Hsbc Bank Plc and Another v. Steven Andrew Wallace
Read the full judgment text of HCA 2422/2007 on BabelCite. This High Court CFI judgment was delivered on 28 November 2007 before Deputy High Court Judge Gill.
Civil practice – interlocutory injunction – employment contract – restrictive covenant – non-compete clause – choice of law – express choice of English law – proper law of contract – Hong Kong Employment Ordinance (Cap 57) ss 4, 7, 70 – whether EO is an overriding statute – UK Employment Rights Act 1996 s 204(1) compared – secondment of UK-based employee to Hong Kong subsidiary – buy-out of notice period under s 7(2) – senior bank employee (head of Investment Banking, Asia-Pacific) – resignation to join competitor Citigroup – garden leave – protection of confidential information and trade secrets – legitimate business interests – reasonableness of duration (six months less garden leave) and territorial scope (Asia-Pacific) – TFS Derivatives v Morgan three-stage test – American Cyanamid principles – Lansing Linde v Kerr – real prospect injunction period will expire before trial – particular regard to prospects of success – serious question to be tried with high prospects of success – balance of convenience – damages not an adequate remedy for plaintiff – undertaking in damages adequate for defendant – injunctions granted – costs of plaintiffs in the cause (nisi).
Legal issues: Applicability of Hong Kong Employment Ordinance to a contract governed by English law · Enforceability of the six-month post-termination non-compete clause · Whether interim injunctions should be granted under the American Cyanamid test
Outcome: Interim injunctions granted in favour of the plaintiffs restraining the defendant from working for Citigroup and from competing in the Asia-Pacific region.
Cited by 3 cases · Cites 1 case
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HCA 2422/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2422 OF 2007 ______________________ BETWEEN
______________________ Before : Deputy High Court Judge Gill in Chambers Dates of Hearing : 20-21 November 2007 Date of Judgment : 28 November 2007 ______________________ J U D G M E N T ______________________ 1.This is an action brought by the Bank against a former employee of senior rank who tendered his resignation and then breached his employment contract in two material ways; the first, because he began working for another bank whilst still employed by the Bank, the second because this other bank is a competitor, and his joining it was conduct contrary to a “non-compete” clause of his contract. 2.The matter before me is an interlocutory application for an interim injunction in two parts; the first, that he be restrained from continuing his existing employment and otherwise from taking up employment until his contract with the Bank is at an end; the second, that he cease being employed by his present employer or any other competitor of the Bank until the non-compete period of restriction comes to an end. 3.The application is opposed in respect of both parts. The first is because he is prepared to pay for and has already tendered the price of buying himself out of his contract with the Bank, so that he was no longer employed by it when he became re-employed. The second, because the non-compete clause of his former contract is unenforceable in the circumstances of his case. History 4.The employee is the abovenamed defendant, Steven Wallace. Formerly living in Putney, London with his family and working in a senior position with Goldman Sachs, he came to be recruited by HSBC, the Bank as I have called it, to take up the post of head of the Asian Advisory Group in Hong Kong. 5.The recruiting and posting was undertaken in a particular way. HSBC is my shorthand for the HSBC Group of Companies, whose members located in UK, Hong Kong and other parts of the world it is said comprise in total the world’s largest financial group based on market capitalization. The parent is HSBC Holdings plc. It was incorporated and is based in the UK. HSBC Bank plc is a wholly owned subsidiary also incorporated and based in the UK, and is one of the country’s major clearing banks. HSBC Markets (Asia) Limited is incorporated and based in Hong Kong. Its business comprises providing tailored financial products and services to major government corporate and institutional clients in the Asia-Pacific region. This business is undertaken within the division known as the Corporate Investment Banking and Markets (CIBM) division of the Bank. 6.For convenience I shall call the HSBC overall, in general terms, the Bank, HSBC Bank plc, HSBC Bank, and HSBC Markets (Asia) Limited, HSBC Markets. 