Candia Shipping (HK) Ltd. v. Wong Chiu Wai and Another

HCA000629/1986

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Headnote

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Contract - employment - restrictive covenant - employee engaged by Hong Kong company, which was part of international group - covenant preventing employee competing with or working for any competitor of employer or for any competitor of other members of the group for 12 months - trade secrets and trade connections - clause held to be void and, unenforceable - wider than necessary to protect employer's trade connections, because it operated world-wide and extended to competitors of persons other than employer - Henry Leatham & Sons Ltd. v Johnstone-White [1907] 1 Ch. 322 applied; Stenhouse Australia Ltd. v Phillips [1974] AC 391 distinguished - delay and misconduct by plaintiff - injunctions refused.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

CIVIL JURISDICTION

ACTION NO.629 OF 1986

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BETWEEN

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Coram: His Honour Judge Downey, sitting as a Deputy Judge of the High Court (in Chambers)

Date: 25th February 1986

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JUDGMENT

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1. By a summons dated the 1st February 1986, the plaintiff seeks various injunctions against the defendants, based essentially upon certain provisions of a written contract made between the first defendant ("Mr. Wong") and the plaintiff on the 5th November 1984. Both defendants strenuously oppose the application the ground that the provisions in question are void and unenforceable as covenants in restraint of trade.

2. It is common ground that the plaintiff, which is a company incorporated in Hong Kong, is a member of what has been referred to, in the affirmations and argument in these proceedings; as "Candia Organisation", which is a grouping of corporate vehicles throughout the world whose parent is Candia Co. S.A. of Piraeus, Greece. The Candia Organisation is the brainchild of Mr. Iraklis Ieronimakis, who is also the managing director of the plaintiff. Candia Co. S. A. was incorporated in Liberia in 1975, at or about the time of the re-opening of the Suez Canal. The Candia Organisation provides various shipping services to clients throughout the world, including more particularly specialised services for those wishing to use the Suez Canal (hereinafter referred to as "Suez Canal Transiting Service"). Mr. Wong was the Manager of Operations and a director of the plaintiff from September 1980 until the summary termination of his employment by, and resignation from the board of, the plaintiff on the 15th August 1985. Since the 1st September 1985 he has been employed by the second defendant providing a broad range of shipping services to clients in Hong Kong and the Far East. In the course of the evidence and argument advanced in support of the summons in this case, the distinction between the plaintiff and Candia Co. S.A. (or other members of the Candia Organisation) has not always been clearly observed. For the purposes of the present application, it is, in my view, important and essential to bear in mind that the injunctions in question are sought by the plaintiff, and not by Candia Co. S.A. (or any other member of the Candia Organisation), and that it has never been suggested that Mr. Wong was employed by Candia Co. S.A. Accordingly, although useful guidance on the relevant principles of law may be derived from the opinion of the Privy Council in Stenhouse Australia Ltd. v Phillips [1974] AC 391, that authority is not directly relevant to the facts of the present case.

3. In essence, the plaintiff seeks to hold Mr. Wong to the obligations which he assumed under the written agreement dated the 5th November 1984. In many respects this is a strange document. It is a mixture of pufferies about the Candia Organisation, contrived acknowledgements by Mr. Wong of certain features of the plaintiff's operations and matters immediately preceding the execution of the agreement, restatements of the basic undertakings of faithful service by employees, and various contractual promises by Mr. Wong. In paragraph 6 of his affirmation, Mr. Wong disputes the binding nature of this document on the ground of duress and possibly other grounds. That issue is not before me, but may become an issue at the trial, when the vagueness and other peculiar features of the agreement may be more significant. For the purposes of the present application, I must and do proceed on the basis that the agreement is binding on Mr. Wong and that I am only concerned with the construction and validity of clauses 14 and 15 thereof. They read as follows:-

"14. Irrespective of the obligation of non-disclosure of any confidential information, the employee also undertakes not to become a competitor or work for any competitor of the company, or for any competitors of companies using the service mark "Candia World Shipping Services", as per Clause No. 2, above, for a period of twelve (12) months after he leaves the company for any reason whatsoever, namely whether his contract is terminated or he resigns.

This contractual binding of the employee is recognized by both parties as being in complete conformity with the spirit of this contract, especially in view of the fact that in exchange for contractual binding the company not only incurs enormous expense for his general and specific education and training, above, but also provides him, in return for not providing his services for one year to any competitor company, a salary that is much higher than the minimum wage as stipulated by the law or national collective agreements, were they apply, so that this excess, paid to him monthly, serves as a sufficient advance compensation, paid to him for the reason, above.

Furthermore this 12-month period is also considered fair and reasonable, for due to probable leak of confidential material, there should be sufficient time for the company to alter and reconstruct its methods of operation and readapt its already coded information.

