HO WING CHEONG AND OTHERS v. GRAHAM MARGOT AND ANOTHER

HEADNOTE

A firm of stock-brokers employed M. to manage its business. His contract of employment restricted him from working for any rival firm in Hong Kong for 3 years after the termination of his contract. M. entered into a number of transactions on behalf of the firm without its express authority, and subsequently left his employment with the firm to work for a rival stock-broker.

HELD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. These two actions, which I heard together, arise out of the employment by the Plaintiffs (carrying on business as stock-brokers under the name of "Hong Leong Securities Co."), of Graham Margot ("Mr. Margot") as Executive Director, and of Norman Ng ("Mr. Ng") as Finance and Administration Manager; and their subsequent defection (together with 16 other employees of the Plaintiffs) to another stockbroker, Sunshine Securities Company, in September 1986.

2. Mr. Margot is a Defendant in both actions. Mr. Ng is a co-defendant with Mr. Margot in one action and Mr. Margot's service company, B. I. S. Consultants Limited ("B.I.S."), is  Mr. Margot's co-defendant in the other action.

3. The first of the Defendants to come on the scene was Mr. Ng, a member of the Institute of Chartered Accountants of Ontario. By a letter dated 18th August 1983, the Plaintiffs offered Mr. Ng employment as Finance and Administration Manager as from 1st October 1983; and on 25th august 1983 Mr. Ng accepted that offer. His employment was terminable on one month's notice on either side or one month's salary in lieu of notice. His letter of offer (on note-paper headed "Hong Leong Securities Co.") was signed by Seow Lun Hoo, described as "Managing Director". The letter (to which I need not otherwise refer) provided that "Your other terms and conditions of employment will be in accordance with the Group's Rules and Regulations governing the Terms and Conditions of Employment or (sic) Employees". This is a reference to the contents of a Manual governing the operations of the Hong Leong Enterprises Limited Group of Companies, the non-banking division of Hong Leong Co. Ltd., of which the Plaintiffs' stock broking business forms part. The associated banking division is the Dao Heng Bank.

4. The version of the Manual produced in evidence was prepared sometime after Mr. Ng   joined the Plaintiffs but before Mr. Margot did so; nothing however turns on this. I will read Section A, the Introduction.

5. During the employments of Mr. Ng and Mr. Margot with the Plaintiffs, there were discussion at various times of possible amendments to the Manual, but nothing came of these discussions.

6. The Manual contains, as part of Section A, a management organisation chart for the non-banking division of the Hong Leong Enterprises Limited Group. It shows, as the Chairman of Hong Leong Enterprises Limited, one Quek Leng Chan; as Managing Director, Seow Lun Hoo (to whom I have already referred); and as Group Financial Controller, one Rick Chan. It discloses the existence of four operating divisions of the Group: trading, insurance, securities and deposit taking. I need not refer again to the first and last of these nor to the insurance division, save to note that the General Manager of the operating company in the insurance division, Hong Leong Insurance Company Limited, was Raymond Ho (the 1st Plaintiff in these actions).

7. I must refer in much more detail to the securities division. The umbrella company is Hong Leong Securities Limited, the 3rd Plaintiff in these actions, which was an administration company and not  itself an operating company. Under Hong Leong Securities Limited are two companies: A. Hong Leong Securities Co. and B. Hong Leong Fund Management Ltd. I need not further refer to B; A is the name under which the Plaintiffs' business is conducted. (The 1st Plaintiff, Raymond Ho, is the holder of the Plaintiffs' stock exchange seat; and the business is owned as to 2.2% by the 2nd Plaintiff, Hong Leong Securities (H.K.) Limited, and as to 97.8% by the 3rd Plaintiff.) The "box" in the chart, so far as it relates to the securities division, discloses that when this edition of the Manual was prepared the following (among others) were in post:

No provision is made for a "Managing Director", as such, of the securities division. The references throughout the Manual to the "Managing Director" are plainly intended to be references to the Managing Director of Hong Leong Enterprises Limited. The Manual spells out the duties of the Group's Managing Director and of the Group Financial Controller. It was the duty of the Managing Director (among other things) to be responsible for the management "of the group companies in Hong Leong Enterprises" and to "supervise the chief operating officers within the non-banking group"; it was also his duty "to take an over-view of the Group's operations, its organisation and management structure, and its control systems and procedures". It was the duty of the Group Financial Controller (among other things) to establish, review, update and monitor adherence to the Manual; to ensure that all monthly accounts and reports of the group companies were properly prepared; and to ensure that all documents and records were properly kept and that all statutory documents and returns were properly filed.

8. A whole section of the Manual (Section I J) is devoted to the operations of Hong Leong Securities Co. I will refer to this section as "the HLS Manual", and I will read the "Forward" (sic).

"HONG LEDNG SECURITIES CO

OPERATION MANUAL

F O R W A R D

Section

9. The reference in paragraph 9 of the "Forward" and elsewhere in the HLS Manual to the "Managing Director" must be read as a reference to the Group Managing Director who, in the organisation chart for Hong Leong Securities Co. contained in the HLS Manual, is set above the Executive Director. Beneath the Executive Director is the General Manager and beneath him (among others) is the Finance and Administration Manager. Section A of the HLS Manual contains detailed descriptions of the duties of (among others) the Executive Director and the Finance and Administration Manager, which I will read.

"SECTION A - DUTIES AND RESPONSIBILITIES

(C)    FINANCE &ADMINISTRATION MANAGER

10. Section B of the HLS Manual relates to the sales department. I need mention particularly only the requirement, specified in paragraph 5(1), that the name of the client must be clearly written on every dealing slip.

