring in new customers. In my view, this is quite sufficient for the purposes of the ex parte hearing. In coming to this conclusion, I bear in mind what Macdougall J. (as he then was) said in Citibank N.A. V. Express Ship Management Services Ltd. [1987] H.K.L.R. 1184, C.A. at p. 1191J :-

    "It would be unfortunate if it were to be thought that in laying down the very sensible and necessary principles concerning disclosure of all material facts, the courts have intended to give active encouragement to undeserving defendants to search ingeniously for facts which a plaintiff might innocently have failed to disclose, in the hope that a judge may consider them to be material and so discharge the injunction. Common sense must prevail. The heavy burden cast on a plaintiff must not be allowed to become so onerous as to be intolerable.?"

17. As to the third alleged Plaintiff's branches, subsidiary the plaintiff's branches, subsidiary companies, agencies and joint ventures, I simply do not regard any such evidence to be material even at the inter partes stage. If the Defendants were right in this contention, a plaintiff would have to reveal all their detail financial information at the outset of the proceedings whether or not the injunction is to be resisted or resisted on the ground of balance of convenience. Such a burden will be so onerous to be intolerable.

18. I reject all of the Defendants' arguments on material non-disclosure.

Serious Question to be Tried

19. Mr. Lin argues that there is no question to be tried in that the restrictive covenants relied on by the Plaintiff is far too wide in ambit. He relies on Fellows & Sons V. Fisher [1976] 1 Q.B. 122, C.A. and Susan Buchanan V. Janesville Ltd. [1981] H.K.L.R. 700, C.A. as authorities in support of the proposition that at the interlocutory stage the court is entitled to construe a written document and come to a view as to the relative strength of the parties' respective cases and decide on the matter accordingly.

20. That may be so in the most straightforward of the cases and I have in mind the interesting argument advanced in Alfred Dunhill Ltd. V. Sunoptic [1979] F.S.R. 337, C.A. which, as was the argument in Fellows & Sons V. Fisher [1976] 1 Q.B. 122, C.A., was based on Stratford & Sons Ltd. V. Lindley [1965] A.C. 269, H.L. However, the argument was not accepted in either Alfred Dunhill or Fellows V. Fisher. In both cases, the matter was decided on the balance of convenience although in the latter case, the Court of Appeal did comment that the defendant there was more likely to succeed.

21. Here, it is accepted that in order to succeed, the Plaintiff must show that the restrictive covenant is reasonable :-

(a)     in point of time;

(b)     as to the geographical area of its operation; and

(c)     as to the restraint it imposes on the employee in respect of the type of work in which he is not      permitted to engage.

22. In Buchanan V. Janesville Ltd. [1981] H.K.L.R. 700, the restrictive covenant there was also in relation to the employment of a hair stylist. It reads :-

    "At the termination of employment the employee agrees not to work in the Colony of Hong Kong as a hairdresser or in any capacity connected with hairdressing in competition with [the plaintiff there] for a period of one year."

23. The Hong Kong Court of Appeal while deciding that the clause was too wide both in respect of geographical area and the ambit of the restraint, held that the one year restraint was reasonable in time.

24. If so, I cannot see how the one year restraint in this case can be said to be unreasonable. As to the georgraphical area, it is said in relation to the case of the 1st Defendant that the district of Tsimshatsui is too wide. There is some evidence that "one district" in the clause concerning the lst Defendant meant one of the nineteeen constituencies in Hong Kong. That is a matter of extrinsic evidence should the trial judge decide that the clause is ambiguous or unclear on its terms. That is a matter for trial. In my view, at this stage, the clause is relatively clear. It means the same district as the Plaintiff's hair salon is in. I do not think the district of Tsimshatsui is too wide.

25. As to the type of activities restrained, the clause concerning the 1st Defendant simply reads "not to be a hair stylist either full time or part time in Hair Salon, Barber Shop or beauty centre". That is, the same capacity as that in which the 1st Defendant was previously employed by the Plaintiff. I do not think this restraint is too wide either.

26. The case of the 2nd Defendant is slightly different. The geographical area for the 2nd Defendant is reduced to one mile radius. If the district of Tsimshatsui is not unreasonably wide, then a fortiori a radius of one mile. The activities sought to be restrained, on the other hand, are restricted to "any business ..... similar to the business of [the Plaintiff] ......". So for example, unlike the Buchanan case, this clause will not prevent the 2nd Defendant from selling hairdressing lotion to other hairdressing salons and matters of the kind such as hairdressing equipment.

27. At this stage of the proceedings, I am not convinced nor prepared to say that the Plaintiff's claim is wholly unarguable. Put it another way, in my judgment, there is a serious question to be tried as to whether these clauses are reasonable and enforceable.

