Bsc Building Materials Supply Co Ltd v. Cheung Chi Hung Michael

HCA006153/1997

IN THE HIGH COURT OF HONG KONG SAR

COURT OF FIRST INSTANCE

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Coram: The Hon. Mr. Justice Waung in Chambers

Date of Hearing: 18, 19 and 20 February 1998

Date of Handing Down of Judgment: 15 April 1998

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JUDGMENT

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1. This is an application by the Defendant to strike out the Statement of Claim and to enter judgment in favour of the Defendant or alternatively for judgment in favour of the Defendant upon the determination of a point of law under Order 14A of the Rules.

FACTS

2. The Plaintiff, BSC Building Materials Supply Co. Ltd. ("BSC") is the key company in a group of companies known as the BSC Group of Companies ("the BSC Group"). BSC and the BSC Group carried on the business of trading in building materials, supplies and technical equipment. The Defendant first started working for BSC in 1972 and for the next 24 years his career with the BSC Group progressed to such an extent that he became the Executive Director of the BSC Group's Building Materials Division. The rise in importance of the Defendant in the BSC Group followed more or less the spectacular rise and growth of the BSC Group from its humble beginning in 1970 with a mere staff of ten into one of the largest building materials and hotel product suppliers in the Far East. Although the BSC Group is organised into 5 Divisions, namely the Buildings Materials Division, the Contracting Division, the Trading Division, the Home Improvement Division and the China Division, the Building Materials Division by its intimate links to the other Divisions, is the main pillar of the BSC Group. The Defendant as an Executive Director of the Building Materials Division has a key role in the BSC Group and he was deeply involved in the whole range of activities of the BSC Group, from staff recruitment and training to dealing with suppliers to and customers of the BSC Group. Although there is no doubt that the Defendant was a high officer of the BSC Group, it is not clear from the evidence precisely how important he was and to what extent his key role in the BSC Group and in the Plaintiff called for extensive protection of the interests of BSC and the BSC Group when the Defendant wished to leave his employment.

3. On 7^th May 1996, the Defendant, well before reaching the retirement age, resigned from the BSC Group (such resignation to take effect immediately). At the time of his resignation, the Defendant was receiving annual remuneration package of $1.5 million in salary, a net profit sharing commission of $365,556 and a travel allowance of $24,000. The big boss of the BSC Group, Mr. William Lau tried to persuade the Defendant to stay or at least to remain as a consultant to the BSC Group but the Defendant did not stay.

4. As the Defendant resigned before his retirement age, he was not entitled to any retirement pension. So the Defendant negotiated with Mr. Lau for an ex gratia payment. The parties carried on long negotiations. The main concern of Mr. Lau was to protect for at least two years the interests of the BSC Group from unlawful harm which the Defendant could inflict on the BSC Group and in return BSC was willing to pay to the Defendant by instalments a very substantial sum. The correspondence showed that the BSC Group's primary concern and consideration for the payment of the very large ex gratia sum was that the Defendant was to go into genuine retirement and that the Defendant not be involved in any competitive business which would cause unlawful harm to the BSC Group.

5. The final agreement was reached by the parties signing on a letter dated 1^st June 1996 from the Plaintiff to the Defendant ("the Agreement"). The key provisions of the Agreement are as follows:-

"... the Company is prepared to grant you a staggered lump sum of HK$11,000,000 (HK$13,000,000 less HK$2,000,000 personal loan to you from me) as termination bonus upon the following terms:-

Provided always that should you be in breach of any of the above terms, any payment outstanding shall immediately cease to be payable and you should forthwith repay to the Company all payments made without prejudice to any claim for damages which may be made by the Group."

It is to be noted that the payment amounts and dates under the Agreement are as follows:-

$5,000,000 (with $2 million as repayment of the loan) on 1^st June 1996;

$4,000,000 at the end of July 1997;

$4,000,000 at the end of July 1998.

The staggered payments and their non-availability upon breach under Clause 5 are no doubt to reinforce the compliance of the Defendant with Clause 3 of the Agreement. It is no coincidence that the final payment of $4,000,000 was to take place after the expiry of the two year period provided in Clause 3.

