Understanding restraint of trade clauses in employment contracts

By Anthony Lam, Solicitor, George Chan & Co

Article exclusively contributed by
George Chan & Co

In a well-drafted employment contract, you will often see provisions restraining an employee from doing certain things after the cessation of his or her employment.

For example, a firm of stockbrokers may employ Mr M as its executive director and request that he signs an employment contract which stipulates he may not seek employment with other firms engaged in the stockbroking business in Hong Kong for at least three years after terminating his employment with the firm. This provision is known as a "restraint of trade" clause. If, one day, Mr M should hand in a letter of resignation and go to work for a competitor, can the firm enforce the provision?

The basic rule considers that all interference with individual liberty of action in trading, and all restraints of trade, are contrary to public policy and therefore void. However, there are exceptions to this rule. The court is only willing to impose the restraints against an employee if those restraints are reasonable. In other words, if the restraints are so harsh that they go beyond reasonable protection of the legitimate interests of an employer, the employer may run the risk of not having those restraints enforceable. The original intention of having protection will vanish.

Rever (AMA) Salon Ltd vs Kung Wai for Danny & Ors (No 2) is a case considered by the Court of First Instance in which the principle of restraint of trade was examined.

The proprietor of a hair salon employed a number of hair stylists. When they were employed, all were requested to sign an employment contract which said that for one year after leaving the hair salon, they could not: (i) solicit the hair salon's clients with a view to providing services for them; (ii) cause services to be given to the hair salon's clients; (iii) work within three quarters of a mile of the hair salon's premises in Tsim Sha Tsui; or (iv) entice anyone employed by the hair salon to leave. A group of seven hair stylists left the hair salon. Not surprisingly, all of them committed acts which were prohibited by the restraint of trade covenants.

The Court of First Instance reiterated the basic rule that contractual provisions, which restricted the employee from taking employment of his choice after he left his employer, would be struck down unless the employer could show they protected his legitimate interests and were reasonable in all circumstances. If the former employer satisfied those criteria, the restraints would be enforced unless the former employee could establish that, to do so, would be against the public interest.

Applying the law, the Court of First Instance held that the restraint of trade covenants were necessary to protect the hair salon's legitimate interests. They had regard for the dependence of a hair salon on its regular customers, the ease with which a customer could be persuaded to follow an employee who left, and the difficulty in following contract law. They were also reasonable in the circumstances, considering that the number of top grade salons in Hong Kong and particularly in Tsim Sha Tsui. Further, the defendants had failed to show that the clauses were contrary to public interest. Therefore, all seven hair stylists were liable for breach of their respective contracts.

Q & A on restraint of trade
Q1 What factors will the Court look at in considering whether a restraint of trade covenant is reasonable or not?
A1 In order to determine the reasonability of a restraint of trade covenant, the Court will take into account all the circumstances which include, inter alia, (i) the industry which the employee is engaged in; (ii) the post held by the employee; (iii) the time and geographical scope restrained; (iv) the kinds of activities restrained; and (v) the inequality of the contracting parties' bargaining power.

Q2 If there is no restraint of trade covenant, does it mean that the employer has no protection?
A2 No, the Court recognises a number of implied duties which an employee owes to his employer. In Rever's case, the Court of First Instance held that there was an implied duty of fidelity by which an employee should not poach his employer's customers or other employees. By actively soliciting other staff to switch jobs and the customers' patronage for the new hair salon, the hair stylists were in breach of the implied duty.

Q3 What kind of relief can I seek from the Court if the employee is in breach of the restraint of trade covenant?
A3 The Court is empowered, inter alia, (i) to grant a comprehensive injunction restraining the employee in breach on his own account or as partner, director, shareholder, agent, servant or consultant or otherwise for any other individual, firm or corporation from doing or continuing the infringing acts; (ii) to disclose the identity of the client contacted by the employee; (iii) to deliver up or destruct all confidential information and client data of the employer; (iv) to claim damages; and (v) to account for profits earned by the employee. If the employee fails to observe the injunction, the Court can jail the employee.

Taken from Career Times 13 August 2004

(Last review date: 23 August 2013)

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