15.    It is explicitely agreed between both parties that actions of competition in the present contract are understood only to be activities related to the existing service of the compapy in the Suez Canal - SUEZ CANAL TRANSITING SERVICE - as well as the new Panama Canal service to be established - PANAMA CANAL TRANSITING SERVICE -,

It is also agreed that the above binding of the employee not to work as a competitor or in competition to the company for one year is not valid in the case of termination of employment by the employer through no fault of the employee. "

4. On behalf of the plaintiff, Mr. Hingorani accepts that clause 14 is prima facie void and unenforceable as being a covenant in restraint of trade, and that the burden is upon the plaintiff to show that it is reasonably necessary in order to protect some legitimate interest of the plaintiff. He contends that it can be justified as reasonable protection of the plaintiff's interests in the form of trade secrets or confidential information and its trade connections. On behalf of the defendants, Mr. Stone contends that, on the evidence now before me, the plaintiff has failed to show that it has any interest which it can legitimately protect by a covenant in restraint of trade, and, in any event, that clause 14 is unreasonable because it is wider than is necessary to give reasonable protection to the plaintiff. Furthermore, quite apart from considerations of the "balance of convenience", he contends that the court should refuse the relief sought on general equitable grounds because of delay and "misconduct" on the part of the plaintiff.

5. It is trite law that an employer is not entitled to protect himself against mere competition on the part of a former employee. He cannot prevent the former employee from utilising the additional skills or knowledge he may have acquired during his employment, unless it consists of confidential information or trade secrets or he can show that the employee has come into contact with his clients or customers in such a way as to acquire influence over them. If one of these special or "proprietary" interests is shown to exist, it can be used as a peg on which to hang a restraint against competition within reasonable limits of time and space. The law was clearly stated by Lord Parker in Herbert Morris Ltd. v Saxelby [1916]A.C. 688 (at 710):-

"In Mason v. Provident Clothing and Supply Co. [1913] A. C.724 it was argued, apparently for the first time in this class case, that an employer might reasonably say "I will not have the skill and knowledge acquired in my employment imparted to my trade rivals," and that the validity of the restraint did not depend upon personal contact with the employer's customers, but upon the fact that the employee gained that general knowledge which put him into a position to compete with his master and made him a source of danger, against which the master was entitled to protect himself.

This argument was rejected by your Lordships' House, and the restraint in question was held bad, as being wider than was necessary to protect the employer from injury by misuse of the employee's acquaintance with customers or knowledge of trade secrets. In fact the reason, and the only reason, for upholding such a restraint on the part of an employee is that the empyer has some proprietary right, whether in the nature of trade connection or in the nature of trade secrets, for the protection of which such a restraint is - having regard to the duties of the employee - reasonably necessary. Such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer's business. "

In the modern world, with its sophisticated and advanced forms of technology, business systems and communications, preventing an employee from working for a rival concern may be the only practical way of preventing exploitation of the employer's trade secrets or trade connections. Whether a covenant to that effect will be upheld as reasonable must depend upon all the circumstances of the particular case, including the nature of the employment and the nature of the "proprietary" interest which exists. 'If such interest does not exist or is not proved to exist, the covenantee must necessarily fail to discharge the burden of proving that the restraint is reasonable and enforceable.

6. Before I consider the evidence before me, I bear in mind that, in accordance with the principles laid down in American Cyanamid Co. v Ethicon Ltd. [1975] A. C.396, the plaintiff need not establish that it has a prima facie case, but merely that there is a "serious question to be tried". It is no part of my function to attempt to resolve conflicts of evidence, on affidavit or affirmation, as to the facts on which the claims of the parties may ultimately depend. In the present case, the plaintiff's prospects of ultimate success may turn upon whether the agreement is binding upon Mr. Wong, despite his allegation of "economic duress", or whether he is discharged from his covenant because of his alleged wrongful dismissal by the plaintiff. However, I am not concerned with those issues, which have no relevance to the present question whether there is a serious question to be tried. Nevertheless, since all covenants in restraint of trade are prima facie void it is, in my view, incumbent upon the plaintiff to adduce some satisfactory proof of one or both of the "proprietary" interests which the law may protect in this manner.

