HCA923/2019

HCA 923/2019

[2019] HKCFI 2047

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 923 OF 2019

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BETWEEN
	CHINA WAH YAN HEALTHCARE LIMITED	1st Plaintiff
	INTERWAY VENTURES LIMITED	2nd Plaintiff
	WOMEN’S HEALTH AND REPRODUCTIVE MEDICINE CENTRE LIMITED	3rd Plaintiff
and
	DR CHAN LEUNG KWOK, CLEMENT	Defendant

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Before: Hon Coleman J in Chambers

Dates of Hearing: 19 July 2019

Date of Judgment: 19 July 2019

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J U D G M E N T

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Introduction

1.  It seems to me that, on an application of this nature, the parties would wish to know the result of the application as soon as possible.  Therefore, I propose to give my decision straight away.  I am, of course, assisted in being able to do so by the fact that both sides have produced full skeleton arguments, indeed one might say with quite a lot of flesh on the bones.  On behalf of the plaintiffs, Mr Lawrence Ng appeared together with Mr Victor Lui of counsel, and on behalf of the defendant, Mr William Wong, SC, appears with Vincent Chiu and Howard Wong of counsel.

2.  The 1st plaintiff is China Wah Yan Healthcare Limited.  It is a company incorporated in Hong Kong in 1989, and is listed on the main board of the Hong Kong Stock Exchange.  It is principally engaged in health management business and medical and wellbeing business.  It is the parent company of the 2nd plaintiff, Interway Ventures Limited, which is a company incorporated in Samoa in early 2016 as a special purpose vehicle specifically for the purposes of purchasing all of the shareholding in the 3rd plaintiff, Women’s Health and Reproductive Medicine Centre Limited, (“WHARM”), which is a company incorporated in Hong Kong in June 2006, and before becoming a wholly-owned subsidiary of the 2nd plaintiff, was wholly owned by the defendant, Dr Chan Leung-kwok Clement. 

3.  WHARM is licensed by the Council on Human Technology under section 23 of the Human Reproductive Technology Ordinance, Cap 561, for the carrying out of various human reproductive medical procedures at WHARM’s licensed centre.  The licence was in place prior to the transfer of ownership from Dr Chan to the 2nd plaintiff. 

4.  Dr Chan is a registered medical practitioner and a specialist in obstetrics and gynaecology, and in particular, specialising in human reproductive technology and in vitro fertilisation (“IVF”).  He is one of only 36 doctors recognised by the Hong Kong College of Obsteticians and Gynaecologists as being qualified in that field.  He has, at all material times until his resignation on 7 May 2019, been a director of WHARM and he was throughout, essentially, the sole person responsible for the business and operation of WHARM.  In circumstances which I will deal with in a moment, he became the managing director of WHARM, and in addition, he was also the Chief Executive Officer of the 1st plaintiff until 21 November 2018. 

5.  These proceedings were commenced by a writ dated 28 May 2019 in which writ the plaintiffs, or a combination of them, claim against the defendant for various relief, including an account of profits in respect of the defendant’s alleged breaches of his fiduciary duties, the terms of a sale and purchase agreement, and the terms of a service contract, all arising from his role as the person responsible of the IVF Centre (Hong Kong) Limited (“IVFC”), which is said to have been in direct competition with the plaintiffs. 

6.  There is also a claim for damages or equitable compensation and declaratory relief, and an injunction in the following terms:

“An injunction restraining the defendant, whether acting by himself, his servants, agents alone or jointly or between any of them or otherwise, howsoever directly or indirectly from;

(1) Taking part or assisting in the business or in any way being involved in the business operation or otherwise of IVFC or any other competitor of the 1st and/or 3rd plaintiffs, including but not limited to acting as the person responsible at the licensed centre operated by IVFC in breach of;

(a) his fiduciary duties owed to the 1st and/or 3rd plaintiffs, and duty of good faith and fidelity owed to the 1st and/or 3rd plaintiffs; and

(b) his contractual obligations set out all in [certain agreements which are detailed].

(2) Undertaking or continuing employment with or providing information, advice, assistance or services to IVFC or any competitor of the 1st and/or 3rd plaintiffs or in any way be engaged, either directly or indirectly, in any capacity of IVFC’s business or any competitor of the 1st and/or 3rd plaintiffs;

(3) Diverting or procuring the diversion of any business opportunity of the 1st and/or 3rd plaintiffs to IVF, or any competitor of the 1st and/or 3rd plaintiffs at all.”

7.  By a summons also dated 28 May 2019, the plaintiffs applied for orders against the defendant in interlocutory injunctive terms, essentially exactly mirroring with terms sought by the injunction in relief paragraph 5 set out on the writ.  It is to be noted that no timeframe is identified for the injunction which is sought to be imposed, probably inadvertently, but not even including the usual phrase, “until trial or further order.”  This may be relevant in considering the appropriate test to be applied when deciding, in the exercise of the discretion, whether or not to grant this form of injunctive relief in the particular circumstances.

