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Upholding Keepwell Commitments: Breakthrough Ruling in Re Peking University Founder Group Company Limited [2024] HKCA 445

Introduction

Keepwell deeds are executed by PRC-incorporated companies undertaking to ensure that their offshore subsidiaries are solvent and will have sufficient liquidity to make payments to foreign creditors under offshore bonds issued by the offshore subsidiaries as they fall due. While the terms of keepwell deeds create an obligation on the onshore parent to provide financial support to the offshore subsidiary, keepwell deeds do not provide for a direct debt claim by a creditor against the onshore parent for any due but unpaid obligation of the offshore subsidiary. Instead, a creditor may only claim breach of contract against the keepwell provider for failing to perform its obligations under the keepwell deed.

This article examines the recent developments in Hong Kong on the law relating to keepwell deeds as illustrated in the case Re Peking University Founder Group Company Limited [2024] HKCA 445.

Factual background

Peking University Founder Group Company Limited (“PUFG“), being a PRC-incorporated holding company of a group of companies, entered into 4 keepwell deeds (“Keepwell Deeds“) in relation to the bonds issued by its subsidiaries, namely Nuoxi Capital Limited (“Nuoxi“) and Kunzhi Limited (“Kunzhi“), in 2017 and 2018. The bonds issued by Nuoxi and Kunzhi were guaranteed by HongKong JHC Co Limited (“HKJHC“) and Founder Information (Hong Kong) Limited (“FIHK“) respectively.

Under the Keepwell Deeds, it was provided, amongst other things, that:-

  • if, and to the extent that PUFG was required to obtain “necessary approvals, consents, licences, orders, permits and any other authorisations from the relevant Approval Authorities” (“Relevant Approvals”) in order to comply with its obligations under the Keepwell Deeds, the performance of such obligation shall always be qualified by, and subject to, PUFG having obtained such Relevant Approvals. It also included an undertaking on the part of PUFG to use its best efforts to obtain the Relevant Approvals (Clause 2.2);
  • PUFG shall cause each of Nuoxi, Kunzhi, HKJHC and FIHK to have a consolidated net worth / consolidated total equity of at least US$1.00 at all times (“Balance Sheet Obligation“) (Clause 4.1(i)); and
  • PUFG shall cause each of Nuoxi, Kunzhi, HKJHC and FIHK to have sufficient liquidity to ensure timely payment of any amounts payable under or in respect of the bonds (“Liquidity Payment Obligation“) (Clause 4.1(ii)).

In 2020, PUFG was ordered by the PRC court to commence reorganization and a liquidation group was appointed to supervise the reorganization. Subsequently, Nuoxi and Kunzhi defaulted under the bonds, whereas HKJHC and FIHK did not honour their respective guarantees. Nuoxi, Kunzhi, HKJHC and FIHK were all put in liquidation since 2021. The liquidators of Nuoxi, Kunzhi, HKJHC and FIHK commenced actions against PUFG, claiming that it had defaulted on its obligations under the Keepwell Deeds, entitling it to damages.

The Court of First Instance (“CFI”)’s decision

In Re Peking University Founder Group Company Limited [2023] HKCFI 1350, the CFI found that since PUFG had been put into reorganisation, there was “no realistic likelihood” that regulatory approvals for transfers necessary to pay liabilities under the bonds would be approved. It was held that although PUFG took no steps at any time to obtain the approvals, consents, licences, orders, permits or any other authorisations as might prove necessary to comply with its obligations under the Keepwell Deeds, the failure to make any effort to obtain them did not prevent it from relying on clause 2.2 (see above) because the necessary approvals could never have been obtained and it made no difference to the outcome.

The CFI dismissed the claims brought by Nuoxi, Kunzhi and HKJHC concerning post-reorganisation breaches on the foregoing basis and only granted declaratory relief in favour of FIHK as PUFG had been in breach of its Balance Sheet Obligation to FIHK before its reorganization.

Nuoxi, Kunzhi and HKJHC (collectively, “Plaintiffs“) appealed against the CFI judgment.

The Court of Appeal’s (“CA”) decision

The Plaintiffs raised 5 broad grounds of appeal, namely that the CFI judge:

  • Ground 1: failed to recognise the nature of the Balance Sheet Obligation;
  • Ground 2: failed to evaluate the nature of the Liquidity Payment Obligation;
  • Ground 3: failed to deal with the Plaintiffs’ arguments on modes of performance not requiring Relevant Approvals;
  • Ground 4: failed to provide a fair opportunity and/or fair trial to the Plaintiffs in breach of natural justice; and
  • Ground 5: failed to conclude that the Plaintiffs’ pleadings are broad enough and not defective.

