A recent decision from Hong Kong (Winta Investment (Hong Kong) Ltd v Ng Kam Chit [2018] HKEC 890) is a timely reminder on the key considerations for employers when drafting enforceable restrictive covenants.
Winta Investment (Hong Kong) Ltd v Ng Kam Chit
The recent case of Winta Investment (Hong Kong) Ltd v Ng Kam Chit [2018] HKEC 890 concerned Mr Ng, an edible ice cube delivery worker who had left his former employer Shiu Pong Ice ("SPI") and begun working for a competitor, Hong Kong Ice & Cold Storage Company Ltd. Mr Ng's employment contract contained a restrictive covenant that purported to prevent him from soliciting or interfering with SPI's customers within 10 months of his employment ending.
Necessary restrictions
SPI argued that this restriction was necessary due to the extremely competitive market in which it operates. SPI pointed to the commercially sensitive information provided to its delivery drivers including customer's names, addresses and contact details. They also alleged that due to part of their drivers' wages coming from a 'commission element', this demonstrated that part of Mr Ng's role was to promote the business and increase the sales of edible ice cubes.
The court found the factual question of the nature of Mr Ng's employment to be a crucial factor in determining the case. The judge acknowledged that a covenant in restraint of trade is prima facie unenforceable unless it is shown to be reasonable in protecting a legitimate asset of the employer. Trade secrets and customer connections were, the court acknowledged, sufficiently important to a business that they were properly to be regarded as assets capable of protection by means of a restrictive covenant of this type.
SPI sought to rely on the English Court of Appeal case of Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526 which held that a milkman's customers were part of his employer's goodwill and therefore an asset which the employer could protect. The court in this case was unconvinced by SPI's submissions that Mr Ng in his role as a delivery driver was in a position "to gain any meaningful influence over customers or cultivate loyalty among them". Such an assertion was deemed to be "far-fetched and unrealistic" and "a far cry from Home Counties where the milkman was recognised as a character "well known to every householder in the road" in a town in Surrey in the early 1970's." SPI's claim was therefore dismissed.
Key takeaways
In today's competitive environment where employees are valued not only for their technical skills but for their connections and industry knowledge, a well drafted restrictive covenant can provide employers with vital protection.
In Hong Kong, covenants which seek to restrain the rights of employees following employment are generally void and unenforceable, as it is contrary to an individual's right to choose their employment under the Hong Kong constitution (the Basic Law).
An exception to this exists where the employer can demonstrate that the restraint:
- was intended to protect the employers' legitimate interests (such as confidential proprietary information or trade secrets, customer connections and stability of the workforce); and
- is reasonable in all the circumstances, both as between the employer and the individual employee and in the public interest.
Striking this balance when drafting restrictive covenants is no easy task. Often employers will only properly turn their mind to the appropriateness and enforceability of covenants when a former employee joins a competitor or is taking steps to poach the company's employees or customers, at which time it is often too late.
To maximise the ability to protect trade connections, confidential proprietary information and the stability of their workforce, employers should:
- ensure restrictive covenants included in employment contracts are appropriate for respective employees;
- review restrictive covenants periodically as the nature of the business and the roles and responsibilities of employees change; and
- act quickly when an individual is suspected of conducting activities in breach of a restrictive covenant.
