XCHRX VITE LTD. v. CHIU OI FAN, FANNY AND OTHERS

HCA 8148/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8148 OF 2000

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REASONS FOR DECISION

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INTRODUCTION

1. The Plaintiff brings this action against the 6 Defendants complaining that:-

(1) the 1st to 5th Defendants repudiated their employment contracts with the Plaintiff by resigning:-

(a) in the case of the 1st and 2nd Defendants, without sufficient prior notice;

(b) in the case of the 3rd to 5th Defendants, without serving out the remainder of their respective fixed terms of employment;

(2) the 1st to 5th Defendants breached their duty of fidelity and good faith in the course of their employment by:-

(a) making use of the Plaintiff's office facilities to prepare for the setting up of a competing business;

(b) unlawfully making use of confidential information belonging to the Plaintiff;

(c) enticing the Plaintiff's employees to breach their employment contracts with the Plaintiff;

(d) wrongfully conspiring to injure the Plaintiff.

It appears that the conspiracy claim (at (d) above) is based on the various alleged wrong-doings set out above.

2. The Plaintiff operates a business of "professional financial printing services", that is, the business of design, typesetting, translation, colour separation and printing company documents such as annual reports, initial public offer prospectuses, financial transaction circulars and corporate brochures. It appears to be common ground that there is a small and highly specialised and competitive market in Hong Kong for such kind of business. Both the number of competing businesses as well as the number of potential customers are small. The customers are mainly the 400 or so listed companies in Hong Kong.

3. The 1st to 5th Defendants were the Plaintiff's former employees working in the marketing department (save for the 2nd Defendant). The Plaintiff complains, among other things, that:-

(1) on 12 July 2000, the 1st to 5th Defendants purported to terminate their employment contracts without prior notice;

(2) since about April 2000, the 1st and 2nd Defendants commenced to form the 6th Defendant before their "resignation";

(3) the Plaintiff received anonymous emails from 17 May 2000 to July 2000 informing it that the Defendants committed the aforesaid wrongful acts.

4. On 14 August 2000, the Plaintiff applied on an ex parte basis for (and obtained) an injunction order that the 1st to 5th Defendants be restrained from:-

(1) directly or indirectly engaging in the business of typesetting for any of the Plaintiff's customers to whom the 1st to 5th Defendants had provided services as the Plaintiff's employees;

(2) directly or indirectly inducing the Plaintiff's employees who were employed by the Plaintiff during the 12-month term prior to 12 July 2000;

(3) directly or indirectly dealing through the 6th Defendant with any of the Plaintiff's current customers who were the Plaintiff's customers when the 1st to 5th Defendants were employed by the Plaintiff.

Further, there was an injunction order that all the 6 Defendants be restrained from using confidential information belonging to the Plaintiff. There are other consequential relief granted in the ex parte order such as disclosure requirements. These require the Defendants to forthwith disclose various information.

5. The "confidential information" involved in this action was set out in para. 30 to 31 of the first affirmation of Tang Yiu Kwan, Quincy dated 12 August 2000 used in the ex parte application. It is said to be information regarding the identity of customers, their contact person, details of their requirements; (unspecified) confidential information provided by them, privacy information, marketing strategy, technology and business methods. It is alleged that these were contained on (inter alia) the Plaintiff's quotations to customers, the customers' previous annual reports and customer database.

6. The Defendants filed evidence prior to today's hearing in effect denying their wrong-doings. While accepting that they resigned from the Plaintiff without prior notice, the Defendants said that offers had been made prior to the ex parte application to pay the Plaintiff wages in lieu of notice. The Defendants claimed that although set-up work regarding the 6th Defendant was made at a time before the 1st and 2nd Defendants' resignation, that was in preparation of the setting up of the 6th Defendant's business which was only commenced after the Defendants have resigned. The Defendants flatly denied having taken away or used any confidential information belonging to the Plaintiff. The other alleged wrong-doings are in effect also denied.

7. At the end of the hearing on 18 August 2000, I discharged the ex parte order and dismissed the Plaintiff's summons. The following are the reasons for doing so.

THE EX PARTE ORDER

8. It is fair to say that the issues raised in this action are hotly disputed. In these circumstances, Mr Chiu for the Defendants complains that there was no valid reason for the Plaintiff to have applied for an injunction order on an ex parte basis. There was no urgency nor was there any need for secrecy. The relief sought was not the Mareva or Anton Pillor types of order. He asked the court to discharge the ex parte order for that reason as well as on the ground that there has been material non-disclosure.