6. Soon after the Agreement was signed and the Defendant obtained his payment of $5 million, there began to be signs that contrary to what the Defendant told Mr. Lau about his retiring to Canada, the Defendant was going into competitive business in Hong Kong against the BSC Group. The Defendant asked Mr. Lau for permission to act as consultant to Grohe, an exclusive German supplier to the BSC Group. Permission was refused. In late 1996, various employees who used to work directly with and under the Defendant left BSC to join the newly established Hong Kong office of Grohe Pacific Ptd Limited ("Grohe Pacific"). Around that time BSC was also served notice by Grohe that its exclusive distribution agreement with BSC was being terminated. Information then came to Mr. Lau that the Defendant was connected with the defection of BSC staff to Grohe Pacific and that the Defendant was involved in two companies which were soliciting suppliers and customers of BSC. Private investigators were therefore engaged by the BSC Group and evidence was obtained which showed that the Defendant had broken Clause 3 of the Agreement. It is in these circumstances that the Plaintiff commenced on the 10^th of June 1997 this Action against the Defendant for two separate reliefs:-

(1) the return of the $5 million paid on 1^st June 1996;

(2) the declaration by the Court that as result of the breach of the Agreement by the Defendant, the Plaintiff is not obliged to make the 2^nd or 3^rd payment of $4 million each to the Defendant which otherwise would be payable on the 31^st July 1997 and 31^st July 1998.

7. There were a great deal of activities in June 1997 as the Plaintiff sought and obtained an injunction from Rogers, J. (as he then was). This injunction Order was discharged in October 1997. Also in October 1997, the Defendant launched this present Summons to strike out the claim in the Action and for judgment against the Plaintiff or alternatively for determination of law under Order 14A in favour of the Defendant and for judgment thereafter to be entered in favour of the Defendant.

8. As there are two separate reliefs by the Plaintiff, one for the return of the $5 million already paid and one for the declaration that the Plaintiff has no liability to pay the $8 million ($4 million plus $4 million), the arguments before the Court naturally also fell into two parts. The issues which were argued could be summarised as follows:-

Issue A relates to both the $5 million claw-back relief as well as the $8 million no-liability relief whereas Issue B strictly speaking is only relevant to the $8 million no-liability relief.

9. It was recognised by Mr. Edward Chan for the Defendant that he assumes the high burden of a strike-out application and that to succeed wholly in his application on both Issue A and Issue B, he must show to the Court that both Issues are unarguably against the Plaintiff and that on a trial of the Action, the Plaintiff is bound to fail at the Trial. Mr. Coleman for the Plaintiff emphasised this point throughout the hearing and said that no matter how strong the case of the Defendant might appear to be on this interlocutory application, there is no certainty that he would succeed at the Trial and that only the Court after hearing all the evidence at the Trial could come to a decision on the two Issues. This aspect will assume considerable significance on this Summons as will be seen later.

ISSUE A

I--LEGITIMATE INTEREST REQUIRING PROTECTION

10. The authorities show that the consideration of whether a restraint against a former employee is reasonable would largely depend on whether the employer has any legitimate interest which requires protection. The extent of such interest is relevant to the question of protection required and to the question of the reasonableness of the restraint. As said by Lord Wilberforce in Stenhouse Australia Ltd. v Phillips [1974] A.C. 391 at 400:-

"... the employer's claim for protection is based on the identification of some advantage or asset inherent in the business which can properly be regarded as, in the general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation."

11. For the limited purpose of this interlocutory strike-out application, it is sufficient to consider briefly three interests of the Plaintiff which might arguably be considered legitimate interests requiring protection:-

12. Trade connection is usually a primary and essential aspect of the goodwill which a successful employer seeks to protect. It covers not just customers connection but its interest can extend to potential customers and suppliers. This aspect of trade connection as being a legitimate interest was not directly attacked by Mr. Chan during the hearing. This is not surprising, having regard to the fact that the Defendant in the course of 24 years and rising to the high position of Executive Director, would have undoubtedly built up, nurtured and has access to (on behalf of the BSC Group) large and extensive trade connections. What the Plaintiff is entitled to protect is the Defendant making use of the trade connections of the BSC Group. What is the extent of the trade connection of the BSC Group which is legitimate interest requiring protection is a matter of fact which must be established at the Trial and this is of course directly relevant to Question II under Issue A of whether Clause 3 is reasonable.

