Case law: Wealthy Realty Ltd v Cheng Yung (DCCJ 5690/2007; February 1, 2008)
This case considered a restraint of trade clause and the reasonableness of a clause which sought to restrain an employee from working for any competitor in the same “district” for six months after termination.
The plaintiff was a real estate agency company in Hong Kong and the defendant had been employed by it as a senior sales manager. The applicable clause in the employment contract (as translated from Chinese) provided as follows:
20.2 To protect the commercial interest of the Plaintiff, customer relationship and workforce, within 6 months after the termination of this Agreement, the Defendant shall not directly or indirectly perform the following matters or either one of them:
20.2.1. accepting employment in respect of; participating in and/or being interested in any real estate agency work within the district which the Defendant had been assigned by the Plaintiff to carry out estate agency work within the period of 6 months immediately preceding the date of the termination of this Agreement.
Throughout the period of the defendant’s employment with the plaintiff, he was assigned to work at the plaintiff’s office in an area of Hong Kong known as Kowloon West. After working for 4 months, the defendant resigned and went to work for a competitor of the plaintiff in an office that was also located on the same street in Kowloon West.
The plaintiff sought an injunction to restrain the defendant from working for the competitor in the ‘Kowloon West’ district on the basis that he was in breach of the restraint of trade clause.
A key issue in the case was the long standing principle that a restraint of trade clause should be no wider than is reasonably necessary for the protection of the plaintiff’s legitimate business interests. Counsel for the plaintiff conceded that just how wide the clause was would be effectively determined in this case by how the word ‘district’ was interpreted. He accepted that the word “district” may have different meanings to different people and that there was no evidence that the plaintiff had demarcated a “district” for the purpose of the Agreement. However, he submitted that the word “district” had a clear and definite meaning when read with the subsequent words in the clause which stated “the district which the Defendant had been assigned by the Plaintiff to carry out estate agency work” and in this case the district was Kowloon West.
However, there was uncontroverted evidence from the defendant that during his employment he had, from time to time, been assigned work in six other districts and not just Kowloon West. The court noted that on this basis the plaintiff’s argument would mean that the restraint of trade clause would stop the defendant from working in all the other districts as well.
Counsel for the plaintiff submitted that if the court formed the view that the meaning of the clause was ambiguous and there were two possible constructions where one would lead to the conclusion that the clause was an unreasonable restraint of trade and thus unlawful and the other would lead to the opposite result, it should be the latter construction which should be adopted as a ‘fall back construction’.
The court held that there was only one possible construction of the clause and this included all districts where the defendant had worked. There was no ‘fall back construction’. The fact that the plaintiff sought an injunction only for Kowloon West had no bearing on the construction of the clause and accordingly, the clause was too wide to be reasonable and was void.
Effects for employers
This case is a reminder that when drafting restraint of trade clauses, employers need to be mindful of how a court will view the reasonableness of the clause. Use of ambiguous terms such as ‘district’ without clearly demarcating the area could lead to an interpretation which is wider than was originally contemplated and render the clause void and unenforceable.