Background Facts

8.  The claim arises in the context of the various agreements that have been made between the parties, and an agreement made between one of the parties and IVFC.  On 7 June 2016, the 2nd plaintiff special purpose vehicle as purchaser and the defendant, Dr Chan, entered into a sales and purchase agreement (“SPA”), whereby Dr Chan agreed to sell and the 2nd plaintiff agreed to acquire his entire share capital in WHARM for the consideration of $8.85 million on the terms and conditions set out in the SPA.  I have been told in evidence from the company secretary of the 1st plaintiff that the acquisition price reflected a premium of around $7.7 million as a ratio of price to earnings against the after tax profits of WHARM for the years to end 2014 and 2015, and that that premium was paid in return for Dr Chan’s commitment for a term of five years for his full devotion, time and efforts to develop the IVF and rejuvenation businesses of the 1st plaintiff’s group, apparently in the expectation that the 1st plaintiff could recoup its investment reflected in that purchase price in about 7.7 years’ time.

9.  There were terms of the SPA which included terms relating to the appointment of Dr Chan as the Chief Executive Officer of the 1st plaintiff and the managing director of WHARM.  Clause 6.1 provides that on the completion date, which it is not in dispute was 23 June 2016, the buyer will appoint the seller as the Chief Executive Officer of China Wah Yan, and will be responsible for the development of the IVF and the rejuvenation businesses of China Wah Yan, and the seller will be entitled to a monthly salary of $130,000 from China Wah Yan when serving his role as the Chief Executive Officer.  It does not matter, but I think that salary has since been varied. 

10.  Mr Ng invites me to focus on the fact that the responsibility of Dr Chan as CEO of China Wah Yan is specifically for the development of the IVF and rejuvenation businesses.  Clause 6.2 provides that, with effect from the completion date, the seller will also be employed as the managing director of the company - that is WHARM - for five years, which is extendable subject to mutual agreement, collectively defined as “the employment period” and again entitled to a monthly salary of $50,000, which salary I think has also been amended, although that does not matter for present purposes. 

11.  One can see in clause 6.2 some echo of what has been said by Mr Lam in his evidence, of the five-year period for which Dr Chan will be employed as managing director following the purchase of WHARM from him.  Clause 8 is headed, “Non-Competition” and clause 8.1 essentially provides that unless the buyer otherwise approves in writing, the seller, Dr Chan, shall devote his best efforts full time to developing the business and the interests of the buyer’s group, subject to permission to carry on certain academic commitments.  That is clause 8.1(a).  Clause 8.1(b) requires Dr Chan to identify to the buyer any business opportunity that might come his way, and most importantly for current purposes, clause 8.1(c) provides:

“During the employment period, Dr Chan shall not and shall cause his affiliates or associates not to directly or indirectly (i) own, manage, engage in, operate, control, work for, consult with, render services or do business with, maintain any interest in (proprietory, financial or otherwise) or participate in the ownership, management, operation or control of any business, whether in corporate proprietorship or partnership form, which is engaged in any business which competes or is likely to compete directly or indirectly with the business currently and from time to time engaged by the buyer’s group, including but not limited to medical business, defined for the purposes of the agreement as ‘the restricted business’.”

12.  Clause 8.1(d), misdescribed as the second 8.1(b) in the agreement, provides that:

“Within two years after the employment period, Dr Chan shall not and shall procure his afffiliates or associates not to, directly or indirectly own, manage, engage in, operate, control, work for, consult with, render services for, do business with, maintain any interest in, proprietary, financial or otherwise, or participate in the ownership, management, operation or control of any business, whether in corporate proprietorship or partnership form, which is engaged in any business which competes or is likely to compete directly or indirectly with the restricted business and is located in any geographical area within 1 kilometre from the districts in which the buyer’s group has operations.”

13.  That clause also prohibits solicitation of customers and enticing or soliciting away senior staff.  Mr Ng reminds me and places emphasis on the fact that clause 8.2 of the SPA identifies that the seller agrees with the buyer that the restrictive covenants in clause 8.1 are reasonable and necessary for the protection of the value of the sale share in the company, and that having regard to the fact that those covenants do not work harshly on it.  I note that clause 8.3 specifically acknowledges that Dr Chan has had the opportunity to take independent advice on those restrictions in clause 8.1. 

14.  On 23 June 2016, the 1st plaintiff as employer and Dr Chan as employee entered into the service contract (“SC”), recital A to which provides that it is a condition precedent to the completion of the SPA that the SC be entered into between those parties.  Under the SC, the company is to employ Dr Chan, both as the Chief Executive Officer of the company and as the managing director of WHARM upon and subject to the terms and conditions set out in the SC.  Relevantly to part of the argument on this application is clause 3, headed, “Duration.”  Clause 3.1 provides that:

“Subject to clauses 3.3 and 3.4 and completion of the SPA, Dr Chan’s appointment/employment as Chief Executive Officer of the company shall commence on the date hereof and shall continue for a period of three years, and the managing director of WHARM shall commence on the date hereof and shall continue for a period of five years, together defined as ‘terms’, unless terminated by the company pursuant to clause 13, Dr Chan giving to the company not less than six months’ notice in writing in accordance with the terms of this Service Contract or any applicable laws and regulations.”

15.  I note that clause 3.2 provides for the automatic extension for the same number of years of the respective terms beyond the original terms, unless mutual agreement otherwise, or one party services a notice of termination on the other one month prior to the expiry of the term. Clause 3.3 provides that:

“Dr Chan undertakes to remain as the Chief Executive Officer of the company and as the managing director of WHARM during the first 24 months of this Service Contract and shall not resign from his office as the Chief Executive Officer of the company and as managing director of WHARM unless the prior written consent and approval from the CWY board and the WHARM board have been duly obtained.”