13. In addition to trade connection, the employer is also entitled to the protection of its business secrets which is a property belonging to the employer not the employee and business secrets in this context would include both trade secrets and confidential information. The employee on the other hand is entitled to his skill, knowledge and experience. Where the line is drawn between business secrets and employee's skill, knowledge and experience is a question of fact which is very difficult to decide even when all the facts have emerged at the Trial. In my view as a general rule, the higher up in the hierarchy of a company is the employee, the more likely he would be in possession of business secrets which require to be protected against unfair use by the employee. Although this aspect was not directly touched upon in the Affidavits, it seems to me at least arguable that in the circumstances, the Plaintiff has an arguable legitimate interest in the BSC Group's business secrets.

14. Staff connection as a third legitimate interest is a subject of growing interest and controversy. Employers argue that losing stable and key workers can be disastrous for a company as recruitment, training, positioning and integration of staff is expensive and time consuming. This matter was discussed in Mehigan and Griffiths on Restraint of Trade and Business Secrets, 3^rd edition at para. 8.4.3 and in Jefferson on Restraint of Trade at pages 78-9. In Kao Lee & Yip v Koo Hoi-yan [1995] 1 HKLR 248, the Court of Appeal left open at page 253 this question of staff solicitation as a legitimate interest. In my judgment, it is at least arguable that having regard to the special facts of this case and the significance of this staff matter to the Defendant and the BSC Group, there is a legitimate interest in relation to staff connection which requires protection. A prime example is the team directly working under the Defendant being persuaded to join a new third party, Grohe Pacific. If the Defendant did the persuading, then Clause 3 would be seen to be perfectly reasonable.

15. On Question I of legitimate interest, I reach the conclusion that there are a number of arguable legitimate interests which require protection and that therefore the Plaintiff is justified to have a restraint clause to protect its legitimate interests.

II--CLAUSE 3 REASONABLE BETWEEN THE PARTIES

16. In Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] A.C. 535, Lord Macnaghten in the classic passage at page 565 said:-

"... restraint of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is sufficient justification, and indeed it is the only justification, if the restriction is reasonable--reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interest of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public."

Whether Clause 3 is reasonable between the parties is the main battle ground at the hearing and this assumes vital importance as Mr. Chan for the Defendant had expressly disclaimed any reliance on public interest as ground for unenforceability of the restraint. Each party's claim to victory is made difficult by the multiple considerations which the Court must have regard to in reaching its conclusion. Without in any way trying to be comprehensive (which is a task for the Trial and not for this interlocutory application), I will examine the following considerations.

17. First, it is worthwhile to remember that the reasonableness test is the answer to the view that it is "oppressive" for the employer to exact restraint which is larger than the necessary protection of the employer. Lord Hershell said in the Nordenfelt judgment at page 549:-

"Whatever restraint is larger than the necessary protection of the party can be of benefit to either, it can only be oppressive, and, if oppressive, it is in the eye of the law, unreasonable."

The primary question is therefore whether the restraint clause is oppressive of the employee and the reasonableness is the test formulated to answer that oppression question. It seems to me that in applying rigidly the reasonableness test, great injustice would be done by providing no room for flexibility when in many cases the agreement in question is clearly not oppressive but the restraint might be said to be in some respects not wholly reasonable or matching each strand of restraint by the appropriate width of the legitimate interest. Many of the authorities therefore call for the broader approach with a great deal of common sense applied to the decision on reasonableness.