11. Section C of the HLS Manual relates to dealing policies and procedures. I must mention, in particular, paragraph 2.1:

"It is the company's policy not to take any position in share trading. We are stock/share brokers but not traders."

12. The remaining sections of the HLS Manual contain nothing to which (in the light of` the conclusions to which I have come) I need refer for the purposes of this judgment; but I should add,  for the sake of completeness, that a number of failures to observe their provisions was pleaded, and proved in evidence.

13. Between 1st October 1983, when as we have seen, Mr. Ng took up his employment with the Plaintiffs, and 1st October 1985, when, as we shall see, Mr. Margot took up his, the Plaintiffs went through some difficult times. Mr. Ng himself had done well enough. He   had received a number of increases of salary; and for the year 1985 he was awarded a bonus of $40,000, and was congratulated on his work performance for 1985, in recognition of his hard work and commitment to his job during that year: see the letter of 1st January 1986 addressed to Mr. Ng by Kwek Leng Hai, the younger brother of Quek Leng Chan to whom I have referred above, and a director of the 2nd  Plaintiff and of the 3rd Plaintiff.

14. During 1985 the Plaintiffs had lost a number of key staff, including Jake van der Kamp and Steven Brown, and had to a considerable extent lost the business, and the goodwill, of a number of its important clients, which had led to a considerable reduction of the Plaintiffs' brokerage income. Although the "Forward" to the HLS Manual had stated (as I have already pointed out): "Full compilation of the manual is likely to take some time, but the plan is to start off with the current regulations and policies and then build up the manual with a steady issue of other instructions" nothing had been achieved in this connection. Some proposals which had been advanced for amendments to the manual had come up against the opposition of Steven Brown and had not been proceeded with.The result seems to have been that the manual was put on the back burner so that, by 1st October 1985, nobody was paying any significant attention to its provisions. As I have said, nothing came of subsequent discussions about  the manual.

15. The Plaintiffs' reputation was not high and their business needed rebuilding. As a force on the stock-broking scene in Hong Kong, Hong Leong Securities Co. was not in a very good way.

16. In these circumstances, the Plaintiffs set about strengthening the staff. In particular they inserted an advertisement in the London "Financial Times for financial analysts. This advertisement was observed by Mr. Margot. He had been employed from June 1972 to June 1978 by Bisgood Bishop and Co., stock jobbers, as a Senior Dealer; from July 1978 to December 1982 by Buckmaster & Moore (Isle of Man) as a Fund Manager; from January 1983 to May 1984 by Nippon Kangyo Kakumaru (Europe) Limited, as Manager of the International Sales Department; and from June 1984 to July 1985 by Shearson Lehman American Express, as Senior Vice-President of their Far-Eastern Division. With this experience, Mr. Margot was not interested in a post with the Plaintiffs as a financial analyst; but he was disillusioned by the failure of his company to gain branch office status in Tokyo and was looking for a new career. He took the view that it was worth responding to the Plaintiffs' advertisement for the purpose of introducing himself to them to see if there might be any areas of mutual interest between them which would be worth exploring. On 5th August 1985, he responded to the advertisement accordingly, drawing attention to his curriculum vitae from which (he said) "you can see that I have gained considerable experience, particularly in the market making field".

17. On 15th August 1985 one Lillian Too, as Managing Director of Hong Leong Securities Limited, wrote to Mr. Margot in the following terms:

Dear Mr. Margot,

Thank you for your letter of 5th August, 1985 and the enclosed C.V. Based on your past work experiences, I am keen to have further discussions with you which could lead to a mutually interesting and rewarding relationship with our Group.

We are a Far East Group based in Malaysia and Singapore where we have diversified interests in property, finance, insurance, manufacturing and trading. In Hong Kong, we have a bank, an insurance company, two DTC's and a securities trading company" We are now interested in expanding our securities operation and are looking to employ a senior person such as yourself to assist in expanding the company. For the right candidate, we would be prepared to offer equity participation in addition to basic salary and participation in our Profit Sharing Scheme.

By now, you would have had a call from Ron Williams, who runs our London finance company. I have asked him to have a preliminary chat with you prior to arranging a meeting.

I look forward to taking the discussion a little further with you when I come to London in mid-September (16th & 17th September).

Thank you for writing to us and I look forward to meeting you."

18. Lillian Too did not add that as soon as the new man arrived she would cease to act, as since January 1985 she had acted, (on her appointment as Managing Director of Hong Leong Securities Limited) as the Manager of the operations of the Plaintiffs, and go off to become Managing Director of the Dao Heng Bank.

19. As a result of this interchange of letters Mr. Margot met Lillian Too in London. He had two meetings with Lillian Too. At one of these meetings, Quek Leng Chan was present; but it is common ground that he said little at the meeting. What was said at the meeting, by Lillian Too and by Mr. Margot, is of some importance'in resolving the issues which I have to decide, and it is unfortunate that the Plaintiffs were unable to call Lillian Too to give evidence. (I should here record that on 23rd February 1987, day 18 of the trial, the Plaintiffs sought to tender affidavit evidence from Lillian Too; but the contents of her affidavit were controversial, and the Defendants would have had no opportunity of cross-examining her upon it. Accordingly, I refused an application by the Plaintiffs for leave to read Lillian Too's affidavit; and I also refused a request subsequently made later the same day by the Plaintiffs to adjourn the trial to enable her to give evidence in person, since that application was not made until the trial was well under way and was made, in my judgment, much too late.)