The Relevant Approvals not always necessary

The CA ultimately allowed the Plaintiffs’ appeals on Ground 3 and granted the appropriate declaratory reliefs to the Plaintiffs. A proper construction of clause 2.2 of the Keepwell Deeds would mean that the Relevant Approvals are not always necessary for PUFG to perform its obligations under the Keepwell Deeds. The CFI judge had failed to consider the possibility of other modes of performance that would not require the Relevant Approvals, for example, issuing a new bond to refinance repayment of the existing bond; repurchase of onshore foreign direct investment, presumably denominated in a foreign currency; and making use of cash to support overseas investment or moving the fund offshore to support overseas project. The CA was of the view that had the judge considered these possibilities, he could not have been satisfied that PUFG had established that it would come within the escape clause in clause 2.2, because the Liquidity Payment Obligation could have been performed without the Relevant Approvals.

Whilst the CA rejected Grounds 1, 2, 4 and 5 raised by the Plaintiffs for various reasons, below are some of the observations made by the CA which are noteworthy.

The Balance Sheet Obligation

In relation to clause 4.1(i) of the Keepwell Deeds, the Plaintiffs contended that “[t]he liability under the Balance Sheet Obligation did not need to be established in an action or converted into a judgment debt in order to be provable in an insolvency. The quantum of that liability was the sum the plaintiffs required to meet their liabilities plus US$1. The reorganisation did not change the contractual rights of the plaintiffs, it only meant that the plaintiffs had different rights of enforcement“.

However, the CA rejected the Plaintiffs’ argument, and held that clause 2.2 must be taken into account in considering the question of breach, the purpose of which is to “prevent PUFG from being in breach in circumstances where it was unable to comply with its undertakings because of the need for and the absence of Relevant Approvals“.

To pursue a claim in relation to the Balance Sheet Obligation, there must be a breach of the ‘see to it’ obligation (meaning, in the context of guarantees, an undertaking by the guarantor that the principal debtor will perform his own contract with the creditor), which alone does not give rise to a claim for damages in the absence of a breach. The breach does not need to be established first in an action, so long as it is eventually shown to give rise to liability.

Breach of natural justice and pleadings

The Plaintiffs contended that the CFI judge acted in breach of natural justice and of their right to a fair trial, as the judge relied on the evidence and submissions in a subsequent case Re Tsinghua Unigroup Co., Ltd [2023] HKCFI 1572. The complaint was that the Plaintiffs were not given a fair or proper opportunity to make further submissions on the inconsistent and contradictory evidence in the trial of the subsequent. The CA quickly dismissed this ground of appeal on the basis that they were provided with the daily transcripts of the trial and could well ascertain what the witness had said in the subsequent trial and were free to make such submissions as appropriate.

Further, the Plaintiffs sought to challenge the CFI judge’s findings that the Plaintiffs’ pleadings did not entitle the court to find PUFG liable for failing to perform its obligations owed to the Plaintiffs prior to its reorganisation. The CA affirmed the CFI decision on this point, holding that the particulars of breaches pleaded by the Plaintiffs were all directed at breaches which took place after reorganisation had started.

Conclusion

The CA has effectively confirmed that the obligations under keepwell deeds are binding and enforceable in the Hong Kong courts.  It has also provided useful guidance on a number of relevant issues such as the available modes of performance and the assessment of losses caused by breaches of keepwell deeds.

The full CA judgment is available at: https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=159968&currpage=T.

Date:
11 June 2024
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Hong Kong Court warned against unwarranted challenge to arbitral awards

In CNG v G & G [2024] HKCFI 575, in dismissing the application to set aside the arbitral award by CNG, the Honourable Madam Justice Mimmie Chan warned that the legal professional should be wary of making unmeritorious challenges to set aside arbitral awards by “massaging” cases to fall under the exceptional grounds of challenge under Section 81 of the Arbitration Ordinance (Cap. 609).

The Court once again reminded litigants that arbitration is a consensual process of final dispute resolution to which parties have voluntarily agreed to, and the limited recourse parties have under the Arbitration Ordinance is not intended to afford them with an opportunity to ask the Court after the event to go through the award with a “fine-tooth comb” to look for defects and imperfections under the guise that the tribunal failed to act within its remit.