18. Second, as pointed out by Mr. Coleman for the Plaintiff, there is far less room for certainty when public policy is the basis of the principle relied on by the Defendant for this interlocutory attack. Lord Watson said at page 553 of Nordenfelt judgment:-

"A series of decisions based upon ground of public policy, however eminent the judges by whom they were delivered, cannot possess the same binding authority as decisions which deal with and formulate principles which are purely legal. The course of policy pursued by any country in relation to, and for promoting the interest of, its commerce must, as time advances and as its commerce thrives, undergo changes and development from various causes which are altogether independent of the action of its Court.... Their function, when a case like the present is brought before them, is, in my opinion, not necessarily to accept what was held to have been the rule of policy a hundred or a hundred and fifty years ago, but to ascertain, with as near as approach to accuracy as circumstances permit, what is the rule of policy for the present time....."

Lord Wright expressed the same sentiment at page 93 of his famous lecture on Public Policy in Legal Essays and Addresses:-

"This (Nordenfelt) case, when read in the light of the authorities over two centuries before it, is a good illustration of the way in which a doctrine of public policy changes with the times. It has to change when the times changes, at least when it is a flexible rule adjusted to conditions of the day, like covenants in restraint of trade, the reasonableness of which is judged by a different test in days of rapid and easy communication as compared with old days when circles of trade and commerce were restricted to small local areas."

It seems to me that in considering the question of reasonableness of the restraint, I must bear in mind this changing standard of public policy and that restraint in this fast almost boundaryless world of fax, mobile telephone and internet deserves to be considered in a very different light from even the situation prevailing in Britain 20 or 30 years ago. The unique commercial position of Hong Kong and its special connection to the rest of the world seem to me also a matter which at the Trial would call for a detailed examination of what ought to be the public policy of the Hong Kong Court in relation to restraint of trade towards the end of this millennium.

19. Third, the diverse authorities suggest that the reasonableness of any particular restraint covenant is peculiarly sensitive to facts. In Herbert Morris Ltd. v Saxelby [1916] A.C. 688, Lord Atkinson said at page 700:-

"..... the onus of establishing to the satisfaction of the judge who tries the case facts and circumstances which show that the restraint is of the reasonable character .....resting upon the person alleging that it is of that character....."

Lord Macnaghten in Nordenfelt referred to special circumstances at page 565. Lord Parker in Saxelby said at page 708:-

".....it becomes necessary to consider in each particular case what it is for which and what it is against which protection is required. Otherwise it would be impossible to pass any opinion on the adequacy of the protection."

In other words, the exercise required to be undertaken is to find out from all the facts and circumstances, what are of value to the employer and what are the harms to the employer in order to measure against what sorts of protection are required.

20. In the Stenhouse judgment, Lord Wilberforce illuminated the true nature of resolving the question of reasonableness of restraint, although speaking directly about period of restraint, by saying the following at page 402:-

"..... It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer's business, the nature of the employer's interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not. An opinion as to reasonableness of elements of it, particularly of the time during which it is to run, can seldom be precise, and can only be formed on a broad and common sense view."

It is because a court judgment on the "reasonableness of elements" cannot be precise that it is essential that all the facts and circumstances must be gone into for the Court to come to a "broad and common sense view" of the reasonableness of the restraint covenant or parts of the covenant (arising after considering severance). In my view this fundamental aspect of this case (indeed of all restraint of trade cases) was overlooked by the Defendant and this fundamental aspect presents an insurmountable obstacle on top of an already high burden inherent in a striking-out exercise. An employer is entitled at the Trial to bring out all the facts and circumstances ("special circumstances" in the words of Lord Parker at first line of page 707 of Saxelby) to justify the restraint and an ex-employee (no matter how aggressive or calculating) is not entitled to deprive the employer such right, except in the plainest and most obvious of cases and this Action is certainly not one of these cases.