20. The evidence of Quek Leng Chan about the meeting was that he told Mr. Margot, towards the end of the interview, that "the main thing was to build up a professional securities firm. He was to build up a professional securities firm with me." Mr. Margot was not told that he would have complete autonomy in managing the business of the Plaintiffs. It was explained to Mr. Margot that he would report to Lillian Too during the time when she was with the company, and would subsequently report to her successor, who was to be Kwek Leng Hai. Mr. Margot was made aware that Lillian Too was leaving. Even the Managing Driectors of each operating division of the Group did not  have complete autonomy.

21. Mr. Quek Leng Chan accepted in cross-examination that the search was for a senior person "to take over the. operation of the company". He accepted that Mr. Margot may have said that the traditional world of a stock-broking house was limited and had no future. He accepted that someone was needed with progressive views about the way the business should be run; but qualified his answer by making it clear that he did not believe that that should extend to speculation.

22. The evidence of Mr. Margot about his meeting with Lillian Too alone was that she asked him for his ideas and aspirations. He told her that retail broking at fixed commissions was finished. Brokers had to take what commission the institution would pay. He said that a brokerage firm would have to go into market making by taking positions on the market in Hong Kong or London, and by making a market in a number of stocks in London, quoting a two-way price for quantities of stock. He made it clear that he had to have a substantial degree of autonomy if he was to take over the Plaintiffs' business and expand it as he would wish to do. Lillian Too did not disagree.

23. He would be the Executive Director of Hong Leong Securities; but she gave him no precise description of the job. She said he would take over the running of the business from her and would report to Quek Leng Chan; she told Mr. Margot she herself reported directly to Quek Leng Chan.

24. Mr. Margot said that at the other meeting, with Lillian Too and Quek Leng Chan, they asked him what his ideas on stock-broking were; how he would expand the business; what areas he would go into; and other matters of this sort. He gave them his ideas. He made it quite clear one would need a large degree of autonomy if the business was to be expanded rapidly. Lillian Too agreed with what he was saying.

25. In the end Lillian Too offered Mr. Margot, while she was still in London, the job of Executive Director of Hong Leong Securities. He agreed to take it. There was no suggestion of a probationary period nor of any restriction to be imposed on Mr. Margot after the termination of his employment.

26. Mr. Margot also told me, and I accept, that as soon as he arrived Lillian Too left the company to him; there was no handing over period. She cleared out her safe and walked out of the office. She went off to manage the Dec Heng Bank and Kwek Leng Hai took over from her as group Managing Director. Mr. Margot met Kwek Leng Hai when the former arrived. Thereafter Kwek Leng Hai did not interfere with the daily management of the Plaintiffs' business.

27. To a considerable extent, the complaints made by the Plaintiffs against Mr. Margot in these proceedings (with which I shall deal first) are that he exceeded the powers conferred on him as Executive Director of the Plaintiffs. In reaching my conclusion as to whether or not these complaints are justified I take into account the contents of the HLS manual. It is unfortunate that when Mr. Margot was engaged the HLS manual appears to have played in practice an insignificant role in the conduct of the business of the Plaintiffs. Mr. Margot soon learned of its existence; he paid little or no attention to it.

28. In my judgment, he cannot be excused for having adopted this attitude. He knew or ought to have known what it contained and he cannot be heard to say that he was entitled to take no notice of it. It is a thousand pities that the Plaintiffs did not take early and vigorous steps (they did take some) to ensure compliance by Mr. Margot and all staff at all levels with the HLS Manual and did not ensure its updating, something they knew it badly needed. But this failures are not matters which Mr. Margot can pray in aid of his case that the HLS Manual was an unimportant document which he was at liberty to ignore. The HLS Manual does not, I think, occupy the centre of the stage; but it is an important part of the background.

29. What, then, was the extent of Mr. Margot's authority when he was appointed as "Executive Director" of the Plaintiffs? This was not spelt out in the meetings with Lillian Too and Quek Leng Chan which preceded his appointment, nor in the two letters dated 23rd September 1985 from the beneficial owners of the business, respectively offering and confirming his appointment. I shall read first the letter from Hong Leong Overseas (H.K.) Limited:-

“Dear Mr. Margot,

RE: POST OF EXECUTIVE DIRECTOR (EXECUTIVE GRADE A3)

Reference your application and subsequent interview with us, we are pleased to offer you employment with Hong Leong Securities Ltd. which is a subsidiary of the Hong Leong Overseas (HK) Ltd., on the following terms and conditions of employment:-

Personal Accident Insurance to be taken out by the company. The quantum of coverage is HK$500,000.00.

The provision of this PA insurance coverage is not a term and condition of employment but is an exgratia provision made by the company.

 

On receipt of your acceptance of our offer, we will make arrangements to fly you to Hong Kong and accommodate you in a suitable hotel for a period of two weeks in order that you may find suitable rented  accommodation. Your flight and hotel accommodation will be at the Company's expense.

If you accept the above offer of employment based on the above mentioned conditions, kindly sign the second copy of this letter at the space provided and return it to  the undersigned.

We are awaiting to welcome you into the Hong Leong Group and we look forward to your long term career development with us.

Yours sincerely,

(This letter was signed by Kwek,Leng Hai as "Managing Director".)

30. I read next the letter from Hong Leong Securities Limited:-

"Dear Mr. Margot,

I refer to our meeting in London on Tuesday 13th September, 1985 and have pleasure in confirming our offer to you of the position of Executive Director with Hong Leong Securities.

