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.