16.  It is right to note at this stage that by a supplemental service contract (“SSC”) dated 7 March 2017, clause 3.3 was deleted in its entirety and replaced by a following new clause. But in practical terms, the new clause made only the change that the 24-month period to which Dr Chan committed to remain as Chief Executive Officer of the company and managing director of WHARM was to be treated as having begun only on 17 March 2017.  As a result, that two-year period expired on 17 March 2019. 

17.  Clause 13 of the SC is headed, “Termination”. Clause 13.1 provides that, “The employment may be terminated by the company (a) by not less than six months’ notice in writing or payment in lieu of a notice of termination (whether given by the company or by Dr Chan).”  I do not need to deal with paragraphs (b) or (c) for present purposes, but one can see at once that the clause is perhaps not most happily drawn, in that it appears on the one hand to refer to the ability of termination only at the hands of the company, whilst on the other hand, referring to a period of six months’ notice or payment in lieu which might be given either by the company or by Dr Chan.

18.  Clause 14 is headed, “Non-Competition and Non-Solicitation”, and materially for present purposes, clause 14.1 provides:

“During the course of Dr Chan’s employment hereunder, and for a period of 12 months thereafter, Dr Chan shall not, without the prior written consent of the company, directly or indirectly and either on his own account or in conjunction with or on behalf of any other person, firm or company;

(a)   participate in or be employed for or be engaged in or invest in any activity or business or assist any third party in respect of any such activity or business, whether in his personal capacity or for his own account as an individual proprietor or as a partner, shareholder, other than as a shareholder of no more than 5 per cent equity interest in a company, officer, director, consultant, trustee or otherwise, which is in competition with the company and/or the group, ‘the restricted business’, within the territory of Hong Kong.”

19.  So one can see that the two non-competition provisions in the SPA and the SC do not quite match.  Whilst both reflect restrictions during the course of employment, the former deals with a two-year post‑termination provision limited to a geographical area of 1 kilometre from the place of business of, probably, the 3rd plaintiff, whilst the latter deals with a one-year post-termination period of restraint with the geographical area of the whole of Hong Kong. 

20.  Two other agreements are relevant to this application.  The first is a deed of undertaking (“DOU”) dated 27 April 2018, and made between Dr Chan as the person giving the undertaking, and WHARM as the recipient of the undertaking.  In his second affirmation, Mr Lam identifies what he says is the background which led to the execution of the DOU.  He says that in early 2018, it had come to the plaintiffs’ notice that Dr Chan had entered into agreements with certain medical groups under his own name personally, and in order to fill the lacuna left by the state of affairs and to ensure that all revenue, including in particular those arising from the agreements in which Dr Chan was personally a party, would be streamed back to WHARM, Dr Chan executed the DOU in favour of WHARM. 

21.  The recitals to the DOU include recital B, which states:

“Dr Chan has entered, and may from time to time, enter into agreements, letter of appointments and/or arrangement with third parties in respect to the medical services to be provided by him or by a group of doctors contracted with WHARM, collectively referred to as ‘agreements’, including but not limited to ...”

22.  Then a number of agreements are set out.  As Mr Lam has identified, some of those agreements are agreements with third parties entered into by Dr Chan in his own name, whereas the remainder are agreements entered into with third parties by WHARM.  Three of the agreements seem to predate the SPA and the remainder were entered into in or after September 2016, including up to March 2018.  Recital C recognises that in connection with the services provided, Dr Chan will be remunerated as specified in the agreements, and in paragraph 2(i) of the deed, Dr Chan undertook that:

“All the remuneration, billings, income, fees and/or other economic benefits in whatever form generated under any of the agreements by Dr Chan and/or the group of doctors contracted with WHARM, ‘the benefits’, shall belong to WHARM.”

23.  Essentially, by that undertaking, Dr Chan agreed to pass on to or to channel back to WHARM any income received by him or doctors contracted with WHARM which was received as a result of those agreements and, it seems from the wording of recital B, such other agreements as might from time to time later be entered into.  The last agreement which is relevant for today’s purposes is a framework agreement (“FA”), which is dated 14 August 2018 and was made between WHARM and IVFC.  In his evidence, Mr Lam identifies what he says is the background to the entering into of the FA.  He refers first to an email dated 8 June 2018 from Dr Chan to the chairman of the 1st plaintiff, in which Dr Chan reported that he had been in discussions with IVFC.  It is relevant to note that these discussions occurred in the context, and the email makes clear that there is the context, of a serious concern about the financial situation of WHARM arising from a drop in referrals since January 2018 leading to decreased clinic income, hospital income and IVF income.

24.  As an aside, I would note that there is some dispute between the parties as to why that financial situation had occurred. It does not seem to me that it matters for today’s purposes and I do not propose to visit the relevant facts or express a view on them, but it is clear that the parties had concerns, and that at least Dr Chan was seeking to explore options which might help to relieve those concerns. 

25.  In paragraph 3 of his email he said to try to solve the problems of decreased referrals leading to decreased surgeries and IVF, several actions had been taken since December 2017, and he listed them at paragraphs (a) to (e).  For present purposes, I can focus on paragraph (e) which stated:

“I am discussing with IVFC to see if they could refer all their IVF patients to me. The condition is I have to carry out all the clinical work and procedures in their centre. I am asking them to prepare a service contract to submit to you. Apparently, they are confident they would have more than 100 patient cycles, but the question is, how would they give me all the cases?”

26.  Mr Lam says although Dr Chan reported that he would have to carry out all the clinical work and procedures at IVFC centres, the plaintiffs did not approve that, and no agreement or arrangement relating to that matter was ever entered into between WHARM and IVFC. 