7.It is accepted that Mr Wallace was offered and agreed to take up the post as head of the Asian Advisory Group of the CIBM division through HSBC Markets. The terms of employment required him to relocate his family to Hong Kong and to be paid a fixed salary with additional remuneration, including a sum to compensate for the upheaval of relocation, housing and education allowances, a discretionary annual bonus and other remuneration consistent with the employment of an expatriate into a senior rank. 8.The contract agreed was in the form of a letter of offer from HSBC Bank to Mr Wallace dated 16 April 2004 in which HSBC Bank was stated to be the employer, and Mr Wallace the employee in the position of Managing Director, Corporate Finance and Advisory in the CIBM Division. Contemporaneous with this offer was another letter offering secondment from HSBC Bank to HSBC Markets. The secondment letter set out the details of remuneration that Mr Wallace was to receive; the expatriate package I have already alluded to. The term of secondment was said to be for up to four years. Mr Wallace signed both letters on 19 April 2004 and thus accepted employment with HSBC Bank and the secondment to HSBC Markets. The family forthwith relocated to Hong Kong and Mr Wallace took up his duties. The Contractual Terms 9.In an affidavit filed in support of this application the head of Human Resources in HSBC Markets, Michael Webb, explained the reason for the employment contract incorporating a secondment letter:
He did not condescend to detail, but that explanation is not challenged. 10.Pertinent terms of the employment contract are at clauses 11, 17 and 21 and I repeat them:
(For convenience I shall refer to this as the non-compete clause.)
(These clauses I shall refer to as respectively the non-solicit and non-poaching clauses.)
The Employee Handbook referred to in clauses 11 and 17 is a manual which establishes terms and conditions of contract of a general nature by which employees are bound. Clause 19 of Mr Wallace’s contract stated that if there is any conflict the letter (this contract) shall prevail. Clause 2.15.7 of the Employee Handbook (referred to in clause 17.6 of the contract) states:
11.The secondment contract recorded that the secondment was based in Hong Kong for the duration (up to four years) with all employment costs (salary allowances and so on) to be met by HSBC Markets. It also stated that at the end of the secondment subject to satisfactory completion every attempt would be made to find a suitable post elsewhere in the Bank. Under the heading UK contract was this term:
The Secondment is Extended 12.Mr Wallace’s career in Hong Kong was advanced when in August 2005 he was promoted to head of Investment Banking, Asia-Pacific. 13.In May 2007 by letter on HSBC Bank letterhead, which referred to Mr Wallace’s employment with HSBC Bank, his secondment was extended to 1 July 2009. The Resignation and Aftermath 14.On Mr Wallace’s account, a combination of his loss of confidence in the Bank’s ongoing investment banking strategy coupled with frequent changes of the management structure and an offer he received from Citigroup to take a regional position in their Mergers and Acquisitions department caused him to tender his resignation. He did this by telephoning one Robin Phillips of HSBC Bank in London on Friday 29 June 2007 and sending to him a formal letter of resignation of that date, copying it to Mr Webb in Hong Kong. 15.On the same day he accepted the position of Managing Director and head of Mergers and Acquisitions in Asia with Citigroup. 16.Two days later, on Sunday 1 July, in the presence of Mr Webb and at his direction, he cleared his desk, surrendered his access pass, laptop and blackberry and left the premises. 17.On Tuesday 3 July Mr Wallace was directed that he was to take garden leave, pursuant to clause 17.6 of his employment contract and clause 2.15.7 of the Employee Handbook. 18.By letter of 13 July 2007 he received notice from HSBC Bank that he was on garden leave, with his employment contract to terminate on 28 December 2007, that being six months after the date of his notice to resign. He was reminded of his obligations and restraints to be exercised during that period and post-termination. 19.Mr Wallace came to a unilateral decision to limit his garden leave to three months and foreshorten his date of termination to three months from notice by making payment in lieu for the balance of three months. He did so on advice that this course was open to him under the Employment Ordinance, Cap.57, Laws of Hong Kong. He vacated his HSBC accommodation in September and by letter of 28 September 2007 wrote to HSBC Bank and HSBC Markets that he had decided to buy out his notice to the extent of three months, thus to bring forward his termination of employment date to 28 September. He tendered a cheque for $950,000 in accordance with section 7(1A) and (2) of the Employment Ordinance (the EO). He gave an assurance that he was aware of his obligations to the Bank following termination and that he intended to comply with all enforceable obligations, including as to confidentiality and non-solicitation of clients and employees. 