Restraint of trade clauses, or post-employment restraints, play a crucial role in protecting the legitimate interests of the employer once an employee's contract is terminated. Covenants in restraint of trade clauses are deemed to be prima facie void as they are contrary to public policy, but they will be upheld where the restraint is reasonable to protect a legitimate interest.
A recent trend in restraint of trade clauses is the introduction of what are referred to as "cascading" clauses, which offer a number of alternative time and geographical covenants. The advantage to these is that each one is severable by a court without affecting the validity and enforceability of the restraint.
A recent New South Wales Supreme Court decision, OAMPS Insurance Brokers Ltd v Hanna [2010] NSWSC 781, discussed the validity of these cascading clauses and in particular the question of uncertainty.
The restraint of trade clause in the Hanna case
Mr Hanna worked for OAMPS Insurance Brokers Ltd for 19 years, most recently as a Team Leader/ Client Director by OAMPS in its Consulting department.
OAMPS' broking business involves selling insurance policies to clients and earning revenue by way of a commission. Because of the nature of the business, "the personal relationship between OAMPS representative and the client's representative will often be an important factor in client retention."
OAMPS included a restraint of trade agreement, "Post Employment Restraint Deed", in its employment contract with Mr Hanna, which said:
"1. To reasonably protect the goodwill and the legitimate business interests of the Company, during the Restraint Period and within the Restraint Area (referred to below), you will not, without prior written consent of the Company, directly or indirectly:
- Entice or solicit, or assist another person to entice or solicit, an employee, contractor, officer, agent or supplier of the Company with whom you have had dealings prior to your employment ending, to cease to provide services to the Company;
- Canvass, solicit or deal with, or counsel, procure or assist another person to canvass, solicit or deal with any client of the Company with whom you have had dealings during the two year period prior to your employment ending.
2. Restraint period means, from the date of termination of your employment:
- 15 months;
- 13 months;
- 12 months.
Restraint Area means:
- Australia;
- The State or Territory in which you are employed at the date of termination of your employment;
- The metropolitan area of the capital city in which you are employed at the date of termination of your employment.
...
4. Each restraint contained in this Deed (resulting from any combination of the wording in clauses 1 and 2) constitutes a separate and independent provision, severable from the other restraints. If a court of competent jurisdiction finally decides any such restraint to be unenforceable or whole or in part, the enforceability of the remainder of that restraint and any other restraint will not be affected." [emphasis added]
Mr Hanna leaves his job at OAMPS
After being approached by a competitor, Mr Hanna resigned from OAMPS. Immediately after the resignation took effect he began working for his new employer.
While Mr Hanna said he had told his new employer that he was not able to approach or provide services to OAMPS' clients, it was acknowledged that he was indeed servicing a number of his previous clients who had approached him and his new employer.
OAMPS claimed that Mr Hanna had breached the Post Employment Restraint Deed and sought an injunction to prevent Mr Hanna from providing services to a specified list of clients for a period of 15 months.
Mr Hanna responded by saying that the Post Employment Restraint Deed was void because of the uncertainty of the scope of the restraint "by virtue of its cascading nature" – because "each permutation is inconsistent with every other one and no mechanism is provided for the selection of the one which is to operate". Furthermore, he said, he hadn't solicited any of OAMPS' clients, and any information he had of their previous insurance and their business needs was information which was volunteered by the clients when they approached his new employer.
Legitimacy of cascading clauses
The courts have taken varying approached to the legitimacy of cascading provisions in restraint of trade clauses.
In J.Q.A.T. Pty Limited v Storm [1987] 2 Qd. R 162, Justice Connolly stated that:
Justice Ambrose agreed with Justice Connolly and said:
"In my view cl.6 could not be said to create mutually inconsistent contractual obligations... I find the tests of "inconsistency" to which I have referred helpful and conclude -
- Clauses are inconsistent when they cannot stand together at the same time; and
- Inconsistency does not lie in the mere co-existence of two or more clauses which are susceptible of simultaneous compliance even though the extent of the obligation imposed by each differs from that or those imposed by the others.
...[In this instance] the respondent may perform the obligation imposed by each without thereby breaching the obligation imposed by any of the others."
However, in Tyser Reinsurance Brokers Pty Ltd v Cooper [1998] NSWSC 689, Justice Young stated that:
"[T]he restraint period is defined in what has been called in argument "cascading drafting", but there are very real difficulties with a clause in that form. The restraint period should not differ depending on what a court should hold.
First, it is not a reasonable way of letting an employee know what are the requirements that bind him or her; secondly, there is great difficulty if there is an appeal against the holding, both pending the appeal and, perhaps, afterwards."
Void for uncertainty?
Justice Hammerschlag in this instance found that the Court in J.Q.A.T. held that a cascading provision in a restraint of trade clause is valid and certain if each individual restraint covenant is
- expressed in clear words;
- is capable of simultaneous compliance; and
- does not require any inquiry or finding by the Court to make it operative.
In the case of OAMPS and Mr Hanna, the court was satisfied that these criteria had been met, and therefore the Deed was not void due to uncertainty. While the case law on cascading clauses has been inconsistent, Justice Hammerschlag stated that he was bound to follow J.Q.A.T. unless he considered it to be clearly wrong.
He also noted that the Deed, as a whole, indicates that the widest enforceable covenant is intended. While the court is able to sever the provision with the widest scope as it deems it unreasonable and hence unenforceable, Justice Hammerschlag pointed out that considerable, but not conclusive, weight should be given to the period as agreed between the parties, namely the maximum specified period.
Under the current circumstances, Justice Hammerschlag found that because of the length of the insurance policies –12 months – and the reasonable time needed to sever the relationship between Mr Hanna and OAMPS' clients, a 12 month restraint was reasonable to protect OAMPS' legitimate interests. As the scope of the restraint was limited to a specified list of clients, he did not need to assess the reasonableness of the geographical restraint.
So when will post-employment restraints of trade be enforced?
Post-employment restraints of trade will be enforced where the covenant is protecting the former employer's legitimate interest, and where the covenant is reasonable in scope. Following the decision in OAMPS Insurance Brokers Ltd v Hanna, it appears that the courts will uphold the judgment in J.Q.A.T. regarding cascading provisions, and deem them to be valid insofar as the obligations are not mutually inconsistent. Care should be taken in drafting restraint of trade clauses to ensure their enforceability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