Section 81 of the Arbitration Ordinance

With the consensual nature of arbitration and the tribunal’s autonomy at the heart of arbitral process, the grounds to set aside an arbitral award as compared to appealing a judgment in Court actions are much narrower. Before delving into the facts and issues of the case, it is helpful to note the permitted grounds to set aside a Hong Kong arbitral award under Section 81 of the Arbitration Ordinance:

  • a party to the arbitration agreement was under some incapacity;
  • the arbitration agreement was not valid under the law to which the parties have subjected it, or failing any indication thereon, under Hong Kong law;
  • the party was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case;
  • the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration;
  • the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, if there was no agreement, Hong Kong law;
  • the subject matter of the dispute is not capable of settlement by arbitration under Hong Kong law; or
  • the award is contrary to Hong Kong’s public policy.

In addition to the above, Schedule 2 of the Arbitration Ordinance contains opt-in provisions which provide for application to the Court to challenge an award on the ground of serious irregularity and for appeals to the Court on questions of law.

Given the limited grounds for challenge as set out above, in CNG v G & G, CNG attempted to find loopholes and problems in the award by “massaging” its challenges as “CNG was unable to present its case“, “the arbitral procedure was not in accordance with the parties’ agreement“, “the Award deals with a dispute not contemplated by or falling within the terms of the submission to arbitration“, and “the Award is in conflict with the public policy of Hong Kong” ([20]).

Facts and Issues

The dispute was between shareholders of a company (“SIL“) which own and operate a mining and processing project, whereby CNG, a state-owned enterprise of the PRC, owned 65% of the shares of SIL and the 1st Respondent owned the remaining 35% of the shares of SIL. Relying on the arbitration clauses contained in both the share purchase agreement and the shareholders’ agreement entered into between the two Respondents, CNG and SIL, the Respondents commenced arbitration proceedings at the HKIAC against CNG for the main claims that CNG (a) failed to honour a right of first refusal conferred on the 1st Respondent under the shareholders’ agreement in respect of CNG’s purported transfer of its shareholding in SIL (the “Share Transfer Claim“); and (b) failed to obtain the unanimous approval of the board of SIL before shutting down certain operations of the mining and processing project.

Failure to deal with issues / give reasons

The Respondents argued in the arbitration that as CNG had issued a valid transfer notice which met the requirements of the shareholder’s agreement to be an offer to the other shareholders, CNG was bound to sell the shares to the 1st Respondent as the only other shareholder of SIL. In contrast, CNG posited that the offer was an independent offer made to a permitted transferee (CGG, an affiliate of CNG by virtue of its control), and did not constitute a transfer notice within the meaning of the shareholder’s agreement which would afford the 1st Respondent the right of first refusal.  The tribunal found that CNG’s transfer notice constituted an offer, which was capable of acceptance and was accepted, and that CNG was bound to sell the shares to the 1st Respondent in accordance with the shareholders’ agreement.

Before the Court of First Instance, CNG’s complaints placed reliance on the failure of the tribunal to deal with key issues or give reasons for its decision on the matter ([23]). For example, CNG emphasised that only 24 paragraphs of the total 163 paragraphs of the award were devoted to the tribunal’s reasoning for its decision on the Share Transfer Claim ([24]). Further, the tribunal did not deal with all the issues listed on the agreed list of issues submitted by the parties ([25]).

In response, Chan J noted that a long prolix judgment or award does not mean that it must contain sound reasoning or analysis of an issue or decision made. Vice versa, a short document likewise cannot indicate that there is no good reasoning or answer to the issue raised for decision ([24]). Moreover, an award is to be read and understood in the context of how the case was argued before the tribunal.  In this case, it was logical for the tribunal to deal with the relevance of CGG being a permitted transferee under the shareholders’ agreement first.  A decision in favour of the Respondents on this issue would render it unnecessary for the tribunal to determine whether, in fact, CGG was a permitted transferee ([33]). As noted by Chan J at [26]:

…the tribunal does not have to set out each step by which it reaches its conclusion, and a failure to deal with an argument or a submission made on or relating to an issue is not equivalent to a failure to deal with an issue.  The tribunal is not required to deal with each issue seriatim, as it can deal with a number of issues in the composite disposal of them.  A tribunal does not fail to deal with an issue if it does not answer every question that qualifies as an issue.  It can deal with an issue where that issue does not arise in view of the tribunal’s decision on the facts or its legal conclusions. A tribunal may deal with an issue by so deciding a logically anterior point such that the other issue does not arise. If the tribunal decides all those issues put to it that were essential to be dealt with for the tribunal to come fairly to its decision on the dispute, it will have dealt with all the issues. So long as a decision on one argument suffices to resolve an essential issue, the tribunal does not have to consider all arguments canvassed upon the issue. Although awards often respond to parties’ submissions, such submissions do not dictate how the tribunal is to structure the disposal of the dispute referred to it…a list of issues is not an exam paper, and I would add that it is not an exam paper with compulsory questions for the tribunal to answer them all.