9. Mr Reyes for the Plaintiff refers to the Supreme Court Practice 1990, Vol. 1, para. 29/1A/21:-

"Generally, an injunction will be granted ex parte only in cases of emergency or, as r. 1 puts it, in cases of 'urgency', and it must be shown that there are strong grounds to justify the application being made ex parte ... because the very fact of giving notice may precipitate the action which the application is designed to prevent ..."

Mr Reyes accepts that there was no emergency in the sense that the application could not await a hearing (either ex parte on notice or inter partes). He argues, however, that giving notice to the Defendants might defeat the very purpose of the application. This is because the Defendants may attempt to secure as many orders from the Plaintiff's customers between the time of service of the summons and the time of the inter partes hearing, and it would be difficult for the Plaintiff to quantify the amount of damages which may be caused by such acts.

10. With respect, I do not agree. Even if, as Mr Reyes suggests, the Defendants attempt to do so, such would only be relevant to the issue of "balance of convenience" but not the issue of "a serious question to be tried". I do not find that the courts will have any difficulty in depriving any defendant of such "tactical" advantage. Such acts may indeed be evidence that an interim injunction is necessary to maintain the parties' status quo at the time of the service of the summons.

11. For the above reasons, I do not consider that the Plaintiff has been able to show strong grounds to justify the application for an ex parte order.

12. Further, one of the grounds advanced by the Plaintiff in this action is an alleged misuse/disclosure of the Plaintiff's confidential information. The part of the ex parte order dealing with this point is para. 2 which provides:-

"The Defendants be restrained from using or disclosing any confidential information acquired by the 1st to 5th Defendants or any of them while employed by the Plaintiff, in particular:-

(1) the identity of the Plaintiff's customers;

(2) the contact details of the Plaintiff's customers;

(3) the special requirements of the Plaintiff's customers;

(4) pricing information provided by customers to the Plaintiff; and

(5) the Plaintiff's pricing information and marketing strategy (including details of special arrangements with customers)."

13. It is trite law that the form of an interlocutory injunction order should be precise:-

"...an injunction [which] simply [restrains] use of the Plaintiff's secrets will be too vague. It is of the essence of a claim against an employee for misuse of confidential information that the employer should specify with particularity the ... confidential information to which he lays claim and the terms of any injunction must also be capable of being framed in sufficient detail to enable the defendant to know exactly what information he is not free to use on behalf of his new employer....":

The Supreme Court Practice, Vol. 1, para. 29/1A/31.

14. The information alleged to be confidential in this action could also be matters forming part of the general knowledge of the Defendants gained in the course of their previous employment with the Plaintiff. The "confidential information" contended for by the Plaintiff was data compiled by it and contained in the form of (a) customer files, (b) the Plaintiff's quotations and (c) the Plaintiff's customers lists. I do not find that para. 2 of the ex parte order sufficiently identified the ambit of the injunction. I further consider that it is incumbent upon the Plaintiff to specify in the ex parte order precisely what information the Defendants are enjoined from using or disclosing. A failure by the Plaintiff to do so is at least a factor to be taken into account in deciding whether to discharge the order.

15. For the above reasons, and without the need to consider whether the Plaintiff was also guilty of material non-disclosure, I find that the ex parte order should be discharged.

THE PLAINTIFF'S INTER PARTES SUMMONS

16. The Plaintiff argues that whether the ex parte order is discharged, an inter partes order (in the same, or similar, terms as the ex parte order) should be granted in its favour.

(1) "Serious Question to be Tried"

17. The Plaintiff puts forth 2 cases in support of this issue: (a) an alleged repudiation by the Defendants of their employment contracts with the Plaintiff; (b) an alleged misuse/disclosure of the Plaintiff's confidential information. These will be dealt with in turn under separate sub-headings.

(1)(a) Alleged Breach of Employment Contracts

18. The 1st to 5th Defendants entered into written employment contracts with the Plaintiff. The employment contracts (in so far as their terms are relevant) can be divided into 2 types: those entered into by the 1st and 2nd Defendants and those by the 3rd to 5th Defendants.

19. Article 6 of the employment contracts entered into by the 1st and 2nd Defendants provides:-

"The length of notice for termination of employment with the [Plaintiff] is three months."

20. The employment contracts entered into by the 3rd to 5th Defendants were for fixed periods and Article 6 thereof provides:-

"... either parties [sic] may terminate that notice [sic] [contract] in writing to the other party upon payment to the other party an amount equal to the aggregate salary of the employer for the remaining term of employment."

21. The Plaintiff complains that no advance notice of resignation was given by the Defendants. Instead, on 12 July 2000, the 1st to 5th Defendants left behind letters of resignation and left their employment immediately. The Plaintiff contends that that was a repudiation of their employment contracts and the Plaintiff was entitled to, and did, refuse to accept such repudiation.

