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.

On 23 April 2024, the Hong Kong Court of Appeal handed down two important decisions clarifying the applicability of the approach emerged from the Court of Final Appeal’s decision in Re Guy Kwok Hung Lam [2023] HKCFA 9 (“Re Guy Lam“) to disputed petition debts subject to an arbitration clause, and arbitrable cross-claims raised by a company in a winding up proceeding.

Re Simplicity – disputed debt subject to arbitration clause

In Re Simplicity & Vogue Retailing (HK) Co., Limited [2024] HKCA 299 (“Re Simplicity“), the Court of Appeal held that when the debt forming the petition debt is disputed and should be referred to arbitration pursuant to an arbitration agreement, the established approach, namely that a petitioner is ordinarily entitled to a winding order if the petition debt is not subject to a bona fide dispute does not apply. Rather, the approach in Re Guy Lam should apply, meaning the petitioner and the debtor company ought to be held to their contract to refer dispute to arbitration, absent countervailing factors such as the risk of insolvency affecting third parties, and a dispute that borders on the frivolous or abuse of process.

The controversy is whether the debtor company should be required to demonstrate a bona fide dispute of the petition debt on substantial grounds notwithstanding the existence of an arbitration clause in order for a petition to be stayed or dismissed ([33]). In this regard, the Court of Appeal held that it is appropriate such controversy should be laid to rest in light of the reasoning in Re Guy Lam, as the effect of arbitration clauses on insolvency petitions is of central importance to the reasoning of the Court of Appeal and Court of Final Appeal’s judgments of Re Guy Lam ([34]).

Further, having regard to the statutory framework protective of arbitration (as evidenced by Section 20 of the Arbitration Ordinance (Cap 609) which provides for the Court to refer matter subject to an arbitration agreement to arbitration), there is an even stronger case for upholding the parties’ contractual bargain that disputes falling within the scope of an arbitration clause should be resolved by arbitration ([37]). Vice versa, it would be an anomaly that a party bound by an agreement for dispute resolution cannot expect to proceed with an ordinary action for his claim, but can resort to the more draconian measure of presenting a petition for winding up a company ([35(5)]).

Importantly, such public policy consideration of holding parties to their bargain is not the only consideration and the approach of the Court in exercising its discretion is “multi-factorial” – the “countervailing factors” mentioned in Re Guy Lam, namely (i) the risk of insolvency affecting third parties, and (ii) a dispute that borders on the frivolous or abuse of process, are simply instances the Court may exercise its discretion not to hold the parties to their agreed dispute resolution mechanism. In this way, the Court retains the flexibility to deal with cases as circumstances require ([39]).

The Third Requirement of Lasmos survives

Prior to Re Guy Lam and Re Simplicity, the approach to disputed petition debt subject to arbitration clause is set out in Re Southwest Pacific Bauxite (HK) Limited [2018] HKCFI 426 as the “Lasmos” approach: the petition should generally be dismissed where it is shown that (i) if the company disputes the debt relied on by the petitioner, (ii) the contract under which the debt is alleged to arise contains an arbitration clause that covers any dispute relating to the debt, and (iii) the company takes the steps required under the arbitration clause to commence the contractually mandated disputed resolution process ([23]). In responding to the company’s submission in this case that the petitioner took no steps to express their intention to arbitrate, the Court of Appeal held that a genuine intention to arbitrate on part of the petitioner remains to be relevant. Otherwise, petitioners could simply raise arbitration clauses as a tactical move with no genuine intention to arbitrate in stalling the winding up process ([42]). However, even if no steps at all were taken, the Court could still exercise its discretion in appropriate cases to grant a short adjournment for the debtor to commence arbitration and require an undertaking from him to proceed with arbitration with all due dispatch. If no progress is made during the adjournment, the Court could consider lifting the stay and proceed to exercise its jurisdiction on the petition debt ([42]).

Nevertheless, as the company in this case did not file any evidence in opposition to the petition and did not comply with the condition for an extension of time to do so, the Court of Appeal dismissed the company’s appeal and ruled that the petitioner is entitled to a winding up order ([43]).