21. Fourth, the nature of the restraint contained in Clause 3 is not of the most severe kind, notwithstanding the criticism leveled at it by Mr. Chan. Restraint generally speaking can take the form of the three types (in ascending order of lack of freedom to the ex-employee):-

Clause 3 in question is of the first and second type namely, non-solicitation clause and non-dealing clause. Clause 3 is made up of two parts:-

(1) no business dealing with customers of the BSC Group;

(2) no luring of customers of the BSC Group to have business dealings with:-

Part (2) is a non-solicitation provision and Part (1) is a non-dealing provision. The common theme in both provisions is the protection of the trade connections defined in Clause 3 as the "customers". To what exact extent such provisions are reasonable must depend entirely on the full facts and circumstances to emerge at the Trial but prima facie at this interlocutory stage, I see nothing inherently impossible for the Plaintiff to establish at the Trial that Clause 3 is reasonable to protect the legitimate interests of the Plaintiff and of the BSC Group. It was suggested at the hearing that in any event Part (2)(b) relating to luring of customers in relation to third parties must be too wide. I disagree. The protection is the trade connection namely the "customers" and it can harm the BSC Group as much if the "customers" are lured away by the Defendant to do business with competitors of the BSC Group as with say a third party which can be a future competitor of the BSC Group such as Grohe Pacific. In fact with a third party (namely not a competitor at the time of the departure of the Defendant) it could be worse as the third party such as Grohe Pacific will even take away the staff team.

22. Fifth, the extent that quantum of payment or consideration is to be taken into account in considering reasonableness is a matter very much arguably in favour of the Plaintiff. There is high authority to suggest that it is a relevant factor. Lord Macnaghten in Nordenfelt said at page 565:-

".....though of course the quantum of consideration may enter into the question of the reasonableness of the contract."

The proposition was approved in Esso Petroleum v Harper [1968] A.C. 269, 300, 318, 323 and in Amoco Australia v Rocca [1975] A.C. 561, 579. In Office Overload v Gunn [1977] FSR 39, Lawton, L.J. referred to the line of cases on the inadequacy of consideration pointing to unreasonableness. In Panayiotou v Sony Music Entertainment [1994] EMLR 229, it was said at page 330:-

".....the size of the consideration may be a positive factor tending to justify the restraint. If the consideration for the restraint is so substantial that by any objective standard it is in the interests of the party receiving the consideration to subject himself to the restraint, then that must.... be a factor pointing in the direction of justification."

In this case, the Defendant was to receive under the Agreement $13 million over a period of 2 years which is of course the period of restraint under Clause 3. The Defendant's yearly pay was under $2 million at the time of the resignation and therefore he was being paid for the two years restriction, more than three times of what he would earn as an Executive Director working full time. A "garden leave" situation would earn the Defendant three times less money but with even greater restriction arising out of the duties as employee and director. To me, the consideration given by the Agreement is not simply large but enormous and it is enormous to reflect the overwhelming reasonableness of the restraint on a man who said he was not going to work anymore. The matter however goes further. The Defendant was actually paid $5 million at the time of the Agreement and in pursuance of the Agreement which must be considered to be reasonable by both parties. In the Amoco case, Lord Cross said at page 579:-

"The fact that a covenator has obtained and will continue to enjoy benefits under the relevant agreement which formed part of the consideration for the covenant which he claims to be unenforceable is no doubt pro tanto a reason for holding that the covenant is not in unreasonable restraint of trade."

For me what is in question, is not so much reasonableness of the Plaintiff but in the light of such large sum, whether it can be said that it is grotesque for the Defendant to be given this generosity and then to bite the hand which gives the large sum.

23. Sixth, the very high position occupied by the Defendant in the BSC Group would strongly suggest the reasonableness of the restraint covenant. As a general rule in my view, the higher up the position in a company or group occupied by the employee and the longer he has worked in that company, the more likely his departure or defection could cause serious harm to the employer company or group. This is after all natural, as a very senior man would know more about business secrets and confidential information and would have access to more significant trade connections than a junior person of recent employment. This aspect was discussed at pages 104-5 of Jefferson on Restraint of Trade. A glance at the Ready Reckoner in Appendix 1 (pages 329-339) of Mehigan and Griffiths on Restraint of Trade and Business Secrets will show the very large percentage of cases whereby the the English Court upholds restraint on high officers of companies. I list below some of these cases:-