Further, the Court was not concerned with whether the tribunal had come to the right decision for the correct reasons, or whether there was evidence to support its finding in the decision ([31]). The Courts’ approach was to read an award generously with minimal curial intervention.  Only when there are meaningful and readily apparent breaches of the rules of natural justice which can cause actual prejudice (rather than to comb an award in order to assign blame or to find fault in the process), may it warrant the setting aside of an award ([27]).

Procedural decisions and alleged inability to present case

In relation to procedure, it was argued for CNG that the tribunal had imposed an unequal and tight timetable on CNG, and had allowed the Respondents last-minute ambushes by adducing late evidence and running an unpleaded case, which resulted in CNG not being able to present its case ([22], [66]).

Citing COG v ES [2023] HKCFI 294, Chan J reiterated that a case management decision of a tribunal is not a decision which the Court should highly interfere with, in the absence of what the Court can find to be a serious denial of justice. Nor is it the function of the Court to descend to a level of reviewing the minutiae of the procedure, while the tribunal is obviously in the best position to decide on the most appropriate and fair manner of proceeding with the arbitration in accordance with the Arbitration Ordinance ([67]). For instance, as Section 46 of the Arbitration Ordinance provides a “reasonable opportunity” (as opposed to “full opportunity” used in Article 18 of the Model Law) to the parties to present their cases, no party can claim the right to have all the time it needs to prepare for the hearing and what the Court seeks to enforce is a standard of due process which are generally accepted as essential to a fair hearing ([68]).

Takeaways

CNG v G & G serves as another reminder from the Hong Kong Court that it does not sit on appeal against the tribunal’s finding of fact or law, nor interfere with the tribunal’s proper exercise of its case management powers. If parties attempt to rehearse once again before the Court arguments already made before the tribunal, or have different counsel reargue its case with a different focus in the hope that the Court may come to a different conclusion, it is likely to attract indemnity costs being awarded by the Court without changing the outcome of the case.

See full judgment here.

 

Date:
7 June 2024
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Hong Kong Stock Exchange Identifies Warning Signs in Dubious Loan Transactions

The Hong Kong regulators are taking actions in relation to their concerns regarding dubious loan transactions in listed companies. In mid-2023, the Securities and Futures Commission (SFC) and the Accounting and Financial Reporting Council (AFRC) published a joint statement on common regulatory concerns and provided guidance on conduct standards in relation to loans or other financial arrangements. In relation to misconduct of listed companies and directors, the April 2024 edition of the Enforcement Bulletin of the Hong Kong Stock Exchange (“HKEX“) discusses red flags commonly seen in lending arrangements of listed issuers and provides practical tips on compliance.

In recent years, the number of regulatory investigations involving loans, advances and other similar arrangements made by listed issuers has been on the rise. Some of the red flags below are often seen in various phases of the lending arrangements:-

The Bulletin also provides practical tips on how to ensure compliance in respect of three areas which are the HKEX’s focus and major concerns, namely (i) directors’ duties, (ii) internal controls and (iii) disclosure obligations:-

The Bulletin serves as an important reminder of the HKEX’s rigorous oversight on loans, advances and other similar arrangements of listed companies. Listed companies and directors are advised to ensure that appropriate internal control measures are in place and the disclosure obligations under Chapters 14 and 14A of the Listing Rules are complied with. Directors should bear in mind their obligations under the Listing Rules, including a duty to safeguard the company’s assets, and they could be asked to demonstrate proper actions have been taken in accordance with established policies and procedures by producing relevant written records. Any material failure in safeguarding the assets of the listed company and/or giving due consideration regarding commercial rationale of proposed loan transactions will likely trigger regulatory investigations and enforcement actions.

Date:
31 May 2024
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The Launch of the 2024 HKIAC Administered Arbitration Rules

In our February 2024 update, we discussed the proposed amendments to the 2018 Hong Kong International Arbitration Centre (“HKIAC“) Administered Arbitration Rules.