22. The Plaintiff argues (and this is undisputed by the Defendants) that there is an implied duty of fidelity and good faith on an employee's part such that he should not compete with his employer or to misuse/disclose his employer's information for a competing business. The dispute between the parties relates to 2 matters:-

(1) whether the employment contracts were already terminated despite the Plaintiff's refusal to accept/recognise the Defendants' resignation;

(2) even if the employment contracts were terminated, whether the said implied duty continues after their termination.

(1)(a)(i) Were the Employment Contracts Terminated?

23. As regards point (1), Mr Reyes relies on the following cases:-

(a) Thomas Marshall v. Guinle [1979] 1 Ch. 227 at 243A-G;

(b) Evening Standard Ltd v. Henderson [1987] 1 CR 589 at 594A-D and 595 B-C.

He submits that these authorities show that an employment contract will not be terminated by an employee's repudiation which has not been accepted by the employer.

24. Mr Chiu responds by referring to s. 7(1) of the Employment Ordinance, Cap. 57 which stipulates that:-

"(1) Subject to section 33(4B), (4BA) and (4BB), either party to a contract of employment may at any time terminate the contract without notice by agreeing to pay to the other party a sum equal to the amount of wages which would have accrued to the employee during the period of notice required by section 6." (emphasis supplied).

He argues that no matter what the position is with regard to steps needed for effectively terminating an employment contract at common law, in Hong Kong the position is made clear by statute by s. 7(1) of Cap. 57. He further refers to the following evidence in this action:-

(1) the affirmation of So Kan Ming dated 18 August 2000. He is the manager of a C&A Management Ltd and deposed that he had offered to pay wages in lieu of notice to the Plaintiff on the Defendants' behalf but that offer was refused by the Plaintiff. He also deposed the Plaintiff refused to inform him the necessary deductible sums in order to work out the outstanding amounts (if any) payable to the Plaintiff;

(2) contemporaneous correspondence in support of (1) above including letters from C&A Management Ltd dated 12 July 2000, 27 July 2000 and 15 August 2000 respectively;

(3) a direct payment of various sums exceeding $2 million on 15 August 2000 into the Plaintiff's bank account.

25. Mr Reyes has not argued that s. 7(1) of Cap. 57 has no application to this action (this will be discussed further below). However, he disputes that the evidence adduced by the Defendants is sufficient to establish this part of their defence.

26. At one stage, Mr Reyes indicates that the affirmation of So Kang Ming is unaccepted/disputed by the Plaintiff. However, I reminded him that it was the Plaintiff's election (after I have expressly given the party the choice of adjourning the hearing of the Plaintiff's inter partes summons to a later date) to proceed with its inter partes summons. After having been so reminded, Mr Reyes fairly accepts that the Plaintiff is bound by the consequences of such an election and no longer relies on this argument.

27. The parties have not referred to the 2 Hong Kong cases on the meaning of s. 7(1) of Cap. 57:-

(a) Yip Wan Chiu v. Magnificent Industrial Ltd [1974] HKLR 183;

(b) Archer v. Hong Kong Channel Ltd [1998] 4 HKC 637.

28. In Yip Wan Chiu, the (then) Full Court was unanimous in their dismissal of the appeal. However, there was a divergence of opinion as to the true meaning of s. 6(1) of Cap. 57 (which, for present purposes, is the equivalent of the current s. 7(1) of Cap. 57). The majority view was that the words "agreeing to pay" mean a binding agreement to pay made between the relevant parties: See pp. 191 to 192 and 196. The Full Court said:-

" The option offered by section 6 is however one of mutual agreement. I understand that section to mean that the parties must agree through the ordinary process of offer and acceptance before the option can become effective. ... where no agreement has been reached and no notice has been given and the employee is compelled to leave his employer's service, and assuming that he diligently searches for equivalent employment and fails to find the same immediately, he may then sue his employer for the whole value of the damage occasioned by the breach. For in that case there has been a breach ... Although I was at first drawn to the idea that the words "by agreeing to pay" in section 6 were to be understood as meaning: "by offering to pay"; or "by undertaking to pay", yet on reflection it seems to me that such an interpretation raises a very real difficulty. Where the offer has been accepted no problem arises for then there is an agreement on which the defaulting party may be sued. But where, for example, the employee refuses to accept the offer or undertaking and later, being perhaps unable to find other employment, wishes to pursue a claim against the employer he may find himself barred out of any approach to the Courts either by way of the statute or of the Common Law. ... the answer would be that there could be no action for breach since the contract had been lawfully terminated at the instant when the employer had done all that the Ordinance required of him by merely offering or undertaking to pay."