Re Shandong Chenming – The treatment of cross-claims

Further to our previous articles[1], the petitioner in Re Shandong Chenming Papers Holdings Limited [2024] HKCA 352 (“Re Shandong Chenming“) appealed the Court of First Instance’s stay of the petition to wind up the company pending determination of an arbitration between the parties. Following Re Simplicity, the principal question here is whether the approach in Re Guy Lam should also be applied where a company has raised a cross-claim against the petitioner which is arbitrated pursuant to an arbitration agreement between the parties. The petitioner submitted that the Court should assess the cross-claim in the ordinary case without an arbitration clause, the test being whether there is a genuine cross-claim based on substantial grounds.

To begin with, the petitioner submitted that there are two questions arising in a petition, the first being the threshold question of whether the petitioner has standing to present his petition. If the petitioner has standing, the second question is whether the company is insolvent and should be wound up. Within this framework, the petitioner posited that Re Guy Lam only concerned with the prior question of standing and the question of cross-claims falls under the second question, which is to be considered with a range of other matters in determining the insolvency of the company. Further, the petitioner argued that since the reason underlying the principle in Re Guy Lam is that the petitioner should be held to his bargain, that principle does not apply to cross-claim which is instead asserted by the company ([24]).

Contrary to the petitioner’s submissions, the Court of Appeal held that while it is true that the dispute over the petition debt is described in Re Guy Lam as a “threshold” question, it is relevant to note that the reasoning in that case is grounded in the wider context of the Court’s discretion to decline jurisdiction and it will be too narrow to read Re Guy Lam to confine its rationale to the question of standing to petition ([37]-[38]). Rather, the Court considers the overall relationship between the parties to see whether the petitioner is a net creditor having an interest to wind up the debtor company ([40], [42])). In this process the Court does not ignore the company’s cross-claims against the petitioner, and indeed regard them as “practically equivalent to disputes of the debt” where reverse cross-claims by the petitioner against the company could also be relevant ([39]). Therefore, where the cross-claim is subject to an arbitration clause, the forum agreement between the parties is likely to be relevant to the exercise of the Court’s discretion – for the Court to enter into the merits of the cross-claim would be against the parties’ agreement ([42]-[43]).

Moreover, the Court of Appeal held that while it is true that it will be the debtor company who has drawn the cross-claim to the Court’s attention, it is not the company seeking the Court’s determination of his cross-claim but the petitioner who is asking the Court to reject the cross-claim as a ground of opposition to the petition. For these reasons the petitioner is making a distinction without a difference and thus the appeal was dismissed ([45]).

Takeaways

The two Court of Appeal decisions put the controversy and debates sparked from First Instance’s decisions to rest and confirmed that Re Guy Lam applies equally to disputed petition debt and cross-claim subject to an arbitration clause.

Further, as the Court of Appeal made clear in Re Shandong Chenming, extending the Re Guy Lam approach to cross-claims would not create a “debt dodger’s charter” as the debtor company would have to show a valid exclusive forum agreement between the parties that governed the cross-claim to rely on the approach. In this light parties who have agreed to refer their disputes to arbitration should proceed with arbitration to resolve any issues before commencing winding up proceedings, so as to avoid wasted time and costs as the Courts will probably hold parties to their contractual bargain and stay or dismiss petitions, save for exceptional circumstances

[1] Articles published on 28 June 2022, 25 August 2023, and 15 November 2023

In collaboration with Essar Insurance Services Limited, Managers of the Professional Indemnity Scheme (“PIS”), we have recently published an article on “Solicitor’s Undertaking” in the Hong Kong Lawyer Journal to highlight risk management issues learnt from the handling of PIS claims.  It can be accessed here .

This article delves into common scenarios in which solicitor’s undertakings are given, emphasises the importance of honouring these undertakings, and sheds light on the potential consequences of breaching them.

An RME bulletin on the same topic has also been published, which can be accessed here.

Should you have any enquiries or require assistance regarding this topic or professional negligence / indemnity generally, please do not hesitate to contact us.