This article follows up on the launch of the 2024 version of the HKIAC Rules (the “2024 Rules“), which will take effect on 1 June 2024 (unless the parties have agreed otherwise) and incorporate most of the previously discussed amendments.

The 2024 HKIAC Rules is available here.

The key amendments are summarised as follows:

  1. Diversity in arbitral appointments (see Art. 9A): parties and co-arbitrators are encouraged to consider “diversity” when selecting arbitrators, but the HKIAC offers no definition or guiding principles regarding the concept of “diversity“. However, the HKIAC, in its press release, has cited its 2016 signing of the ERA Pledge as an example – the Pledge aims to increase the appointment of women arbitrators to achieve fair representation and gender parity.

 

  1. New overarching considerations (see Art. 13.1): tribunals and parties should now consider information security and environmental impact when adopting procedures for the conduct of the arbitration. This reflects the HKIAC’s existing practices, such as its offering of “HKIAC Case Connect” since 2021, which is a secure case management platform with banking-grade encryption and continuous server monitoring, and its work on drafting the “Green Protocols” to promote sustainable arbitration.

 

  1. Clarifications of the arbitral tribunal’s powers (see Art. 13.6, 13.9 and 13.10): the amendments clarify that the tribunal has power to determine preliminary issues and enhance the HKIAC’s role in matters that impact the integrity of the arbitral process, such as the appointment of arbitrators and revocation of an arbitrator’s mandate.

 

  1. Enhancements to the mechanism for a single arbitration to proceed under multiple contracts (see Art. 29.2): the amendments allow the HKIAC to appoint the arbitral tribunal if it determines that the arbitration is properly commenced under Article 29, with parties deemed to have waived their rights to designate an arbitrator.

 

  1. Time limit to declare the closure of proceedings (see Art. 31.1): the revisions now impose a fixed time limit, no later than 45 days from the last directed submissions, for the tribunal to declare the proceedings or the relevant phase of the proceedings closed.

 

  1. Considerations for cost apportionment (see Art. 34.4): factors such as the relative success of the parties, scale and complexity of the dispute, parties’ conduct, outcome related fee structure agreements, and adverse environmental impact should be taken into account when determining whether the costs of arbitration are reasonable and how to apportion arbitration costs.

 

  1. Enhanced information security provisions (see Art. 45A): data protection and cybersecurity are critical in international arbitration, as demonstrated by the hacking incident of the Permanent Court of Arbitration website during the China-Philippines maritime border dispute in July 2015. In light of this background, the HKIAC has taken steps to address the risk of cyberattacks such as recognising secure online repositories as valid means of communication and is now empowering the arbitral tribunal to make decisions, orders, or awards in respect of any breaches of information security measures agreed upon by the parties or directed by the tribunal.

 

  1. Determination of fees payable to arbitrators (see §5.1 of Schedule 2 and §5 of Schedule 3): the amendments grant the HKIAC the authority to review and adjust the fees and expenses of the arbitral tribunal if parties have chosen to pay based on an hourly rate. Similarly, if parties have elected to pay by reference to an ad valorem fee scale, the HKIAC is empowered to determine the amount of fees and expenses to be paid to any arbitrator.

 

  1. Clarifications of the powers of the emergency arbitrator (“EA“) (see §10 of Schedule 4): the 2018 Rules include an emergency arbitration mechanism which enables parties to seek urgent interim relief from an emergency arbitrator prior to the establishment of the arbitral tribunal. Typically, the HKIAC appoints an EA within 24 hours of receiving an application, and the EA will make an emergency decision within 14 days. The 2024 Rules clarify that the EA has the power to issue any preliminary or interim order during this 14-day timeframe.

 

Overall, the 2024 revisions codify the HKIAC’s existing initiatives and clarify the powers of tribunals and the institution itself.  These changes are a targeted enhancement which underscores the HKIAC’s commitment to maintaining its preeminent position in international arbitration.

Date:
23 May 2024
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The Hong Kong Court hesitant to enforce 12-month worldwide “non-compete covenant” in employment contract

In the recent case Manulife Financial Asia Limited v Kenneth Joseph Rappold & ors [2024] HKCFI 989, the Court of First Instance (“Court”) has once again emphasised the importance of ensuring that “non-compete covenants” (“NCCs”) in employment contracts are drafted in such a way that they go no further than reasonably necessary to protect the employer’s legitimate business interests.

Background

This decision concerns an application for interim-interim injunction against Mr Rappold (who was formerly employed by Manulife Financial Asia Limited (“Manulife“), the Plaintiff, as Chief Financial officer, Asia) from joining Prudential, which Manulife argued was its key competitor, pending determination of an interlocutory application.

