MBM METAL WORKS HONG KONG, LTD v. JONATHAN DEREK NICHOLS AND ANOTHER

HCA 2936/2018

[2019] HKCFI 52

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2936 OF 2018

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REASONS FOR DECISION

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Introduction

1.  On 28 December 2018, I dismissed the application of the Plaintiff (“the applicant”) for interim interim injunctions with costs, saying that the reasons would be handed down. This, I now do.

Basic facts

2.  The applicant is a company incorporated in Hong Kong.  Its principal business is provision of bespoke glass and window façade solutions for construction projects in Hong Kong, China and Australia.  Many of its customers are well-known and one of which is Louis Vuitton. 

3.  The 1^st Defendant (“the respondent”) had joined the applicant since May 2001 and had occupied a senior management position before his departure on 25 July 2018.  Besides, he became a shareholder of the applicant holding one-third of its shares since 5 September 2011.  More importantly, on 12 February 2015, he, the other two shareholders[1] and the applicant entered into a Shareholders’ Agreement which contains a “Non-Competition and Non-disclosure Clause” as follows:

“10.01 Each of the Shareholders covenants with each of the other party to this Agreement that during the continuance of this Agreement he will not: -

(a) directly or indirectly, own, manage, operate or participate in the ownership, management or operation of any corporation, partnership, joint venture, association or any other entity, which competes, or is likely to compete, with the Company or any other member of the Group;

(b) divulge or communicate to any unauthorized person any of the trade secrets or other confidential information belonging to the Company or any other member of the Group or acquired by that Shareholder as a result of this Agreement or any services rendered under it and shall take all reasonable steps to bind his directors, employees and agents in his behalf.

10.02   Each of the Shareholders further undertakes that in contemplation of the termination of this Agreement or the sale of any of his shares in the Company and for 1 year after any such termination or sale, he will not whether on his own account or on behalf of any other person solicit, interfere with or endeavor to entice away from the Company any person, firm, or company who or which at any time during the previous 1 year prior to such termination or sale was a customer, supplier, agent, distributor or employee of the Company.”

4.  The departure of the respondent from the applicant had not been amicable.  On 22 October 2018, there was a letter from the applicant’s solicitors to the respondent which referred to Cl 10(a) and (b) above and said,

“We are instructed that our client found that in breach of the Shareholder” agreement, you have participated in the management or operation of Craft Holdings Limited/Craft Façade Tech (Hong Kong) Company Limited, a corporation, which competes, or is likely to compete, with our client or any other member in the group of our client. In this respect, our client reserves its rights to apply to Court for an injunction against you to restrain you from being employed by Craft Holdings Limited. If the application is materialized, our client will seek costs against you.”

5.  Furthermore, there was a claim filed by the respondent in the Labour Tribunal against the applicant.  During the hearing in the Labour Tribunal on 5 November 2018, the respondent admitted that he had been working in Craft since September 2018. 

6.  On 18 December 2018, the applicant filed[2] a Writ of Summons (with a Statement of Claim) against the respondent (as the 1^st defendant) and also another of its former employee[3] alleging against both of them breaches of employee duties and breaches of duty of care.  As against the respondent, there are also allegations of breaches of fiduciary duty as a director, breaches of the Shareholders’ Agreement[4], breaches of tortious duty of care, unjust enrichment and failure to return to work[5].  It is pertinent to note at this juncture that, of the ten remedies ((a)-(j)) which the applicant seeks against the respondent as stated in the prayer, nine of them ((a)-(i)) are couched in monetary terms and only one is an injunctive relief.  Moreover, the injunction sought is just about non-competition: 

“(j) An injunction restraining the 1^st Defendant from continuing to work and/or participate in the management and/or operations of Craft Holding Limited in any capacity whatsoever in breach of the Shareholders’ Agreement”

What is conspicuously absent from the Statement of Claim is any allegations of breaches by the respondent of his duties of confidentiality or non-solicitation under the Shareholders’ Agreement.

7.  On 21 December 2018, the applicant took out the Summons which becomes the subject of the present application with a call-over fixed on 28 December 2018 and listed for 30 minutes.  In the Summons, the applicant seeks a number of reliefs including not only an interlocutory injunction based on Cl 10.01(a) of the Shareholders’ Agreement, but also two other interlocutory injunctions based respectively on Cl 10.01(b) and Cl 10.02.  For the sake of convenience, I would refer to aforesaid three interlocutory injunctions as the “Non-competition Injunction”, the “Non-disclosure Injunction” and the “Non-solicitation Injunction”. 