Further to our previous articles[1] on the lower court decisions’ on the validity and constitutionality of the Letter of No Consent (“LNC“) Regime (“Regime“), the highest court of Hong Kong, the Court of Final Appeal (“CFA“), has put the uncertainty of the Regime to rest and confirmed its lawfulness.

The Appellants in Tam Sze Leung & Ors v Commission of Police [2024] HKCFA 8 lodged a final appeal to the CFA based on four questions of law. To begin with, it is helpful to understand the Appellants’ characterisation of the Regime which is common-themed across the four questions.

The Appellants’ Mischaracterisation of the Regime

At the outset, the CFA noted that the Appellants did not challenge the constitutionality of the related legislation, i.e. sections 25 and 25A of the Organised and Serious Crimes Ordinance (Cap 455) (“OSCO“).  Rather, they challenged the Regime as operated by the police, e.g. as “an informal asset freezing mechanism developed by the police” and that when issued, “LNCs invariably cause the recipient to refuse to deal with that property for fear of committing an offence under OSCO section 25(1)” ([14]).

The CFA noted that the police have developed a set of operational policies and procedures which are set out in the Force Procedures Manual (“FPM“), and that in giving effect to the FPM and the OSCO, a specific sequence of events would likely take place when the police receive information of possible money laundering, which includes the issuance of LNCs followed by constant reviews and endeavours to obtain a restraint order. Under Section 25A(2)(a) of OSCO, the issuance of LNCs amounts to withholding of a grant of immunity to the banks against criminal liability in dealing with the relevant funds ([51]), and if the banks decide to deal with the funds in question, it runs the risk of incurring criminal liability given that the information provided by the police is likely to constitute reasonable grounds for banks to believe that those funds represent the proceeds of an indicatable offence ([48]).

However, the CFA clarified that no property belonging to the suspect is ever held or seized by the police. It is the banks who maintain the accounts for the customers, and in accordance with the anti-money laundering requirements, decide whether or not the customers should be allowed to draw on the suspect funds ([47]).  Although the banks’ desire to avoid criminal liability when LNCs are issued (i.e. no immunity being granted by the police) might have motivated them to freeze the accounts, the freeze remains to be the bank’s act ([48]).

As such, the CFA held that the Appellants mischaracterised the freezing of the accounts as the actions of the police.

The Four Appeal Questions

With the analysis of the common-themed flaw among the four questions, we briefly summarise the CFA’s findings on the four appeal questions as follows.

Question 1A: Ultra Vires Ground

The major flaw found by the CFA in this question is that according to the Appellants, in order for the issuance of LNCs to be intra vires (i.e. within the legal power or authority granted to the police), they had to be authorised by OSCO and that in the absence of such authorisation in the ordinance, those actions were ultra vires ([59]). The CFA noted that the Appellants mischaracterised the authorisation to come from OSCO, rather than the Police Force Ordinance (Cap 232) (“PFO“). While Sections 25A of OSCO is primarily concerned with the granting of immunity to banks at a stage after the police investigation ([62]), it is Section 10 of PFO which confers authority to the police in taking lawful measures for preventing and detecting crimes and offences, and which lays down the duties and powers of police officers to issue LNCs in order to prevent the dissipation of proceeds of money laundering ([64]-[65]).

The second flaw found by the CFA is the Appellant’s mischaracterisation of the freezing as the police’s act as mentioned above ([67]-[69]).  As for the third flaw, the CFA clarified that (contrary to the Appellant’s contention) a restraint order from the Court is not the only lawful means of immobilising a bank account, and the PFO empowers the police to instigate disablement by the banks.

Question 1B: Improper Purpose Ground

As with the Ultra Vires ground, the Improper Purpose ground was similarly misdirected. This ground involved the contention that, having been given a statutory power, the police misused it for an improper purpose.  Similarly, the CFA held that the Appellants’ argument was flawed as they again relied on OSCO instead of PFO as the source of the police’s powers to deal with the bank, and that the Appellants mischaracterised the actions of the police as freezing of the accounts. Further, the CFA commented that even if the freezing of the accounts were properly attributed to the actions of the police, such is only a temporary measure which is aimed at preventing dissipation of the suspect’s assets pending further investigation and any potential restraint order from the Court, and is not a misuse of the powers conferred by the PFO.

