November 7, 2014

Restraint of Trade – Cascading Clauses

A clause which provides for different ‘levels’ of restraint in an employment contract is commonly referred to as a ‘cascading restraint clause’. Cascading restraint clauses can operate by providing for multiple options in relation to distance/geography, time periods and the nature and type of conduct to be restricted. Each variable is treated as an individual clause, and is severable and independently binding. This means that where one level of restraint may be deemed too harsh, the employer can look to enforce a lower level restraint without the entire clause being invalidated.

The operation of cascading restraint clauses was tested in OAMPS Insurance Brokers Ltd v Hanna [2010] NSWCA 781, and the decision by the New South Wales Court of Appeal confirms that these clauses are valid and enforceable.

OAMPS Insurance Brokers Ltd v Hanna

Mr Hanna commenced employment as an experienced insurance broker with OAMPS in 1990, resigned from OAMPS in 2010 and commenced a position at another insurance broking firm.

During his employment with OAMPS, Mr Hanna’s employment was subject to a written employment agreement. A schedule to the employment agreement contained a post-employment restraint deed.

After Mr Hanna left OAMPS, a dispute arose regarding the enforceability of the restraint clause in the deed. The restraint clause itself was a cascading clause with 9 restraints, which ranged from 15 months across Australia, down to 12 months across metropolitan Sydney.

Outcome

OAMPS sought an injunction to prevent Mr Hanna from providing services to a number of its clients. The injunction was ultimately granted, and Mr Hanna was restrained from dealing with 17 clients for a period of 12 months.

Mr Hanna advanced a number of grounds of appeal, including that the cascading restraint clause was void for uncertainty, and went beyond what was reasonably necessary to protect OAMPS’ interests.

The Court of Appeal held that the restraint clause was not void for uncertainty. It was clear that the various restraint periods and areas were part of separate and independent provisions, all capable of being understood and complied with.

The Court also said that the restraint did not go beyond what was reasonably necessary to protect OAMPS’ interests, and the 12 months restraint period sought by OAMPS was reasonable. The 12 month period was reasonable because it ensured OAMPS was able to renew the insurance policies of the clients it sought to restrain Mr Hanna from dealing with..

Takeaways

  1. To ensure that cascading restraint clauses are valid, the document should make it clear that the various periods and areas of the restraint are part of separate and independent provisions.
  2. In order to determine what a reasonable restraint is, the Court will consider each case individually. It is a matter of what is reasonable to protect the legitimate interests of the employer.
  3. Generally, the more experienced, senior and tenured the employee, the more extensive the restraint that may be enforced against them.