The Call-over

8.  Whilst the call-over hearing on 28 December 2018 was supposed to be inter partes and despite the fact that Ms Lok, counsel for the respondent, was able to advance arguments on his behalf, I am of the view that the respondent has not been afforded a reasonable opportunity to argue against the application: cf Chu Shu Ho David and Mission Hills Golf Club Limited v Lam Hon Lit Harry[6]:

(a)  the Summons was served without any prior notice on the solicitors acting for the respondent in the action at which time the solicitors were yet to have instruction to accept service of the Summons on the respondent’s behalf;

(b)  besides, the Summons was only served at 5:10 pm on 21 December 2018 which was a Friday and also the day before the Winter Solstice.  The solicitors were put into further difficulty in that the applicant had demanded them to confirm their instruction to accept service on the respondent’s behalf by the following Monday at 12 noon (Christmas Eve).  That happened while the respondent was overseas which was not at all surprising given that he is an expatriate and it was at that time of the year;

(c)  at the Christmas Eve, the solicitors were dumped with a 19-page submissions from the applicant which cited a total of 15 case authorities; and

(d)  the respondent’s solicitors only managed to file a Notice to Act when he returned Hong Kong on 27 December 2018 which was the day before the call-over, with the result that the affidavit evidence before the court is all one-sided from the applicant; and

(e)  what compounds the matter is that the Summons seeks, among other things, the “Non-disclosure Injunction” and “Non-solicitation Injunction” which were not foreshadowed in the Statement of Claim. 

9.  In the circumstances, I am of the view that it is only fair that the applicant’s application should be treated as one of ex parte (on notice) so that the applicant would still bear the duty to make full and frank disclosure of all material facts within its knowledge and also points of law: compared with Huginoho Co Ltd v Vimiu HK Co Ltd[7]and see Memory Corp plc v Sidhu[8].  However, for the avoidance of doubt and as can be seen in the discussion below, I should say that the result of the present application would not have been different even if it were truly inter partes so that the duty of full candor was not applicable. 

10.  As I have said, the call-over before me was only listed for 30 minutes.  Because of the shortage of time for the court’s consideration and the complexity of the issues involved, it would in my view not be fair to deal substantively with the applicant’s Summons at the call-over.  Instead, it would be more appropriate for me to rule on the applicant’s application (for the interim interim injunctions) and give directions to facilitate the substantive hearing in the near future.  In the event, having heard counsel I dismissed the applicant’s application for the three interim interim injunctions sought with costs and gave directions for the substantive hearing.

The applicable legal principles

11.  The essential principles concerning the grant of an interlocutory injunction have been set out in the leading authority of American Cyanamid Co v Ethicon Ltd[9]which is also applicable to cases concerning restraint of trade: Lawrence David Ltd v Ashton[10].  Generally speaking, the requirements are first “that there is a serious question to be tried” and second “that the balance of convenience lies in favour of granting an injunction”: see Hong Kong Civil Procedure 2019, Vol 1, at §§29/1/9-17.

12.  As regards the first requirement, it is pertinent to note that in Hengshi International Investments Ltd v Bayspring International Ltd^[11], Au-Yeung J held that the burden of showing a serious issue to be tried is not “a very steep hurdle”.  In the interlocutory stage, the principal concern of the court is that it may make a wrong decision in the sense that after trial, the party to whom an interlocutory injunction has been granted may lose, or the party who has been refused one may win.  The court would therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong.

13.  As regards the second requirement, the case authorities emphasise, in particular, the need to take account of such special factors as the individual case may demand.  The modern approach for the grant of interlocutory injunction is that the court should take whichever course seemed likely to cause the least irremediable prejudice to one party or the other, whether the injunction was prohibitory or mandatory. Where the injunction was likely to cause irremediable prejudice to the defendant, the court may require a high degree of assurance that at the trial it would appear the injunction was rightly granted: Shih- Hua Investment Co Ltd v Zhang Aidong[12].

14.  Furthermore, in cases concerning restrictive covenants, the court in determining whether or not, on the balance of convenience, to grant an injunction, can properly take into account the plaintiff’s prospect of success at trial: Lansing Linde Ltd v Kerr[13].

15.  On the approach which the Court should adopt when considering whether to grant an interim interim injunction, in the recent judgment of the Court of Appeal in China Shanshui Cement Group Limited & Others v Zhang Caikui & Others^[14], Lam VP says,

“13. … It has to be reiterated that interim interim relief is meant to be an urgent temporary stop-gap measure and the circumstances were such that the court has to do practical justice on the balance of fairness even though it may not have sufficient time to consider the matter fully: see NPYJ v SMRC [2018] 1 HKLRD 573 and [3] and [4].

