Smile Inc. Dental Surgeons Pte Ltd v Lui Andrew Stewart

• Jurisdiction: Singapore
• Judgment Date: 16 December 2011
• Date: 16 December 2011
• Docket Number: Suit No 847 of 2009
• Court: High Court (Singapore)

Smile Inc Dental Surgeons Pte Ltd

Plaintiff

and

Lui Andrew Stewart

Defendant

[2011] SGHC 266

Woo Bih Li J

Suit No 847 of 2009

High Court

Contract—Illegality and public policy—Restraint of trade—Restrictive covenant found to be unreasonable—Whether discretionary severance approach could be applied to save covenant

Contract—Illegality and public policy—Restraint of trade—Restrictive covenant seeking to exclude competition—Whether existence of such covenant necessarily precluded existence of legitimate proprietary interest—Whether employer of general dental practitioner had legitimate proprietary interest

Contract—Illegality and public policy—Restraint of trade—Whether restrictive covenant was unreasonable in reference to interests of parties—Whether geographical limit was justified by scope of employer's legitimate proprietary interest—Whether absence of time limit was unreasonable

Employment Law—Employees' duties—Circumstances in which fiduciary duties arise in employment relationship—Whether relationship of trust and confidence sufficient to give rise to fiduciary duties—Whether employee owed fiduciary duties to employer

Employment Law—Employees' duties—Distinction between solicitation and dealing—Employer pleading that employee conducted business with former customers of employer—Whether sufficient to constitute solicitation

Employment Law—Employees' duties—Employee forming intention to leave and compete with employer and taking preparatory steps—Whether duty of good faith and fidelity breached

Smile Inc Dental Surgeons Pte Ltd (‘Smile’) was incorporated by Dr Ernest Rex Tan Sek Ho (‘Dr Tan’) and his wife Chong Mo-Ai Grace in 1997. In July 2003, Smile and Dr Andrew Stewart Lui (‘Dr Lui’) signed an employment contract (‘the Contract’) whereby Dr Lui was employed as an associate dental surgeon. Dr Lui was assigned to work full-time at Smile's clinic at ‘Forum the Shopping Mall’ (‘the Forum clinic’) with effect from July 2005.

In March 2008, Dr Gareth Pearson (‘Dr Pearson’) gave notice to Smile that he intended to stop working in September 2008. Dr Pearson was a dentist who was based primarily at the Forum clinic. Dr Lui and Dr Pearson together accounted for 80% of the Forum clinic's patient pool.

In January 2009, Dr Lui incorporated Dental Essence Pte Ltd (‘Dental Essence’) while he was still employed by Smile. On 25 February 2009, Dr Lui entered into a one-year tenancy agreement on behalf of Dental Essence for premises within a five minutes' walk from the Forum clinic. On the same day, Dr Lui also gave written notice of his resignation to Smile. In March 2009, Dr Lui committed to renovation works of Dental Essence's premises and Dr Pearson joined Dental Essence as a shareholder and a dentist.

Smile agreed that Dr Lui's last day of work would be 18 April 2009. After Dr Lui's departure from the Forum clinic, it experienced a significant decrease in monthly revenue. Smile commenced an action against Dr Lui on 8 October 2009 and closed the Forum clinic in September 2010. The action was bifurcated upon application by Dr Lui.

Smile's first main point was that Dr Lui had breached the following express terms in the Contract:

1. (a) Clause 24 (‘the Radial Clause’), which prohibited Dr Lui from practising within three kilometres of, inter alia, the Forum clinic.

2. (b) Clause 23 (‘the Non-Solicitation Clause’), which prohibited Dr Lui from canvassing, soliciting or procuring any of Smile's patients for himself or any other persons.

3. (c) Clause 25 (‘the Non-Dealing Clause’), which provided, inter alia, that ‘existing and new patients’‘shall remain with’ Smile.

Smile's second main point was that Dr Lui had also breached (a) his implied duty of good faith and fidelity and (b) his fiduciary duties.

Held, dismissing the claim:

(1) The Radial Clause prohibited Dr Lui from practising within three kilometres from the Forum clinic. Dr Lui admitted that he was practising within three kilometres from the Forum clinic. Dr Lui had breached the Radial Clause: at [41].