27.  Reference is also made to the notes or discussion points of a meeting held on 27 July 2018 which, again, was a discussion held in the situation of a significant decrease in clinical workload, and therefore, income and cash flow.  Against a list of possible reasons why that might have occurred, which included not enough referrals from supporting medical groups and that lots of IVF cases went to Thailand and Taiwan because of costs and advertisement suggesting gender selection, there was a list of possible solutions.

28.  One of them was that Dr Chan had had discussions with IVFC  and had resumed discussions of getting more IVF cases and that the CFO of IVFC had kindly agreed to refer all cases to him, and reference is made to the agreement having been submitted to the 1st plaintiff pending its kind approval.  Mr Lam says in his evidence that that note again does not reflect any idea that referred cases would be conducted at IVFC’s centre, but in any event, no such approval was given as would have led to an actual agreement between WHARM and IVFC.  He emphasises that Dr Chan never once mentioned that he either had been or would help IVFC to set up its licensed centre or get its licence or be engaged as the person responsible of the licensed centre as that would be in direct competition with the business of the 1st plaintiff or WHARM.

29.  Under the terms of the FA, which is clearly the document, a draft of which had been provided through Dr Chan to the 1st plaintiff’s management and was ultimately signed by him on behalf of WHARM with their encouragement and approval, there is a recital C which provides:

“WHARM wishes to appoint the medical practitioner [that is Dr Chan] for the provision of medical services as a specialist doctor, the services as defined below, to IVFC and IVFC has agreed to appoint the medical practitioner as a specialist doctor upon and subject to the terms and conditions set out herein. WHARM shall procure the medical practitioner to provide the services at the request of IVFC subject to and upon the terms and conditions set forth in this agreement.”

30.  “Services” is specifically defined as:

“Medical and healthcare-related services to be provided by the medical practitioner to IVFC, its service providers, strategic partners and/or their clients, the scope of which shall be agreed by WHARM and IVFC from time to time.”

31.  Clause 3 of the FA under the heading, “Services” provides, at  3.1 and 3.2:

“WHARM shall procure the medical practitioner to provide the services at IVFC as IVFC may reasonably require for the proper performance and execution of the services;

The medical practitioner shall work such hours and periods, the visiting sessions, as mutually agreed in writing by WHARM and IVFC.”

32.  Clause 4 relates to payment of the service fees in accordance with a schedule to the FA which essentially provides that the service fees for the services provided by Dr Chan during the visiting sessions shall be divided, and 70 per cent of the sum of the specialist consultation fee and the doctor ward round fee and surgical fee would be payable to WHARM. Obviously, the other 30 per cent would be retained by IVFC.  There are certain fee provisions relating to diagnostic fees and other fees, but they are not material for present purposes. 

33.  It might be noted in passing that clause 5 of the FA relates to management during the visiting sessions, and specifically identifies that there may be an actual or potential conflict of interest among IVFC, WHARM and the medical practitioner during the visiting sessions, and that if that arises, the duty is to adhere to the rules of IVFC. 

34.  Clause 7 headed, “Restrictive Covenants” specifically prohibts Dr Chan from, amongst other things:

“Directly or indirectly soliciting, enticing or enticing away any agents or patients of IVFC, and to keep any contact information of or contact patients of IVFC, its service providers and/or strategic partners only with IVFC’s prior written consent.”

35.  On 21 November 2018, Dr Chan resigned as the CEO of the 1st plaintiff, and after that date until his resignation on 7 May 2018, only served as the managing director of WHARM.  It does not seem to me that there can be, nor is there really, any real dispute that whilst Dr Chan was managing director of WHARM and whilst he remains in employment as an employee of the 1st plaintiff and/or WHARM, he owed and owes fiduciary duties of good faith and a general duty of good faith and fidelity as an employee.  The fiduciary duties as a director would include duties not to put himself in a position of conflict, and duties not to profit at the expense of the company of which he is a director. 

36.  As indicated, WHARM had a relevant licence from the Council and Dr Chan was the person responsible for that licence and under the licensing regime.  Indeed, as required by the relevant Human Reproductive and Technology Ordinance, no person shall carry on the relevant activities and embryo research except pursuant to a licence, and the person responsible in relation to a licence refers to the individual specified in the licence as the individual under whose supervision any activities authorised by the licence shall be carried on. 

37.  The specific duties of the person responsible are set out in a Code of Practice on reproductive technology and embryo research provided by the Council on Human Reproductive Technology, and identify that it shall be the duty of the person responsible to ensure:

“(a) The other persons to whom the licence applies are of such character and are so qualified by training and experience as to be suitable persons to participate in the relevant activity authorised by the licence for reproductive technology centres with satellite centres/associated doctors. The person responsible of the centre is fully responsible for the acts of his/her satellite centres’ associated doctors. Therefore, person responsible must play a supervisory and proactive role to ensure that his/her satellite centres’ associated doctors provide the relevant RT services authorised by the licence in compliance with the Ordinance and its subsiduary legislation, the code, the licensing manual for reproductive technology centres and the terms and conditions to which the licence is subject;

(b) Proper equipment is used;

(c) Proper arrangements are made for the keeping of gametes and embryos and for the disposal of gametes and embryos that have been allowed to perish;

(d) Proper practices are used in the course of that activity; and

(e) The conditions of the licence are complied with.

It is a duty of the person responsible to ensure that the code is made known to all relevant staff involved.”