1. East Essex Farmers Ltd. v Holder (Manager)

2. Gilford Motor v Horne (Managing Director)

3. Kerchiss v Colora Printing Inks (Director)

4. Calvert, Hunt and Barden v Elton (Branch Manager)

5. Littlewoods Organisation v Harris (Director)

6. Bridge v Deacons (Solicitor/Partner)

7. Rex Stewart, Jeffries Parker v Parker (MD Advertising Agency)

8. Lawrence David v Ashton (Sales Director)

9. Ingham v ABC Contract Services (Branch Manger)

10. Morris Angel v Hollande (Group Managing Director)

11. Hanover Insurance v Shapiro (Chairman, MD, Director, Manager)

12. Alliance Paper Group v Prestwich (Managing Director).

In my judgment, at the Trial of the Action the high position occupied by the Defendant and therefore what the Defendant with that high position could do to the BSC Group would have to be taken into account to determine if Clause 3 is reasonable.

24. Seventh, it was suggested that two years is too long a period for the restraint and reliance was placed on what was said in the Judgment of Ho Wing-cheong v Graham Margot [1991] 1 HKLR 245. It is to be noted that what Godfrey, J. (as he then was) characterised the 3 year period as being too long turned on the particular facts and evidence in that case (see page 249). For me, the two year period of Clause 3 is plainly arguable as being reasonable.

25. Eighth, the worldwide scope of Clause 3 is heavily relied upon by Mr. Chan as proving almost conclusively that Clause 3 is unreasonable. I disagree. Even assuming (for the moment) that the Clause is of worldwide import, it is nevertheless a matter for the Plaintiff to show to the Court (at the Trial) what is the full justification for restraint without geographical restriction. Much will depend on the evidence. But in this day of mobile telephone, fax and internet which cut across not only national boundaries but also reaching out across continents and oceans, it is certainly possible that the true protection of the Plaintiff and the BSC Group would require a non geographical limitation restraint. In this case for example, the Defendant can move between two homes in Hong Kong and Vancouver (or Hong Kong and Shenzhen) and yet be able to cause harm to the BSC Group outside Hong Kong as effectively as from Hong Kong and this would be specially so if he has put together in Hong Kong his ex BSC Group team to work for a competitor of the BSC Group (or new third party competitor). The world has changed so much that worldwide restraint in cases such as this cannot be regarded as having no prospect of success at the Trial.

26. But is Clause 3 bound to be regarded as being of world wide import? It does not say so expressly and by the conventional wisdom of case law on restraint, it has been argued that it is to be so regarded. The normal rule of construction is contra preferendum and if the clause does not expressly state a geographical coverage, it ought to be construed as being limited to the locality (which in this case would be Hong Kong). But the weight of judicial case history seems to suggest that a different approach is to be adopted for restraint cases and that in addition to having to justify reasonableness of a restraint clause, the normal rules of construction is also displaced or altered, loaded against the employer. I venture to suggest that there is scope for reconsideration of this approach and that it is not unarguable that Clause 3 on its true construction could be held to be limited to Hong Kong.

27. Ninth, there was the suggestion that Clause 3 is so wide as to cover a number of situations where the Defendant would be prevented from carrying on any business (such as insurance) which is in no way related to the business of the BSC Group. In this connection, it is worthwhile to bear in mind that the Court will not adopt extravagant interpretations to render a restraint clause void (see Chitty on Contract, 27^th edition, Vol. 1, para 16-082; Mehigan and Griffiths on Restraint of Trade and Business Secrets, para. 3.3). In Home Counties Diaries v Skilton [1970] 1 WLR 526, 536 per Salmond Lord Cross said at page 537:-

"... the validity of a covenant is not to be tried by the improbabilities that might fall within its wording"

Morris, L.J. in M & S Drapers v Reynolds [1957] 1 WLR 9 put it thus:-

"I do not consider that restriction would necessarily be held to be unreasonable merely because it could be shown possibly to extend to one or two cases beyond the range of contemplated protection."

28. Tenth, it has been suggested that the group company protection extending to associate companies is too wide and unnecessary. This may be the position in former days. But as can be seen in Stenhouse (page 404) the court examines the facts of each case to decide whether protection extending to associate companies would be considered to be unreasonable.