28. Then it is said that these clauses were designed solely to restrain competition and bad for that reason also. In my view, that is a matter for trial. There is evidence before me that suggests the Defendants were enticing customers of the Plaintiff away to their own salon. Furthermore, the Plaintiff has put in considerable evidence explaining why these clauses were important to its business and why they were inserted in the contracts. Mr. Lam also feared that unless these clauses were upheld, this case would actually encourage the existing hair stylists currently employed by the Plaintiff to leave its employment with the hope that they could do so with immunity. I am of the opinion that the Plaintiff has shown a prima facie case that the object of these clauses is more than merely to prevent the Defendants from competing per se with their previous employer. I shall leave this question to the trial judge to decide.

Balance of Convenience

29. I have already said that there is evidence which suggests that the Defendants had been enticing customers of the Plaintiff to go to their hair salon. In particular, there is an admission from the 2nd Defendant that the Defendants chose the present shop because "it was convenient for their previous regular clients". The loss complained of by the Plaintiff is therefore loss of business which is not all that easy to prove or quantify. The loss of the Plaintiff is not, however, irreparable or unquantifiable. If the Plaintiff is relying on misuse of confidential information then its position may be much stronger but the evidence on this at the moment is not all that clear cut.

30. If an award for damages is adequate remedy for the Plaintiff, there is no evidence that the Defendants are in any position to pay such damages. Indeed, the evidence is to the contrary. Both Defendants are very young in age and they claimed they had no interest in the hair salon they now work in. They are merely employees.

    on the other hand, the loss which will be suffered by the Defendants is purely their loss of salary in the meantime. Furthermore, the restraint is limited in time, in geographical area and in the activities sought to be restrained. The Defendants can no doubt easily attain alternative and comparable employment in some other district of Hong Kong. Indeed, if I were to grant the injunction asked for, I would have thought they have a duty to mitigate their loss by seeking alternative employment elsewhere.

31. The Plaintiff has adduced evidence to show that it is a large corporation with sufficient financial resources. As a matter of fact, Miss Chik offered to fortify the Plaintiff's undertaking as to damages by paying into Court a sum of $120,000. That, I think, removes any doubt as to the financial position of the Plaintiff.

32. Mr. Lin referred me to the well known passage in Vernon V. Universal Pulp Containers Ltd. (1980] F.S.R. 179 :-

    "It would be intolerable if the Cyanamid case was allowed to become a charter of success for all rich companies who seek interlocutory injunctions against poor companies in cases in which damages would be an adequate remedy, enabling them to obtain an injunction merely on showing that there is a serious question to be tried. ......... If the defendants are in a precarious financial state, the grant of an injunction against them to restrain them from carrying on the activity which they hope will restore them to prosperity may of itself drive them into insolvency and liquidation, and so leave the Plaintiffs in undisputed possession of the field. Accordingly, I think the Court has to be astute to prevent this sort of unfairness if this can be done without injury to the plaintiffs." (at p. 191)

33. That is not the situation here. The Defendants can earn their living just as easily outside the respective defined geographical areas. There is no question that they would be driven destitute.

    in these circumstances, it is my firm view that the balance of convenience lies in granting the injunction sought. All the other factors are either neutral or slightly in favour of the Plaintiff. For example, I regard the question of merits as slightly favouring the Plaintiff.

34. Having come to the view that in all the circumstances I should exercise my discretion to grant the injunction prayed for - albeit in some slightly amended form which I shall come to in a moment - I come back to the question of material non-disclosure. If the Plaintiff were guilty of withholding a material fact, namely, the respective age of the Defendants when the contracts were made (which I have held it was not) and that the ex parte order should be set aside on that ground, I consider the facts are such that I should in any event exercise my discretion to grant an inter partes interlocutory injunction at this stage.

35. I appreciate I should only exercise my discretion sparingly see Balcombe L.J. in the Brink's Mat case [1988] 1 W.L.R. 1350, C.A. at p. 1358F. I give particular weight, however, to the following factors :-

(i)     The omission is not suggested to be intentional;

(ii)     The 1st Defendant was only technically an infant at the time of contract. The maturity age has in fact since then been lowered to 18;

(iii)     Neither Defendants sought to avoid the contract prior to its termination;

(iv)     Prima facie, the contracts are beneficial to the Defendants;

(v)     Even with the disclosure of the omitted facts, an injunction could still properly be granted by the     learned judge. If I were him I would.

36. As to the wording of the injunction order, I think the injunction affecting the 1st Defendant should follow the language of clause 7 of the 1st Contract except that the geographical area should be restricted to the distirct of Tsimshatsui. I make an order in terms of paragraph (ii) of the Plaintiff's summons dated 21st April 1992 as regards the 2nd Defendant. I make no order as regards paragraphs (iii) and (iv) of the same summons. The injunctions are granted on the condition that the Plaintiff do fortify its undertaking as to damages by bringing into court within 7 days hereof the sum of HK$120,000. Such sum is to remain in court until trial. I make an order nisi that costs should be in the cause.