Hong Kong High Court considers reasonableness of restrictive covenant

In Pure International (HK) Ltd v Lo Yan Chan Kenneth [2013] HKEC 1092 the Court of First Instance considered the validity of a six-month restriction prohibiting an ex-employee from finding employment in the same activity within 1000 metres of the company's principal location.  The employee was a fitness instructor who had been with the company since 2004 and had built a substantial reputation over the years.  The Court found that the restrictive covenant was reasonable to protect the commercial interests and goodwill of the company.   The case demonstrates that courts are likely to uphold covenants that are tailored to an employee's role and responsibility, and that are no more than what is reasonably required to protect the legitimate interests of an employer.

Facts

Kenneth Lo's employment contract contained a clause restraining him for six months post-termination from employment in the same activity within a radius of 1000 metres of the principal location of Pure International (HK) Ltd's ('Pure') business. Mr. Lo resigned from his employment, served out his notice period and subsequently joined Ultimate Performance (one of Pure's competitors) as a fitness instructor. In addition, prior to his departure (while he was still serving out his notice period), he appeared in a public interview on the internet to promote UItimate Performance's business to the disadvantage of Pure.  Pure applied for an injunction to restrict Mr. Lo from performing services as a fitness instructor at Ultimate Performance. 

Decision

Deputy Judge Seagroatt granted the injunction to prohibit Mr Lo from performing services as a fitness instructor within 1000 metres of Pure's principal location for the six month period set out in the contract. 

The Court ruled that the restrictive covenant was eminently reasonable in the given circumstances.  The following factors influenced the Court's decision:

1. the restrictive covenant was clear, precise and reasonable in terms of time and geographical scope;
2. the company had commercial interests and goodwill which needed a reasonable degree of protection;
3. the defendant was reminded of his contractual obligations one day before he left the company and acknowledged the limitations imposed upon him, both orally and in writing;
4. the area covered by the radius of 1000 metres left the defendant a wide range of other fitness centres in which to work out the restrictive period, either as an employed or free-lance trainer;
5. the defendant must have known from his years of experience with the plaintiff and the benefits he had derived that they would require a degree of protection following the loss of an employee in whom they had invested much over the years; and
6. promoting Ultimate Performance's business at the disadvantage of Pure whilst the defendant was still under Pure's employment was a clear act of disloyalty and a breach of the implied term of trust and confidence in his employment contract.

Post-termination restrictions in Hong Kong

Hong Kong has no legislation governing the enforceability of post-termination restrictions and therefore has no fixed maximum or minimum period of time stipulated for restricting employees from competing against the employer after termination. Deciding whether a particular restriction is enforceable is an uncertain matter and has over the years been the subject of considerable litigation. There is abundant case law on point, but not all of it is consistent since each case is decided on its own facts. No clear policy on duration, therefore, can be stated from the court cases. The general theme that may be drawn, however, is that care must be taken in the preparation of restrictions and they should be tailored to deal with the particular circumstances of each employment situation.

Non-compete

Restraints that are drafted clearly and precisely have a better chance of being held enforceable.  In particular, the duration, geographical area and scope must be directly relevant to the employee and no more than what is reasonably required to protect the legitimate interests of any employer.

The employee's seniority and the degree of influence he/she has over the business are relevant factors in judging reasonableness.  In each case, the company should consider the minimum period it will require to rebuild loyalty from its existing customers and employees after the departure of the employee in question.

Non-solicit/non-entice

To ensure that a clause on non-enticement of employees is reasonable, it must limit the target group of employees. Identifying those employed whilst the employee was employed and with whom he/she had a personal connection or over whom he/she could exercise some personal influence is likely to be significant.  A blanket restriction covering all employees of the employer is not likely to be enforceable.

Similar principles apply in relation to non-solicitation of customers.  A blanket ban on approaching all customers, including those the employee had no contact or connection with, will not be enforceable. The clause should be drafted to apply to customers with whom the employee had a personal connection and those who are most likely to follow the employee on his/her departure.

All restrictions

Ideally, every restriction should be separately drafted.  Where this is not possible and the company intends to impose the restriction across board from junior to more senior employees, it may be safer to adopt a shorter period of, say, three to six months. Employers should note that a common form, standard restriction inserted in all contracts of employment will generally be viewed with suspicion by the courts, and may be less readily enforceable than one which is individually thought through and perhaps even negotiated.

Take away points

• Restrictive covenants are draconian in nature and are usually carefully scrutinised by the courts for enforceability.
• Restrictive covenants should be tailored to the employee's circumstances of employment and must be drafted clearly and precisely.
• The duration, geographical area and scope must be directly relevant to the employee in question and no more than what is reasonably required to protect the legitimate interests of any employer.  These matters will be judged by reference to the position at the time the employment contract was made.
• Ideally, every restriction should be separately drafted.  Where this is not practicable, the company should adopt a shorter period of restriction, eg, three to six months.

If you would like to discuss please contact Gareth Thomas, Helen Beech or Priya Aswani.