Please note below  the terms of your employment:

This offer of employment is subject to the receipt of satisfactory references and to this end, perhaps you will be good enough to furnish us with the names and addresses of senior officials within the organisations for whom you have worked during the period of the last ten years together  with confirmation that we may write to them.

On receipt of your acceptance of our offer, we will make arrangements to fly you to Hong Kong and accommodate you in a suitable hotel for a period of two weeks in order that you may find suitable rented accommodation. Your flight and hotel accommodation will be at the Company's expense.

We look forward to welcoming you as a member of our staff in the near future. Should you, however, have any queries, please do not hesitate to contact me."

(This letter was signed by Lillien Too as "Managing Director".)

31. In the absence of any express definition of the extent of the powers conferred on Mr. Margot as "Executive Director" I must fill the void by a process of implication: see Liverpool City Council v. Irwin [1976] 2 All E.R. 39 per Lord Wilberforce at p.43 c - g. I consider first, for this purpose, the nature of the business of stock broking. Primarily this consists of dealing in marketable securities on the instructions of clients of the house, an activity which generates brokerage income, and the provision of back up research services. The profitability of this business depends on the margin by which brokerage income exceeds the operating expenses of the business. (Another, subsidiary, source of income is the provision of credit to private clients at interest to encourage them to deal.) The beneficial owners of the business, however, are not bound to confine themselves to these conventional activities. Subject to the constraints of legislation and of the rules of the exchange or exchanges on which the business operates, they can speculate with the capital employed in the business, and pledge its credit, in any way they like. They can decide, as a matter of policy, to take positions on account of the house, buying long or selling short. They can decide, as a matter of policy, to act not just as stock-brokers but as jobbers or market makers, quoting two way prices for the sale and purchase of securities taken on the books of the house. They might, as a matter of policy, be well advised to expand the activities of the house beyond, or even well beyond, conventional stock broking in order to keep pace with rapid and international changes in the nature of the securities industry at different times and in different places. On the other hand, the adoption of such policies may involve risks which the owners of the business are not prepared to take.

32. If the owners of a stock-broking business appoint someone to manage the business on their behalf without expressly conferring on him the power to adopt such a policy or policies, then in my judgment the appointee's powers are limited to those necessary and incidental to the performanc of his executive functions in the proper, management of the business, and he is not empowered to adopt any such policy or policies without their consent. He cannot speculate with the capital employed in the business on account of the house; he cannot pledge the credit of the house except in the ordinary course of business and so as to facilitate the dealings of customers of the house.

33. Where, as here, the appointee is described on his appointment as "Executive Director" and where, as here, the operating manual of the house (however cavalierly treated) contains nothing apt to confer any powers on the "Executive Director" to adopt such policies, it would be dangerous and wrong to hold that the appointee has some implied power to do so. Of course, it is open to the owners of the business expressly to confer wider powers on the appointee after the date of his appointment than the narrower powers conferred on him by necessary implication at its commencement. And of course, it is open to the owners of the business, if the appointee in some particular instance exceeds his powers, to ratify or adopt what he has done. But it is trite law that a person who asserts that an act, originally an excess of powers, has been ratified or adopted must prove that he against whom the assertion is made ratified or adopted the act in question with full knowledge of all the material facts and that the latter's words or conduct point unequivocally to such ratification or adoption.

34. In the present case, the result in my judgment is that Mr. Margot had no power by virtue of his appointment to speculate with the firm's capital or to pledge its credit except on behalf of clients. But in any particular case in which it is alleged that he has exceeded his powers, he can meet the challenge by proving that in that particular case he was expressly authorized to act as he did or that his act, even if originally in excess of his powers, can be shown by clear and unequivocal evidence to have been ratified or adopted by the owners of the business.

35. I return to narrate the events which followed the meetings in London, after which it was agreed that Mr. Margot would become Executive Director of the Plaintiffs and take up his appointment on 1st October 1985.

36. Mr. Margot left England for Hong Kong on 27th September 1985 (before, in fact, either of the letters dated 23rd September 1985 reached him). He reported to Lillian Too at the Plaintiff's place of business on 30th September 1985, a Monday, and saw the letters for the first time. He expressed concern at the references in the letters to a probationary period, and a restrictive covenant, neither of which had been discussed with him. But Lillian Too gave him the impression that he was forthwith to take charge of the Plaintiff's business, an impression she confirmed by leaving the house immediately to take over as Managing Director of the Dao Heng Bank Ltd., removing her personal effects on that very day. No doubt unaware of the exhortation contained in Ezekiel, Cap.XLIII, v. 11, Lillian Too did nothing to hand the business over to Mr. Margot, or instruct him in his operations.

37. Mr. Margot quickly concluded the business was in bad shape. There had recently been a mass resignation of staff, of which he had not been told, and a serious falling off of business from major institutional clients. It appeared that Lillian Too had been put in to manage the Plaintiffs' business over the heads of Jake Vander Kamp and Steven Brown. The last Group Financial Controller had not been replaced. There was no general manager. The business was burdened with enormous management fees payable to Hong Leong Overseas (H.K.) Limited and Lillian Too (standing in September 1985 at HK$148,000.00 and HK$621,000.00 respectively). Mr. Margot set about rebuilding the business.

38. Mr. Margot saw no future in trying to rebuild the business simply as a conventional stock-broking business, relying for its revenue on brokerage income, at a time when the nature of the industry was rapidly changing and it was becoming accepted practice for stock-broking houses to act as market makers and to take positions in shares both for the house and for the purpose of providing a better service to clients. Mr. Margot felt that, within reason, it was within his brief to expand the business in these days. But I find as a fact (and it is an important finding) that Mr. Margot realized perfectly well that he was not entitled to follow any practice, or adopt any policy, of which he knew or ought to have known the owners of the business would, or might, disapprove unless he first sought and obtained their express consent.