(emphasis supplied).

29. The Yip Wan Chiu case was referred to in the Court of Final Appeal decision of Archer. Because of the facts therein, the Court of Final Appeal did not find it necessary to resolve the difference between the majority view and the dissenting view over this point in Yip Wan Chiu but Litton PJ referred to the dissenting judgment in the following passage:-

"Counsel for the respondent ... relies on Yip Wan Chiu v Magnificent Industrial Ltd [1974] HKLR 183 where the majority (McMullin and Pickering JJ) held that under the then s 6(1) of the Employment Ordinance (the equivalent, for practical purposes, of our s 7) the words 'agreeing to pay' did not simply mean 'offering to pay' or 'undertaking to pay', and unless the other party accepted the offer no termination of a contract of employment under that section could take effect. Huggins J dissented on this issue. He said:

It would not have required a statute to lay down that a contract of employment, like any other contract, can be terminated by mutual consent and I find nothing in the section which is indicative of a situation involving such consent."

(at p. 642).

30. Since no argument has been raised on the applicability of s. 7(1) of Cap. 57 (as a matter of law), it is strictly unnecessary to consider this point. However, I shall make the following observations for the sake of completeness:-

(a) the natural and ordinary meaning of s. 7(1) of Cap. 57 supports the dissenting view in Yip Wan Chiu. The draftsman used the phrase "either party" therein rather than "parties" to a contract of employment;

(b) the reasoning adopted by the majority view in Yip Wan Chiu is inconsistent with the need to enact s. 8 of Cap. 57:-

"Nothing in Section. ...... 7 shall be taken ..... to prevent either party to a contract of employment from waiving, at the time notice is required to be given ..., his right to notice or to payment in lieu of notice." (emphasis supplied)

The same phrase "either party to a contract of employment" appears in both s. 7(1) and s. 8 of Cap. 57. It is trite law that a "waiver" in relation to contracts can be effected by one of the contracting parties. If the said phrase in s. 8 is intended to refer to one of the contracting parties, there is no reason to think that the same phrase in s. 7(1) should have a different meaning;

(c) S. 7(1) of Cap. 57 is subject to s. 33(4B), (4BA) and (4BB). In short, these latter provisions prohibit an employer from terminating a contract of employment under s. 7 during a "sick leave" period. These provisions are thus a prohibition against a unilateral termination of an employment contract by an employer while an employee is entitled to "sick leave". If the prohibition referred to (by way of exception) in s. 7(1) deals with the unilateral termination of employment contracts, this indicates that the remainder of s. 7(1) must also be intended to cover the unilateral termination of these contracts. For this reason, the meaning of s. 7(1) advocated for by the dissenting judgment in Yip Wan Chiu is more likely.

31. By reason of the above observations, I consider that Mr Reyes is correct in not arguing the applicability of s. 7(1) of Cap. 57. However, with respect to him, I disagree with his argument that the evidence filed by the Defendants is insufficient to establish that they have effectively terminated their employment contracts pursuant to that provision (either in July or August 2000).

(1)(a)(ii) Whether the Duty of Fidelity etc. Continues after the Contracts were Terminated

32. The Plaintiff submits that even if the employment contracts were effectively terminated, the Defendants' duty of fidelity and good faith still continues. The Plaintiff relies on the following 2 cases in support of this submission:-

(a) the Thomas Marshall case;

(b) GSL Engineering Ltd v. Yau Hon-yin [1991] 1 HKLR 199.

33. None of the Defendants was the Plaintiff's director. Mr Chiu drew my attention to the 2 different types of duty set out in Thomas Marshall:-

(1) a servant's implied duty of fidelity and good faith: see pp. 244 B-E, 247 D-E and 249 D-E;

(2) the fiduciary duty of a director of a company: see pp. 245 B-E and 247 D-E.

Further, he says the GSL case involved a defendant who was the plaintiff's former managing director.

34. Mr Chiu contends that the 2 cases relied on by the Plaintiff only decided that a director's duty to the company can extend beyond his term of directorship but there is no legal principle which establishes that the implied duty of fidelity and good faith should extend beyond the life of an employment contract (as opposed to a director's duty). He further contends that the learned Judge in Thomas Marshall in fact doubted whether the director's duty should warrant the grant of the interlocutory injunction sought (at p. 247 thereof).