38.  There was some argument between Mr Ng and Mr Wong as to whether this in effect identifies that the person responsible has to ensure only technical compliance.  I am not sure that the argument is assisted by focusing on what technical compliance means, and whether this is only technical compliance; clearly, there is a real supervisory and proactive role to be performed by any person responsible named in any relevant licence.  It seems to me to be clear that the time taken to perform the relevant duties as the person responsible are bound to be in excess of the time taken by that person, if that person also engages in the provision of medical services direct to patients with the benefit of the licence.

39.  The plaintiffs’ complaint arises from the fact that it says in around mid-March 2019, it discovered to its total astonishment and as previously unbeknownst to it that Dr Chan had been acting as the person responsible of IVFC’s licensed centre which is within a walking distance of less than 200 metres from WHARM’s licensed centre, and which carries on business in direct competition with the business of the 1st plaintiff and/or WHARM.  I think on the materials that it is not realistically in dispute that the plaintiffs did not have knowledge that Dr Chan had been acting as the person responsible of IVFC’s licensed centre, nor did they have clear knowledge, at least, that Dr Chan had assisted in the process of obtaining the relevant licence which is likely to have occurred over a period of some six months or so prior to his commencement of duties as person responsible for IVFC on 19 January 2019, although it might straightway also be noted that that six-month period, if taken, would have commenced around August 2018, which happens to be the month in which the FA was executed.

40.  Following the discovery of these facts, there was an exchange of correspondence between the parties.  The 1st plaintiff wrote to Dr Chan on 18 March 2019 specifically making the point that he had been acting as the person responsible of the IVFC Centre without their knowledge and/or consent which was asserted to be a clear and flagrant violation in breach of the terms of the SPA and the SC, and serious breach of the fiduciary duties owed.  Twelve specific questions were asked.  On 29 March 2019, Dr Chan replied.  He did not deny that he had been acting as the person responsible of IVFC’s licensed centre, but he alleged that his acting in that way was not in any direct competition with the business and interests of WHARM, and rather, that he had helped IVFC to apply for the licence by acting as their person responsible to benefit WHARM. 

41.  On 3 April 2019, the plaintiffs’ solicitors wrote to Dr Chan, pointing out what they saw as fallacies in the excuses and explanations offered by Chan and asking him to provide answers to the questions previously posed.  They posed a rhetorical question, “How can it be for the benefit of WHARM when you are also assuming the role of the person responsible of another licensed centre which is performing the same/similar services of WHARM and in direct competition with WHARM’s business?”  As is sometimes said, the problem with posing rhetorical questions is that occasionally someone will answer them.  In this case, Mr Wong offered an answer.  I will come back to that in due course.

42.  After a holding reply sent by Dr Chan’s solicitors, a substantive reply was received from a letter dated 7 May 2019. In that letter, Dr Chan admitted, through his solicitors, that he had acted as the person responsible of the IVFC Centre since January 2019, but the letter did not address most of the questions previously posed, save to point out that Dr Chan had not been separately remunerated for acting as the person responsible for IVFC. 

The Law

43.  The principles applicable on questions relating to the interpretation or construction of contracts is relatively well settled and is not significantly in dispute between the parties to this application. If necessary, one can look at the principles fairly recently set out in the case of Arnold v Britton [2015] AC 1619, and in particular at paragraphs 15 to 23 of Lord Neuberger’s speech and at paragraphs 76 and 77 of Lord Hodge’s speech, which principles have recently been revisited and restated in Hong Kong in the Court of Appeal’s decision in Chun Wo Construction & Engineering Company Limited v The Hong Kong Housing Authority [2019] 2 HKLRD 683.  I do not propose to rehearse those applicable principles, save to acknowledge that one must look at the actual terms used by the parties to construe them in their relevant context, and to seek to give proper commercial effect to those terms. 

44.  As to the test to be applied for the grant or refusal of injunctive relief, there is an issue between Mr Ng and Mr Wong as to whether or not Mr Ng needs to satisfy a higher hurdle on the merits than merely identifying a serious issue to be tried.  Mr Wong says that where what is being sought by the injunction would in effect grant final relief to the plaintiff, at least in the sense that any likely period of restraint which might be imposed would have either expired or largely expired before the date of any trial in this action, then a higher test ought to be applied than merely requiring the identification of a serious issue to be tried.  That higher test might be that the court should be reasonably confident that it is likely that the plaintiff or plaintiffs would succeed at trial.

45.  As it happens, some years ago in the case of East Asiatic Shipping Limited v Wong Wing Cheung Basil & Ors, HCA 1502/2010, 7 December 2010, when sitting as a Deputy High Court judge, I had to address a similar point in another case, where there was an application for an injunction seeking to restrain certain activities after the end of a period of employment.  I think that, properly read, in that case it was accepted between the parties that I should, and that I did, apply a higher test than merely requiring a serious issue to be determined. In paragraph 68 I noted that it was accepted by counsel appearing for the plaintiff that:

“... where a period of restraint will have expired before the action is tried, it might be said that the grant or refusal of the interlocutory injunction will effectively dispose of that part of the action, such that it is proper to have regard to the prospects of the plaintiff succeeding in the action.”