39. Mr. Margot made a visit to London in mid-October, to see what he could do for the Plaintiffs' business there and to bring his wife out to Hong Kong. He left on 11th October 1985 and on his return on 28th October 1985 he set about rebuilding and expanding the business.

40. On 29th November 1985 he wrote a memorandum to Kwek Leng Hai in this connection which I will read:

"To enhance our position in the market, I feel it would be appropriate to extend the range of services we are presently offering to our clientele. To be seen to be participating by way of bidding and offering on lines on stock, BUT NOT acting as a market maker, I believe it would increase our business levels. Listed below are the stocks and the parameters to which I feel we should work within, together with a maximum exposure figure. [and the stocks are listed]

The above stocks and sizes have been compiled by K. Lam, N. Ng and myself and are open to discussion and amendment.

The maximum exposure figure I feel should be $5m which would give us enough scope to satisfy the major institutions we deal with.

I look forward to your response and would value your opinion on the above suggestions."

41. This shows, in my opinion, that Mr. Margot recognised that he needed approval from the owners of the business before implementing any change in policy, even comparatively minor. I reject Mr. Margot's explanation of this memorandum, which was that its purpose was only to provide some sort of guidance to junior dealing staff. I have no doubt this was part of its purpose, but the claim that it was its whole or sole purpose is incredible, for these reasons. First, there is nothing whatever in the memorandum itself to suggest that the purpose was in fact that which Mr. Margot seeks to assign to it. Secondly, it is couched in terms which suggest that, on the contrary, it was to be of general application. Thirdly, it would not work if operated in the limited way suggested. And fourthly, if Mr. Margot had thought he had the powers he now claims to have had, he could have issued the memorandum on his own authority: instead of which he put this proposal up for approval to Kwek Leng Hai.

42. The terms of Kwek Leng Hai's response of 17th December 1985 were as follows:

"Re: In House Share Dealing Position

Your memo on the above subject is referred.

I have taken note of your request and are agreeable to allow in house share dealing on the attached list of authorised shares on the following basis:-

(I need not read the attached list)

43. This response leaves no room for doubt that Kwek Leng Hai (in my judgment rightly) regarded Mr. Margot's suggestion as of general application and applicable to all in house share dealing positions by whomsoever taken; and regarded himself as the person whose function it was to supervise or monitor the operation.

44. On 2nd April 1986, following the completion of his probationary period, Mr. Margot received the following letter on Hong Leong Overseas (H.K.) note paper signed by kwek Leng Hai.

"Dear Mr. Margot,

We have much pleasure in advising you that following upon the successful completion of your period of probation, Management has approved your confirmation to permanent staff status. With effect from 1st April, 1986, you have been confirmed in your position as Executive Director, Hong Leong Securities.

As mentioned in our letter of offer of employment dated 23rd September, 1985, we would be obliged if you could hereby undertake that you may not seek employment with any other firms engaged in the stock-broking business in Hong Kong for at least three years after terminating your employment with the Company.

If you accept this offer of confirmation of employment, kindly sign the second copy of this letter at the space provided and return it to the undersigned."

45. After some thought about the restriction (which was not professionally drawn and which he had not discussed with anybody), Mr. Margot countersigned the letter on 26th April 1986, accepting its terms and conditions.

46. Before coming to the Plaintiffs' complaints about Mr. Margot I must mention a management meeting held on 23rd June 1986 at which Quek Leng Chan is reported as having "reminded the management that discipline and controls must be present at all levels [my emphasis] which in return is reinforced by rewards on loyalities. He also emphasized that the company should not be taking any position in trading and be more concentrated on servicing clients for long term relations". I reject Mr. Margot's suggestion that this was a policy which applied to junior staff but not to himself. But on the other hand, I do not accept the case for the Plaintiffs that Mr. Margot attempted deliberately to deceive the owners of the business as to what he was doing . On the contrary, I find that when Mr. Margot stepped out of line they quickly became aware of it and remonstrated with him. Quek Leng Chan gave evidence (which I accept) that he told Mr. Margot at several management  meetings that he did not want the house to take positions or otherwise speculate. However, an employer who discovers his employee to have exceeded or abused his powers but has chosen rather to admonish than to sack him is not in my judgment precluded from complaining when the employee commits a similar excess or abuse of  power in future.

47. With these observations, I now turn to the particular complaints made by the Plaintiffs about Mr. Margot's conduct of the Plaintiffs' business. These may be labelled as follows:

48. Mr. Margot, before he came to work for the Plaintiffs, had become acquainted with one David Schenk. Mr. Schenk, when Mr. Margot came to Hong Kong in September 1985, was a director of a ship broking company called Victoria Ship Brokers Limited. The two met. Mr. Schenk opened an account (given a number, 551) with the Plaintiffs and deposited HK$200,000.00 with the Plaintiffs. Neither the requirements of the stock exchange rules, nor of the Plaintiffs' own rules about customers dealing with the Plaintiffs, appear to have been observed. For example, Mr. Schenk entered into no formal customer agreement, despite the provisions in that behalf contained in the stock exchange rules and in the HLS Manual. Save for the deposit to which I have referred, Mr. Schenk dealt with the Plaintiffs entirely on credit. Mr. Schenk was married to a wife who disapproved of his speculations. In a half-baked attempt to carry on with them in deceit of his wife, Mr. Schenk arranged with his fellow directors of Victoria Ship Brokers Limited and with Mr. Margot, to trade with the Plaintiffs under the name of Victoria Ship Brokers Limited. No numbered account was opened for these dealings (which were effected outside the account number 551). Some of these dealings produced a profit. Three sums, of HK$190,368.75 (this sum lent to Mr. Margot at his request), HK$633,403.00 and HK$336,850.00, were paid to Mr. Margot at Mr. Schenk's direction out of these profits. I have no doubt, and I find, these transactions were genuine transactions for the benefit of Mr. Schenk (although on the face of them they were highly suspicious, were not properly recorded, and, as was admitted on behalf of Mr. Margot, call for an explanation). Mr. Schenk, in due course, paid off his indebtedness to the Plaintiffs, who lost nothing. In my judgment, although the Plaintiffs' suspicions about the conduct of Mr. Margot (and Mr. Ng) in relation to these transactions were readily understandable, they have no ground for claiming any relief against Mr. Margot or Mr. Ng in connection with the Victoria transactions.