35. I agree with Mr Chiu's contentions and conclude that there is no serious question to be tried over this point.

(1)(a)(iii) The "Springboard" Theory

36. The Plaintiff argues that the so-called "springboard" theory applies to this action. This is summarized in the following passage in Terrapin Ltd v. Builders' Supply Co. (Hayes) Ltd [1967] R.P.C. 375 cited in Toulson & Phipps: Confidentiality (1986) at p. 57:

"As I understand it, the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public. The brochures are certainly not equivalent to the publication of the plans, specifications, other technical information and know-how. The dismantling of a unit might enable a person to proceed without plans or specifications, or other technical information, but not, I think, without some of the know-how, and certainly not without taking the trouble to dismantle. I think it is broadly true to say that a member of the public to whom the confidential information had not been imparted would still have to prepare plans and specifications. He would probably have to construct a prototype, and he would certainly have to conduct tests. Therefore, the possessor of the confidential information still has a long start over any member of the public ... It is, in my view, inherent in the principle upon which the Saltman case rests that the possessor of such information must be placed under a special disability in the field of competition in order to ensure that he does not get an unfair start ... ."

(emphasis supplied).

37. The basis on which the Plaintiff advances this argument is that there is evidence the Defendants started to prepare to set up a competing business (that is, the 6th Defendant) before the employment contracts were (as contended for by the Defendants) terminated on either 12 July or 15 August 2000. The Plaintiff submits it is irrelevant whether the Defendants did so during their spare time, or whether it was limited to renting and decorating the office premises (and did not involve soliciting or diverting the Plaintiff's business). With respect, I disagree. Mr Reyes (rightly) concedes if employees merely discuss plans to set up their own competing business during their spare time while being employed, this would not amount to a breach of the implied duties such as would justify the application of the "springboard" theory. I do not consider that the preparatory work undertaken by the Defendants was much different from the acts conceded by the Plaintiff to be insufficient to justify the use of the "springboard" theory. Alternatively, even if these acts should raise a serious question to be tried as to whether they justify the application of this theory, I do not find that they warrant the grant of the injunction sought herein as a matter of discretion.

(1)(b) The Alleged Misuse/Disclosure of Confidential Information

38. As stated above (under the heading "The Ex parte Order"), I consider para. 2 of the ex parte order does not sufficiently identify the alleged confidential information misused/disclosed by the Defendants. It appears that Mr Reyes accepts this and he indicates that the Plaintiff is prepared to accept any order which the court may grant so that it refers to confidential information as contained in the Plaintiff's "customer files, quotations and customer lists".

39. I have doubts as to whether in fact these documents contain "confidential information" as that phrase is understood in this area of the law. The evidence in support of this part of the Plaintiff's case is set out in para. 31 of the affirmation of Quincy Tang dated 12 August 2000 which only stated this:-

"This information was contained (inter alia) on the Plaintiff's quotations to customers, customers' annual reports published in previous years and customer database."

40. It is however unnecessary for me to resolve this aspect of this application because although the Defendants deny they have misused/disclosed the Plaintiff's confidential information, they are willing through counsel to undertake not to do so on an entirely without prejudice basis (both as to liability and as to costs of this application).

41. The Plaintiff is willing to accept this undertaking in lieu of an injunction. For this reason, no order was made on the basis of this part of the application.

(2) "Balance of Convenience"

42. By reason of the matters aforesaid, there is no need to consider this issue.

(3) Conclusion

43. For the above reasons, the Plaintiff's inter partes summons is dismissed.

COSTS

44. The Plaintiff does not oppose the Defendants' application for costs of the ex parte application and order. Those costs are to be paid to the Defendants in any event.

45. The Defendants also ask for the costs of the Plaintiff's inter partes summons. The Plaintiff asks for those costs to be in the cause. At the end of the hearing, the parties agree that I should make a costs order nisi in this "Reasons for Decision".

46. I agree with the Plaintiff's argument to the extent that the costs of the summons (excluding the costs of the hearing on 18 August 2000) should be in the cause. This is because 2 undertakings were given to Court by the Defendants which were accepted by the Plaintiff in lieu of an injunction. I understand this was agreed to by the parties on a "no admission of liability" basis.

47. However, I consider that different considerations apply to the costs of the hearing on 18 August 2000. Most (if not all) of the hearing time was spent by the parties on arguments over which the Defendants turn out (in essence) to be the winning parties. For this reason, I consider my discretion should be exercised in adopting the usual rule that costs should follow the event. The costs of the 18 August 2000 hearing are to be paid to the Defendants in any event.

48. In order to assist the taxation of costs, those costs should include the costs of the lawyers' court attendance on that day as well as the preparatory work of the Defendants' solicitors, such as legal research and skeleton submissions (if any) (but not costs for work such as the preparation of affirmations or related conferences (which are costs of the summons)). The preparatory work of counsel should have been included in counsel's brief.