29. Eleventh and finally, I turn to the string of cases on restraint relating to pension payments (Wyatt v Kregliner [1933] 1 KB 793; Bull v Pitney-Bowes [1967] 1 WLR 273; Sadler v Imperial Life Assurance of Canada [1988] IRLR 38 and Marshall v Financial Management [1995] 1 WLR 1462 (Sumption, J.) and [1997] 1 WLR 1527 CA) which show a tendency of holding the restraint to be unreasonable. In so far as these cases show that post retirement pension payment contracts are as much subject to the doctrine of restraint of trade as general employment contracts, it is not necessary for me in this Judgment to express any contrary view. But these cases only show that post-retirement benefit restraint is not an excluded class and is subject to the same reasonableness test as employer/employee restraint of trade covenant. Each case must still depend on its individual facts and circumstances at the Trial for the Court to come to a decision as to whether the clause in question is unreasonable and therefore unenforceable.

30. Having considered and reviewed the above eleven considerations relating to the question of reasonableness of Clause 3 restraint, I can now state my conclusion on Question II of Issue A. In my judgment, the Defendant has failed to persuade me that the Plaintiff is bound to fail on the reasonableness of restraint. On the totality of the materials before me, I am not even persuaded that the Defendant has necessarily a very strong case on "reasonableness between the parties", the test formulated in the Nordenfelt case. It follows therefore strictly speaking, it is not necessary for this Court to continue the examination of Question III of Issue A or the examination of Issue B.

III--SEVERANCE OF PARTS OF CLAUSE 3

31. Assuming that Clause 3 in its present form will be held unreasonable at the Trial as being unnecessarily wide for the protection of the legitimate interests of the Plaintiff and the BSC Group, Question III is the debate whether any substantial part of Clause 3 can be saved. This is where severance "in the sense of reduction or modification of an objectionable clause" (per Dunn, L.J. at page 187G of Alec Lobb v Total Oil [1985] 1 WLR 173) comes in. The difficulty for this Court however is that without knowing what part of Clause 3 was found to be too wide or unreasonable, it is really speculative to discuss whether appropriate severance could save Clause 3. It is in this context that again the full facts and circumstances must be known to the Court (which can only take place at the Trial) in order that the Court can decide, based on these full facts and circumstances, whether the objectionable aspects of Clause 3 could be legitimately severed from Clause 3 so as to enable the rest of Clause 3 to be enforceable. In the Sadler judgment and in the Marshall judgment, various rules as to severance were discussed but their applications all turn on the special facts of the cases. In the Jefferson book (Chapter 7 at pages 143 to 152) and in the Mehigan and Griffiths book (pages 38-41) the subject was covered at some depth. What emerges from these discussions on this difficult subject is that it is impossible for this Court to say now that severance would not be able to save Clause 3 at the Trial. Without further long elaboration, I am content to state my conclusion that on this Question III, I also find against the Defendant.

ISSUE B

32. Issue B will only arise if I find against the Plaintiff on Issue A. As I have found in favour of the Plaintiff on Issue A, Issue B does not call for a determination. However as it had been extensively argued, I will briefly state what would have been my conclusion if I had been wrong on Issue A.

33. It will be seen immediately that the restraining influence in the Agreement is not just Clause 3 but also Clause 5. Clause 5 contains the twin stipulations of the carrot and the rod. The carrot is the agreement to pay the three instalments over two years. The rod is the stipulation that upon breach by the Defendant's promise in the Agreement (which of course include the restraint covenant in Clause 3), any instalment already paid is to be returned to the Plaintiff and all outstanding instalments will cease to be payable. The carrot and the rod are twins and I do not see how they are to be separated or severed. It seems to me therefore that simply as a matter of construction, Clause 3 and Clause 5 must fall or survive together.

34. There are many alternative routes to the same conclusion and for the purpose of this interlocutory application, all I need to do is to express my opinion that the point is clearly arguable and to indicate some other approaches (by no means exhaustive) which would lead to the same result.