7. The evidence in support of the application reveals hardly anything about the plaintiff's business or the nature of Mr. Wong's employment. The bulk of the affidavit of Mr. Ieronimakis is addressed, in somewhat general and vague terms, to the activities of the Candia Organisation. This is, perhaps, not surprising since the deponent, if he will pardon my borrowing a concept from another civilisation, is really the 'paterfamilias' of the Candia Organisation. The date of the plaintiff's incorporation is not stated. Neither the size of the staff in Hong Kong nor the volume of business generated by it are given. The nature of Mr. Wong's duties are not spelled out in the two contractual documents relied on by the plaintiff, namely, a telex dated the 8th September 1980 and the written agreement dated the 5th November 1984. The higher salary, which is designed to serve as "sufficient advance compensation" for the restraint is not stated. Virtually all that is said on this aspect of the case is contained in a few lines of the seven-page affidavit of Mr. Ieronimakis. Mr. Wong's duties included' "marketing the worldwide shipping services of the Candia Organisation to Far East clients, running the Hong Kong office and generating new business" (para.9). During his employment with the plaintiff Mr. Wong was engaged in considerable overseas travel. "including visits to the Candia Organisation offices in Greece, New York and Egypt and to the Far East Shipping locations. During this period he maintained contact with all of the Candia Organisation clientele" (para.12). There is really no evidence that he had any meaningful access to what might, in this context, be fairly regarded as trade secrets or confidential information, as distinct from the plaintiff's scheme of organisation or systems and methods of business. (Cf. Herbert Morris Ltd. v Saxelby, supra at 711-712; Commercial Plastics Ltd. v Vincent [1965] 1 QB 623, 641-2). Such access is left to be inferred from the mere assertion (in paragraph 10) that the training programme for the proposed new Panama Canal Transiting Service would "necessarily involve the staff learning specialised methods, techniques, systems and information which were exclusive to the Candia Organisation and therefore the subject of confidentiality. " No facts are given to indicate the basis on which that assertion is made. Bearing in mind the fact that a great deal of information regarding these specialised services is already in the public domain, as a result of publications issued by the canal authorities and those offering these services, it was incumbent upon the plaintiff to indicate more clearly the exclusive quality of its alleged proprietary interest. In my view, it has wholly failed to do so.

8. The only evidence which, in my view, might be capable of supporting this assertion of access to confidential information is the reference to the "clients continuation sheet", which is a record of transactions and communications with clients. Although the plaintiff's deponents do not say so, it is conceivable that such documents might contain details of how the plaintiff may have found solutions to the special needs or problems of particular clients. But, in the absence of any evidence to suggest that Mr. Wong took away or copied these documents, there ought to be some evidence to show that the details recorded in these documents were such that they could easily be carried away in Mr. Wong's memory, or dredged up from the recesses of his memory if and when the need arose. In my view, there is no such evidence in this case, and the plaintiff has failed to make out a case for protection on the basis of trade secrets or confidential information.

9. Although there is considerable force in Mr. Stone's submission that what the plaintiff fears is competition, pure and simple, there is, in my view, some evidence that Mr. Wong's employment by the second defendant is likely to injure the plaintiff's trade connections  by misuse of his acquaintance with the plaintiff's clients. I take Mr. Wong's points that there is no concept of the "exclusive customer" and that ship owners tend to pick and choose between companies offering particular shipping services. But, I do not think that that rules out the probability that, during his employment of approximately 5 years, he acquired some influence over the plaintiff's clients.  However, when considering the reasonableness of the covenant taken in order to protect that interest, I consider that the court must have regard to the number and locations of the plaintiff's clients, and the degree of Mr. Wong's contact with them.

10. In an attempt to answer Mr. Stone's contentions that clause 14 was void because it imposed a world ride restraint preventing Mr. Wong from working for anyone in the world who provides a Suez or Panama Canal Transiting Service, and was designed to protect companies other than the plaintiff, Mr. Hingoiani advanced a rather subtle argument, which I found difficult to fellow as it had not been developed in his opening submissions. If I have not wholly misunderstood the argument, it was to the effect that the plaintiff was offering a specialised service in a specific geographical location to a world-wide clientele; and, any company providing Suez Canal Transiting Services would be a competitor of the plaintiff because the latter maintains contacts with all clients of the Candia Organisation throughout the world. Since any competitor of the other companies would already be a competitor of the plaintiff, the words "... or for any competitors of companies using the service mark 'Candia World Shipping Services' ... " do not really enlarge the scope of the protection given by the covenant. Clause 14 merely protects the plaintiff's proprietary interest in its trade connections.

11. With respect, this is an example of the distinction between the plaintiff and Candia Co. S.A. being overlooked or becoming blurred. More to the point, the argument is not supported by the evidence in this case. Mr. Wong's duties (according to paragraph 9 of Mr. Ieronimakis' affidavit) included marketing services to Far East clients. Within that geographical area it may be reasonable to infer that he acquired some influence over the plaintiff's clients. But, the mere fact that he maintained contact with all of the Candia Organisation clientele (para.12) does not mean that they would, or did, become clients of the plaintiff, or that Mr. Wong acquired any influence over them. It is, in my view, ludicrous to suppose that Mr. Wong's sphere of influence extended to clients of the Candia Organisation in North America, Europe or the Mediterranean simply because he visited offices in New York, Greece, Egypt and the Far East.