20.Meanwhile, one Terry Endsor of Citigroup had been in correspondence to negotiate terms to reduce the length of the notice period. His proposals were rejected by HSBC Bank. 21.By letter of 4 October 2007, the HR Manager of HSBC Bank wrote to Mr Wallace reiterating his employment was ongoing until 28 December 2007; that the EO had no application as the contract was governed by English law. And there was no equivalent right to buy out one’s notice in the manner proposed. His cheque for $950,000 was returned. 22.On 24 October Mr Wallace was credited with his usual monthly salary cheque of $316,667. 23.By letter of 26 October, Mr Wallace re-tendered the cheque for $950,000 and sent another for $316,667 being reimbursement of a payment “made in error”. 24.These cheques have been retained but unbanked. 25.Meanwhile, Mr Wallace began working for Citigroup on 9 October 2007. 26.It is his case that he made no secret of this, communicating informally with colleagues still with the Bank, and with his secretary at HSBC Markets. He did not however tell Mr Webb, or anyone else with whom there had been correspondence or other communication concerning his duties and entitlements post notice of resignation. 27.Mr Webb deposed that there were concerns that Mr Wallace might have joined Citigroup prior to formal departure from the Bank and his movements were monitored. On 1 November Mr Webb telephoned Citigroup and asked to speak to Mr Wallace. When he was put through he recognised the voice of Steven Wallace and then hung up. The Bank engaged a private investigator. He reported that Mr Wallace was seen entering Citigroup’s premises at 8:20 a.m. on 8 November. 28.There was thereafter correspondence between solicitors engaged by both parties but without resolution. 29.Johnson Stokes & Master representing HSBC Bank and HSBC Markets filed this writ on 15 November. On the same date, they made application for the interim orders that is now before me. The Application for Injunctions 30.The first is that Mr Wallace be restrained from working for Citigroup until after 28 December 2007. 31.The second is that he be restrained from being concerned in the business of Citigroup in the Asia-Pacific region which is likely to be competitive with the investment banking business of HSBC Markets CIBM division including employment in the Mergers and Acquisitions department of Citigroup until after six months after 28 December 2007 less the period spent on “garden leave”. 32.As an alternative to the first and second applications, upon the basis of a finding that Mr Wallace was entitled to buy out his notice and join Citigroup after 28 September 2007, was a repeat of the second application save that the six months was to run from 28 September 2007. 33.So, enforcement of the non-compete clause at 17.3. 34.A further claim for disclosure of competing business undertaken was not pursued at the hearing. 35.Also not pursued was a summons lately filed for enforcement by injunction of the non-solicit and non-poaching clauses; this because Mr Wallace agreed to give undertakings to comply therewith and has done so. The Legal Principles for Interim Injunctions 36.This is an application for interlocutory injunctive relief, bringing thus into play the principles set out in the leading case of American Cyanamid Co.v Ethicon Ltd [1975] AC 396. In the first place, the plaintiff’s claim must not be frivolous or vexatious and there must be a serious question to be tried. Then the court has to consider whether if the plaintiff succeeds at trial it would be adequately compensated by damages for any loss caused by the refusal to grant an interlocutory injunction. If damages would be an adequate remedy, and the defendants would be in a position to pay them, no injunction should be granted. If damages would not be an adequate remedy, the court should consider whether, if the injunction were granted, the defendants would be adequately compensated by the plaintiff’s undertaking as to damages. If so, and the plaintiff would be in a position to pay them, there would be no ground to refuse the injunction. Where there is doubt as to the adequacy of the respective remedies in damages the question of balance of convenience arises. 37.In the normal course this requires in the first instance a positive response to the first question: “Is there a serious question to be tried?” 38.But in this case, there being a real prospect that the period that the injunction will run will have expired prior to trial, I am obliged to pay particular regard to the prospects of success at trial; see Lansing Linde Ltd v Kerr [1991] 1 All ER 418. 39.But as Chu J warned on the point in Fortune Realty Company Ltd v Chan Hui Yeung Dick (unreported), HCA 1582/2001, 24 May 2001 at para. 9:
On the facts of her case she concluded:
40.A restrictive covenant in a contract of employment which restrains the employee from undertaking certain activity post-contract is prima facie unenforceable. It becomes enforceable only if it is reasonable having regard to the interests of the parties concerned and of the general public. It is said of the doctrine of restraint in trade that it:
per Lord Wilberforce in Esso Petroleum Co. Ltd v Harper’s Garage (Stowaport) Ltd [1968] AC 269 at p. 331. Is the Employment Ordinance Applicable? 41.This question arises because Mr Wallace invoked its terms, specifically section 7(2), to buy out his notice period thus to accelerate the date of termination to 28 September 2007. The section reads:
42.Mr Smith SC representing Mr Wallace submits the EO does apply, given the terms of section 4, and given that Mr Wallace was employed to work in Hong Kong and did work here, thus there being no basis for contending that it does not. In the circumstances, thus, the contract of employment has its closest and most real connection with Hong Kong. 43.Section 4 reads:
44.He says further, that an express choice of a law other than that of Hong Kong cannot be used to exclude an employee’s right to invoke section 7, by virtue of section 70, which reads:
Analysis 45.In my view the question is answered by establishing what is the contract’s proper law: see Dicey, Morris and Collins on The Conflict of Laws, 14th edition at 33-059:
(The past tense is used because in the UK the law has now changed as a result of the UK becoming a signatory to the Rome Convention, which has no application to Hong Kong.) 46.There are statutory exceptions as I am about to come to, but subject to these, parties to contracts including employment contracts are entitled to choose the governing law; in this case English law. Thus there is a presumption that English and not Hong Kong laws are to be applied in establishing the parties’ rights. 47.This presumption is capable of being overridden if the statutory law of the land says so; in other words that the statute is an overriding statute. This is so in England in respect of employment contracts. 48.I quote from Dicey at 1-057:
The EO has no similar provision; thus, the EO is not, as I find, an overriding statute; this statutory exception does not arise. 49.The presumption may have been capable of being rebutted if Mr Wallace could have established that the parties had no connection with England, and that the invoking of English law was a device artificially introduced to exclude EO protection. 50.But in the circumstances of this case that cannot be so. The employer is a UK incorporated and based company. It is the parent company with whom Mr Wallace, also British, contracted. And for good reason as I have stated, common to all recruits sent overseas on expatriate terms. His connection with the Hong Kong company is by secondment; again, for good reason. 51.And it seems to me to make good sense that a group of companies spread all over the world would want to employ its senior executives under one umbrella and one governing law. 52.I conclude that there is a strong likelihood that Mr Wallace will be found not to be able to invoke the provisions of sections 70, 4 and 7 of the EO because this is a law of Hong Kong and not England. This would mean that he remains an employee of HSBC Bank; that HSBC Markets was entitled to return his buy-out cheque of $950,000 and was not in error when it paid him his October salary. Is the Non-Compete Clause Enforceable? 53.I shall begin by considering how, in practice, it could affect Mr Wallace’s current employment. 54.On the basis that he will be employed by HSBC Bank until effectively the end of the year, the covenant will prevent his working, at least in a competitive field, for the competitor Citigroup, for six months thereafter, less the period of garden leave, so for three months already taken and prospectively one more month, which would permit him to begin again by 1 March 2008. 55.Whether the non-compete clause is reasonable and enforceable is a matter for trial. The parties clash on various aspects of Mr Wallace’s areas of responsibility at HSBC Markets, and I cannot and will not second guess findings of fact. But as it will not be possible or practical for the matter to be tried by then, I have to pay particular regard to the prospects of success. 