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Hong Kong – Restrictive Covenant Is Void For Protection Against Competition.

18 November, 2013

 
 

In the District Court case Union Gain Limited v Chu Wilton Lucas [DCCJ 2383/2013], the Defendant, Mr. Chu, was employed under an employment contract with the Plaintiff, a hair salon, as a hair stylist.

 

Immediately after termination of the Defendant’s employment, he joined a competitor of the Plaintiff. The Plaintiff sought an interlocutory injunction against the Defendant restraining him from joining the competitor in breach of the restrictive covenant under his employment contract with the Plaintiff.

 

Under the Defendant’s employment contract with the Plaintiff, it was provided that :-

 

“9(a)…the Employee covenants that he will not without the prior written consent of the Company (such consent to be withheld only in so far as may be reasonably necessary to protect the legitimate interests of the Company) after the termination of this agreement for whatever reason….

 

…. 

 

(iii) for a period of 1 year, whether on his own account or as shareholder, partner, director, agent, servant or consultant or otherwise for any other person, be engaged in the provision of Services within a radius of ½ mile of the Premises or such other business premises of the Company (as to be determined by the Company at its absolute discretion) pursuant to clause 4 above where the Employee habitually worded [sic] 6 months prior to the said termination or the Premises in the case of termination as a result of a breach of Clause 1 above.”

 

The court considered that as it was an interlocutory application, the court could not resolve factual disputes. Further, as it was unlikely that the trial of the action could take place before the expiration of the relevant restrictive covenant, the court considered that the usual American Cyanamid test should be applied with a rider that the court should have a greater regard to the Plaintiff’s prospect of success.

 

The court considered that there was simply nothing pleaded in the Statement of Claim to assert that the restrictive covenant in question was enforceable. In terms of evidence, it appeared that the affirmation of the Plaintiff’s witness only contained very general and non-specific references to trade connections, goodwill and confidential information. More importantly, the Plaintiff’s counsel had confirmed that such trade connections, goodwill and confidential information which the Plaintiff sought to protect under the restrictive covenant only related to existing customers of the Plaintiff.

 

In the circumstances, the present restrictive covenant was plainly unreasonably wide as it extended beyond dealing with existing customers of the Plaintiff whom the Defendant had served when he was employed by the Plaintiff. It prohibited the Defendant from serving new customers within the ½ mile radius, even though the Plaintiff had no connection with such customers whatsoever. The court considered that there was simply no justification for such a wide-ranging clause. Therefore the court ruled that the Plaintiff had no good prospect of success in upholding the validity of the present restrictive covenant and dismissed the Plaintiff’s application.

 

Employers should note that a post termination restrictive covenant is only enforceable if the restrictions aim to protect their legitimate business interests and the scope of restriction is reasonable. In addition, the employer wishing to enforce the restrictive covenant has the duty to provide evidence to the court to support the aforesaid.

 

Deacons


For further information, please contact:

 

Elsie Chan, Deacons

elsie.chan@deacons.com.hk

 

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