12. Apart from thinking that a "non-solicitation" covenant was all that was reasonably necessary to protect the plaintiff from exploitation of its trade connections in the present case, extending the area of the restraint to the entire world, coupled with the apparent object of protecting persons other than the plaintiff, makes clause 14, albeit restricted by clause 15, clearly unreasonable and void. In my view, the present case is covered, inter alia, by the decision in Henry Leatham & Sons Ltd. v Johnstone-White [1907] 1 Ch. 322. The covenant in question looks like a pure restraint on competition, because the plaintiff's propriety interest is limited to its trade connections and the plaintiff has sought to protect that interest by a provision which is clearly far too wide. Furthermore, in my view, it cannot be saved by the application of the doctrine of severance.

13. For the reasons I have given, I do not think that the plaintiff has established that there is a serious question to be tried. The present case is not, in my view, one near the borderline which divides a restraint which is enforceable and one which is void on grounds of public policy (see Fellowes & Son v Fisher [1976] 1 QB 122 at 139). No real attempt has been made to show any basis for any form of order against the second defendant. In any event, and assuming that I am wrong with regard to the complaints against Mr. Wong, I consider that the balance of convenience is against granting any of the orders sought by the amended summons. There is no evidence that the plaintiff will suffer irreparable damage by the refusal of an injunction; whereas Mr. Wong would lose his present job and may not be able to find another job commensurate with his age and experience. If the plaintiff's contentions are correct, he could not safely be employed by any company which has offered or might offer Suez Canal Transiting Services to one of its customers, without first checking whether that customer had ever been a customer of the plaintiff. The probabilities are that Mr. Wong would be unemployed or grossly underemployed during the next six months. There is also the question of delay. Obviously allowance must be made for an applicant to assemble his evidence and consider his position. But, in the present case there has been no satisfactory explanation for the delay of 3 months between discovery of Mr. Wong's employment by the second defendant - a clear breach of clause 14 according to the plaintiff - and the issue of the writ in this action. On the contrary, there is evidence tending to suggest that the plaintiff did not regard Mr. Wong's employment by the defendant as a real threat to its interests. Mr. Ieronimakis made several visits to the offices of the second defendant in Hong Kong and its parent body in Stockholm after discovering that Mr. Wong had been employed by the second defendant. Yet, he does not seem to have ever mentioned that such employment was a breach of a covenant clearly binding upon Mr. Wong.

14. That brings me to a somewhat different and rather disturbing aspect of this case. Shortly after the summary termination of his employment on the 15th August 1985, Mr. Wong was sued by the plaintiff for various alleged irregularities on his part regarding monies of the plaintiff. I do not know the precise details. For present purposes, the details are not important. Since then and prior to the commencement of the present action Mr. Wong has been exposed to a series of acts by or on behalf of the plaintiff which have been described - fairly, in my view, - as "harassment" of Mr. Wong. I have no doubt that Mr. Ieronimakis is the author or originator of these acts. He may have had just cause for making a complaint to the police and for dealing with the enquiries from the Inland Revenue Department in the manner referred to in paragraph 17 of his affidavit. But, I am unable to see the relevance of these events to the present proceedings. It seems to me to be a naked attempt to inject a note of grave prejudice against Mr. Wong. But, worst of all, is the extraordinary behaviour of Mr. Ieronimakis when he went to the second defendant's offices en or about the 11th December 1985. Mr. Wong deposes to ether similar incidents, but the meeting with Mr. Svedberg is sufficient and very revealing. It is disclosed by Mr. Ieronimakis himself. He expresses surprise at Mr. Svedberg's aggressive defence of Mr. Wong, but does not deny the truth of any of the allegations in Mr. Svedberg's affidavit (Exhibit "11-6"). He doesn't even seek to justify or explain his own behaviour. No explanation or apology or regret was expressed during the hearing before me. Mr. Hingorani simply did not deal with this aspect of Mr. Stone's submissions. Apart from casting a heavy cloud of doubt and suspicion over the genuineness of the plaintiff's alleged proprietary interests in this case, as Well as the true reason for the restraint contained in clause 14 of the agreement, this conduct of the plaintiff's managing director is, in my view, incompatible with the grant of discretionary relief of the kind sought by the present application. I realise that in modern times the maxims of equity are often overworked. But I regard this as a clear instance of a litigant with soiled hands approaching the court for equitable relief, only after strong-arm tactics, threats and intimidation have failed. On this ground alone, I think that the present summons should be dismissed.

Representation:

Mr. Jeevan Hingorani, instructed by Messrs Johnson, Stokes & Master for Plaintiff

Mr. W.D. Stone, instructed by Messrs Deacons for Defendants