14. Thus, in the recent decision of Cyberland (China) Ltd v Zhang Wei Bing [2018] HKCFA 19, Ribeiro PJ granted a stay on payment out of money in court pending the Appeal Committee having the opportunity to hear the application for leave to appeal. His Lordship adopted the test of balance of fairness at [7] of that decision.

15. Given the short lifespan of interim interim relief and the high discretionary nature of a first instance decision on the grant and refusal of relief, the Court of Appeal would rarely interfere with such decision: NPYJ v SMRC [2018] 1 HKLRD 573.

16. As we said, the court will only consider granting interim interim relief when it does not have sufficient time or fair opportunity to consider an application for interlocutory relief fully.  Hence whatever views formed at such hearing and whatever decisions made must be provisional, open for further arguments and revisiting in the future.  But it does not follow that it would be wrong for the court to form some provisional view on the arguability or merit of a plaintiff’s case.”

16.  Based on the above, when considering whether to grant an interim interim injunction, the relevant considerations would include (but not necessarily limited to):

(a)  whether there is a serious issue to be tried;

(b)  whether there is urgency;

(c)  whether damages would be an adequate remedy; and

(d)  whether the balance of convenience is in favour of the granting of the injunction sought.

17.  Lastly, in view of the wide terms in which the proposed injunctions are couched which basically mirror the restrictive covenants as contained in the Shareholders’ Agreement, I bear in mind the “Certainty Principle” as propounded in the celebrated text by Steven Gee QC in Commercial Injunctions[15] that:

“There is a general principle that an order must be expressed in unambiguous language so that the defendant knows exactly what is forbidden or required by the order. …

   The principle applies to all injunctions.  This is a matter of fairness to the person enjoined.  It goes not only to the drafting of an injunction when in principle the decision has been made to grant it, but also to the decision itself on whether to grant an injunction or specific performance.  The degree of certainty required should be considered with the possibility of contempt proceedings in mind and whether the injunction would be enforceable in such proceedings.”

The applicant’s case

18.  As regards the “Non-competition Injunction”, it is the applicant’s case that the respondent has, in breach of the aforesaid restrictive covenants, joined and worked for Craft, which is a direct business rival and competitor of the applicant.  I note that there is an issue as to whether Cl 10.01(a), properly construed, is wide enough to catch also an “employment”[16].  If so, whether it is impermissibly wide and in unreasonable restraint of trade so that (unless severance is possible) it is void ab initio in the sense of being unenforceable: Mary Caroline Tillman v Egon Zehnder Limited[17].

19.  As regards the “Non-disclosure Injunction”, Mr Wong for the applicant is unable to identify or to provide particulars of any trade secrets or confidential information which the proposed injunction is seeking to protect.  Nor is Mr Wong able to pinpoint any actual breach which is said to have been committed by the respondent.  Similarly, the supporting affirmation of Ho Jenny casts no light on those matters.  The highest that Mr Wong can put in this regard is that there is a “risk” of leaks based on what he describes as “circumstantial evidence”, namely that the respondent had held a senior position in the applicant and therefore he would be in possession of certain confidential information belonging to the applicant which is yet to be identified, that he is now working for Craft which is a rival company and that Craft is actual competing with the applicant for the project in Beijing of Louis Vuitton which has been a customer of the applicant.  However, bearing in mind the nature of the applicant’s business which is not about products design but construction projects, there is an issue as to whether the applicant has any trade secrets at all which can be fairly regarded as its property, as distinct from the skill, experience, know-how, and general knowledge which can fairly be regarded as the property of the respondent to use without restraint for his own benefit or in the service of a competitor: Herbert Morris Ltd v Saxelby[18]. Depending on the nature of the trade secrets in question, there may be an issue as to whether they are relevant for the present purpose.  There may also be an issue as to whether the so-called “circumstantial evidence” is sufficient. Lastly, there may be an issue as to whether the proposed injunction would offend the “Certainty Principle”.  The above matters call for detailed consideration in due course.