46.  Having regard to some discussion as to how those prospects might be viewed, I referred to the passage in Lansing Linde Ltd v Kerr [1991] 1 WLR 251 at 258A-D which effectively requires that, whilst on a wider view of the balance of convenience, it might still be right to impose a restraint, there should still be some assessment of the plaintiff’s prospects of success, “some assessment” being the phrase so as to discourage prolonged interlocutory battles on affidavit evidence.  That view has also been taken in Hong Kong.  Clearly, a court is not to embark upon a mini-trial on the affidavits.  All that is required is some assessment of the plaintiff’s prospects of success and it is for the judge to control the extent of that assessment. 

47.  As to the principles applicable, in assessing the enforceability of coventants in restraint of trade, in the East Asiatic case, I set out what seemed to me to be reasonably well-settled principles not significantly in dispute in that case:

“The basic rule is that covenants in restraint of trade are unenforceable unless they can be shown to be reasonable in the interests of the parties and in the public interest. It is trite that the burden of demonstrating the reasonableness of a covenant is on the party seeking to enforce it.”

48.  As I identified in paragraphs 75 and 77, the relevant principles might be summarised as follows:

“75. (1) If the court is to uphold the validity of any covenant in restraint of trade, the covenantee must show that the covenant is both reasonable in the interests of the contracting parties and reasonable in the interests of the public.

(2) A distinction is, however, to be drawn between (a) a covenant against competition entered into by a vendor with the purchaser of the goodwill of a business, which will be upheld as necessary to protect the subject-matter of the sale, provided that it is confined to the area within which competition on the part of the vendor would be likely to injure the purchaser in the enjoyment of goodwill he has bought, and (b) a covenant between master and servant designed to prevent competition by the servant with the master after the termination of his contract of service.

(3) In the case of contracts between master and servant, covenants against competition are never as such upheld by the court. …

(4) The subject-matter in respect of which an employer may legitimately claim protection from an employee by a covenant in restraint of trade was further identified by Lord Wilberforce in Stenhouse Ltd v Phillips [1974] AC 391, at 400, as follows:

‘The employers’ claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.’

(5) If the court is to uphold restrictions which a covenant imposes upon the freedom of action of a servant after he had left the service of the master, the master must satisfy the court that the restrictions are no greater than are reasonably necessary for the protection of the master in his business. For any covenant in restraint of trade to be treated as reasonable in the interests of the parties, it must afford no more than adequate protection to the benefit of the party in whose favour it is imposed.

…

77.   It is also well established that if a restrictive covenant cannot be shown by the employer to be reasonable, it will be struck down and will not be enforced unless the offending part can be severed by applying a notional ‘blue pencil’ in removing words. The court cannot and will not re-write the covenant or contract by substituting what in its view would be a reasonable restriction as to time, geographical location or types of work.”

Analysis

49.  In this case, the core of the complaint is Dr Chan having acted as the person responsible for IVFC and his role in advising and assisting in the obtaining of the licence under which he became the person responsible for IVFC.  Whilst I have described that as the core of the complaint, it is actually the only complaint.  There is no real suggestion in the evidence of any other activity that is said to have been conducted by Dr Chan which might in any way have fallen foul, or might in future fall foul, of the terms of the SPA or the SC.  I therefore shall not lose sight of that, namely that the focus is in relation to a relatively narrow complaint relating to Dr Chan’s activities vis-à-vis IVFC.

50.  As I have indicated, Mr Ng relies to a significant extent on the fact that there appears to have been deliberate concealment of Dr Chan’s involvement in assisting with the obtaining of the licence and in becoming and then acting as the person responsible for IVFC.  He says, and there is force in his submission, that the arguments now adopted for Dr Chan smack of something of late forensic argument created by lawyers on the back of the DOU and FA, but arguments not previously in the mind of Dr Chan.  For his part, Dr Chan says, and the submission is continued for him, that it is practically implicit in what was agreed between the various parties in the DOU and in the FA, that what Dr Chan would perform at IVFC could only be performed if IVFC had the relevant licence and a person responsible named under that licence, and because WHARM is in the same business, it cannot have failed to have understood those matters.

51.  Looking at the materials overall, it is at least arguable, probably strongly arguable, that the plaintiffs would not have had expressly in mind that particular point, and particularly not that if the licence were necessary for IVFC, that it would be Dr Chan himself who would be working to obtain that licence and then acting as the person responsible under any such licence.  There seems to me to be force in Mr Lam’s evidence that it would not have occurred to, and did not occur to, the plaintiffs that Dr Chan would be spending time, particularly unremunerated time, in obtaining a licence for IVFC and then acting as the person responsible under that licence, in addition to the provision of whatever medical services he provided direct to clients or patients of IVFC using his speciality.

52.  I accept there is a strong element in the evidence as a whole that whatever steps Dr Chan was taking were primarily designed to deal with the frustration that he felt and with the difficult financial situation that faced WHARM.  I think that there is much force in the suggestion that the real motivation was ultimately to benefit WHARM by the provision of income from treating patients who were not patients of WHARM, but whose fees for that treatment would somehow substantially come back to WHARM. But what appears to have happened, perhaps unthinkingly, is that IVFC has, at least to some extent, been created as a competitor to WHARM when previously it was not a competitor of WHARM.  Of course, that problem of competition needs to be seen in its proper context.  It is at least significantly ameliorated as a problem because there is only one person who was providing the relevant medical services, either at WHARM or at IVFC, and that was Dr Chan.