Mr Rappold’s employment contract contained an NCC which provided, among other things, that for a period of 12 months following a voluntary termination of his employment, Mr Rappold must not be employed in a “Similar Capacity” by a “Competitor[1].  

The Court refused to grant an interim-interim injunction against Mr Rappold. In reaching this decision, whilst stressing that its views on the merits of Manulife’s claim should be treated as provisional in nature, the Court considered that (i) Manulife had not demonstrated that its claim to enforce the NCC had reasonably good prospect of success at trial; (ii) the balance of convenience was against the granting of such interim-interim relief.

No reasonably good prospect of success in demonstrating enforceability of NCC at trial

As a general principle, an NCC (being a form of restraint in trade) is prima facie unenforceable unless the employer can show that (i) it is reasonable in the interests of the parties and in the public interest, and (ii) it goes no wider than is reasonably necessary for the protection of the employer’s legitimate business interests.

There are three reasons contributing to the Court’s view that the NCC in this case may not be found enforceable at trial:

  • First, there was no geographical limitation in the NCC (i.e. it imposed a worldwide restriction on Mr Rappold). As Mr Rappold only possessed confidential information relating to Manulife’s business in the Asia region, Manulife was unable to justify a worldwide restraint which prohibits Mr Rappold from being employed outside Asia. Despite Manulife’s attempt in performing the ‘blue pencil’ test[2], from the way the NCC was drafted the Court was unable to read-into it any geographical limitation.
  • Secondly, Manulife was unable to justify why a 12-month period of restriction was necessary to protect its legitimate business interests. The Court observed that information in today’s modern business world would often cease to be confidential within a very short time. However, Manulife was unable to identify specifically the confidential information allegedly possessed by Mr Rappold, nor was evidence adduced to explain (i) the shelf life of each category of the allegedly confidential information, (ii) how such shelf life warranted a 12-month restraint, and (iii) how such confidential information materially affected Manulife’s business.
  • Thirdly, the NCC lacked a “temporal backstop” and applied to all work done by Mr Rappold throughout his 5-year employment with Manulife (as opposed to work carried out more recently), and was therefore arguably wider than necessary.

Balance of convenience lies against granting an interim-interim injunction

The Court was also of the view that the balance of convenience lies against granting an interim-interim injunction for the following reasons:

  • Considering Mr Rappold’s age and the competitiveness of the insurance industry, granting an interim-interim injunction would cause irreparable harm to Mr Rappold’s career prospects which could not be quantified in monetary terms;
  • On the contrary, Manulife failed to demonstrate an appreciable risk of irreparable damage to its business if no interim-interim injunction was granted, considering that Mr Rappold would already be bound by the confidentiality covenant and undertaking in his employment contract;
  • The Court also factored in Manulife’s delay in seeking interim injunctive relief, which had already caused disruption to Mr Rappold’s employment plans.

For the reasons above, the Court refused to grant an interim-interim injunction against Mr Rappold, which is the course that carries a “lower risk of injustice” in case the decision turns out to be wrong.

Takeaways

This decision serves as yet another reminder that an NCC should be drafted in such a way that the geographical scope and duration of the restraint is no more than necessary to protect the employer’s legitimate business interests. Any employer seeking injunctive relief should also be reminded to act swiftly and to prevent unnecessary delay.

Hence, when drafting an NCC, it is always helpful to first identify the legitimate business interests it seeks to address, such that a reasonable geographical scope and duration can be determined for the NCC. When the reasonableness of the scope is in doubt, it is equally helpful to use language which makes it easy for the relevant part to be severed out from the rest of the clause, such that the clause may be saved by the ‘blue pencil’ test.

The full decision can be accessed here.

[1] Both “Similar Capacity” and “Competitor” were defined in the NCC, and there was no dispute that by joining Prudential as Chief Transformation Officer, Mr Rappold was employed in a “Similar Capacity” by a “Competitor”.

[2] When a court is able to sever an offending part of the clause and leave the remaining part of the clause intact, it may do so and convert an otherwise unenforceable clause into an enforceable one. This is known as the ‘blue pencil’ test. The test requires: (i) that the severance must be carried out without adding or modifying the remaining wording; the remaining terms must continue to be supported by adequate consideration; and (iii) the removal of the severed words must not affect the meaning of the remaining part so as to change the character of the contract which the parties entered into.

Date:
17 May 2024
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