Question 2: Constitutionality Ground

The Appellants sought to challenge the constitutionality of the Regime by alleging that, among others, it infringed:

1. the rights to use of property under the Basic Law (Articles 6 and 105);
2. the rights to private and family life under the Bill of Rights (BOR 14); and
3. the rights of access to court and to legal advice under both the Basic Law (Article 35) and Bill of Rights (BOR 10).

First, for the rights to use of property, as mentioned above, the freezing of the accounts remained the banks’ doing ([81]). Thus, the CFA found that the police’s actions did not prevent the Appellants from using the property, and on this ground alone, the constitutional challenge based on property rights could not be sustained.  Nonetheless, the CFA went further and examined the “prescribed by law” and “proportionality” tests, and concluded that the Regime is prescribed by law (as the PFO and FPM offer a clear and accessible sets of provisions conferring the power) ([83]), the Regime has a legitimate aim (to facilitate investigation and detection of crime, and prevent dissipation of criminal proceeds), and the temporary and provisional nature of LNCs reflected a reasonable balance between the anti-money laundering aims of society and protection of individual rights ([84]-[87]).

Second, for the rights to private and family life, the CFA agreed with the Court of First Instance and the Court of Appeal that the Appellants did not adduce evidence of hardship they experienced, and their hypothetical infringement of such right should not be entertained ([90]).

Third, for the rights of access to court and to legal advice, the same objection in respect of the rights to private and family life applied to the Appellants’ suggestion that the freezing of accounts was “well capable” of impairing their ability to retain a lawyer for advice or take legal action to contest the freeze ([93]). As the Appellants managed to instruct solicitors and three counsels to present and argue their case, the CFA would not address this constitutional challenge ([90]).

Question 3: Fair Hearing Ground

On this front, the Appellants alleged that since LNCs effectively achieved an indefinite freeze of assets without the formalities of a restraint order, this involved a “determination of rights and obligations in a suit at law”, and as such under BOR 10 and common law, the Appellants should be afforded adequate opportunity to make representations, a hearing before an independent and impartial tribunal, and adequate reasons should be handed down for the decision to issue the LNCs.  In rejecting this argument, the CFA stated that the police did not determine the Appellants’ rights to the relevant funds and the investigations conducted by the police are incomparable to a “suit at law”.  Moreover, the police were fully entitled to keep sensitive aspects of their investigations confidential ([99]), and it had in any event been open to the Appellants to seek relief against the banks in a “suit at law” or to bring a judicial review against the police as in this case.  As such, these rights were not engaged ([100]-[101]).

Question 4: A Revisit of the Interush Decision

The Court of Appeal previously held that the Regime was a necessary and proportionate restriction on the right to enjoyment of private property ([9(d)].  With the above analysis in mind, the CFA noted that the Court of Appeal adopted a different analytical basis, and proceeded to hold that it was not easy to see how the rights to use of property had been infringed ([109]).

Takeaways

With the Regime finally confirmed, victims of fraud would be more assured that bank accounts suspected of holding crime proceeds would most probably be temporarily frozen upon the issuance of LNCs by the police, potentially before civil action begins. This will assist victims to recover their stolen funds, before the funds dissipate, making the recovery more difficult.

On the other hand, banks should be reminded to keep proper document trail as to the grounds and supporting evidence of their decisions to freeze accounts in mitigating their potential liabilities owed to affected customers.

We have assisted many of such victims to recover their stolen funds, including cases where there had been a full recovery, and also in circumstances where the stolen funds had gone through several levels necessitating further tracing. It is essential that victims react speedily and decisively and seek legal assistance as soon as they are alerted to being defrauded.  Speed is of the essence, in light of technology in this day and age.

See full judgement here.

[1] Articles on 4 September 2023, 14 April 2022 and 11 February 2022.