53.  At least up to now, it seems, it is not as if Dr Chan’s activities at IVFC have built up some large team of doctors who are capable of producing or providing medical services in direct competition with the human reproductive services to be provided by him, or anyone else, at WHARM.  Whilst it is correct that he probably spent time which otherwise he had promised to devote fully to WHARM, when assisting IVFC in obtaining a licence and then acting as the person responsible under that licence, if he ought to have received remuneration for those activities, he has undertaken that that remuneration would be returned to WHARM.  Also, it seems clear that although not much activity has yet occurred under the various arrangements, Dr Chan has been accounting to, and he says he will continue to account to, WHARM for the relevant income that he receives by providing medical services to patients at IVFC in accordance with the fee-sharing arrangement, if I might call it that, provided under the FA. 

54.  I accept that there is force in Mr Ng’s argument that the FA is, precisely as its name suggests, merely an agreement which sets out a framework of what might later become more detailed arrangements agreed from time to time between WHARM and IVFC, and in particular by reference to visiting sessions in the form defined in the FA.  But I also note that the obligation to account for fees under arrangements put in place under the FA rest primarily with IVFC, albeit no doubt would require some input from Dr Chan.  So whilst it might be said that there is a strong argument that the particular services provided by Dr Chan in assisting with obtaining the licence and acting as the person responsible under that licence have not been specifically agreed by the plaintiffs, and that the FA cannot be taken to identify that agreement, that may not particularly matter in circumstances where the agreement must contemplate that Dr Chan will give treatment and consultation to patients who are the patients of someone other than WHARM, namely IVFC, and that those patients will remain the patients of IVFC and that Dr Chan cannot do anything to entice them away from IVFC. 

55.  If one steps back from the detail for one moment, what in effect has been put in place, whether strictly under the FA or not, is an arrangement where in addition to treating people at WHARM and receiving the treatment income for WHARM at WHARM, Dr Chan has identified another pool of patients who he may also treat and a substantial part of the income for that will come to WHARM, without WHARM having to expend the same degree of overheads or costs in generating those fees. 

56.  I can turn to the question relating to termination of employment.  There is an argument as to whether or not the notice which Dr Chan has given on, or with effect from, 6 March 2019, said to expire on 6 September 2019, is effective in the context of the SPA which refers to the appointment of him as managing director for a period of five years.  Mr Wong says that this is a point of construction or interpretation of the contract, and is something which I can decide today. Whilst tempted to do that, it seems to me that ultimately that is a question which may have some fact sensitivity, depending on the context, and I do not propose finally to decide the point today.  But it does seem to me, looking at the totality of the terms, whilst there is reference to employing for a five-year period, the actual lock-in provisions, if I might call them that, were limited to 24 months, albeit the start date of those 24 months was subsequently extended so that the overall period was extended to almost three years.

57.  So I am not persuaded that there is a strong argument for the plaintiffs that Dr Chan is unable to leave his employment by giving valid notice of termination before the expiry of a five-year period from the date of the SPA. But in any event, even if he were to do so in breach of that agreement, it seems to me that the consequences of that would be a claim to damages for wrongful early termination of the employment, and it is at least extremely unlikely, if not difficult, even to imagine the circumstances in which a court will order an employee to continue working for an employer when they have fallen out, and by way of some formal mandatory requirement that that employment continue.  As I say, the real claim for a wrongful early termination, if it turns out that that is the case, would be damages for breach which would sound in part by the failure to have given sufficient payment in lieu of notice which might be calculated in accordance with section 8A of the Employment Ordinance, and possibly by some other measure of damages.

58.  So it seems to me that for the purposes of today’s hearing, I should proceed on the basis that there is a strong argument that the employment term will continue only until 6 or 17 September 2019.  I refer to 17 September because the two-year period, as extended under the SCC, would run from 17 March and so if six months’ notice were only able to be given on 17 March 2019, that would expire on 17 September 2019.

59.  As to the post-termination restraint, there is something of a tension between the terms of the SPA and the terms of the SC. In one, there is a longer period of two years, but a relatively narrow geographical area of 1 kilometre from the place of business of, as I said, probably WHARM’s business location.  In the other, there is a shorter period of one year, but the rather wider geographical limitation relating to the whole of the territory of Hong Kong.  Looked at in broad terms, it seems to me that there is a much stronger argument for upholding the smaller geographical area as properly enforceable, particularly as that area is identified in the SPA document which creates the sale of the business, including its goodwill, from Dr Chan to the 2nd plaintiff, that business being the business of WHARM.

60.  There is what seems to me rather weaker an argument in relation to the likely enforceability of a one-year period over a much wider territorial limitation in the service contract, the SC.  In those circumstances, what should one do in this context?  It seems to be that one necessarily asks the question whether damages would be an adequate remedy.  I have already identified that if there is a termination too early under the contract of employment, or under the terms of the SPA, the relevant damages seem to me to sound fairly readily in accordance with the terms of the Employment Ordinance or such other figures as might be calculated.  Insofar as there might be a breach of non-competition during the employment, it seems to me that damages might not be so easy to calculate, but I have identified that the only real complaint relates to the activities of Dr Chan in IVFC and there are no other allegations.

61.  As regards his acting as person responsible for IVFC, he has sought to extricate himself from that by notifying the Council that he wishes to step down from that role in April 2019, but that process is apparently taking some time and Mr Ng has informed me that as at the middle of July 2019, the register still records Dr Chan as being the person responsible under the licence granted to IVFC.  Either he is performing those duties which would put him likely in some form of breach as a result of his obligations owed to the plaintiffs, or if he is not performing those duties, that is likely to put him in some difficulty with the Council. But it does seem that within a relatively short period of time, the position will be rectified by his being removed as the person responsible and the amount of time that he would need to spend in exercising those duties as the person responsible are likely to be able to be assessed in some way, a value given to them in some way, making damages probably adequate as a remedy.

