In a significant decision for employers, the New South Wales Court of Appeal recently dismissed an appeal against a decision upholding a post-termination restraint deed which included a number of cascading provisions.
The decision means carefully drafted "cascading" or "step" restraints, which typically impose a range of decreasing restrictions on certain activity of departed staff – to hedge against a court striking down unreasonable parts – are not void for uncertainty on the basis they contain no mechanism for the selection of which provision actually binds the ex-employee.
The background
Peter Hanna, an experienced insurance broker, commenced employment with OAMPS Insurance Brokers Ltd (OAMPS) in 1990. He resigned from OAMPS on 22 April 2010, having accepted an offer to work at another insurance broking firm. His resignation was effective from 28 May 2010.
On 30 September 2008, whilst Mr Hanna was still employed by OAMPS, he signed a written employment contract, a schedule to which contained a post-employment restraint deed.
After Mr Hanna left OAMPS, a dispute arose between the parties concerning the enforcement of the restraint covenant. The covenant contained a cascading clause with nine separate and overlapping provisions: the widest period and area being 15 months in Australia, and the narrowest being 12 months in the metropolitan area of Sydney.
On 30 July 2010 the Supreme Court found that one of the combinations of the restrictions, a 12 month Australia-wide restraint, was reasonable to protect OAMPS' business.
The appeal
The questions on appeal concerned:
- whether the covenant was void for uncertainty
- the reasonableness of the covenant
- the primary judge's failure to apply the test in Stacks Taree v Marshall [No 2] [2010] NSWSC 77
- the primary judge's findings in relation to reasonableness and the 12 month restraint period.
The decision
On 19 October 2010 the New South Wales Court of Appeal dismissed Mr Hanna's appeal finding as follows.
- The restraint deed 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 without breaching any other. Neither their operation, nor any principle of law concerned with certainty of contract, required a mechanism or hierarchy of order of operation.
- The restraint deed was not against public policy under the Restraints of Trade Act 1976 (NSW) by reason of multiple and several operation of the cascading clause in the restraint deed.
- The restraint covenant was not unreasonable. The reasonableness and validity of a restraint clause should be assessed at the time of entry into the contract.
- There is no legally required test in assessing the reasonableness of the duration of the restraint period. The use of one test or another depends on the facts and the evaluation of the approach that is reasonable.
Implications for employers
This decision is a useful guide to employers to assist them in the drafting of appropriately worded restraint covenants so as to provide them with more likelihood to be able to prevent ex-employees soliciting or approaching clients. However, the idiom that the devil is in the details remains true. That is, the wording used in post-employment restraint covenants is critical to an employer's ability to persuade a Court to enforce them.
The decision also serves as a timely reminder to employers whose post-termination restraints include cascading provisions to ensure that the provisions include clear language that each permutation of the restraint is separate, independent and severable from all other permutations. Without this confirmation cascading provisions may well be unenforceable by reason of them being void for uncertainty.
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.