56.What is apparent and not in dispute is that Mr Wallace was employed to head a division in the Bank whose primary function is to provide advisory services which include mergers and acquisitions, leveraged and acquisition finance, and strategic finance for major commercial corporate and institutional clients including governments. Mr Wallace was required to have a knowledge of the identity of these clients and their areas of growth actual and potential, and an intimate knowledge of the financial products developed and made available by the Bank for the purpose. 57.Whilst the degree of direct client contact Mr Wallace was engaged in is disputed, it cannot be gainsaid that he would have been privy to highly sensitive information. If there is any doubt about that one only has to look at the overall remuneration including discretionary bonuses that Mr Wallace was paid during his period of active employment with the Bank. Mr Wallace himself deposed:
On any view, he was, and is, no journeyman. And although, as I have said, the role he played will require to be determined after trial, there is no serious challenge to the proposition that what he came to be told and to learn was information equivalent to the Bank’s trade secrets. 58.It is in the context of that that I have to decide whether the non-compete clause post termination (less the period of garden leave) is likely to be found to be no more than is reasonably necessary for the protection of the Bank. 59.Mr Smith sought to distinguish the circumstances of this case with those in which a non-compete contractual restraint was habitually found to be reasonable. These are cases where the nature of the duties of the ex-employee invites a particularly close relationship between himself and a customer or client of the employer to develop, so that upon his departure to a competing undertaking situated not too far away, the client or customer would be bound to follow. These cases include senior hairdressers (I believe these days they are called artistic directors); see Rever v Kung [2003] 2 HKC 268, a real estate agent working alone in a small, developing country town; see Scorer v Seymour Jones [1966] 1 WLR 1419, and an insurance broker in a niche market; see Thomas v Farr [2007] IRLR 419. 60.Mr Wallace’s role in the Bank gave only limited opportunity for interaction with clients, and did not provide for a close personal relationship to develop. After all, the deals negotiated and struck were not the work of one man; rather it was a team effort, incorporating a number of bank officers and invariably accountants and lawyers as well. 61.Representing the interests of HSBC Bank and HSBC Markets before me was Mr Burns SC. It was his contention and primary position that it was because Mr Wallace by virtue of his seniority in the Bank had knowledge of confidential information of a sort that elevated it to a trade secret that warranted protection. This was not a senior hairdresser, real estate agent or specialist insurance broker situation, but one no less warranting non-compete protection for a period of time in the theatre of operations. 62.He quoted at length from the case TFS Derivatives v Morgan [2005] IRLR 246, in which the court was asked to grant injunctive relief to enforce a non-compete clause in a contract of employment, post termination of the contract. As the title suggests, the ex-employee’s field was in equity derivatives. Mrs Cox J stated at paragraph 37:
And at paragraph 75:
Analysis 63.It seems to me having regard to the principles enunciated in the case TFS Derivatives that HSBC Bank and HSBC Markets representing the Bank should be entitled to the protection they ask for. The duration of six months (less gardening leave) is not unreasonably long and the territory (the Asia-Pacific region) not unreasonably wide. Conclusion 64.There has been demonstrated a serious question to be tried with high prospects of success after trial. Damages prospectively would not be an adequate remedy. But if Mr Wallace were to succeed following the granting of these injunctions he would be adequately compensated in the undertaking in damages put up by HSBC Bank and HSBC Markets. 65.I grant the applications at 1 and 2 of the summons of 15 November. There shall be no order in respect of the summons of 20 November. 66.Costs are nisi. Those of the HSBC Bank and HSBC Markets are in the cause.
Mr A Burns SC, instructed by Messrs Johnson Stokes & Master, for the 1st and 2nd Plaintiffs Mr C Smith SC, instructed by Messrs Tanner de Witt, for the Defendant | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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