62.  In any event, when it comes to the balance of convenience, I take into account the point made in relation to the public interest and the fact that Dr Chan is one of the relatively small number of specialists in the particular field of assisted reproductive technology.  He himself has identified that he has a number of patients who have been impregnated through those technological means who have due dates beyond September 2019.  He says, and I accept, that those patients would ordinarily require his care and attention, and that all infertility pregnancies with the aid of technology are regarded as high-risk pregnancies requiring formal training of a very high standard.  I can probably also take judicial notice of the fact that patients who have needed to resort to reproductive technology and so to become pregnant are likely to be very sensitive to who it is from whom they are receiving their treatment advice and assistance.

63.  In those circumstances, I am certainly not prepared to grant any injunction beyond 17 September 2019.  The question therefore remains as to whether or not any form of injunctive relief should be imposed on Dr Chan between now and that date.  I note that up to today, and in the period of the adjournment from the date of the first hearing at the end of May until today, Dr Chan has undertaken, pending the substantive hearing of the summons, he will not in any way be involved in the business and/or operation of the IVFC Centre, including but not limited to acting as the person responsible of that centre.

64.  Looking at the matter overall, applying what I see to be some assessment of the merits of the claim in its various respects; whether damages would be an adequate remedy; looking at the balance of convenience, particularly focusing on the usual approach of trying to impose the decision which would appear to be the least prejudicial of two, depending upon the result that might ultimately eventuate at trial; and particularly taking into account the public interest in a doctor of Dr Chan’s obvious ability and specialism; it seems to me that the only injunction which should be imposed is one requiring him not to be involved in the business and/or operation of IVFC Centre, insofar as he is the person responsible under IVFC’s licence at that centre, on his undertaking to ensure that any fees or other income that he would receive from treating IVFC’s patients at their centre would be returned or channelled back to WHARM. It seems to me that there is no need to impose any wider injunction against him, either before or after September of this year.

65.  As there is no other real identification in the evidence of any other way in which it might be said that Dr Chan would act in breach of the obligations owed by him, either in the form of fiduciary duties owed or employment duties owed, I do not think any other form of injunction is necessary or appropriate.  That is my ruling.

(Disussion re on costs)

66.  Following my ruling, I have heard submissions in relation to the costs of this application.  On behalf of the plaintiff, Mr Ng asked for plaintiffs’ costs in the cause, essentially on the basis that he has had to come to court to achieve any order, and he has achieved some order, and that that order is in accordance with what was the focus of his complaint, namely the fact that Dr Chan had been acting, at least historically, as the person responsible for an entity which has, wittingly or otherwise, been created as a competitor or potential competitor of the plaintiff companies.

67.  Mr Wong, on the other side, asks for costs against the plaintiffs in favour of the defendant because he says he is, in essence, the real winner of this application, and because the plaintiffs had not previously suggested that the hearing today could be dispensed with by resolving the matter in accordance with an undertaking in the terms of what ultimately I have been required to order.

68.  I think it fair to say that in days gone by, on applications for injunctive relief, it was usual to make an order either for the plaintiff’s costs in the cause or sometimes the defendant’s costs in the cause, depending on how it was viewed the interlocutory application had been conducted and won. But the changes which came in with the Civil Justice Reform in 2009 were specifically to broaden the scope which the court might ordinarily take into account.  It seems to me that one of the reasons for those changes was to try to encourage costs matters to be dealt with at and immediately after interlocutory hearings, and for there not to be a tail of costs which could only be resolved much later down the line.

69.  One of the problems that I have perceived in making any order such as plaintiff’s costs in the cause, is that it only encourages the parties to continue to fight to the end of that cause, rather than necessarily seeking to resolve matters in some more consensual manner beforehand.  There is force in Mr Ng’s submission that he has been forced to come to court to get anything because the undertaking that was offered until today was never extended as an undertaking to any later period, be it September this year or any other time, albeit that Dr Chan has, at the same time, identified that he has tried to remove himself from being the person responsible.

70.  On the other hand, I do not accept that Dr Chan is to be regarded as the overall winner.  It is correct that he has now been ordered to be restrained in a way which is significantly narrower than was being sought by the summons, but nevertheless an order has been put into place.  Essentially, I have decided, at least to the relevant standard necessary for the grant of an injunction, that it was not appropriate for him to have acted in setting up the licence for IVFC and then acting as the person responsible albeit that his remaining activities with IVFC are largely to be accounted for and have been accounted for by the transfer of income to WHARM.

71.  It seems to me, in those circumstances, and trying to draw a line under this application once and for all, and to discourage the parties insofar as it is otherwise thought to be encouragement that they should pursue this matter all the way to a trial, where neither side has come out of this entirely successfully, where each has had some element of success and some element of failure, the appropriate costs order is to make no order as to costs. Therefore, each party will bear their own costs of this application.

	(Russell Coleman)
	Judge of the Court of First Instance High Court

 

Mr Lawrence K F Ng and Mr Victor T S Lui, instructed by Iu, Lai & Li, for the 1st, 2nd and 3rd plaintiffs

Mr William Wong, SC, Mr Vincent Chiu and Mr Howard Wong, instructed by F Zimmern & Co, for the defendant