                2.    The SNL transactions

49. Under this head comes trading, in the name of the Plaintiffs' nominee company Stock Nominees Limited in "contracts" in Hang Seng Index Futures, on account of the house, a form of speculation to which, in my judgment, Mr. Margot's powers as Executive Director of the Plaintiffs did not extend. He had no authority from the owners of the business, or anyone representing them, to indulge in these speculations, and there is nowhere near sufficient evidence to satisfy me that they clearly and unequivocally adopted them. The Plaintiffs' lost HK$1,043,980.00 on these transactions, and HK$8,398.00 on another unauthorized transaction in the shares of Hang Seng Bank Ltd. In my judgment they are entitled to recover these losses from Mr. Margot.

                3.     "No name" transactions

50. These transactions were effected by Mr. Margot for the house.    Particulars of the transactions are set out in paragraph of the Statement of Claim as follows:

PARTICULARS

51. Mr. Margot accepted that a system which employs the use of "no name" transactions is open to the gravest abuse. Although it has its advantages in preserving confidentiality that is not sufficient justification for adopting it without express authority.

52. In my judgment, these were. transactions which Mr. Margot had no power to effect without the consent of the owners of the business first sought and obtained; and in the absence of clear and unequivocal evidence that the Plaintiffs subsequently ratified and adopted these transactions, the Plaintiffs are entitled to the relief claimed against Mr. Margot, HK$2,207,396.00 (less HK$672,475.00 : see 4 below).

                4.     The Merrill Lynch/Swire Pacific A transactions

53. These transactions arose, as I find it, of genuine errors by the Plaintiffs' dealing staff. The Plaintiffs had accepted and confirmed an order by Merrill Lynch for 500,000 shares which they could not or did not complete. Mr. Margot tried to put these errors right but in the end tried to trade out of the problem and took the decision to leave the house exposed to an open position on the balance of 363,500 shares of which it was short for the completion of the Merrill Lynch order. This can now perhaps be seen, with hindsight, to have been the wrong decision. It eventually cost the Plaintiffs HK$672,475.00 to close the position. But in my judgment the decision was one which it was within the power of Mr. Margot to take and I am not satisfied that the decision when it was taken was unreasonable. The case for the Plaintiffs under this head accordingly fails. The lose is included in the claim at 3 above and must be deducted from it.

                5.     The Giles and Overbury transactions.

54. Mr. Margot, before he joined the Plaintiffs, had made the acquaintance of a wealthy investor based in the Isle of Man. This investor agreed with Mr. Margot to trade with the Plaintiffs via a Manx company called Soupirant Investments Limited. The dealings on behalf of this company were with London brokers Giles and Overbury and were carried out in Mr. Margot's own name. No mention of Scupirant Investments Limited appears anywhere in the books or records of the Plaintiffs, but I am satisfied that the transactions were genuine transactions carried out for a genuine client which has accepted responsibility for them. The Plaintiffs' claim for relief in this connection fails.

                6.     Vivian Gray

55. On 12th May 1986 Mr. Margot applied L8,009 sterling of the Plaintiffs' money in the purchase of 100,000 shares in Control Securities Limited for his own benefit by paying that sum for those securities to London stock brokers Vivian Gray. He claims Quek Leng Chan for the Plaintiffs had agreed to treat this application of the Plaintiffs' money as a loan properly made to Mr. Margot. It is up to Mr. Margot to satisfy me that this was so. He has failed to do this. Accordingly he must repay the money to the Plaintiffs end account to them for any profits resulting from this transaction.

56. Other claims made against Mr. Margot in these proceedings relate to his subsequent conduct. On 18th September 1986 he left the Plaintiffs, without any notice, handing in a letter of resignation to take immediate effect. He went off to work for Sunshine Securities Limited, a competitor of the Plaintiffs. He caused telexes to be sent to a number of the Plaintiffs' clients, in the following terms:

"ANNOUNCEMENT

Effective immediately, Graham Margot, Norman Ng, Rory Mcallister, George Lynn, Bill Barron, James Osborn and Winson Lee have resigned from Hong Leong Securities and will be reached at

Sunshine Securities Limited 17th Floor, Far East Finance Centre 16 Harcourt Road, Hong Kong

 

Sunshine Securities Limited is a wholly-owned subsidiary of Sunshine Pacific Limited, listed on Hong Kong Stock Exchange with shareholders funds of HKDLR 223 Million as at 31st December, 1985.

Sunshine Pacific is well cashed up with nominal debt and emerges as a global expansion vehicle of Lee Ming Tee and Bill Wyllie. The Group's current investment includes Regal Hotels, Tylfull, Crusader which are both listed on Hong Kong Stock Exchange, and Sunshine Allied, a listed manufacturing company in Singapore, and Dragonair, HK Macau International and Shares and Commodities Trading.