On 13 March 2024, the Court of First Instance of the High Court (“Court“) in A v B and others [2024] HKCFI 751 refused to enforce an arbitral award on the ground that the arbitrator had failed to give reasons.

Background

On 25 August 2022, the sole arbitrator (“Arbitrator“) granted an arbitral award (“Award“) in favour of the Applicant (“A“) at the International Center for Dispute Resolution under the Rules for International Commercial Arbitration of the American Arbitration Association (“Arbitration“).

Under the Award, the Respondents were held to be jointly and severally liable to pay to A royalty fees and other charges under the licence agreements entered into between A and the 1^st Respondent. The licensee, and the 2^nd and 3^rd Respondents, were prohibited from engaging in any educational business in Hong Kong.

On 12 May 2023, the Court granted leave to A to enforce the Award (“Leave“).

Ground to set aside the Leave – Failing to give reasons

On 23 June 2023, the Respondents applied to set aside the above leave on the ground that the Arbitrator had failed to give any reasons for her decisions. The Award simply made findings and conclusions, without any analysis of the decisions.

Mimmie Chan J in her judgment noted the principles set out in R v F [2012] 5 HKLRD 278, Z v Y [2019] 1 HKC 244, and LY v HW [2022] HKCFI 2267, that awards are to be read generously, in a reasonable and commercial way, expecting, as is usually the case, that there will be no substantial fault that can be found with it. Mimmie Chan J also noted the policy of minimal curial intervention as highlighted in AI & ors v LG II [2023] 4 HKC 135. Any inference that a tribunal has failed to consider an important issue is to be made only if it is clear and virtually inescapable.

However, Mimmie Chan J concluded that, however generously the Award in the case was read, objectively read and in the context of the issues raised and submissions and arguments made before the tribunal, the arbitrator failed to adequately explain in the Award the reasons for her conclusions on the key issues raised in the Arbitration, of the applicable governing law of the Agreements, on the effective date of termination of the Agreements, and on the enforceability or the reasonableness of the non-compete covenant, all of which were disputed by the parties.

Analysis

In the course of reaching the above conclusions, Mimmie Chan J held that the Respondents, as parties who had submitted their disputes to the tribunal for arbitration and determination, were legitimately entitled to expect key issues which affected their rights and liabilities to be dealt with and explained with sufficient reasons in the Award.

Likewise, the procedural law governing the Arbitration required the Arbitrator to give reasons of her decisions. Under Article 33 of the International Arbitration Rules, the tribunal “shall” state the reasons upon which an award is based, unless the parties have agreed that no reasons need be given. Paragraph 5 of the Supplementary Procedures for International Commercial Arbitration of the American Arbitration Association contains an identical provision. There was no suggestion that the parties had waived the need for reasons. Thus, the Award did not comply with the aforementioned rules as no reasons were given, and had not been made in accordance with the procedure of the Arbitration to which the parties had agreed.

In line with R v F [2012] 5 HKLRD 278 and A v B HCCT 40/2014, 15 June 2015, Mimmie Chan J emphasised that the Respondents were entitled to query whether the key issues in the Arbitration had been considered by the Arbitrator, and if considered, why the issues were determined against them. It would be contrary to public policy to enforce and recognise the Award when those important issues, which the parties were entitled to expect to be addressed in the Award, were not in fact addressed or explained.

Hence, Mimmie Chan J was satisfied that failing to give reasons was sufficiently serious to affect the structural integrity of the arbitral process, and to have undermined due process and then set aside the Leave accordingly.

Takeaways

It is observed that although the Hong Kong courts hold a pro-arbitration approach in enforcing arbitral awards, the courts do uphold the structural integrity of the arbitral process.

The same requirement of stating the reasons in the arbitral award is stated under section 67 of the Arbitration Ordinance (Cap. 609) (Article 31 of the UNCITRAL Model Law) that “the award shall state the reasons upon which it is based, unless the parties have agreed that no reasons are to be given or the award is an award on the agreed terms under article 30“. Article 35.4 of the Hong Kong International Arbitration Centre (HKIAC) Administered Arbitration Rules (2018) contains the same requirement.

Please see full judgment here.