(2) Smile's pleaded claim in relation to the Non-Solicitation Clause was based on the fact that Dr Lui treated 716 patients at Dental Essence who had previously been patients of Smile. Although Smile raised two further instances of alleged solicitation in Dr Tan's affidavit, these were not pleaded and Smile was therefore precluded from relying on them. As regards the sole pleaded fact, this was insufficient to establish that Dr Lui had sought to canvass, solicit or procure the patients to be his patients at Dental Essence. There was a distinction between solicitation and mere dealing. Dr Lui had not breached the Non-Solicitation Clause: at [43] to [48] and [53].

(3) The reference to ‘existing and new patients’ in the Non-Dealing Clause seemed to be a reference to the records of the patients, whether non-existing or existing at the time when Dr Lui left Smile. If there was any ambiguity, the contra proferentem rule might have meant that it should be construed against Smile. However, the court was obliged to adopt Smile's interpretation because of Dr Lui's pleadings. In his defence, he had accepted that the clause extended to the patients themselves and not merely to their records. On this basis, Dr Lui had breached the Non-Dealing Clause: at [61] to [65].

(4) A restraint of trade had to be reasonable. There had to also be a legitimate proprietary interest over and above the mere protection of the employer from competition, and the restrictive covenant had to not go further than what was reasonable to protect this interest. It was not disputed that the three clauses were covenants in restraint of trade. However, Dr Lui's defence challenged the validity only of the Radial Clause and the Non-Dealing Clause, but not the Non-Solicitation Clause. He was therefore precluded from challenging the validity of the Non-Solicitation Clause in his closing submissions: at [66] and [72].

(5) The purpose of most, if not all, restraint of trade provisions in the employment context was to protect the employer from competition by an employee should the employee leave. The fact that a provision sought to exclude competition to some extent did not necessarily mean that an employer had no legitimate proprietary interest to protect: at [79].

(6) The employer's or institutional hold of Smile on the patients who sought general dental services at the Forum clinic would usually not be strong. A patient who was happy with Dr Lui's services would quite easily switch to a competing clinic which Dr Lui practised at if that clinic was almost equally convenient to the patient and if the charges for both clinics were comparable. It would be too far-reaching to conclude that, generally speaking, an employer of a general dental practitioner would not have a legitimate proprietary interest to be protected. In the absence of evidence to the contrary, Smile did have such an interest to be protected: at [86] and [87].

(7) The three-kilometre exclusion zone in the Radial Clause had a dual purpose. The first was to make it less convenient for Dr Lui's former patients from using his services at his new clinic which would be outside the three-kilometre radius. The second was to make it impossible for him to compete for new patients in the same vicinity as the Forum Clinic, ie, persons who were treated by others at the Forum Clinic and persons who had never been treated at the Forum Clinic. The second purpose did not protect Smile's legitimate proprietary interest. To the extent that Smile was attempting to prevent Dr Lui from competing for new patients in the same vicinity, such an attempt was to prevent competition per se and was unreasonable: at [95] and [96].

(8) The absence of any time limit in the Radial Clause was also unreasonable. Dr Tan himself testified that the rapport that a general dental practitioner had with his patient would usually wear out after two to three years: at [101].

(9) Covenants in restraint of trade in the employment context were strictly scrutinised. The discretionary severance approach should not be used for employment contracts. Employers should draft a reasonable restraint of trade provision rather than to try and get the maximum protection which their employees would agree to. The discretionary severance approach would only encourage employers to try their luck by initially imposing the maximum protection they could get an employee to agree to and then to rely on a reading-down of the provision when confronted with the likelihood of an unfavourable result in court. Not every employee would have the courage or resources to resist the threats of an employer to comply with a restraint of trade provision. In any event, Smile did not plead or submit as to just how far the Radial Clause should be read down: at [120], [122] and [123].

(10) Based on Smile's interpretation of the Non-Dealing Clause, Dr Lui was precluded from dealing with any of Smile's patients from any of the clinics of Smile. It was unreasonable to preclude Dr Lui from dealing with patients from the Forum Clinic or any other clinic of Smile whom he had never treated before, just because they were patients of one of the other practitioners of Smile. It was also unreasonable that there was no time limit in the clause: at [126] and [130].

(11) It was trite law that an employee was under a duty to serve his employer with good faith and fidelity. The issue was whether Dr Lui had breached this duty by reason of the pleaded acts. An employee might form an intention to leave or set up in competition with his employer and take preparatory steps towards that goal. Such preparatory steps might be permissible in law. They did not necessarily constitute a conflict of interest in law which required an employee to tell his employer of his plans to leave or to refrain from taking those preparatory steps: at [137] and [147].

(12) An intention by a director to set...