With the additional personnel, Graham Margot, Norman Ng, Rory Mcallister, George Lynn, Bill Barron, James Osborn, Winson Lee and others all recently joined from Hong Leong Securities, the company will definitely play a major role in share broking and corporate finance in Hong Kong, Australia, Singapore, Malaysia and London.

Dated September 18, 1986."

57. His conduct, in my judgment, was clearly a breach of the restrictive covenant he had entered into at the end of his probationary period. But is the covenant enforceable?

58. I turn to the law. Pacts sunt servanda; but provisions in a contract of employment which restrict the fields of employment open to the employee after he has left the employer operate in restraint of trade, and, for reasons of public policy, are treated by the laws as unenforceable unless the employer can show that at the time the contract was made the restrictions were reasonably required for the protection of the legitimate interests of the parties and the public. So far as the employer is concerned he has of course an interest in protecting himself against competition from his former employee, but the law does not regard this, by itself, as a legitimate interest. The only legitimate interest of the employer is the protection of his confidential information, and if the restrictions which he seeks to impose on his former employee go no further than is reasonably necessary to protect that, then the Court will enforce those restrictions, although the inevitable result will be to fetter the right of the employee to compete with his former employer.

59. The confidential information capable of protection by such restrictions includes not only information in the nature of trade secrets but also the information which can be acquired by the employee from contact with customers. The point is well put by Mr. Justice Salter in Putsman -v- Taylor [1927] 1 K.B. 637, at page 641, where he says this:

"The relation between master and servant is always confidential, though in differing degrees. The relation between a master and the servant who manages his business for him is highly confidential. During the service he is in constant contact with the master's customers, and cannot fail to learn their names and addresses, their likes and dislikes, and something of their financial credit. Such knowledge can be used with effect, after the determination of the service, to induce such customers to transfer their custom to a new employer. Certain conduct of this kind will be restrained, as being in breach of implied terms of the contract of service" [and he cites some authority]. "Other conduct of this kind, though injurious to the late employer, will not be restrained in the absence of express agreement. Such agreement need not take the form of a covenant against solicitation. Such a covenant is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition, provided that it is not wider than is reasonably necessary to safeguard his proprietary interests against unfair use by the former servant of information gained during the service."

60. The reason for this attitude on the part of the law is that the employer's customer connection belongs to the employer, not to the employee, although it may be the employee who has built it up or maintained it. If the law were to permit the employee, who has built up or maintained the employer's customer connection, to walk off with it, after the termination of the employment, in the face of restrictions entered into by the employee to protect the employer against just such a risk and going to further than reasonably necessary for that purpose, the employer would have just cause for complaint. The risk is that the employee "might obtain such personal knowledge of and influence over the customers of his employer ... as would enable him, if competition were allowed, to take advantage of his employer's trade connection" - see Herbert Morris Ltd. -v- Saxelby [1916] A.C. 688 per Lord Parker of Waddington at page 709. Such restrictions, then, will be enforced if "the protection sought is reasonably necessary to ...... prevent some personal influence over customers being abused in order to entice them away" - see Faccenda Chicken Limited v. Fowler [1986] I.C.R. 297, per Neill L.J. at 310F.

61. Accordingly, where an employee is placed in a position in which he has that type and degree of contact with the employer's customers which means that, after the employee leaves, the customers may leave with the employee, the law will uphold against the employee any restrictions which go no further than is reasonably necessary to prevent that happening.

62. In the present case, the Court will enforce the covenant in question against Mr. Margot only if the Plaintiffs have demonstrated:

63. First, that the contact that Mr. Margot had with the Plaintiffs' clients and the degree of that contact as known or envisaged in 1985 Was such as to warrant a reasonable concern on the part of the Plaintiffs that, when he left, clients might want to deal with him in future rather than with the Plaintiffs;

64. Secondly, that the covenant goes no further than is reasonably necessary for the protection of the Plaintiffs against this risk.

65. As to the first of these points, it was submitted for Mr. Margot that the nature and degree of his contact, as Executive Director, with the Plaintiffs' clients was not such as to warrant such a covenant, as it might have been in the case of an account executive or salesman. I reject this submission. In my judgment, Mr. Margot's position with the Plaintiffs was such that such a concern as that to which I have adverted would have been entirely reasonable. The telexes sent by Mr. Margot to the Plaintiffs' clients on 18th September 1986 provide an eloquent demonstration of this: and Mr. Margot's own evidence given on the morning of day 19 of the trial was that "our business is a very personal business which travels with the individual."