35. In Howard Hudson v Ronayne [1971] 126 CLR 449, a case also involving the agreement to pay a retired employee by instalments on condition of the observance of a restraint which was held to be unreasonable. The High Court of Australia held by a majority (Barwick, C.J. dissenting) that the ex employee could not recover the outstanding instalments. Walsh, J. at page 463-4 of the report expressed his opinion that it is a case of dependent covenants and referred to an "intended reciprocity of obligation between promises" (per Kitto, J. in Brooks v Burns Philip Trustee [1969] 121 CLR 438) which required an inference that the validity of each promise is a condition of the operation of the other. I accept that reasoning and it is at least arguable that the reasoning also applies to this case.

36. Gibbs, J. in the same Howard Hudson case said at page 469 that to require the employer to make payments even if the ex employee acted to the detriment of the employer within the meaning of the restraint clause would be to entirely alter the nature of the obligation which the deed imposes. I agree with that view and this furnishes the third way I would consider that the Plaintiff has no obligation to pay the $8 million instalments.

37. In the Marshall case, the English Court of Appeal posed different tests for severance but adopted the test of the agreement "will be struck down in its entirety only if, in substance, and regardless of form, it is an agreement for an invalid restraint." I have no doubt that the restraint is the true nature of this Agreement or that at least it is arguably so. This being the case, it furnishes a fourth reason why I conclude that the $8 million point is arguably not due.

38. As can be seen in cases ranging from Amoco to Alec Lobb, through Sadler to Marshall, (the textbooks express the same opinion) the subject of severance (in the sense of survival or fall of the whole contract) is a particularly difficult problem which had always troubled the courts. Amidst the many problems and uncertainties of this case, I have no doubt that this point is plainly arguable and that it is not suitable for either Order 14A determination or for an interlocutory striking-out application. I would therefore also hold against the Defendant on this Issue B.

FINAL REMARKS AND CONCLUSION

39. It had been strongly submitted by the very able Leading Counsel for the Defendant that this is a clear case where the legal authorities are wholly with the Defendant and that accordingly judgment should now, at this interlocutory stage, be entered for the Defendant on both the claw-back $5 million claim as well as on the no-liability $8 million claim. For reasons stated earlier, I disagree with the contentions. In my opinion, in 1988 the law in Hong Kong is not so impotent or lacking in common sense, as to sanction a claim for immediate judgment of $13 million which has so little merit to recommend itself.

40. Unfortunately, it seems to me that the law on this subject had developed in a way too heavily in favour of the employee with the result that no coherent principle can be properly deduced from the authorities and so much depends on the uncertain or capricious application by a particular court of a flexible principle to the particular facts of a case. The result of this unfortunate state of the law is that not infrequently, it is the employer who seeks to disown the agreement contending that the restraint is unreasonable or too wide. The uncertain application of a flexible principle often results in depriving the employee of the very benefit the employee seeks to obtain by a restraint which was considered objectively by both parties to be reasonable and acceptable. The absurdity I have in mind can be simply illustrated by a reversal of the present situation. If the day after this Agreement was signed by the parties, the Plaintiff reneged and refused to pay the $5 million with the allegation that the Agreement, Clause 3 and Clause 5 are in unreasonable restraint of trade, would the Court not try to lean against such meritless contention. It seems to me that the just solution to this whole area of the law is for the Hong Kong Court to re-examine the legal principle in the light of the modern conditions prevailing in Hong Kong where employees are no longer in a weak position (compared to a lowly apprentice in England 150 years ago) and where the parties can be left (generally speaking) to be the best judge of what is a reasonable restraint or a fair bargain for a non boiler-plate restraint.

41. For all the reasons stated above, in my judgment the Summons of the Defendant must be dismissed with costs to the Plaintiff in any event. I direct that the parties apply to me within 14 days of this Judgment for directions as to the further conduct of this Action.

Representation:

Mr. Edward Chan, S.C. & Mr. Horace Wong instructed by Messrs Johnson Stokes & Master for the Defendant

Mr. Russell Coleman instructed by Messrs Simmons & Simmons for the Plaintiff