20.  As regards the “Non-Solicitation Injunction”, the applicant’s case is based on a bid submitted by Crafts for a project of Louis Vuitton in Beijing, the mainland in which the applicant was also interested.  The applicant says that the respondent was somehow involved in the bid of Crafts’ for the project as he was seen being present at the tender interview in Hong Kong.  In the proposed injunction, the applicant asks that the respondent be restrained from “soliciting, interfering with or endeavouring to entice away … any person, firm or company who or which … was and/or is a customer … of the [applicant], including but not limited to Louis Vuitton”.  However, Louis Vuitton is a brand name.  The legal entity which invites tenders for the project in Beijing is called “Louis Vuitton China Company Ltd”.  The evidence before me, however, is wholly ambiguous as to whether this company is or was a customer of the applicant.  Ho Jenny only refers to “Louis Vuitton” as being a customer of the applicant.  Furthermore, where submitting a bid for a project in response to an invitation to tender would amount to “soliciting, interfering with or endeavouring to entice away” would be a matter which requires consideration.

21.  Closely connected to the above issues is the fact the “Non-Competition and Non-Disclosure Clause” in question is contained not in an employment contract but in the Shareholders’ Agreement which contains a rather complicated “Termination Clause”.  Besides, there is on the face of it no territorial limits to the restrictive covenants in question.  The situation is such that the covenant in question (unless avoided) would be binding on the respondent as long as he remains a minority shareholder of the applicant which is a private company controlled by the other two shareholders who are father and son.  

Consideration

22.  Since I do not propose to deal with the Summons substantively and that there will be a substantive hearing in due course, I hope that I would be forgiven for not dealing with every points that counsel have raised in their written and oral submissions.  Besides, because of time constraint, Ms Lok is yet to have a reasonable opportunity to advance detail submissions on the validity of the restrictive covenants which are of central importance to the injunctions.  My humble view, which must be provisional in nature and should in no way be interpreted as having the effect of influencing the future conduct of the case, is that there are apparent problems regarding the validity and scope of the “Non-Competition and Non-Disclosure Clause” which bear on the applicant’s prospect of success in this regard at the trial.

23.  Quite apart from the apparent problems about the “Non-Competition and Non-Disclosure Clause”, there are three other reasons for my ruling on the application for the interim interim injunctions and any one of them is, in my view, fatal to the applicant, not to say a combination of some or all of them, namely: (1) delay; (2) adequacy of damages to the plaintiff; and (3) possible irremediable prejudice to the respondent.

Delay

24.  Here, delay is the antithesis of urgency.  I note that in Harbour Front Limited v Leung Yuet Keung & Anor[19], a delay of two weeks (in case of an application for an interim injunction pending appeal) was held to be too long.  Roger VP, whose judgment Ma CJHC (as he then was) agreed, had the following to say,

“Harbour Front’s conduct in waiting for two weeks before commencing the proceedings and then making applications on very short notice on the basis of urgency was likely to result not only in grave inconvenience to the other parties, as well as the court, but would have made it difficult for the other parties to present their case properly. In my view, Harbour Front’s manner of conducting this litigation was, in itself, tantamount to an abuse and would have justified this court in refusing to hear the application on the basis of delay alone.”

In my humble view, what Roger VP said above is equally apposite to applications for interim interim injunction, if not more so.

25.  According to the letter of the applicant’s solicitors dated 22 October 2018 which I have quoted above, by which date the applicant had already “found” that the respondent was in breach of Cl 10.01(a) and (b) of the Shareholders’ Agreement.  If Mr Wong is right (and I express no definite view on this point for the present purpose) that a mere risk of breaches of the restrictive covenants as contained in Cl 10 is in itself sufficient to support an application for interlocutory “Springboard Injunctions” which the present application is about and if there is any real urgency in the matter, then the applicant could and should have taken action once they knew that the respondent was working for a competitor.  However, there was a gap of two months before the Summons was taken out and the delay remains unexplained.  Moreover, there is no reason why the Summons could not have been taken out before or at least the same time as the Writ of Summons, bearing in mind that it was filed with a detailed Statement of Claim. 

26.  It seems to me from the limited amount of evidence before the Court that what prompted the applicant to take action was the Louis Vuitton project in Beijing.  However, if that were the case, since the respondent has been in the employ of Craft for several months already and that Craft has submitted its tender for the project, the utility of the interim interim injunctions would be rather limited, as “the horse has bolted”.

27.  In all the circumstances, I am unable to be satisfied that there is urgency in the matter.

Adequacy of damage

28.  The applicant makes a bare assertion in its supporting affirmation of Ho Jenny that:

“It is practically very difficult to estimate the amount of loss that MBM will suffer as a result of Mr Nichols’ breach. Among other reasons, it will be difficult to ascertain how much business MBM has lost a result of Mr Nichols’ breach to quantify such losses. Further, it will be difficult for MBM to prove that Nichols’ breach was causative of MBM’s loss.”

