Introduction

Common law policy is against enforcement of restraints of trade. A clause in an employment contract that restrains the activities of an employee after termination of employment is prima facie void (as being a restraint of trade and contrary to public policy) and unenforceable unless the employer can prove it is reasonable as between the parties, and in the public interest. It is trite that the time for ascertaining the reasonableness of a restrictive covenant is the time of the making of the contract.

That said, is evidence about matters that happened after the making of the employment contract relevant for the purpose of determining the reasonableness of a restrictive covenant? In the recent decision of BFAM Partners (Hong Kong) Ltd v Gareth John Mills & Segantii Capital Management Limited [2021] HKCFI 2904, the Court of First Instance (“CFI”) granted an injunction to enforce a six-month non-competition restriction in an employment contract, and discuss this question.

Background

The plaintiff, BFAM Partners (“Employer”), is a company that provides fund management services. On 11 February 2019, the Employer employed the 1^st defendant, Mr. Mills (“Employee”), as a technology consultant. The employment contract contains a non-compete clause that provides the Employee shall not be employed or perform services in competition with the Employer for a period of 6 months after termination of his employment in respect of products or services for which he was materially involved or responsible during his employment (“Non-Compete Clause”).

The Employee resigned on 22 February 2021 and his employment ceased on 21 May 2021. There was no dispute that the “six-month restriction period” in respect of the Non-Compete Clause is between 1 May and 31 October 2021. By a letter dated 29 April 2021, the Employer informed the Employee that it would pay him on a monthly basis a sum equivalent to his monthly basic salary during the six-month restriction period. On 24 May 2021, without the Employer’s knowledge or consent, the Employee commenced work with the 2^nd defendant, a competitor of the Employer (“Competitor”), as its chief technology officer. On 23 June 2021, the Employer made the first monthly payment for the non-competition period to the Employee. The Employee subsequently returned the payment to the Employer and stated his employment had ceased on 21 May 2021. In the correspondences between the Employer, Employee and the Competitor, the Employee alleged that the Non-Compete Clause was unenforceable.

On 27 July 2021, the Employer commenced legal proceedings to enforce the Non-Compete Clause by seeking an injunction to prevent the Employee from working for the Competitor until 31 October 2021 as well as an interlocutory injunction to the same effect.

The law: Enforceability of a non-competition clause

The CFI noted that the interlocutory injunction sought would only be valid until 31 October 2021 and a trial before then would not be possible, thus the grant or refusal of the interlocutory injunction would in effect dispose of the claim between the Employer and the Employee. The CFI considered that it should take the course which appears to carry the lower risk of injustice and more regard would be given to the plaintiff’s prospect of success in considering the issue of balance of convenience.

A restrictive covenant is unenforceable unless it can be shown to be reasonable in the interests of the parties and in the public interest. Regarding the prospect of success of the Employer’s case, the CFI had to consider (1) whether the Non-Compete Clause protects the Employer’s legitimate interests; and (2) whether the Non-Compete Clause is no more than reasonable and necessary to protect the Employer’s legitimate interests.

The decision

Whether the Non-Compete Clause protects the employer’s legitimate interests

The Employer argued that the Non-Compete Clause protects its legitimate interests in respect of confidential information and trade secrets, since the Employee had played a key role in improving the technology infrastructure used to execute the Employer’s trading strategies. The Employee had knowledge of both the confidential information and the trade secrets associated with the products and services he had provided to the Employer, which constitute legitimate interests that the Employer was entitled to protect. The CFI accepted the Employer’s evidence and held that the Non-Compete Clause would protect its legitimate interest.

Is evidence about matters that happened after the making of the employment contract relevant?

The Employee argued that the Non-Compete Clause was unreasonable. He was employed as a technology consultant at the time of employment contract and the Employer wrongly relied on evidence of matters that were not within parties’ contemplation at the time of contract. The CFI rejected that argument.

It is trite that the time for ascertaining the reasonableness of a restrictive covenant is the time of the making of the contract. It does not, however, follow that evidence about matters that happened after the making of the employment contract would be irrelevant for the purpose of determining the reasonableness of the Non-Compete Clause. The key is to ascertain the parties’ intentions, or what they contemplated, at the time when the contract was made. If it was within the parties’ intentions or contemplation at the time of the contract to anticipate a matter from arising subsequently, it cannot be objectionable for the court to take into account evidence about such a matter when determining whether the restrictive covenant is reasonable.

The CFI held that it was within parties’ contemplation, among other things, that the Employee would be promoted to an important role of the technology team of the Employer and would come across confidential information to perform his duties. The Employee retained the Employer’s confidential information in his mind or at least had a general impression.

Whether the Non-Compete Clause goes no further than is reasonably necessary

The CFI considered the Non-Compete Clause only sought to restrict the Employee from being employed or engaged in the provision of products and services to a competitor for a period of 6 months after the termination of employment with an express geographical limit in Hong Kong, and agreed with the Employer that the restriction was appropriate and reasonable because the life-cycles of its trading strategies would be around 6 months.

Prejudice to the Employee if the injunction was granted

The Employer promised to pay the Employee his base salary during the six-month restriction period. The CFI took the view that the Employee’s livelihood would not be affected if the injunction was granted. Any harm that the Employee may suffer as a result of the injunction would be compensable in monetary terms given that the Employer agreed to provide the usual undertaking as to damages.

The CFI granted an injunction in favour of the Employer to enforce the Non-Compete Clause against the Employee.

Takeaway

Restrictive covenants in employment contracts are generally unenforceable unless the employer can show they are reasonable between the parties. Whilst the time for ascertaining the reasonableness of a restrictive covenant is the time of the making of the contract, there is nothing to stop an employer from adducing that evidence regarding matters that took place after the making of the contract for the purpose of determining the reasonableness of the restrictive covenant in issue. The key is to ascertain the parties’ intentions, or what they contemplated, at the time when the contract was made.

In BFAM Partners, one of main reasons for the CFI to grant the injunction was the fact that the Employer had adduced cogent evidence to identify and successfully proved that it was within the intentions or contemplation of both the Employer and the Employee that (1) the Employee’s duties and responsibilities might change if there was a change of the nature of his employment if there was a promotion, (2) the Employee would need to develop products for and provide services to the Employer in the course of his employment, and (3) the Employee would come across confidential information in the course of developing products for and providing services to the Employer and it was important to the Employer that the confidentiality of such information must be preserved.

It is often not straightforward for an employer to enforce a restrictive covenant against an employee. When in doubt, it is advisable for the parties concerned to seek legal advice.