66. As to the second point, however, the Plaintiffs have failed to satisfy me that a period as long as 3 years was needed for the protection of their legitimate interests. It appeared from the evidence of Kwek Leng Hai that the major reason for the imposition of this length of restriction was to tie Mr. Margot to the Plaintiffs for a period over which they could amortize the cost of bringing him from England to Hong Kong and setting him up here : in effect to get value for money from Mr. Margot. But this could and should have been done by getting him to sign a contract for a 3 year term. It was illegitimate, in my judgment, to try and do so by the imposition of a 3 year restriction on the termination of his employment, which was determinable, after the end of the probationary period of 6 months, on 3 months' notice : compare Gledhow Autoparts Ltd. v. Delaney [1965] 3 All E.R. 288 per Diplock LJ at p.295. But even if the major reason for the imposition of the restriction had been to protect the Plaintiffs from an unfair invasion of their customer connection (and I am prepared to accept that this was a subsidiary reason) the period of 3 years was in my judgment much longer than was reasonably required for the purpose, taking "a broad and commonsense view" : see Stenhouse Limited v. Philips [1974] 2 WLR 134, per Lord Wilberforce at p.140G. As is pointed out by Mr. J.D. Heydon in his valuable monograph on the Restraint of Trade Doctrine, at pp. 158, 159, there are two, or at any rate two main, factors which have to be considered in determining the reason-ableness of time restraints which purport to protect a customer connection. The restraint will be reasonable only if its duration is no longer than necessary (1) for the employer to put a new man on the job and for the new employee to demonstrate his effectiveness to customers; and (2) to prevent an employee who has quit the territory from returning to acquire the employer's business. I bear in mind the point made in Bridge v. Deacons [1984] 2 W.L.R. 837 (P.C.) at p.844 that there appears to be no reported case where a restriction which was otherwise reasonable has been held to be unreasonable solely because of its duration. I also bear in mind the fact that in Lyddon v. Thomas [1901] 17 T.L.R. 450 (decided before Mason v. Provident Clothing and Supply Co. Ltd. [1913] A.C. 724, and Herbert Morris Ltd. v. Saxelby (supra), landmark decisions which changed the approach of the courts to restrictions on employees) a restriction of 20 years on a provincial stock broker was upheld. But I have no doubt that in Hong Kong in 1985 the Plaintiffs did not need a restriction of 3 years to achieve their legitimate objects. 1 year would have been ample to break the connection of Mr. Margot with the Plaintiffs' clients "for a sufficient period to let the next man obtain the connection": see Middleton v. Brown [1878] 47 LJ (NS) 411, per Jessel MR at p.413.

67. For these reasons, I decline to grant any relief to the Plaintiffs in respect of Mr. Margot's restrictive covenant.

68. There remain two further claims against Mr. Margot with which I have not yet dealt. The first of these is based on the fact that when Mr. Margot left for Sunshine Securities Limited a large number of the Plaintiffs' staff went with him. It is said on behalf of the Plaintiffs that Mr. Margot has been guilty of enticing these members of their staff away. Mr. Margot, although he accepts telling the members of the staff that he was leaving, denies having said or done anything to entice them to leave with him. But the evidence clearly supports the case for the Plaintiffs that this was a concerted operation. All the members of the staff left together; Mr. Margot was in effect entrusted with the job of recruiting staff for Sunshine Securities; and they were referred to in the telexes sent out to the Plaintiffs' clients on the day they left. In my judgment, the inference is irresistible that Mr. Margot did entice these members of the staff away. But the Plaintiffs failed to prove any damage resulting from this (I reject their claim that overpayments of salary are attributable to the enticement). Indeed, the minutes of the management meeting of the Plaintiffs held on 20th October 1986 record that "the management changes in September had not had any substantial adverse impact on the business of the company, and customers had generally shown continued support to us." The Plaintiffs' own evidence was that, after a hectic three days following the defection, the business of the Plaintiffs had been put back on an even keel. In these circumstances, the Plaintiffs' case on this aspect of the matter must fail. The last claim against Mr. Margot is that he is liable in damages for breach of contract for leaving without notice. As I understand it, this claim is admitted and I need say no more about it, save that it must include any overpayment of salary made to Mr. Margot.

69. I turn to the case made by the Plaintiffs against Mr. Margot's service company B.I.S. Consultants Limited. Mr. Margot claims, and the Plaintiffs accept, that under his letters of engagement (which I have already read) he is entitled to have paid by the Plaintiffs the relocation expenses attributable to his move from London to Hong Kong. The question is whether all the various sums taken from the Plaintiffs by Mr. Margot and debited to the account of B.I.S. Consultants Limited with the Plaintiffs are payable by the Plaintiffs to Mr. Margot under this head. In my judgment, none of the sums still in dispute are so payable. The sums taken by Mr. Margot to pay his solicitor's fees and costs (including stamp-duty) totalling HK$70,116.00, on the purchase of his flat in Hong Kong, and the initial down payment of HK$20,000.00 on that flat, and the sums totalling HK$34,340.00 claimed by Mr. Margot for the furnishing,and decoration of the flat, are not in my judgment, properly to be treated as relocation expenses. I find that Mr. Margot and B.I.S. Consultants are bound to repay these sums to the Plaintiffs. On the other hand, I am satisfied that Mr. Margot was entitled to charge the whole cost of his visit to Kuala Lumpur in play 1986 to the Plaintiffs and I do not hold the Plaintiffs entitled to recover any part of this sum.

70. I turn lastly to the claims against Mr. Ng. In my judgment, the Plaintiffs' case against Mr. Ng wholly fails. He had himself drawn attention to the unsound management structure; and as the financial and administration manager, Mr. Ng was not responsible for the adoption of any policy contrary to that of the owners of the business nor for the adoption of any practice which has caused loss. He was entitled to assume Mr. Margot was acting within his powers. I accept that in many ways Mr. Ng fell short of the highest standards in performing his duty properly to record the transactions of the house in the books and records of the Plaintiffs but I am not satisfied that these failures on the part of Mr. Ng caused the Plaintiffs any loss or damage.

71. I will make an Order in terms of minutes to be signed by junior Counsel for the Plaintiffs and approved by Counsel for the Defendants. If any difficulty arises in the preparation of the minutes as a result of anything contained in this judgment, the case should be restored to the list for Counsel to address argument to me upon the minutes. I will also hear Counsel as to costs on a date and at a time to be fixed through the usual channels.