I note that there is no suggestion by the applicant that the respondent would be unable to pay damages.  On the other hand, I note that the applicant in the main action is seeking damages (for other claims not relating to the alleged breach of Cl 10) against the respondent for over HK$8 million.

29.  With respect, whether the alleged difficulties do exist and if so, to what extent are always case-specific questions.  In the present case, I note that the business of the applicant is project-based and many of the applicant’s customers are substantial and well-known organisations which are likely to offer their projects to contractors through tendering.  I note, in particular, the Louis Vuitton Project in Beijing calls for a tendering exercise which would entail a detailed calculation of costs and profit margins beforehand.  On the other hand, the evidence shows that the respondent is only working just for Craft and no other.  It is also relevant to note that the waiting time before the substantive hearing of the Summons is not expected to be lengthy so that the number of the projects that the applicant may lose to Craft would be limited.

30.  In all the circumstances, I am unable to accept that the alleged difficulties at their face value.  Furthermore, I am also unable to be satisfied, in view of the limited amount of evidence before me as set out in the affirmation of Ho Jenny, that damages would not be an adequate remedy to the applicant in case the interim interim injunctions are not granted.

Irreparable prejudice

31.  Mr Wong is frank that the interlocutory injunctions if granted, would have the effect of removing the respondent from the employ of Craft.  As to this, Mr Wong submits that the respondent can find another job.  Noting that there is no evidence before the court that the applicant has the financial ability to honour its undertaking for damages, Mr Wong says that the applicant is prepared to provide fortification, in the region of $300,000 to $500,000, for the undertaking, if necessary.

32.  In this regard, I bear in mind that the present case is not about two companies engaging in a lawsuit.  This is about a middle-age expatriate making a living in Hong Kong.  Ms Lok, hampered by the lack of evidence from her side, says from the bar table that the respondent has a family to feed and a son studying overseas to support.  She says, on the other side, that when the respondent left the employ of the applicant its accounts were all in red.  I would not speculate about the respective means of the parties.  However, the inherent probability is that the undertaking for damages by the applicant, even if fortified as suggested, could hardly afford any consolation to a person who needs to work if he were to lose his job and to face the uncertainty as to when damages, if eventually payable, would be paid.  Moreover, now that the respondent has been settled in Craft for several months, the probability is that the injunctions would have the effect of not only removing him from Craft, but also forcing him to breach his obligations to the latter.  Lastly, the possible adverse effect of the injunctions on his prospect of finding alternative employment should not be ignored.

33.  I am fully alive to the fact that the respondent is yet to file any affidavit and I reckon that this point about the inadequacy of damages as a remedy to the respondent may not carry equal weight as the two previous considerations.  However, based on the limited amount of evidence before me and by a narrow margin, I am inclined to the view that the interim interim injunctions, if imposed, would likely to cause irreparable prejudice to the respondent.

Conclusion

34.  I find that the present application for interim interim injunctions fails at the threshold as not being urgent. 

35.  Besides, there are also my finding that the damages would be sufficient remedies to the applicant but not to the respondent.

36.  In any event, even assuming that I am wrong about my provisional assessment of inadequacy of damages as a remedy to the respondent, I am of the view that by looking at the matter in the round and taking into account my provisional assessment of the prospect of the applicant’s success, the balance of convenience tips in favour of not granting the interlocutory injunctions sought by the applicant at this stage.

Directions

37.  Ms Lok informs that the respondent will in due course file an application to strike out the Summons.  Therefore, the parties agree that the substantive hearing of the Summons and the application for striking out should be dealt with together and that one day should be reserved for that purpose. 

38.  For that purpose and by consent, I give the following directions:

(i) the respondent do have leave to file affidavit evidence in opposition to the Summons within 28 days thereof;

(ii) the applicant do have leave to file affidavit evidence in reply (if any) within 28 days thereafter;

(iii) no further affidavit be filed without leave of the Court;

(iv) the Summons be adjourned for substantive arguments with 1 day reserved on an early date to be fixed in consultation with but not by reference to counsel’s diaries; 

(v) liberty to apply; and

(vi) costs (of the Summons) be reserved.

Costs

39.  As regards costs of the hearing, having heard counsel, I ordered that the respondent should have his costs of the hearing.  By way of summary assessment, the quantum of which is agreed at the sum of $130,000, to be paid by the applicant forthwith.